What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-13 compared with 2024-05-13 · 67 added, 54 removed, 150 unchanged (45% of the section changed)

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expectations for unsupported platform or product versions and related inventory and other charges;

Russian invasion of Ukraine impacts;

Israel–Hamas war impacts;

supply chain expectations;

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The Reader should not place undue reliance on these forward-looking statements.

The following discussions and the 2023 Annual Report on Form 10-K section entitled “Risk Factors – Cautionary Factors That May Affect Future Results” describes some, but not all, of the factors that could cause these differences.

First quarter revenue at $6.1 million was down 16% compared with $7.2 million from the prior year period, reflecting lower backlog coming into the period plus timing of shipments from new bookings.

First quarter bookings were at $8.1 million, up 41% from the prior year on strong opportunity conversion in Europe and Asia.

As a result, backlog increased $1.7 million during the first quarter to $4.5 million as of March 31, 2024.

Most of these bookings are expected to be shipped and recognized as revenue in the second half of 2024.

Data I/O has a broad product portfolio and diversified international market presence as reflected in our revenue mix by product and geography.

The Americas region has seen tremendous growth over the past two years due to capacity expansion and is expected to absorb this capacity in 2024.

Our strong first quarter bookings performance was a result of diversification as strength in Europe and Asia offset lower orders in the Americas region.

Research and development efforts remain focused on strategic growth markets, namely automotive electronics and IoT new programming technologies, secure supply chain solutions, automated programming systems and their enhancements for the manufacturing environment and software.

At Data I/O, we are investing for the long-term to retain and extend our leadership position in automotive electronics and security deployment.

We are continuing to develop technology to securely provision newer categories of semiconductors, including Secure Microcontrollers, Authentication Chips, and Secure Elements.

We continue to focus on extending the capabilities and support for our product lines and supporting the latest semiconductor devices, including various configurations of NAND Flash, eMMC, UFS and microcontrollers on our newer products.

Furthermore, Data I/O remains focused on growth from the Automotive, Industrial and Prorgramming Center markets worldwide combined with spending controls, process efficiencies and operating leverage.

The following discussions and the 2023 Annual Report on Form 10-K section entitled “Risk Factors – Cautionary Factors That May Affect Future Results” describe some, but not all, of the factors that could cause these differences.

Second quarter revenue of $5.1 million was down 32% compared with $7.4 million in the prior year period, reflecting divergent business conditions across our markets and sales channels.

Bookings of $13.7 million in the first half of 2024 increased slightly from $13.3 million in the prior year period.

Through the first half of the year, Asia and Europe sales regions performed ahead of bookings expectations offset by a decline in the Americas.

Strength in programming centers and industrial markets in the first half of 2024 was offset by weakness in automotive electronics.

We experienced delayed automotive electronics capacity expansion from existing customers, as these customers pushed orders out into the future.

Revenues were impacted by customer requested timing of backlog to shipment conversions resulting in a backlog increase of $2.6 million from the beginning of the year to $5.4 million as of June 30, 2024.

Progress on spending controls, process efficiencies and direct product cost reductions was achieved as reflected in the second quarter performance.

Gross margin as a percentage of sales increased by 170 basis points from the first quarter of 2024 and operating expenses were reduced by 21% from the prior year period and 19% from the first quarter of 2024.

We believe the improved operating leverage and current backlog should favorably impact future performance.

Data I/O remains focused on growth from the Automotive, Industrial and Programming Center markets worldwide combined with spending controls, process efficiencies and operating leverage.

The continued outlook by industry analysts for automotive electronics, which remains our primary market focus, remains strong based on the long-term forecast for a decade.

In the first quarter of 2024, Data I/O continued to expand its market penetration while reducing operating expenses.

This approach to disciplined growth remains a priority in 2024.

Disciplined growth combined with disciplined spending remains a priority in 2024.

CRITICAL ACCOUNTING POLICY JUDGMENTS AND ESTIMATES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires that we make estimates and judgments, which affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.

On an on-going basis, we evaluate our estimates, including those related to revenue recognition, sales returns, credit losses, inventories, income taxes, warranty obligations, restructuring charges, contingencies such as litigation and contract terms that have multiple elements and other complexities typical in the capital equipment industry.

