Data I/O Corporation — Q2 2019 Form 10-Q
Business context and reporting period
Data I/O Corporation develops automated and non-automated programming systems, adapters, software and maintenance solutions for semiconductor manufacturers and programming centers. The filing covers the three and six months ended June 30, 2019. Management reported a cyclical downturn in capital spending, particularly in automotive electronics, while continuing investments in secure provisioning, automotive electronics, IoT and automated programming technologies.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Change |
|---|
| Net sales | $5.834 million | $7.204 million | Down 19.0% |
| Gross margin | $3.584 million | $4.249 million | Down 15.7% |
| Gross margin percentage | 61.4% | 59.0% | Up 2.4 points |
| Operating income | $75,000 | $246,000 | Down 69.5% |
| Net income | $127,000 | $486,000 | Down 73.9% |
| Diluted EPS | $0.02 | $0.06 | Down $0.04 |
| Six-month metric | 2019 | 2018 | Change |
|---|
| Net sales | $11.892 million | $14.834 million | Down 19.8% |
| Gross margin percentage | 61.1% | 58.4% | Up 2.7 points |
| Operating income | $105,000 | $590,000 | Down 82.2% |
| Net income | $153,000 | $616,000 | Down 75.2% |
| Net cash used in operating activities | $(1.455) million | $(798,000) | Greater use of cash |
- Q2 revenue consisted of automated programming systems of $4.651 million, down 18.1%, and non-automated systems of $1.183 million, down 22.4%.
- By product type, equipment sales declined 24.2% to $3.537 million and adapter sales declined 18.8% to $1.421 million. Software and maintenance increased 11.0% to $876,000.
- International revenue represented 89.6% of Q2 sales, compared with 86.5% in the prior-year quarter. Asia was the strongest territory despite tariffs.
- Research and development expense declined 8.9% to $1.680 million, while SG&A declined 15.2% to $1.829 million. Cost reductions were partly offset by the lower revenue base.
- Management attributed the higher gross margin percentage primarily to favorable product mix and overhead and currency variances. The filing states that full-year gross margin is modeled in the mid-to-upper fifties.
- Cash and cash equivalents were $15.165 million at June 30, 2019, compared with $18.343 million at December 31, 2018. Working capital was $19.541 million, down from $21.065 million.
- The company reported no traditional debt. Operating lease liabilities totaled $2.199 million, including $667,000 current and $1.532 million long term.
- Cash used in investing activities was $305,000, including $365,000 of capital expenditures. Cash used in financing activities was $1.442 million, including $1.220 million for share repurchases.
- Adjusted EBITDA, excluding equity compensation, was $728,000 in Q2 2019 versus $1.269 million in Q2 2018, and $1.204 million for the first six months versus $1.843 million.
Material changes versus the prior comparable period
- Revenue declined primarily because of slower automotive-electronics cyclical demand; the 2018 comparison also benefited from use of backlog.
- Q2 order bookings were $5.1 million versus $7.2 million in Q2 2018. Backlog at June 30, 2019 was $1.4 million versus $1.9 million a year earlier.
- Despite the sales decline, gross margin percentage improved because of product mix and favorable operating variances.
- Operating income and net income fell sharply because the gross-margin dollar decline exceeded reductions in R&D and SG&A.
- Operating cash flow deteriorated, principally reflecting lower earnings and a $2.223 million decrease in accounts payable and accrued liabilities.
- The company adopted ASC 842 on January 1, 2019, recognizing $1.864 million of right-of-use assets and $2.199 million of lease liabilities at June 30, 2019. Management stated that the adoption did not affect the statement of operations but reduced reported working capital through the current lease liability.
- Under its $2 million repurchase authorization, the company repurchased 347,781 shares from November 2018 through June 2019 at an average price of $5.03, leaving approximately $251,000 available.
Guidance, outlook, risks and unusual items
- Management expects the cyclical downturn in capital spending, industry changes, geographic shifts, exchange-rate volatility, trade issues and tariffs to remain important factors.
- The company is continuing strategic investment in secure provisioning, including secure elements, authentication chips and secure microcontrollers, while pursuing cost reductions and geographic and real-estate optimization.
- Management expects existing cash and working capital to fund operations and capital requirements for at least the next one-year period under its operating plan. It noted that losses, growth initiatives, acquisitions or additional share repurchases could reduce liquidity and potentially require additional financing.
- Tariff effects were manageable during 2019 but remain an uncertainty and could become more significant.
- Purchase commitments and other obligations totaled approximately $2.0 million at June 30, 2019, with all but $646,000 expected to be paid within 12 months. Most arrangements were cancelable with short notice and without significant penalty.
- The company reported no material pending legal proceedings, no material changes to the risk factors in its 2018 Form 10-K, and no material off-balance-sheet arrangements beyond disclosed leases and commitments.
- A $7.1 million valuation allowance remained against deferred tax assets, reflecting uncertainty associated with the company’s loss history and economic outlook.
- The filing text does not provide formal revenue or earnings guidance beyond the full-year gross-margin model and management’s liquidity assessment.
Important facts for investors to verify
- Whether order bookings, backlog and automotive-electronics demand recover after the reported cyclical downturn.
- Whether the improved gross margin percentage is sustainable once favorable product mix, overhead and currency variances normalize.
- The company’s ability to generate positive operating cash flow while funding product development and capital expenditures.
- Remaining liquidity after lease payments, purchase commitments, potential repurchases and any cash needs at the U.S. headquarters.
- The future effect of tariffs, foreign exchange movements and international exposure, which represented nearly 90% of Q2 revenue.
- The realization prospects for deferred tax assets and the potential for future tax expense as valuation allowances change.
