Data I/O Corporation — Q2 2013 Form 10-Q Summary
Business context and reporting period
Data I/O develops and sells automated and non-automated semiconductor programming systems, related technology, software and services. The unaudited report covers the quarter and six months ended June 30, 2013. The company is focused on its core programming business, strategic growth markets and returning to profitability.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $5.271 million | $5.360 million | $10.029 million | $9.039 million |
| Gross margin | $2.939 million; 55.8% | $2.941 million; 54.9% | $5.480 million; 54.6% | $4.882 million; 54.0% |
| Operating income (loss) | $(0.605) million | $(0.482) million | $(1.075) million | $(2.182) million |
| Net income (loss) | $(0.624) million | $(0.057) million | $(1.083) million | $(1.735) million |
| Basic and diluted loss per share | $(0.08) | $(0.01) | $(0.14) | $(0.21) |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $0.302 million | $(0.653) million |
- Cash and cash equivalents were $10.588 million at June 30, 2013, compared with $10.528 million at December 31, 2012. Approximately $8.8 million was held in foreign subsidiary accounts.
- Working capital was $13.226 million, down from $13.837 million at year-end 2012. Accounts receivable increased to $3.204 million, while inventories declined to $3.393 million from $4.033 million.
- The filing does not report traditional interest-bearing debt. Liabilities included $4.263 million of current liabilities and $0.393 million of long-term other payables.
- Capital expenditures were $0.236 million during the first six months, compared with $0.378 million in the prior-year period.
- Reported EBITDA was a loss of $0.498 million in Q2 2013. Adjusted EBITDA, excluding the $0.642 million restructuring charge, was positive $0.144 million.
Material changes versus the prior comparable period
- Second-quarter sales decreased 1.7%, while six-month sales increased 11.0%. International sales represented 90.5% of quarterly sales, compared with 85.9% in the prior-year quarter.
- Orders increased 30% year over year to $6.7 million and backlog rose to $2.4 million, compared with $1.1 million at June 30, 2012 and $0.9 million at December 31, 2012. Most of a significant consumer-electronics order remained in backlog.
- Gross margin improved to 55.8% from 54.9% in Q2 2012, primarily due to product mix and favorable variances. Management cautioned that the backlog mix could produce lower margins in the next quarter because of higher direct material costs.
- Research and development expense declined 21.7% to $1.117 million, primarily because of lower Azido-related costs, personnel reductions and reduced contractor usage.
- SG&A expense declined 10.6% to $1.785 million, reflecting prior restructuring savings, partly offset by relocation costs, higher incentive compensation and commissions.
- Net loss increased from $0.057 million to $0.624 million in Q2, principally because of the $0.642 million restructuring charge and the absence of prior-year foreign tax refund benefits.
Outlook, commentary, risks and unusual items
- Second-quarter restructuring actions included personnel severance and lease-abandonment costs. The company expects approximately $0.300 million of annual operating expense reductions when fully implemented by Q3 2013.
- Lease-abandonment costs of approximately $0.329 million will continue to be paid over the lease terms unless renegotiated or partly offset by subleases. The restructuring reserve was $0.528 million at June 30, 2013, including $0.332 million expected to be paid within twelve months.
- Management believes existing working capital is sufficient to fund operations and capital requirements for at least the next year, but warns that failure to achieve its business plan could require additional spending reductions or financing.
- The company operates in a cyclical, rapidly changing industry and is exposed to demand and capital-spending fluctuations, product-mix changes, international market conditions, foreign exchange, inventory obsolescence, customer credit risk and technology execution risk.
- At year-end 2012, the company recorded a $2.3 million impairment of its Azido software technology and continues to evaluate strategic alternatives for that technology.
- The company maintains a full valuation allowance against deferred tax assets because of its loss history and uncertainty regarding future realization. The valuation allowance was $11.1 million at June 30, 2013.
- No material legal proceedings were pending, and management reported no material changes to the risk factors in the 2012 Form 10-K. Disclosure controls were considered effective, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether the $2.4 million backlog converts to shipments and revenue in the third and fourth quarters as scheduled.
- Whether restructuring savings are realized without impairing product development, customer support or sales capabilities.
- Whether the less favorable PS and FLX backlog mix reduces gross margin as management expects.
- The concentration, collectability and geographic exposure of international sales, particularly given that 90.5% of Q2 revenue was international.
- The availability and repatriation constraints on the $8.8 million of cash held by foreign subsidiaries.
- Progress toward operating and net-income breakeven while the company continues to report losses.
- The future value or disposition of the impaired Azido software technology and the realization of deferred tax assets.