On an on-going basis, we evaluate our estimates, including those related to revenue recognition, sales returns, bad debts, inventories, income taxes, warranty obligations, restructuring charges, contingencies such as litigation and contract terms that have multiple elements and other complexities typical in the capital equipment industry.

We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances.

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We expense contract acquisition costs, primarily sales commissions, for contracts with terms of one year or less and will capitalize and amortize incremental costs with terms that exceed one year.

During the first quarter of 2024 and 2023, the impact of capitalization of incremental costs for obtaining contracts was immaterial.

During the first and second quarters of 2024 and 2023, the impact of capitalization of incremental costs for obtaining contracts was immaterial.

We exclude sales, use, value added, some excise taxes and other similar taxes from the measurement of the transaction price.

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Installation that is considered perfunctory includes any installation that is expected to be performed by other parties, such as distributors, other vendors, or the customers themselves.

This analysis considers the complexity, skill and training needed as well as customer expectations regarding installation.

This analysis considers the complexity, skill and training needed, as well as customer installation expectations.

We enter into arrangements with multiple performance obligations that arise during the sale of a system that could include hardware, software, installation, services and support and extended maintenance components.

We allocate the transaction price of each element based on the relative selling prices.

We allocate the transaction price of each element based on the relative selling price.

Relative selling price is based on the selling price of the standalone system.

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Revenue is recognized on the system based on shipping terms, software based on delivery, installation and services based on completion of work and software maintenance and extended warranty support ratably over the term of the agreement, typically one year.

When we sell software separately, we recognize revenue upon the transfer of control of the software, which is generally upon delivery, provided that only immaterial items in the context of the contract with the customer remain on our part and substantive acceptance conditions, if any, have been met.

When we license software separately, we recognize revenue upon the transfer of control of the software, which is generally upon delivery, provided that only immaterial items in the context of the contract with the customer remain on our part and substantive acceptance conditions, if any, have been met.

We recognize revenue when there is an approved contract that both parties are committed to perform, both parties’ rights have been identified, the contract has substance, collection of substantially all the consideration is probable, the transaction price has been determined and allocated over the performance obligations, the performance obligations including substantive acceptance conditions, if any, in the contract have been met, the obligation is not contingent on resale of the product, the buyer’s obligation would not be changed in the event of theft, physical destruction or damage to the product, the buyer acquiring the product for resale has economic substance apart from us and we do not have significant obligations for future performance to directly bring about the resale of the product by the buyer.

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At the current time, we expect, therefore, that reversals of the tax valuation allowance will take place as we are able to take advantage of the underlying tax loss or other attributes in carry forward or their use by future income or circumstances allow us to realize these attributes.

The transfer pricing and expense or cost sharing arrangements are complex areas where judgments, such as the determination of arms-length arrangements, can be subject to challenges by different tax jurisdictions.

The transfer pricing and expense or cost sharing arrangements are complex areas in which judgments, such as the determination of arms-length arrangements, can be subject to challenges by different tax jurisdictions.

Share-based Compensation:

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Net sales by product line

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Automated programming systems

$ 4,009 (32.5 )% $ 5,935 $ 8,832 (25.5 )% $ 11,862

Non-automated programming systems

1,053 (28.0 )% 1,463 2,329 (15.8 )% 2,767

Total programming systems

$ 5,062 (31.6 )% $ 7,398 $ 11,161 (23.7 )% $ 14,629

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Net sales by location

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Net sales by type

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Software and maintenance

Net sales in the first quarter of 2024 were $6.1 million, as compared with $7.2 million in the prior year period and $6.9 million in the fourth quarter of 2023.

Sales decrease in the first quarter primarily reflects timing of shipments on new first quarter bookings and higher backlog in the prior periods from favorable post-lockdown recovery one year ago.

First quarter 2024 bookings were $8.1 million, as compared with $5.7 million in the prior year period and $7.2 million in fourth quarter of 2023.

Bookings increase in the first quarter was due to strong sales opportunity conversion in Europe and Asia markets.

Backlog increased $1.7 million in the first quarter to $4.5 million as of March 31, 2024 as compared to $3.2 million as of March 31, 2023 and $2.8 million as of December 31, 2023.

Data I/O had $1.8 million in deferred revenue as of March 31, 2024 as compared with $2.0 million as of March 31, 2023.

