Data I/O (DAIO) - 2019 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the company's unaudited consolidated financial statements, management's discussion, market risk disclosures, and internal controls for the quarter Item 1. Financial Statements This section presents Data I/O Corporation's unaudited consolidated financial statements and detailed notes for the quarter ended March 31, 2019 Consolidated Balance Sheets This section provides a snapshot of the company's assets, liabilities, and equity as of March 31, 2019, and December 31, 2018 Consolidated Balance Sheets | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :----------------------------- | :---------------------------- | :----------------------------- | | Total Assets | $30,910 | $30,723 | | Total Current Assets | $26,043 | $27,920 | | Cash and cash equivalents | $14,782 | $18,343 | | Total Current Liabilities | $5,522 | $6,855 | | Total Stockholders' Equity | $23,492 | $23,357 | Consolidated Statements of Operations This section details the company's revenues, expenses, and net income for the three months ended March 31, 2019 and 2018 Consolidated Statements of Operations | Metric | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | Change (YoY) | | :----------------------------- | :--------------------------------------------- | :--------------------------------------------- | :----------- | | Net sales | $6,058 | $7,629 | -20.6% | | Gross margin | $3,685 | $4,416 | -16.6% | | Operating income | $29 | $344 | -91.6% | | Net income | $26 | $130 | -80.0% | | Basic earnings per share | $0.00 | $0.02 | -100.0% | | Diluted earnings per share | $0.00 | $0.02 | -100.0% | Consolidated Statements of Comprehensive Income (Loss) This section presents the company's net income and other comprehensive income components for the three months ended March 31, 2019 and 2018 Consolidated Statements of Comprehensive Income (Loss) | Metric | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | | :--------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net income | $26 | $130 | | Foreign currency translation gain (loss) | $128 | $301 | | Comprehensive income (loss) | $154 | $431 | Consolidated Statement of Stockholders' Equity This section outlines changes in the company's stockholders' equity, including share repurchases and compensation, as of March 31, 2019 Consolidated Statement of Stockholders' Equity | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :-------------------------------- | :---------------------------- | :----------------------------- | | Total Stockholders' Equity | $23,492 | $23,357 | | Common Shares Outstanding | 8,287,825 | 8,338,628 | | Repurchased shares | $(312) | - | | Share-based compensation | $287 | - | Consolidated Statements of Cash Flows This section details the cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2019 Consolidated Statements of Cash Flows | Metric | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | | :------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Net cash provided by (used in) operating activities | $(3,264) | $(1,631) | | Net cash provided by (used in) investing activities | $(115) | $(338) | | Net cash provided by (used in) financing activities | $(306) | $(5) | | Cash and cash equivalents at end of period | $14,782 | $16,816 | Notes to Consolidated Financial Statements This section provides detailed explanations of the company's accounting policies, significant estimates, and specific financial statement line items - The financial statements are unaudited and prepared according to SEC rules, including all necessary adjustments. Operating results for Q1 2019 are not necessarily indicative of the full year. The adoption of Topic 606, "Revenue from contracts with customers," did not materially impact 2018 financial statements[20][21] - Revenue is recognized upon transfer of control of products or services, with specific policies for installation, multiple performance obligations, and separate software sales[22][23][24][25][26] - Inventories consist of raw material, work-in-process, and finished goods[41] - Property and equipment, net, totaled $1,969k as of March 31, 2019, down from $1,985k as of December 31, 2018[42] Other Accrued Liabilities (in thousands) | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :-------------------------- | :---------------------------- | :----------------------------- | | Other accrued liabilities | $1,405 | $789 | | Lease liability - short term | $662 | $0 | | Product warranty | $442 | $471 | - The adoption of ASC 842 on January 1, 2019, led to the recognition of right-of-use assets of $2,039k and total operating lease liabilities of $2,399k as of March 31, 2019. The weighted average remaining lease term is 4.03 years, and the weighted average discount rate is 5%[38][40][45][47] - Purchase commitments and other obligations totaled $1,831k as of March 31, 2019, with most expected to be paid within twelve months[52] - No material legal proceedings or indemnification claims were pending as of March 31, 2019[53] Earnings Per Share | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Basic earnings per share | $0.00 | $0.02 | | Diluted earnings per share | $0.00 | $0.02 | Share-Based Compensation (in thousands) | Metric | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | | :-------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Total share-based compensation | $287 | $177 | | Unamortized future equity compensation expense | $2,581 | - | | Remaining weighted average amortization period | 2.44 years | - | - The Board approved a share repurchase program of up to $2 million. For the quarter ended March 31, 2019, 57,612 shares were repurchased for $310,489[62] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, strategic focus, critical accounting policies, and liquidity for the quarter General This section highlights the forward-looking nature of the report and inherent uncertainties in the company's economic outlook - The report includes forward-looking statements regarding economic outlook, industry prospects, future financial results, and market growth, which are subject to inherent uncertainties and risks[65] Overview This section outlines the company's strategic focus on automotive electronics, core programming business, and R&D efforts amidst industry challenges - The company focuses on automotive electronics and managing its core programming business for growth and profitability, while investing in security provisioning products[66] - Research and development efforts are concentrated on automotive electronics, IoT new programming technologies, secure supply chain solutions, and automated programming systems[67] - Challenges include operating in a cyclical and rapidly evolving industry environment, balancing industry changes, new technologies, business geography shifts, exchange rate volatility, trade issues, and increasing