Data I/O Corporation — Q1 2013 Form 10-Q Summary
Business context and reporting period
Data I/O Corporation designs and sells programming systems used by electronics manufacturers. The unaudited report covers the three months ended March 31, 2013, compared with the same period in 2012. Management is focused on its core programming business, strategic growth markets, cost reduction, and returning to profitability.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $4.759 million | $3.679 million | +29.4% |
| Gross profit | $2.541 million | $1.942 million | +30.8% |
| Gross margin | 53.4% | 52.8% | +0.6 percentage points |
| Operating loss | $0.470 million | $1.700 million | Improved by $1.230 million |
| Net loss | $0.459 million | $1.677 million | Improved by $1.218 million |
| Loss per diluted share | $0.06 | $0.19 | Improved |
| EBITDA loss | $0.294 million | $1.375 million | Improved by $1.081 million |
| Cash flow from operations | $(0.049) million | $0.259 million | Declined by $0.308 million |
Automated programming systems generated $2.942 million of sales, up 44.9%, while non-automated systems generated $1.817 million, up 10.2%. International sales represented 92.4% of revenue, compared with 87.2% in the prior-year quarter.
Research and development expense declined 13.4% to $1.205 million, and selling, general and administrative expense declined 19.7% to $1.806 million. The reductions primarily reflected lower Azido-related costs, prior-year CEO search and separation expenses, and September 2012 restructuring savings.
Cash and cash equivalents were $10.392 million at March 31, 2013, compared with $10.528 million at December 31, 2012. Working capital was $13.544 million, down from $13.837 million. Current assets were $17.282 million and current liabilities were $3.738 million. The filing reports no borrowings or material debt; long-term other payables were $0.228 million.
Material changes versus the prior comparable period
- Revenue increased 29.4%, primarily from wireless OEM and related electronics manufacturing services customers and a new consumer home electronics customer.
- First-quarter orders were approximately $4.8 million, up 13% from $4.2 million. Ending backlog was $0.9 million, down from $1.6 million at March 31, 2012 and unchanged from December 31, 2012.
- Gross margin improved modestly because higher volume absorbed fixed costs and unfavorable variances decreased.
- Operating and net losses narrowed substantially because of higher sales and lower operating expenses, although the company remained unprofitable.
- Operating cash flow turned negative, primarily because of the operating loss and a $0.236 million increase in accounts receivable, partly offset by a $0.400 million reduction in inventories.
- Weighted-average shares declined to 7.749 million from 8.765 million, primarily reflecting the prior-year share repurchases. No repurchases occurred after March 31, 2012.
- The Azido software technology had a carrying value of only $34,000 at March 31, 2013 after a $2.318 million impairment charge in the fourth quarter of 2012. Management continued evaluating strategic alternatives for the technology.
Guidance, outlook, risks, contingencies, and unusual items
Management stated that it believed available working capital was sufficient to fund operations and capital requirements for at least the next one-year period. Approximately $8.5 million of cash was held in foreign subsidiary accounts, and repatriation could be subject to tax and other impediments.
Additional restructuring actions taken in April 2013 are expected to produce approximately $0.300 million of annual operating expense reductions when fully implemented by the third quarter of 2013. The company expects to record approximately $0.195 million of personnel severance costs and $0.330 million of lease-abandonment costs in the second quarter. Lease-abandonment payments may continue over the lease terms unless renegotiated or partially offset by subleases.
Key risks include the cyclical and rapidly evolving electronics industry, dependence on capital spending and customer demand, international exposure and foreign currency movements, inventory obsolescence, warranty costs, execution of restructuring actions, and continued operating losses. The company maintains a full valuation allowance against its deferred tax assets because of its loss history and uncertainty regarding future realization.
Operating lease commitments totaled $2.960 million through 2016, and purchase and other obligations totaled $0.821 million at March 31, 2013. The company reported no material pending legal proceedings and no material changes to the risk factors in its 2012 Form 10-K. Disclosure controls were assessed as effective, with no material changes in internal control over financial reporting.
Most important facts for an investor to verify
- Whether revenue growth and the $0.9 million backlog can be sustained, particularly given the company’s dependence on international and cyclical electronics customers.
- Whether restructuring actions deliver the expected approximately $0.300 million annual expense reduction and whether the estimated second-quarter charges remain within expectations.
- Whether the company can reach operating cash-flow and net-income breakeven without materially reducing its $10.4 million cash balance.
- The concentration, collectability, and geographic distribution of accounts receivable and international cash.
- Potential additional impairment or limited recovery associated with the Azido technology.
- Exposure to inventory obsolescence, warranty claims, foreign currency changes, lease commitments, and other operating obligations.