On a geographic basis, international sales represented approximately 96% of total net sales for the first quarter of 2024 compared with 87% in the prior year period.

Total equipment sales were 55% of revenues, adapters were 30% and software and services revenues were 15% of revenues respectively in the first quarter of 2024 compared with 56% and 31% and 13% respectively for the first quarter of 2023.

Automotive electronics represented 49% of orders followed by 37% for programming centers and 14% for IoT for the first quarter of 2024.

Net sales in the second quarter of 2024 were $5.1 million, down 32% as compared with $7.4 million in the second quarter of 2023.

The decrease primarily reflects timing of current backlog conversion to shipments expected in the second half of 2024 and lower second quarter bookings on weakness in the automotive electronics market in the Americas region.

Similarly, second quarter bookings were $5.6 million on strong opportunity conversion in Asia and Europe, offset by a decline in the Americas.

The revenue decline was also reflected in our product mix with year-to-date capital equipment sales at 51% of revenues as compared to 59% in the prior year.

Our adapters, software, maintenance and support services provided a steady base of recurring revenue which helped offset the equipment decline, accounting for a larger 49% of year-to-date revenue compared to 41% in the prior year.

International sales represented approximately 88% of total net sales for the second quarter of 2024 compared with 86% in the second quarter of 2023.

Backlog at June 30, 2024 was approximately $5.4 million, an increase of $2.6 million from the $2.8 million at the beginning of 2024.

The increase reflects customer requested timing of delivery dates on booked orders with reductions in backlog expected in the second half of 2024.

Finally, Data I/O had $1.5 million in deferred revenue at June 30, 2024, down slightly from $1.6 million at December 31, 2023.

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Percentage of net sales

Gross margin as a percentage of sales in the first quarter of 2024 was 52.8% as compared to 59.5% in the same period last year and 58% in the fourth quarter of 2023.

The decrease in gross margin percentage primarily reflects lower sales volume on relatively fixed manufacturing and service costs, sales channel and product mix impacts.

Gross margin as a percentage of sales was 54.5% in the second quarter of 2024 as compared to 59.1% in the same period of 2023 with a similar year-to-date decrease compared to the prior year.

The gross margin decline reflects lower sales volume on relatively fixed manufacturing and service costs and product mix.

Ongoing cost reduction initiatives lowered material, production and service costs from the first quarter of 2024 and second quarter of 2023, partially offsetting the sales decline.

RESEARCH AND DEVELOPMENT

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Percentage of net sales

Research and development (“R&D”) expenses decreased in the first quarter of 2024 as compared to the same period in 2023.

We have maintained our investment in our product development and supporting our growth initiatives while maintaining cost control discipline.

Research and development (“R&D”) expenses in the second quarter and year-to-date 2024 decreased compared to the same periods in 2023, primarily due to lower consulting and outside services in support of our product lines.

Through prioritization and focus on key engineering programs, the company continues to efficiently invest in the research and development of new technology, products and services.

SELLING, GENERAL AND ADMINISTRATIVE

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Selling, general & administrative

Selling, general &

administrative

Percentage of net sales

Selling, General and Administrative (“SG&A”) expenses were slightly lower in the first quarter of 2024 as compared to the same period in 2023.

First quarter spending reduction reflects higher compensation and inflationary increases offset by continued efficiency improvements and cost reduction efforts.

Selling, General and Administrative (“SG&A”) expenses in the second quarter of 2024 decreased by approximately $579,000 or 23% from the prior year period primarily due to lower channel and sales commissions associated with lower sales volume and continued efficiency improvements and cost reductions efforts.

As a result, core personnel, facilities, IT and other consulting and outside services costs declined compared to the prior year period.

Cost reductions initiated in 2023 have contributed to lower second quarter and year-to-date expenses in 2024.

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Interest income

Interest income was higher in the first quarter of 2024 compared to the same period in 2023 due to higher interest rates and invested balances.

Interest income was higher in the second quarter and year-to-date 2024 compared to the same periods in 2023 due to higher average interest rates and higher invested balances.

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Income tax benefit (expense)

Income tax benefit (expense) for the first quarter of 2024 and 2023 primarily related to foreign and state taxes.

