Data I/O Corporation 10-Q Summary
Business context and reporting period
Data I/O Corporation designs and sells automated and non-automated semiconductor programming systems, adapters, software and maintenance services, with a focus on automotive electronics, IoT, secure provisioning and manufacturing automation. This unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. Approximately 95.3% of first-quarter 2021 sales were international.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 | Change or comment |
|---|---|---|---|
| Net sales | $6.015 million | $4.785 million | Up 25.7% |
| Gross profit | $3.338 million | $2.784 million | Up 19.9% |
| Gross margin | 55.5% | 58.2% | Down 2.7 percentage points |
| Operating income (loss) | $(330,000) | $(609,000) | Improved by $279,000 |
| Net income (loss) | $(333,000) | $(554,000) | Improved by $221,000 |
| Basic and diluted loss per share | $(0.04) | $(0.07) | Improved |
| Operating cash flow | $24,000 | $452,000 | Lower by $428,000 |
| Capital expenditures | $92,000 | $340,000 | Lower year over year |
| Cash and cash equivalents | $13.621 million | $13.814 million | March 31, 2021 versus March 31, 2020 |
| Working capital | $18.081 million | Not clearly provided | Up $22,000 from December 31, 2020 |
At March 31, 2021, total assets were $25.344 million and stockholders’ equity was $19.416 million. Current liabilities were $5.296 million. The filing does not report conventional outstanding debt or borrowings; obligations primarily consist of operating lease liabilities and other payables. Total operating lease liabilities were $1.094 million, and purchase commitments and other obligations totaled approximately $1.5 million, substantially all payable within twelve months.
Management stated that existing cash and internally generated funds are expected to fund operations and capital requirements for at least the next year. Cash declined by $546,000 from December 31, 2020, primarily due to funding the operating loss and 2020 year-end accruals. Foreign exchange effects reduced reported cash by $490,000 during the quarter.
Revenue mix and material changes
- Automated programming systems generated $4.910 million, up 43.7%; non-automated programming systems generated $1.105 million, down 19.2%.
- Equipment revenue was $3.347 million, up 29.4%; adapter revenue was $1.908 million, up 41.9%; software and maintenance revenue was $760,000, down 10.9%.
- International sales were $5.731 million, or 95.3% of total sales, compared with 94.3% in the prior-year quarter.
- Capital equipment represented 56% of revenue, adapters 31%, and software and services 13%, compared with 54%, 28%, and 18%, respectively, in Q1 2020.
- First-quarter bookings were $5.4 million, compared with $4.3 million in Q1 2020 and $6.0 million in Q4 2020. Management attributed the sequential decline partly to orders accelerated into the prior quarter and normal first-quarter seasonality.
- Backlog was $3.0 million at March 31, 2021, compared with $3.9 million at year-end 2020 and $2.3 million at March 31, 2020.
- Gross margin declined primarily because of less favorable factory variances and higher direct-material costs associated with the shift toward equipment and adapters, partly offset by improved overhead absorption.
- Research and development expense was essentially flat at $1.606 million. Selling, general and administrative expense increased 13.9% to $2.062 million, primarily due to $220,000 of higher sales commissions and increased consulting, audit and investor-relations costs.
Guidance, outlook and management commentary
- Management reported significant improvement in the business during Q1 2021 after the COVID-19-related and cyclical downturn. China led the recovery, followed by the Americas; Europe was expected to lag by approximately one quarter.
- Management expected second-quarter 2021 gross margin to be in the mid-to-upper 50% range and stated that cost-control measures would continue.
- The company continues to invest in automotive electronics, IoT programming technologies, secure supply-chain solutions, automated programming systems and SentriX security deployment products.
- Management expects capital expenditures to be funded by existing cash and internally generated funds, although additional cash at the U.S. headquarters could require repatriation from foreign subsidiaries and may involve tax or other impediments.
- Reported EBITDA was negative $105,000 in Q1 2021 versus negative $359,000 in Q1 2020. Adjusted EBITDA, excluding $278,000 of equity compensation, was positive $173,000 versus negative $110,000.
Risks, contingencies and unusual items
- COVID-19, semiconductor shortages, customer and factory shutdowns, travel restrictions, supply-chain delays, tariffs, foreign-exchange volatility and changing demand could affect revenue, manufacturing and customer support.
- The company has substantial international exposure and sources components from China and other countries, creating geographic, logistics and currency risks.
- The company maintains a $9.0 million valuation allowance against deferred tax assets because of its loss history and uncertain economic outlook. Q1 2021 income tax expense was $32,000.
- Inventory obsolescence, warranty claims, sales returns, customer credit deterioration and rapidly changing semiconductor technologies could adversely affect margins and results.
- No material pending legal proceedings or material indemnification claims were reported. Management identified no material changes to the risk factors in the 2020 Form 10-K.
- There were no material changes in internal control over financial reporting, and management concluded that disclosure controls were effective at a reasonable level of assurance.
Important facts for investors to verify
- Whether the recovery in automotive and international demand continues and converts into bookings, backlog and revenue.
- Whether gross margin returns to the stated mid-to-upper 50% range and whether factory variances and product mix remain adverse.
- Whether semiconductor shortages, supply-chain constraints and COVID-19 restrictions affect production or customer installations.
- Whether the company can sustain positive operating cash flow while continuing strategic research, development and security-business investments.
- The timing and cash impact of the approximately $1.5 million of purchase commitments and $1.094 million of operating lease liabilities.
- Potential liquidity effects of continued operating losses, foreign-exchange movements, repatriation of foreign cash, share repurchases or business-development activities.