Data I/O Corporation 10-Q Summary
Business Context and Reporting Period
Data I/O Corporation filed its unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. The company develops programming systems, adapters, software and maintenance solutions for semiconductor and electronics manufacturers. It is focused on automated programming systems, new programming technologies and markets including automotive electronics, wireless and consumer electronics, industrial controls and programming centers.
Financial Performance and Position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $6.159 million | $6.213 million | $17.019 million | $16.631 million |
| Gross margin | $3.169 million | $3.391 million | $8.749 million | $8.908 million |
| Gross margin percentage | 51.5% | 54.6% | 51.4% | 53.6% |
| Operating income | $476 thousand | $730 thousand | $762 thousand | $768 thousand |
| Net income | $439 thousand | $646 thousand | $589 thousand | $750 thousand |
| Diluted EPS | $0.05 | $0.08 | $0.07 | $0.09 |
- Q3 EBITDA was $552 thousand versus $728 thousand in the prior-year quarter; nine-month EBITDA was $925 thousand versus $1.112 million.
- Adjusted EBITDA was $645 thousand in Q3 and $1.255 million for the nine months, compared with $818 thousand and $1.426 million, respectively, in the comparable 2014 periods.
- Cash and cash equivalents were $8.995 million at September 30, 2015, compared with $9.361 million at December 31, 2014. Approximately $5.1 million was held in foreign subsidiaries.
- Working capital was $13.860 million, up from $13.063 million at year-end 2014. The company reported no debt or significant external capital expenditure plans.
- Operating cash flow for the nine months was $453 thousand, compared with $126 thousand in 2014. Capital expenditures were $632 thousand, resulting in net cash used in investing activities of $632 thousand.
- Total assets were $19.104 million and stockholders’ equity was $14.516 million at September 30, 2015.
Material Changes Versus Prior Comparable Period
- Q3 sales declined 0.9%, while nine-month sales increased 2.3%. Q3 sales were up 24% sequentially from $5.0 million in Q2 2015.
- Automated programming systems increased 4.0% in Q3 and 11.3% for the nine months. Non-automated programming systems declined 14.5% and 18.3%, respectively.
- International sales represented 92.7% of Q3 revenue. Q3 sales increased 79% in Asia and 18% in Europe but declined 62% in the Americas. Foreign currency translation reduced Q3 revenue by approximately $260 thousand and nine-month revenue by approximately $1 million.
- Orders increased 10% year over year to $5.9 million in Q3. Backlog declined to $1.6 million from $2.0 million at September 30, 2014 and $1.9 million at June 30, 2015.
- Gross margin declined because of unfavorable currency effects and a less favorable product and channel mix, including continued weakness in Latin America.
- SG&A increased 4.2% in Q3, partly because of approximately $90 thousand in one-time costs related to the Redmond headquarters move. The new facility is expected to reduce rent by approximately $50 thousand per quarter.
- Prior restructuring actions were fully implemented. No restructuring expense was recorded in 2015, and the remaining approximately $120 thousand restructuring liability was incorporated into deferred rent in July 2015.
Guidance, Outlook, Risks and Unusual Items
- Management expects to continue investing in product development, sales demonstration equipment and research and development while managing costs and pursuing profitable growth. No specific revenue or earnings guidance was provided.
- Management believes existing working capital and internally generated funds are sufficient to fund operations and capital requirements for at least the next twelve months, subject to execution of its business plan.
- Key risks include cyclical and rapidly changing industry demand, semiconductor and electronics capital spending, product transitions, unfavorable currency movements, customer and regional concentration, inventory obsolescence, warranty claims and the ability to achieve profitable growth.
- Operating lease commitments totaled $2.822 million, including the amended Redmond facility lease through April 2021. Purchase commitments and other obligations totaled $958 thousand, with all but $59 thousand expected to be paid within twelve months.
- The company reported no material pending legal proceedings and no material changes to the risk factors disclosed in its 2014 Form 10-K.
- A valuation allowance of $11.6 million was maintained against deferred tax assets. Unrecognized tax benefits were $211 thousand at September 30, 2015. Tax years 2012 through 2014 remained open for examination in the United States.
- The company was evaluating the impact of the new revenue recognition standard, effective for public entities for fiscal years beginning after December 15, 2017, with early adoption permitted.
- Disclosure controls and procedures were concluded to be effective at a reasonable level of assurance, with no material changes to internal control over financial reporting.
Investor Verification Items
- Verify whether automated programming system growth can offset declines in non-automated systems and regional weakness.
- Monitor gross margin recovery, particularly the effects of currency movements and product and channel mix.
- Assess backlog, orders and deferred revenue as indicators of near-term demand and revenue conversion.
- Review foreign cash balances and any tax or other restrictions on repatriation.
- Evaluate liquidity after lease obligations, purchase commitments, capital expenditures and potential growth initiatives or share repurchases.
- Confirm the eventual accounting impact and implementation approach for the new revenue recognition standard.