Data I/O Corporation — Form 10-Q Summary
Business context and reporting period
Data I/O Corporation designs and sells programming systems, adapters, software and maintenance services used in electronics manufacturing. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. The company was classified as a smaller reporting company and had 7,992,394 common shares outstanding as of October 26, 2016.
- Strategic focus: managed and secure programming technology, automated programming systems, software, automotive electronics and Internet of Things applications.
- Product mix for the third quarter: 63% equipment, 28% adapters and 9% software and maintenance.
- International sales represented 93.0% of third-quarter revenue and 87.7% of nine-month revenue.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | Change | 9M 2016 | 9M 2015 | |
|---|---|---|---|---|---|---|
| Net sales | $6.588 million | $6.159 million | 7.0% | $17.002 million | $17.019 million | |
| Gross margin | $3.643 million | $3.169 million | 15.0% | $9.259 million | $8.749 million | |
| Gross margin percentage | 55.3% | 51.5% | +380 bps | 54.5% | 51.4% | +310 bps |
| Operating income | $621 thousand | $476 thousand | 30.5% | $838 thousand | $762 thousand | 10.0% |
| Net income | $625 thousand | $439 thousand | 42.4% | $901 thousand | $589 thousand | 53.0% |
| Diluted EPS | $0.08 | $0.05 | Increase | $0.11 | $0.07 | Increase |
- Approximate operating margin was 9.4% in Q3 and 4.9% for the first nine months. Approximate net margin was 9.5% in Q3 and 5.3% for the first nine months.
- Q3 EBITDA was $755 thousand, compared with $552 thousand in the prior-year quarter. Adjusted EBITDA, excluding equity compensation, was $865 thousand versus $645 thousand.
- Nine-month EBITDA was $1.288 million versus $925 thousand; adjusted EBITDA was $1.697 million versus $1.255 million.
- Research and development expense increased 14.3% in Q3 to $1.358 million, while SG&A increased 10.6% to $1.664 million.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents were $9.725 million at September 30, 2016, down from $11.268 million at December 31, 2015. Approximately $4.5 million was held in the United States, with the balance in foreign subsidiaries.
- Working capital was $14.285 million, compared with $13.823 million at year-end 2015. Total current assets were $19.179 million versus current liabilities of $4.894 million.
- Net cash provided by operating activities was $466 thousand for the first nine months, compared with $453 thousand in the prior-year period.
- Capital expenditures were $1.688 million, up from $632 thousand, primarily reflecting purchases of property, plant and equipment and internally developed demonstration and test equipment.
- Financing activities used $267 thousand, including $191 thousand for share repurchases.
- The filing does not report senior debt or borrowings. It reports $473 thousand of long-term other payables and $3.988 million of operating lease commitments.
- Management stated that available cash and working capital should fund operations and capital requirements for at least the next year, although additional cash could be required for U.S. operations.
Material changes versus the prior comparable period
- Third-quarter revenue increased 7.0%, driven primarily by stronger automotive electronics bookings and higher sales of PSV, LumenX, RoadRunner and adapter products. Nine-month revenue was essentially flat.
- Automated programming system revenue increased 9.1% in Q3 and 3.9% for the first nine months. Non-automated system revenue declined 0.4% and 12.7%, respectively.
- Q3 revenue increased 21% in Asia and 32% in the Americas but declined 20% in Europe. Nine-month revenue increased 16% in Asia and 13% in the Americas but declined 20% in Europe.
- Order bookings rose to $7.9 million from $5.9 million, and backlog increased to $3.1 million from $1.6 million at September 30, 2015 and $2.0 million at June 30, 2016.
- Gross margin improved primarily because of product mix, favorable factory variances and fixed-cost leverage.
- Operating expenses increased due to higher R&D investment, patent filings, engineering recruitment, commissions, consulting, employee-related costs and rent.
- Accounts receivable increased to $5.198 million from $2.790 million at year-end 2015, and inventory increased to $3.896 million from $3.705 million.
- The company repurchased 80,345 shares for approximately $191 thousand during the first nine months under a program authorizing up to $1 million of repurchases.
Guidance, outlook, risks and unusual items
- Management did not provide specific quantitative revenue or earnings guidance in the filing.
- A five-year supply agreement with Bosch Car Multimedia was signed during the quarter following a competitive benchmark evaluation. Initial system orders began in 2016, with larger business impact expected in 2017 and 2018.
- Management continues to target profitable operations while investing in new products and balancing cyclical demand, geographic shifts, foreign-exchange volatility, rising costs and strategic investments.
- Key risks include the cyclical and rapidly changing electronics industry, customer capital-spending levels, product acceptance, product mix and pricing, inventory obsolescence, warranty claims, foreign-currency movements and dependence on international markets.
- The company maintained an $11.2 million valuation allowance against deferred tax assets because of uncertainty related to its loss history and industry cyclicality. Unrecognized tax benefits were $222 thousand.
- Operating lease commitments totaled $3.988 million, and purchase commitments and other obligations totaled $1.394 million, of which all but $38 thousand was expected to be paid within twelve months.
- Previous restructuring actions were fully implemented; no new restructuring charge was reported. The filing states that no material legal proceedings were pending.
- Management concluded that disclosure controls and procedures were effective and reported no material changes in internal control over financial reporting.
- New accounting standards involving stock compensation, leases and revenue recognition had not yet been adopted; management was evaluating their effects.
Facts investors should verify
- Whether the Bosch supply agreement produces the expected increase in revenue and bookings during 2017 and 2018.
- Whether the $3.1 million backlog converts to revenue as expected and how much is affected by deferred revenue, currency translation and shipment timing.
- Whether the improved gross margin is sustainable given product mix, factory utilization, warranty costs, pricing and currency movements.
- Whether higher accounts receivable and inventory convert to cash without material collection issues or inventory write-downs.
- The location and repatriation constraints of foreign cash balances, including any associated tax implications.
- The remaining capacity and effect of the $1 million share-repurchase authorization on liquidity and share count.
- The eventual effects of adopting the new revenue, lease and stock-compensation accounting standards.