costs[66] Critical Accounting Policy Judgments and Estimates This section details the key accounting estimates and judgments, including revenue recognition, inventory valuation, and tax valuation allowances - Key estimates and judgments are made in revenue recognition, allowance for doubtful accounts, inventory valuation, warranty accruals, tax valuation allowances, and share-based compensation[70] - Revenue recognition policies align with Topic 606, with revenue generally recognized upon transfer of control. The adoption of Topic 606 did not materially impact 2018 financial statements[71][72][74] - Inventory is stated at the lower of cost or net realizable value, with adjustments for obsolescence. Significant decreases in demand or rapid technological changes could adversely affect gross margin[80] - A valuation allowance of $6.9 million is maintained for deferred tax assets due to loss history and uncertain economic outlook[82][96] Results of Operations This section provides a detailed analysis of the company's net sales, gross margin, operating expenses, and net income for the reporting period Net Sales by Type (in thousands) | Metric | Mar. 31, 2019 | Change (YoY) | Mar. 31, 2018 | | :----------------------- | :------------ | :----------- | :------------ | | Equipment sales | $3,711 | (27.9%) | $5,149 | | Adapter sales | $1,461 | (13.6%) | $1,690 | | Software and maintenance | $886 | 12.2% | $790 | | Total programming systems | $6,058 | (20.6%) | $7,629 | - Net sales for Q1 2019 declined 20.6% to $6.1 million, primarily due to strong cyclical demand in Automotive Electronics and Programming Centers in 2017. International sales accounted for 94.1% of total sales in Q1 2019, with Europe being the strongest territory[86][88] - Order bookings were $6.2 million for both Q1 2019 and Q1 2018. Backlog at March 31, 2019, was $2.0 million, down from $2.7 million in the prior year[89] Gross Margin (in thousands) | Metric | Mar. 31, 2019 | Change (YoY) | Mar. 31, 2018 | | :---------------- | :------------ | :----------- | :------------ | | Gross margin | $3,685 | (16.6%) | $4,416 | | Percentage of net sales | 60.8% | +2.9 pp | 57.9% | - The increase in gross margin as a percentage of sales was due to a favorable channel and product mix, as well as comparatively favorable factory variances and ongoing cost reductions[91] Operating Expenses (in thousands) | Metric | Mar. 31, 2019 | Change (YoY) | Mar. 31, 2018 | | :-------------------------------- | :------------ | :----------- | :------------ | | Research and development | $1,681 | (10.5%) | $1,879 | | Selling, general and administrative | $1,975 | (9.9%) | $2,193 | - R&D and SG&A expenses decreased primarily due to lower headcount-related costs and incentive compensation, partially offset by higher stock compensation[92][93] - Interest income increased by 71.4% to $12k in Q1 2019 due to minor increases in interest rates[94] - The company reported an income tax benefit of $29k in Q1 2019, compared to an expense of $(45)k in Q1 2018, primarily due to converting AMT credits into a receivable and lower pre-tax foreign subsidiary income[95] Financial Condition This section assesses the company's liquidity, capital resources, cash flow, and share repurchase program, including the impact of new accounting standards Liquidity and Capital Resources (in thousands) | Metric | Mar. 31, 2019 | Change (QoQ) | Dec. 31, 2018 | | :-------------- | :------------ | :----------- | :------------ | | Working capital | $20,521 | $(544) | $21,065 | - Cash decreased by $3.6 million from December 31, 2018, primarily due to paying 2018 accrued incentive compensation, share repurchases, and inventory build to avoid potential tariff changes[97] - The adoption of ASC 842 on January 1, 2019, reduced working capital by recognizing a $662k current lease liability[98] - The company believes it has sufficient cash and working capital to fund operations and capital requirements for at least the next year, but may require additional cash for growth or acquisitions[101] - The Board approved a $2 million share repurchase program (Nov 1, 2018 - Oct 31, 2019). For Q1 2019, 57,612 shares were repurchased for $310,489. As of March 31, 2019, approximately $1,156,048 remained available under the program[104][105] - No significant off-balance sheet arrangements exist, other than operating lease commitments and other purchase commitments[106] Non-GAAP Financial Measures (in thousands) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | EBITDA earnings | $189 | $397 | | Adjusted EBITDA earnings (excluding equity compensation) | $476 | $574 | - The company adopted the new lease accounting standard, ASC 842, on January 1, 2019, using the modified retrospective transition method, which required balance sheet adjustments for right-of-use assets and lease liabilities[110] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that the company has no applicable quantitative and qualitative disclosures about market risk for the reporting period - This item is not applicable[111] Item 4. Controls and Procedures Management concluded that disclosure controls were effective as of March 31, 2019, with no material changes in internal controls - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective at a reasonable level of assurance as of March 31, 2019[112] - There were no material changes in internal controls over financial reporting during the period covered by this report[113] PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, and other miscellaneous information for the reporting period Item 1. Legal Proceedings The company reported no material pending legal proceedings as of March 31, 2019 - As of March 31, 2019, the company was not a party to any material pending legal proceedings[115] Item 1A. Risk Factors No material changes to the risk factors described in the Annual Report on Form 10-K for December 31, 2018 - There are no material changes to the Risk Factors described in the Annual Report on Form 10-K for the year ended December 31, 2018[116] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None[116] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None[116] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not Applicable[116] Item 5. Other Information The company reported no other information for this period - None[116] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications and Interactive Data Files - Exhibits include certifications pursuant to Section 302 and Section 906 of the Sarbanes Oxley Act of 2002, and Interactive Data Files pursuant to Rule 405 of Regulation S-T[116] Signatures The report was signed by Anthony Ambrose and Joel S. Hatlen on behalf of Data I/O Corporation on May 15, 2019 - The report was signed by Anthony Ambrose, President and Chief Executive Officer, and Joel S. Hatlen, Vice President and Chief Operating and Financial Officer, on May 15, 2019[119][121]