Data I/O Corporation — Form 10-Q Summary
Business context and reporting period
Data I/O Corporation designs and sells programming systems, adapters, software and maintenance products used to program semiconductor devices. The filing covers the quarter and six months ended June 30, 2014. The company is a smaller reporting company; its common stock outstanding at August 1, 2014 was 7,843,526 shares.
Financial performance and position
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Net sales | $5.599 million | $5.271 million | $10.418 million | $10.029 million |
| Gross margin | $3.022 million; 54.0% | $2.939 million; 55.8% | $5.517 million; 53.0% | $5.480 million; 54.6% |
| Operating income (loss) | $393 thousand | ($605 thousand) | $37 thousand | ($1.075 million) |
| Net income (loss) | $447 thousand | ($624 thousand) | $104 thousand | ($1.083 million) |
| Diluted earnings (loss) per share | $0.06 | ($0.08) | $0.01 | ($0.14) |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | ($1.262 million) | $302 thousand |
- Second-quarter revenue increased 6.2%; six-month revenue increased 3.9%. Automated programming systems increased 8.2% in the quarter and 8.4% year to date.
- International sales represented 89.2% of second-quarter revenue and 88.8% of six-month revenue.
- Second-quarter orders were $6.3 million, down 7% year over year but up 8.5% sequentially. Backlog was $2.7 million at June 30, 2014, compared with $2.4 million a year earlier.
- Cash and cash equivalents were $8.220 million at June 30, 2014, compared with $10.426 million at December 31, 2013. Approximately $7.0 million was held in foreign subsidiary accounts.
- Working capital was $12.015 million, compared with $12.244 million at December 31, 2013. The filing states that the company believes existing working capital will fund operations and capital requirements for at least the next year.
- Accounts receivable increased to $5.171 million from $1.980 million at year-end, primarily reflecting increased shipments and deferred revenue activity. Inventory was $3.952 million.
- No borrowings or senior debt balance is presented in the balance sheets. Long-term other payables were $236 thousand at June 30, 2014.
- Capital expenditures were $707 thousand in the first six months, compared with $236 thousand in the prior-year period.
- Second-quarter EBITDA was $562 thousand, versus an EBITDA loss of $498 thousand; adjusted EBITDA excluding equity compensation was $687 thousand, versus a loss of $362 thousand.
Material changes versus the prior comparable period
- The company returned to quarterly profitability, with operating income of $393 thousand and net income of $447 thousand, compared with operating and net losses in the prior-year quarter.
- Six-month results also improved to near break-even operating income and positive net income, compared with significant losses in the first half of 2013.
- SG&A expense declined 18.4% in the quarter and 12.5% year to date, primarily due to restructuring-related personnel reductions, cost controls, lower commissions, consulting and depreciation costs.
- Restructuring expense declined to zero in the second quarter from $642 thousand in the prior-year quarter; a $13 thousand estimate true-up was recorded in the first quarter of 2014.
- Gross margin percentage declined to 54.0% from 55.8% in the quarter and to 53.0% from 54.6% year to date, primarily because of less favorable product mix and unfavorable variances.
- Operating cash flow changed from $302 thousand provided in the first six months of 2013 to $1.262 million used in the first six months of 2014, mainly because of the $3.189 million increase in accounts receivable.
Guidance, outlook, risks and unusual items
- Management attributed sales growth to strong orders for the new PSV7000, introduced in late 2013, and reported particularly strong automotive-sector demand. Management expects backlog and deferred revenue to support sequential sales growth in the second half of 2014.
- The company announced the PSV3000 automated programming system in July 2014, targeting an entry-level price point and the Asian market.
- The business remains exposed to cyclical and rapidly evolving semiconductor and capital-equipment markets, customer capital-spending levels, product transitions, geographic and product mix, foreign currency movements and international operating risks.
- Restructuring actions have been implemented. Remaining restructuring reserves were $371 thousand at June 30, 2014, including $273 thousand expected to be paid within twelve months and $98 thousand related to lease-abandonment payments expected to continue through July 2016.
- Operating lease commitments totaled $2.328 million, and purchase commitments and other obligations totaled $986 thousand at June 30, 2014. Most purchase arrangements were cancellable with short notice.
- The company maintains a $12.2 million valuation allowance against deferred tax assets and does not expect significant reversals absent sufficient taxable income. Unrecognized tax benefits were $192 thousand.
- No material pending legal proceedings or material indemnification claims were reported. Management identified no material changes to the risk factors in the 2013 Form 10-K.
- ASU 2014-09, the new revenue-recognition standard, is effective for annual periods beginning after December 15, 2016; the company was evaluating its impact. ASU 2014-08 is not expected to have a material impact.
- On July 30, 2014, the company adopted an amended executive agreement providing specified change-in-control severance benefits and a 0.5-times-base-salary control-event payment. A separate August 7, 2014 letter confirmed a $134,351 severance arrangement for CFO Joel Hatlen if terminated without cause outside a change in control.
Important facts for investors to verify
- Whether PSV7000 and PSV3000 demand converts into sustained orders, revenue and margin improvement.
- The collectability and timing of the substantial accounts-receivable balance and the resulting effect on operating cash flow.
- Whether gross-margin pressure from product mix and unfavorable variances persists.
- The timing and cash impact of remaining restructuring, lease and other contractual obligations.
- The availability and repatriation constraints of foreign-held cash, including potential tax or other impediments.
- The potential impact of the new revenue-recognition standard and continued tax valuation allowances.
- The financial consequences of executive change-in-control and severance arrangements.