Data I/O Corporation 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. The filing was signed November 8, 2013. Data I/O develops and sells automated and non-automated semiconductor programming systems, software, and related products. The company is classified as a smaller reporting company.
Financial Performance and Position
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $5.357 million | $4.311 million | $15.387 million | $13.350 million |
| Gross margin | $2.556 million; 47.7% | $1.927 million; 44.7% | $8.036 million; 52.2% | $6.809 million; 51.0% |
| Operating income (loss) | $79,000 | $(1.372) million | $(995,000) | $(3.554) million |
| Net income (loss) | $146,000 | $(1.329) million | $(938,000) | $(3.063) million |
| Diluted EPS | $0.02 | $(0.17) | $(0.12) | $(0.38) |
| EBITDA | $228,000 | $(1.094) million | $(563,000) | $(2.661) million |
- Automated programming system sales increased 34.9% in Q3 and 21.9% for the first nine months. Total programming system sales increased 24.3% and 15.3%, respectively.
- International sales represented 84.5% of Q3 revenue and increased 30.1% year over year; U.S. sales were essentially flat in Q3 and declined 17.8% for the first nine months.
- Research and development expense declined 22.4% in Q3 and 19.3% year to date. Selling, general and administrative expense declined 17.5% and 16.0%, respectively.
- Cash and cash equivalents were $10.294 million at September 30, 2013, compared with $10.528 million at December 31, 2012. Working capital was $13.692 million versus $13.837 million at year-end.
- Cash provided by operating activities was $62,000 for the first nine months, compared with $461,000 of cash used in the prior-year period. Capital expenditures were $463,000.
- The filing does not show outstanding bank debt or other conventional borrowings. Liabilities included $4.467 million of current liabilities and $385,000 of long-term other payables.
- Approximately $8.6 million of cash was held in foreign subsidiary accounts and could be subject to tax or other repatriation impediments.
Material Changes Versus Prior Period
- Q3 revenue increased $1.046 million, or 24.3%, while gross margin improved 300 basis points to 47.7%.
- The company returned to quarterly operating profitability and net profitability, compared with significant losses in Q3 2012. Management attributed the improvement to higher volume relative to fixed costs, cost reductions, and lower restructuring and development-related expenses.
- For the first nine months, the net loss narrowed by $2.125 million to $938,000, but the company remained unprofitable.
- Third-quarter orders were $4.3 million, up 5% year over year but down 36% sequentially. Backlog was $1.3 million, compared with $2.4 million at June 30, 2013 and $1.0 million at September 30, 2012.
- Accounts receivable increased $1.4 million from year-end, primarily because two customers were past due; the customers paid $1.2 million during the week after quarter-end. Inventory increased $158,000 in Q3, partly for the new PSV7000 product.
Outlook, Risks, and Unusual Items
- Management is focused on returning the core programming business to sustained profitability while investing in new programming technology, automated systems, software, and support for devices such as NAND Flash and microcontrollers.
- Data I/O announced the PSV7000 in September 2013, which management stated could reduce programming costs by up to 50% and provide improved small-part handling capabilities.
- Bookings decelerated during Q3 and were softer than expected. Management cited economic uncertainty, cyclical demand, limited capacity-related capital spending, geographic shifts, and changing product mix as continuing challenges.
- Restructuring charges were $642,000 in Q2 2013 and $1,000 in Q3. Management expects the implemented personnel and facility actions to reduce annual operating expenses by approximately $300,000. The remaining restructuring reserve was $431,000, including $235,000 expected to be paid within twelve months and $196,000 related to lease abandonment payments due over more than one year.
- Total operating lease commitments were $2.665 million, and purchase commitments and other obligations totaled $1.104 million, substantially payable within twelve months. The company reported no material pending legal proceedings.
- The company believes existing working capital will fund operations and capital requirements for at least the next year, but states that failure to achieve its operating plan could require further spending reductions or additional financing.
- A full valuation allowance of approximately $11.2 million was maintained against deferred tax assets because of the company’s loss history and uncertain outlook. Unrecognized tax benefits were approximately $155,000.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting.
Investor Verification Points
- Verify whether the Q3 improvement is sustainable given the sharp sequential decline in bookings and backlog.
- Monitor collections and customer concentration risk, particularly the effect of past-due accounts receivable on liquidity.
- Assess whether the PSV7000 and other new products generate sufficient demand and margins to offset cyclical and technology-related risks.
- Track completion and cash cost of restructuring actions, including lease-abandonment obligations.
- Reconcile cash availability with the $8.6 million held overseas and evaluate potential repatriation constraints.
- Confirm progress toward sustained profitability, since the company remained loss-making for the first nine months of 2013 despite the profitable third quarter.