Data I/O Corporation — Q2 2015 Form 10-Q Summary
Business context and reporting period
Data I/O develops and sells programming systems, adapters, software, and related maintenance services for semiconductor and electronic manufacturing markets. The filing covers the three and six months ended June 30, 2015. The company reported 7,929,260 common shares outstanding as of August 1, 2015 and is classified as a smaller reporting company.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $5.0 million | $5.6 million | $10.9 million | $10.4 million |
| Gross margin | $2.7 million | $3.0 million | $5.6 million | $5.5 million |
| Gross margin percentage | 54.9% | 54.0% | 51.4% | 53.0% |
| Operating income | $64 thousand | $393 thousand | $286 thousand | $37 thousand |
| Net income | $100 thousand | $447 thousand | $149 thousand | $104 thousand |
| Diluted EPS | $0.01 | $0.06 | $0.02 | $0.01 |
| Operating cash flow | Not separately presented for the quarter | $301 thousand | $(1.262) million |
Q2 operating margin was approximately 1.3%, compared with approximately 7.0% in the prior-year quarter. Six-month operating margin was approximately 2.6%, compared with approximately 0.4% in the prior-year period. Management reported Q2 EBITDA of $197 thousand and adjusted EBITDA, excluding equity compensation and restructuring charges, of $345 thousand.
Financial position and liquidity
- Cash and cash equivalents were $9.145 million at June 30, 2015, compared with $9.361 million at December 31, 2014.
- Working capital was $13.119 million, up modestly from $13.063 million at year-end 2014.
- Total assets were $18.198 million and stockholders’ equity was $14.071 million.
- The balance sheet presents no borrowings or senior debt; current liabilities were $4.012 million and long-term other payables were $115 thousand.
- Six-month cash flow included $394 thousand of capital expenditures and $60 thousand of net cash used in financing activities. Cash declined $153 thousand before a $63 thousand unfavorable exchange-rate effect.
- Approximately $5.7 million of cash was held in foreign subsidiaries and may be subject to tax or other repatriation restrictions.
- Management believes existing working capital is sufficient to fund operations and capital requirements for at least the next year, but states that failure to achieve the business plan could require expenditure reductions or additional financing.
Material changes versus the prior comparable period
- Q2 sales declined 11.4% year over year and 16% sequentially, primarily because of lower volumes in older product lines, particularly wireless customers. Newer PSV7000, PSV5000, and PSV3000 systems partially offset the decline.
- Six-month sales increased 4.2%, driven by the newer automated programming systems. Automated-system sales increased 16.0% for the six-month period, while non-automated-system sales declined 20.1%.
- International sales represented 79.9% of Q2 revenue, down from 89.2% in Q2 2014. Asia increased 25%, while the Americas declined 4% and Europe declined 39%.
- Foreign-currency translation reduced Q2 sales by approximately $300 thousand and contributed to pressure on six-month gross margin.
- Q2 gross margin percentage improved to 54.9% from 54.0%, reflecting product and channel mix and lower unfavorable labor and overhead variances. Six-month gross margin percentage declined to 51.4% from 53.0%, primarily due to currency effects.
- Q2 R&D expense increased 6.0% to $1.243 million, while SG&A declined 2.8% to $1.415 million. Six-month SG&A declined 6.1%, reflecting lower commissions, bad debt, personnel reductions, and cost controls.
- Q2 net income declined substantially from $447 thousand to $100 thousand. Six-month net income increased to $149 thousand from $104 thousand, despite a $188 thousand foreign-currency transaction loss in 2015 versus a $27 thousand gain in 2014.
- Orders declined 19% year over year to $5.1 million. Backlog was $1.9 million at June 30, 2015, compared with $2.7 million a year earlier and $1.7 million at March 31, 2015.
Outlook, commentary, risks, and unusual items
- Management is focused on profitable growth of the core programming business, market-share gains, expansion of addressable markets, and investment in new programming technology, automated systems, and software.
- The company delivered multiple PSV5000 systems during the quarter and is targeting high-volume manufacturers in automotive electronics, wireless and consumer electronics, industrial controls, Internet of Things electronics, and programming centers.
- No specific quantitative revenue, earnings, or margin guidance was provided. Management cautions that the industry is cyclical and rapidly evolving and that actual results may differ from forward-looking statements.
- Previous restructuring actions have been fully implemented. The remaining restructuring liability was $120 thousand at June 30, 2015, including $103 thousand current and $17 thousand long term. The liability was expected to be incorporated into deferred rent following the July 2015 lease amendment.
- The amended Redmond headquarters lease extends through April 2021, reduces space and rental costs, and is expected to save approximately $1.5 million of cash versus the prior lease. Total operating lease commitments were $2.850 million at June 30, 2015.
- Inventory, warranty obligations, sales returns, revenue recognition, foreign exchange, tax valuation allowances, and technology-driven obsolescence are key estimates and risk areas. The company maintained an $11.9 million tax valuation allowance and reported $206 thousand of unrecognized tax benefits.
- The company reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and no material off-balance-sheet arrangements other than disclosed leases and commitments.
- The company is evaluating the future adoption impact of the new revenue recognition standard, ASU 2014-09; the filing does not provide a quantified impact.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2015, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the newer PSV5000, PSV7000, and PSV3000 systems can offset declining legacy and wireless-related demand.
- Order trends, backlog conversion, and the significant year-over-year decline in Q2 orders.
- The effect of foreign-currency movements on revenue, gross margin, and reported earnings.
- The sustainability of positive operating cash flow and the availability of cash held by foreign subsidiaries.
- Whether the company can maintain profitability while funding R&D, capital expenditures, facility moves, and approximately $1.2 million of unamortized future equity compensation expense.
- The eventual effect of ASU 2014-09 on revenue timing and reported results.