Data I/O Corporation: Q2 2016 Form 10-Q Summary
Business context and reporting period
Data I/O Corporation designs and sells programming systems, adapters, software and maintenance solutions used to program semiconductor devices. The unaudited report covers the three and six months ended June 30, 2016, with comparisons to the same periods in 2015. The company is focused on automotive electronics, Internet of Things, automated programming systems, managed and secure programming technology, and related software.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $5.801 million | $4.958 million | $10.414 million | $10.860 million |
| Gross margin | $3.088 million; 53.2% | $2.722 million; 54.9% | $5.616 million; 53.9% | $5.580 million; 51.4% |
| Operating income | $391 thousand | $64 thousand | $216 thousand | $286 thousand |
| Net income | $444 thousand | $100 thousand | $276 thousand | $149 thousand |
| Diluted EPS | $0.06 | $0.01 | $0.03 | $0.02 |
| Operating cash flow | Not separately provided for the quarter | $(805) thousand | $301 thousand |
- Q2 bookings were $5.7 million versus $5.1 million in Q2 2015. Backlog was approximately $2.0 million at June 30, 2016, and deferred revenue was $1.1 million.
- Automated programming systems generated $4.657 million of Q2 sales, up 34.1% year over year. Non-automated programming systems generated $1.144 million, down 22.9%.
- Q2 sales were 70% equipment, 21% adapters, and 9% software and maintenance.
- Cash and cash equivalents were $8.824 million at June 30, 2016, down from $11.268 million at December 31, 2015. Approximately $3.7 million was held in the United States, with the balance held by foreign subsidiaries.
- Working capital was $13.743 million versus $13.823 million at year-end 2015. The company reported no debt balances or significant external capital expenditure plans.
- Capital expenditures were $1.377 million during the first six months, compared with $394 thousand in the prior-year period.
- At June 30, 2016, total assets were $19.388 million, current liabilities were $3.931 million, and stockholders’ equity was $14.984 million.
Material changes versus the prior comparable period
- Q2 revenue increased 17.0%, primarily from strong bookings in automotive electronics and IoT markets, higher PSV-family sales, and growth in Asia and Europe. First-half revenue declined 4.1%, mainly because of lower automated programming system sales.
- Q2 gross margin dollars increased 13.4%, but gross margin percentage declined 170 basis points because of product mix and less favorable factory variances. First-half gross margin percentage improved to 53.9% from 51.4%.
- Q2 operating income increased to $391 thousand from $64 thousand. First-half operating income declined to $216 thousand from $286 thousand because the revenue decline and higher SG&A more than offset gross-margin improvement.
- Q2 R&D expense declined 5.7%, while SG&A increased 7.8% because of higher employee-related costs, bad debt reserves and commissions. First-half SG&A included approximately $20 thousand of non-recurring Shanghai office relocation costs.
- Operating cash flow shifted to an $805 thousand use from $301 thousand provided, primarily reflecting increases in receivables and inventory and decreases in accounts payable and accrued liabilities.
- The company repurchased 73,845 shares for approximately $174 thousand during the first six months under a program authorizing up to $1.0 million through March 31, 2017. Approximately $826 thousand remained available under the program at June 30, 2016.
- Share-based compensation increased to $300 thousand for the first six months from $238 thousand, including $205 thousand in Q2 versus $148 thousand in the prior-year quarter.
Guidance, outlook, risks and unusual items
- Management intends to continue developing automated programming, secure programming, software and related product enhancements while controlling costs and pursuing strategic growth markets.
- Subsequent to quarter-end, the company announced a five-year supply agreement with Bosch Car Multimedia. Management expects some business in 2016, with a larger impact expected in 2017 and 2018; the filing does not provide a contract value or specific revenue guidance.
- Management believes existing cash and working capital will fund operations and capital requirements for at least the next twelve months. Potential needs include funding losses, growth initiatives, share repurchases and acquisitions. Repatriation of foreign-held cash could be subject to tax and other impediments.
- Management identifies cyclical demand, rapid technological change, product mix, customer capital spending, foreign currency volatility, inventory obsolescence, warranty claims, credit risk, and dependence on new product acceptance as principal risks.
- The company maintained an approximately $11.4 million valuation allowance against deferred tax assets and expects to continue limiting recognition of those assets because of its loss history and industry uncertainty. Unrecognized tax benefits were $218 thousand at June 30, 2016.
- Operating lease commitments totaled approximately $4.163 million, and purchase commitments and other obligations totaled approximately $1.394 million, of which all but $44 thousand were expected to be paid within twelve months.
- The filing reports no material pending legal proceedings, no material changes to the previously disclosed risk factors, and no material off-balance-sheet arrangements other than disclosed lease and purchase commitments.
- Disclosure controls and procedures were reported effective at a reasonable level of assurance, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Bosch supply agreement produces the expected 2016 contribution and the larger 2017–2018 opportunity described by management.
- Whether bookings, backlog and automated-system demand convert into sustained revenue growth after the strong second quarter.
- Whether gross-margin pressure from product mix and factory variances persists.
- Whether receivables, inventory and capital expenditures continue to consume cash despite reported profitability.
- The location, availability and potential tax consequences of the company’s foreign-held cash.
- The impact of currency movements, inventory obsolescence, warranty claims, customer credit quality and semiconductor-industry cyclicality.
- The eventual accounting effects of the pending stock-compensation, lease and revenue-recognition standards; the filing states that the impact had not yet been determined.