Data I/O Corporation — Q1 2017 Form 10-Q Summary
Business context and reporting period
Data I/O Corporation, a smaller reporting company, designs and sells semiconductor programming systems, consumables, software and services. The filing covers the unaudited three months ended March 31, 2017, compared with the three months ended March 31, 2016. Management focused on automotive electronics, Internet of Things, industrial, consumer and wireless markets, while investing in secure programming, automated handling and newer semiconductor technologies.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $7.224 million | $4.613 million |
| Gross profit | $4.167 million | $2.528 million |
| Gross margin | 57.7% | 54.8% |
| Operating income (loss) | $804,000 | ($175,000) |
| Net income (loss) | $979,000 | ($168,000) |
| Diluted earnings (loss) per share | $0.12 | ($0.02) |
| Operating cash flow | ($830,000) | ($962,000) |
| Capital expenditures | $403,000 | $642,000 |
| Adjusted EBITDA | $1.245 million | $44,000 |
- Automated programming systems generated $5.925 million of sales, up 80.0%; non-automated programming systems generated $1.299 million, down 1.7%.
- International sales were $6.476 million, or 89.6% of total sales, compared with $3.590 million, or 77.8%, in the prior-year quarter. U.S. sales declined to $748,000 from $1.023 million.
- Revenue mix was approximately 70% equipment, 22% consumables and 8% software and services.
- Research and development expense increased 37.3% to $1.545 million. Selling, general and administrative expense increased 15.2% to $1.818 million.
- Cash and cash equivalents were $10.513 million at March 31, 2017, including approximately $5.2 million in the United States and approximately $5.3 million in foreign subsidiaries.
- Working capital was $15.486 million, compared with $14.573 million at December 31, 2016. Total current liabilities were $5.278 million; the filing does not show traditional bank debt or borrowings.
- Total assets were $22.824 million and stockholders’ equity was $17.095 million at quarter-end.
Material changes versus the prior comparable period
- Sales increased 56.6%, primarily due to stronger automotive electronics and IoT demand from original equipment manufacturers and programming centers, with particularly strong European growth.
- Gross margin improved 290 basis points, attributed to favorable factory variances, higher volume and better fixed-cost utilization, and favorable product mix.
- The company moved from an operating loss to operating income and from a net loss to net income.
- Operating cash flow remained negative, although the use of cash improved by $132,000 year over year. Cash usage reflected increases in receivables and inventory, payments of previously accrued incentive compensation and pension contributions, and a reduction in deferred revenue.
- Order bookings were $8.4 million, described as a 17-year high and 42% above the prior-year quarter’s $5.9 million. Backlog was $4.9 million at March 31, 2017, versus $3.2 million at December 31, 2016 and $2.0 million at March 31, 2016.
- A $211,000 non-operating gain resulted from the sale of non-core and excess internet domain addresses. Management expected smaller related sales during 2017.
- No shares were repurchased during the quarter. The repurchase program expired March 31, 2017 after 80,345 shares had been repurchased for approximately $191,009 including commissions and charges.
Guidance, outlook, risks and unusual items
- Management did not provide specific numerical revenue or earnings guidance. It stated that it expects continued investment in products, service, rental, demonstration and test equipment, funded by existing cash, internally generated funds or lease financing.
- Management believes available cash and working capital are sufficient to fund operations and capital requirements for at least the next year, but noted that U.S. operations may require repatriation of foreign cash, which could involve tax and other impediments.
- Liquidity could be reduced by operating losses, business growth, strategic initiatives, share repurchases, acquisitions or other business-development activities. Failure to achieve the current business plan could require spending reductions or additional financing.
- The business operates in a cyclical and rapidly changing industry and faces risks from demand variability, capital spending trends, foreign exchange volatility, geographic shifts, increasing costs, product transitions and technology obsolescence.
- Inventory was $4.407 million at quarter-end, up from $4.059 million at December 31, 2016. Management noted that weaker demand or product transitions could increase inventory reserves and reduce margins.
- Product warranty liabilities were $404,000 at March 31, 2017, compared with $371,000 at year-end 2016. Higher-than-expected warranty claims could adversely affect gross margin.
- Operating lease commitments totaled $3.939 million, and purchase commitments and other obligations totaled $1.575 million, of which all but $28,000 were expected to be paid within 12 months.
- The company reported no material pending legal proceedings and no material changes to the risk factors in its 2016 Form 10-K.
- A $10.7 million valuation allowance was maintained against deferred tax assets. Unrecognized tax benefits were $230,000 at March 31, 2017. The filing states that the impact of adopting the new revenue recognition standard in 2018 remains unknown.
- 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 during the quarter.
Most important facts for investors to verify
- Whether the strong bookings and $4.9 million backlog convert into sustained revenue, particularly given the company’s cyclical industry and shipment-based revenue recognition.
- Whether international concentration, which reached approximately 90% of sales, increases exposure to foreign exchange, regional demand and geopolitical risks.
- Whether gross-margin improvement is sustained after the favorable product mix and factory-utilization effects in Q1.
- Whether the company can convert reported profitability into positive operating cash flow while receivables and inventory remain elevated.
- The eventual impact of adopting the new revenue recognition standard on revenue timing, sales incentives and reported results.
- The availability and tax implications of foreign-held cash if additional funding is required for U.S. operations.