Data I/O Corporation: Fiscal 2013 Form 10-K Summary
Business context and reporting period
Data I/O designs, manufactures and sells automated and manual programming systems, adapters, software and services used to program flash memory, microcontrollers and other programmable semiconductor devices. Its customers primarily serve wireless and consumer electronics, automotive and industrial markets. The filing covers the fiscal year ended December 31, 2013, with comparative fiscal 2012 information. It is an annual filing, not a quarterly report, although fourth-quarter restructuring activity is disclosed.
International sales represented 87.5% of 2013 revenue. The company sold to more than 500 customers worldwide, but two distributors accounted for approximately 14% and 13% of sales. Data I/O had 82 employees at year-end and operates as one reportable segment.
Financial performance and condition
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $18.717 million | $17.085 million | +9.6% |
| Gross margin | $9.510 million; 50.8% | $8.638 million; 50.6% | Margin +0.2 points |
| Operating loss | $2.668 million | $6.941 million | Improved $4.273 million |
| Net loss | $2.576 million | $6.429 million | Improved $3.853 million |
| Basic and diluted loss per share | $0.33 | $0.80 | Improved |
| Net cash from operations | $0.335 million | $(1.271) million | Improved $1.606 million |
| Capital expenditures | $0.678 million | $0.492 million | Increased $0.186 million |
| Cash and cash equivalents | $10.426 million | $10.528 million | Down $0.102 million |
| Working capital | $12.244 million | $13.837 million | Down $1.593 million |
Automated programming-system revenue increased 13.0% to $12.173 million, while non-automated system revenue increased 3.7% to $6.544 million. Equipment sales rose to 58% of total sales from 52%, while adapter sales declined to 28% from 31% and software and maintenance sales declined to 14% from 17%.
Research and development expense declined 17.6% to $4.586 million, and selling, general and administrative expense declined 14.4% to $6.378 million. The company recorded $1.183 million of restructuring charges in 2013 and a $31,000 impairment charge related to the Azido software technology; the Azido asset had no remaining carrying value at year-end. Adjusted EBITDA excluding restructuring charges and stock-based compensation was a loss of $491,000, compared with a loss of $2.696 million in 2012.
Total assets were $17.502 million and stockholders’ equity was $12.862 million at December 31, 2013. The balance sheet does not show conventional bank debt; liabilities consisted primarily of current operating liabilities, accrued restructuring costs and $313,000 of long-term other payables. Cash held in foreign subsidiaries totaled approximately $8.345 million and may be subject to tax or other repatriation constraints.
Material changes versus the prior comparable period
- Revenue increased 9.6%, supported by higher capital-equipment sales, a rebound in capital spending and stronger Asia and Americas demand. Europe declined 18%.
- Bookings increased 14.4% to $19.5 million, and year-end backlog increased to approximately $1.9 million from $0.9 million.
- Gross margin improved modestly despite customer discounts, product-mix changes and unfavorable factory labor and overhead variances.
- Operating and net losses narrowed substantially due primarily to higher sales, lower R&D and SG&A spending, and the much smaller impairment charge.
- Operating cash flow turned positive, although cash declined slightly after $678,000 of capital expenditures and the company remained unprofitable.
- The company implemented additional restructuring in the second and fourth quarters. The actions were expected to reduce annual operating expenses by approximately $300,000 and $750,000, respectively, when fully implemented.
- No share repurchases occurred in 2013. The prior $6 million repurchase program was completed in 2012.
Guidance, outlook, commentary and risks
Management stated that it was refocusing the core programming business on returning to profitability while investing in new programming technology, automated handling systems, software and support for NAND Flash, e-MMC and microcontrollers. The PSV7000 was introduced in 2013 and management stated that it could reduce programming costs by up to 50%.
Management described bookings as initially soft after the third quarter began, followed by improvement in December. The filing provides no formal revenue or earnings guidance. Management believed existing cash and working capital were sufficient to fund operations and capital requirements for at least the following one-year period, but noted that additional financing could become necessary if revenues remain insufficient or cash is used for losses, growth initiatives, acquisitions or other purposes.
- Demand is exposed to cyclical semiconductor and electronics capital spending, economic uncertainty, customer delays and quarterly order volatility.
- International operations create foreign-exchange, collection, regulatory, tariff, political and repatriation risks.
- Two distributors represented approximately 27% of 2013 net sales in aggregate, creating customer and channel concentration risk. Avnet represented approximately 12% of year-end accounts receivable.
- The company relies on single-source or limited-source suppliers for certain components and uses foreign contract manufacturers for some parts and adapters.
- Rapid technology changes, including increased use of in-system or post-placement programming for certain high-density NAND and e-MMC devices, could reduce demand for some products.
- The company has incurred operating losses in three of the last five years and maintained a full valuation allowance against approximately $12.0 million of deferred tax assets.
- Restructuring obligations totaled $873,000 at year-end, including $723,000 expected to be paid in 2014 and $150,000 of longer-term lease-abandonment payments expected through July 2016.
- Two employee restructuring-related separation claims were accrued. Management identified no other legal proceedings expected to have a material adverse effect.
- Operating lease commitments totaled approximately $2.454 million, and purchase and other obligations totaled approximately $895,000, primarily payable over the next twelve months.
Important facts for investors to verify
- Whether revenue growth and the increased backlog convert into sustained profitability and positive operating cash flow.
- The timing and realized savings from the 2013 restructuring actions, including remaining severance and lease-related payments.
- Customer and distributor concentration, particularly Data Copy Limited, Di-Tek and business influenced by Blackberry-related EMS customers.
- Demand trends for PSV7000, high-density NAND and e-MMC programming, and the competitive impact of post-placement or in-system programming.
- Liquidity after considering that most cash held by foreign subsidiaries may not be readily available for U.S. operations without tax or other costs.
- Potential inventory obsolescence, supplier interruptions, warranty claims and foreign-exchange effects.
- The company’s ability to use its approximately $19.821 million of U.S. net operating loss carryforwards, which are subject to valuation allowances and Section 382 limitations.
- The filing’s stated controls conclusion: management assessed disclosure controls and internal control over financial reporting as effective, while the independent auditor did not provide an internal-control attestation because Data I/O was a non-accelerated smaller reporting company.