The effective tax rate differed from the statutory tax rate primarily due to the effect of valuation allowances, as well as foreign taxes.

We have a valuation allowance of $8.9 million as of March 31, 2024.

As of March 31, for both 2024 and 2023, our deferred tax assets and valuation allowance have been reduced by approximately $434,000 and $429,000, respectively.

Income tax benefit (expense) for the second quarter of both 2024 and 2023, primarily related to foreign and some state taxes.

Foreign income tax in the second quarter of 2024 was primarily a result of a China subsidiary dividend withholding tax of $337,000 paid in connection with a dividend repatriation to the U.S.

parent company.

Year-to-date income tax benefit (expense) was primarily due to the same factors as in the second quarter of 2024.

The effective tax rate differed from the statutory tax rate due primarily to the valuation allowance’s effect, as well as foreign taxes.

We have a valuation allowance of $9.3 million as of June 30, 2024.

As of June 30, for both 2024 and 2023, our deferred tax assets and valuation allowance have been reduced by approximately $437,000 and $437,000, respectively.

Given the uncertainty created by our loss history, as well as the volatile and uncertain economic outlook for our industry and capital spending, we have limited the recognition of net deferred tax assets including our net operating losses and credit carryforwards and continue to maintain a valuation allowance for the full amount of the net deferred tax asset balance.

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Working capital

At March 31, 2024, our principal sources of liquidity consisted of existing cash and cash equivalents.

Cash at $12 million decreased $342,000 from December 31, 2023 primarily due to lower revenue and higher first quarter expenditures for public company cost including audit, regulatory filings and stock exchange fees, and annual incentive compensation disbursements.

Correspondingly, working capital decreased by $277,000 during the first quarter to $18.1 million as of March 31, 2024.

At June 30, 2024, our principal sources of liquidity consisted of existing cash and cash equivalents.

Cash at $11.4 million decreased $901,000 from December 31, 2023 primarily due to lower year-to-date revenue and higher first quarter expenditures for public company costs including audit, regulatory filings and stock exchange fees, and annual incentive compensation disbursements.

Correspondingly, working capital decreased by $796,000 during the year to $17.6 million as of June 30, 2024.

The Company continues to have no debt.

Although we have no significant capital expenditure plans currently, we expect to continue to carefully make and manage expenditures to support the business.

In the second quarter of 2024, we completed a $3.4 million dividend distribution from our China subsidiary operation, incurring a $337,000 foreign tax withholding expense.

This was undertaken to optimize the cash position and operating needs of each subsidiary, increase the interest earning potential of our cash holdings and ensure available liquidity at the U.S.

headquarters to support future strategic and operational initiatives.

Although we currently have no significant capital expenditure plans, we expect to continue to carefully make and manage expenditures to support the business.

Engineering and production tooling, test equipment and sales demonstration products will continue to be purchased as we develop and release new products.

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We believe that we have sufficient cash or working capital available under our operating plan to fund our operations and capital requirements through the next one-year period, and beyond.

If this belief is incorrect, we may require additional cash at the U.S.

headquarters, which could cause potential repatriation of cash that is held in our foreign subsidiaries.

For any repatriation, there may be tax and other impediments to any repatriation actions.

As many repatriations typically have associated withholding taxes, those amounts withheld will be a current tax without generating a current or deferred tax benefit recognition.

Our working capital may be used to fund possible losses, business growth, project initiatives, share repurchases and business development initiatives, including acquisitions, which could reduce our liquidity and result in a requirement for additional cash before that time.

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NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURES

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was ($645,000) in the first quarter of 2024 compared to $253,000 in the first quarter of 2023.

Adjusted EBITDA, excluding equity compensation (a non-cash item), was ($364,000) in the first quarter of 2024, compared to $502,000 in the first quarter of 2023.

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was approximately ($379,000) in the second quarter of 2024 compared to $490,000 in the second quarter of 2023.

Adjusted EBITDA, excluding equity compensation (a non-cash item), was approximately $3,000 in the second quarter of 2024, compared to $870,000 in the second quarter of 2023.

Year-to-date Adjusted EBITDA was ($361,000) and $1.4 million for the periods ending June 30, 2024 and 2023, respectively.

Non-GAAP financial measures, such as EBITDA and adjusted EBITDA, should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis