Data I/O Corporation 10-Q Summary
Business Context and Reporting Period
Data I/O Corporation designs and sells semiconductor programming systems, consumables, software and services, with a focus on automotive electronics, Internet of Things applications, secure provisioning and automated manufacturing. This unaudited Form 10-Q covers the three months ended March 31, 2018. The company is classified as a smaller reporting company.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $7.629 million | $7.224 million | 5.6% increase |
| Gross profit | $4.416 million | $4.167 million | 6.0% increase |
| Gross margin | 57.9% | 57.7% | 20 basis-point increase |
| Operating income | $344,000 | $804,000 | 43.0% decrease |
| Operating margin | 4.5% | 11.1% | Declined |
| Net income | $130,000 | $979,000 | 86.7% decrease |
| Diluted earnings per share | $0.02 | $0.12 | Declined |
| Adjusted EBITDA | $574,000 | $1.245 million | 53.9% decrease |
| Operating cash flow | $(1.631) million | $(830,000) | Greater use of cash |
Research and development expense increased 21.6% to $1.879 million, while selling, general and administrative expense increased 20.6% to $2.193 million. The resulting total operating expenses rose 21.1% to $4.072 million.
Cash and cash equivalents were $16.816 million at March 31, 2018, compared with $18.541 million at December 31, 2017. The company reported working capital of $19.898 million. It had no reported borrowings or debt; long-term other payables were $472,000. Total assets were $28.870 million and stockholders’ equity was $22.663 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily from sales to automotive electronics original equipment manufacturers. Automotive customers represented 59% of new orders, compared with 40% in Q1 2017.
- International sales increased 11.9% to $7.244 million and represented 95% of revenue, while U.S. sales declined 48.5% to $385,000.
- Non-automated programming systems revenue increased 27.5% to $1.656 million; automated programming systems revenue increased 0.8% to $5.973 million.
- Gross margin improved modestly due to product mix, higher order volume and improved factory utilization.
- Profitability declined substantially because increased R&D and SG&A spending more than offset the gross-profit increase. Spending supported the SentriX security provisioning platform, automotive technology, business development, commissions, trade shows and brand awareness.
- Q1 order bookings declined to $6.2 million from $8.4 million. Backlog was $2.7 million at March 31, 2018, versus $4.9 million a year earlier and $4.0 million at December 31, 2017.
- Q1 2017 included a $211,000 gain from the sale of non-core and excess Internet domain addresses; there was no comparable gain in Q1 2018. Q1 2018 also included a $176,000 foreign-currency transaction loss versus a $32,000 loss in Q1 2017.
- The company adopted ASC Topic 606 revenue recognition on January 1, 2018 using the modified retrospective method. Management stated that adoption did not have a material impact on the quarter.
Cash Flow, Liquidity and Commitments
Operating cash flow was negative $1.631 million, primarily reflecting annual payments for previously accrued incentive compensation and pension obligations, changes in receivables and payments of accounts payable and accrued liabilities. Investing cash flow was negative $338,000, consisting primarily of capital expenditures. Financing cash flow was negative $5,000. Exchange-rate movements increased cash by $249,000.
Management stated that existing cash and working capital are expected to fund operations and capital requirements for at least the next year. Capital expenditures are expected to support internally developed service, rental, demonstration and test equipment and may be funded with existing funds, internally generated cash or possible lease financing.
Operating lease commitments totaled $3.609 million, and purchase commitments and other obligations totaled $984,000 at March 31, 2018, substantially all payable within twelve months. The filing reported no material pending legal proceedings and no material off-balance-sheet arrangements other than disclosed leases and commitments.
Outlook, Commentary and Risks
Management is focused on growth and profitability in the core programming business while investing in automotive electronics, IoT, secure provisioning, automated programming and software. No specific quantitative revenue or earnings guidance was provided.
Key risks include the cyclical and rapidly changing semiconductor capital-equipment industry, fluctuations in customer demand and product mix, lower bookings and backlog, foreign-exchange volatility, rising costs, technology and inventory obsolescence, customer credit risk, warranty claims and the need to fund strategic investments. Management stated that a failure to achieve its business plan could require expenditure reductions or additional financing.
The company maintained a $6.8 million valuation allowance against deferred tax assets and had $278,000 of unrecognized tax benefits at March 31, 2018. Tax years 2014 through 2018 remained open for examination in the United States. The company was evaluating the impact of the new lease accounting standard effective January 1, 2019.
Important Facts for Investors to Verify
- Whether the decline in bookings and backlog persists and converts into lower future revenue.
- Whether automotive and international demand can offset weaker programming-center and U.S. sales.
- Whether elevated R&D and SG&A investments generate sufficient future revenue and margin expansion.
- Cash burn, annual compensation and pension payments, and the sustainability of liquidity if operations become unprofitable.
- Foreign-currency effects, inventory obsolescence, warranty reserves and customer-acceptance or collection risks.
- The eventual balance-sheet impact of ASC 842 lease adoption in 2019.
- The assumptions supporting the deferred-tax valuation allowance and uncertain-tax-position balances.