Data I/O Corporation — Q3 2012 Form 10-Q Summary
Business context and reporting period
Data I/O Corporation designs and sells automated and non-automated programming systems used primarily in electronics manufacturing. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods.
Management attributed the downturn to excess capacity in the installed base of programming equipment, reduced capital spending in Asia-based electronics manufacturing, and economic uncertainty associated in part with the European sovereign debt situation. International revenue represented 80.7% of third-quarter sales and 84.6% of nine-month sales.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $4.311 million | $7.051 million | $13.350 million | $20.943 million |
| Gross margin | $1.927 million | $3.943 million | $6.809 million | $12.116 million |
| Gross margin percentage | 44.7% | 55.9% | 51.0% | 57.9% |
| Operating income (loss) | $(1.372) million | $0.360 million | $(3.554) million | $1.517 million |
| Net income (loss) | $(1.329) million | $0.130 million | $(3.063) million | $1.061 million |
| Basic diluted EPS | $(0.17) | $0.01 | $(0.38) | $0.12 basic; $0.11 diluted |
| Net cash from operating activities | Not separately provided for quarter | Not separately provided for quarter | $(0.461) million | $2.367 million |
At September 30, 2012, cash and cash equivalents were $11.187 million, working capital was $14.398 million, and total assets were $22.352 million. The company reported no debt. Current liabilities were $4.254 million, and stockholders’ equity was $17.869 million.
Nine-month investing cash outflow was $0.543 million, primarily capital expenditures. Financing cash outflow was $6.010 million, including $6.026 million for share repurchases. Cash declined from $18.120 million at December 31, 2011 to $11.187 million at September 30, 2012. Approximately $9.5 million of cash was held in foreign subsidiary accounts at quarter-end.
Material changes versus the prior comparable period
- Third-quarter revenue declined 38.9% year over year and 20% sequentially from the second quarter of 2012. Nine-month revenue declined 36.3% year over year.
- Automated programming systems revenue fell 43.4% in the quarter and 38.9% for the nine-month period; non-automated systems revenue fell 28.4% and 31.2%, respectively.
- International revenue declined 43.2% in the quarter and 40.3% year to date. Asia revenue declined 57% in the quarter, Europe 40%, and the Americas 17%.
- Gross margin percentage decreased primarily because lower volume was spread over fixed manufacturing costs and the company recorded a $164,000 excess and obsolete inventory charge.
- R&D decreased 3.6% in the quarter but increased 3.4% year to date, partly due to higher costs related to the acquired Azido technology.
- SG&A declined 21.2% in the quarter and 9.1% year to date, reflecting lower professional fees, commissions, incentive compensation, and other costs.
- The company recorded a $214,000 restructuring charge in the third quarter, primarily for severance. The actions are expected to reduce quarterly operating expenses and production costs by approximately $300,000; $47,000 of savings was reflected in third-quarter results.
- The company repurchased approximately 1.546 million shares for $6.0 million under its 2012 program, which was completed in the first quarter. No repurchases occurred in the second or third quarters.
Guidance, outlook, management commentary, risks and unusual items
Management did not provide specific revenue or earnings guidance. It stated that the business remains cyclical and rapidly evolving, with demand affected by electronics manufacturing capacity, alternative programming methods, factory integration, device technologies, quality requirements, and customer capital spending.
Management expects restructuring actions to reduce ongoing R&D and other operating costs and believes existing working capital is sufficient to fund operations and capital requirements for at least the next year under its operating plan. It also cautioned that failure to achieve the business plan could materially affect liquidity and results and could require additional expenditure reductions or financing.
On October 25, 2012, Anthony Ambrose was appointed President and director, and was scheduled to become Chief Executive Officer on November 14, 2012. His inducement equity grant consisted of 200,000 non-qualified stock options and 75,000 restricted shares.
After quarter-end, the company repatriated $1.0 million of cash without foreign tax under a tax-holiday arrangement. Management noted that future repatriation may be subject to tax and other impediments.
Other notable items include a $318,000 German tax refund received during the second quarter, a $10.2 million tax valuation allowance at September 30, 2012, and $138,000 of unrecognized tax benefits. The company had $3.452 million of remaining operating lease commitments and $906,100 of purchase and other obligations, most of which were due in 2012. Management reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
Disclosure controls and procedures were assessed as effective, and the company reported no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether demand and backlog recover from the reported $1.0 million backlog at September 30, 2012.
- Whether restructuring actions achieve the anticipated approximately $300,000 of quarterly cost reductions.
- Whether gross margins recover from 44.7% as volume improves and inventory charges abate.
- The sustainability of cash resources after the $6.0 million share repurchase and continued operating losses.
- The location, tax accessibility, and repatriation restrictions affecting foreign-held cash.
- The potential impact of the new CEO transition, inducement awards, and remaining share-based compensation expense.
- Inventory obsolescence, warranty claims, customer credit quality, foreign-exchange movements, and the cyclical electronics manufacturing market.
- The effect of the $10.2 million tax valuation allowance and uncertain tax positions on future tax benefits.