What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-12 compared with 2024-08-13 · 86 added, 59 removed, 158 unchanged (48% of the section changed)

28 unchanged sentences

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.

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

Third quarter revenue at $5.4 million was down 17% compared with $6.6 million from the prior year period.

Since the beginning of the year, automotive electronics uncertainty has increased and customer capacity expansion has slowed, resulting in lower system shipments in the Americas and Europe.

Offsetting this headwind was the Asia channel which grew 29% in the third quarter and 26% year-to-date.

While sales of systems to the automotive market were below expectations, we continue to achieve steady performance from our programming centers, industrial markets and recurring revenue offerings.

Specifically, our consumables, software and services grew 6% in the third quarter and currently represent 50% of our total year-to-date revenue, which provides a steady base of revenue to help offset the present Capex softness.

Order backlog remains strong at $4.7 million as of September 30th, 2024 and down only $700,000 from the start of the quarter, with further reductions expected as planned customer deliveries occur in the next two quarters.

Third quarter operating expense was $3.2 million, down $334,000 or 9% from the prior year and down $1.3 million or 11% on a year-to-date basis.

Core personnel, facilities, IT and other outside services costs declined through prioritization of critical initiatives and overall efficiency improvements.

This lower and more efficient cost structure has partially mitigated the year-to-date revenue shortfall while positioning the Company to fund critical future growth initiatives.

Looking ahead, we expect continued near-term market headwinds, which will be partially mitigated by continued backlog reductions in the upcoming quarters, as well as leveraging the progress made on managing costs.

Overall, we remain very solid financially with a strong cash position, no debt and improved cost and operating structures which enable us to begin implementing future market, product and operational initiatives to drive growth under new company leadership.

Finally, a Chief Executive Officer (“CEO”) transition was initiated with industry veteran and current Data I/O Board member, William “Bill” Wentworth, becoming President effective September 1, 2024, and CEO effective October 1, 2024.

Bill replaced retiring Anthony Ambrose in his CEO role for Data I/O for the past twelve years.

CRITICAL ACCOUNTING POLICY JUDGMENTS AND ESTIMATES

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

During the first three 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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Relative selling price is based on the selling price of the standalone system.

For the installation and service and support performance obligations, we use the value of the discount given to distributors who perform these components.

For software maintenance performance obligations, we use what we charge for annual software maintenance renewals after the initial year the system is sold.

Installation, services and support costs are based on the discount given to distributors who perform these services.

For software maintenance performance obligations, we use the charge for annual software maintenance renewals after the expiration of the initial warranty coverage.

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.

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Once transferred, the equipment is sold by our regular sales channels as used equipment inventory.

These product units often involve refurbishing and an equipment warranty and are conducted as sales in our normal and ordinary course of business.

These product units often involve refurbishing and are sold in our normal and ordinary course of business with standard warranty coverage.

The transfer amount is the product unit’s net book value, and the sale transaction is accounted for as revenue and cost of goods sold.

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Net sales by product line

September 30,

(in thousands)

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 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.

Net sales in the third quarter 2024 were $5.4 million, down 17% compared with $6.6 million in the third quarter 2023.

Since the beginning of the year, automotive electronics uncertainty has increased and customer capacity expansion has slowed, resulting in lower system shipments in the Americas and Europe which are offsetting growth in Asia.

While the automotive system results are below expectations, the Company continues to achieve steady performance from programming centers, industrial markets, and its recurring revenue offerings.

Third quarter 2024 recurring services and consumable adapter sales increased by 6% from the prior year, while system sales declined by 34% during the same periods.

Third-quarter bookings mirrored sales at $4.7 million, down from $5.3 million in the prior year.

Backlog remains strong at $4.7 million as of September 30, 2024, down $0.7 million from the start of the quarter, with further reductions expected as planned customer deliveries occur in future quarters.

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Percentage of net sales

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.

Gross margin as a percentage of sales was 53.9% in the third quarter as compared to 53.7% in the prior year period.

Despite lower sales volume, gross margin as a percentage of sales remained comparable to prior quarters in 2024 due to product mix favoring software and services over reduced system sales, and successful efforts to improve material, production and service costs through ongoing cost reduction initiatives.

Year-to-date gross margin decline from prior year reflects lower sales volume on relatively fixed manufacturing and service costs.

RESEARCH AND DEVELOPMENT

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Percentage of net sales

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.

Research and development (“R&D”) expenses in the third 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.

1 unchanged sentence

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Percentage of net sales

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.

Selling, General and Administrative (“SG&A”) expenses in the third quarter of 2024 decreased by approximately $300,000 or 15% from the prior year period primarily due to lower channel and sales commissions associated with lower sales volume, continued efficiency improvements and receipt of a $228,000 China subsidy grant to recognize past and promote continued local business development.

All operational areas including sales, marketing, facilities, IT, finance and human resources contributed to these reductions through efficiency improvements and cost reductions throughout the year.

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Interest income

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.

Interest income was higher in the third 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 second quarter of both 2024 and 2023, primarily related to foreign and some state taxes.

Income tax benefit (expense) for the third 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.

2 unchanged sentences

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.

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

As of September 30, for both 2024 and 2023, our deferred tax assets and valuation allowance have been reduced by approximately $441,000 and $435,000, 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.

1 unchanged sentence

LIQUIDITY AND CAPITAL RESOURCES

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Working capital

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.

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

The balance sheet remains strong with cash of $12.4 million at the end of the third quarter compared to $12.3 million on December 31, 2023.

Cash increased slightly from the beginning of the year due to reduced operating expenses and improved collections of receivables, offset by lower revenue, higher inventories, cash expenses paid annually in the first quarter, and the second quarter tax repatriation expense of approximately $337,000.

Correspondingly, working capital decreased by $811,000 during the year to $17.6 million as of September 30, 2024.

The Company continues to have no debt.

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.

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We have tried to balance our spending with our anticipated revenue levels and the goal of profitable operations.

We have implemented, or have initiatives to implement, geographic shifts in our operations, reduce exposure to the impact of currency volatility, tariffs and taxes, increase product development efficiency, and control costs.

We have implemented or have on-going initiatives to reduce material and logistic costs, enhance product quality, increase operational and R&D efficiencies and minimize tax expenses.

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.

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.

Any substantial inability to achieve our current business plan could have a material adverse impact on our financial position, liquidity, or results of operations and may require us to reduce expenditures and/or seek possible additional financing.

Any substantial inability to achieve our current business plan could have a material adverse impact on our financial position, liquidity, or results of operations and may require us to further reduce expenditure and/or seek possible additional financing.

OFF-BALANCE SHEET ARRANGEMENTS

1 unchanged sentence

NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURES

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.

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was approximately ($267,000) in the third quarter of 2024 compared to $102,000 in the third quarter of 2023.

Adjusted EBITDA, excluding equity compensation (a non-cash item), was approximately $37,000 in the third quarter of 2024, compared to $402,000 in the third quarter of 2023.

Year-to-date Adjusted EBITDA was ($324,000) and $1.8 million for the periods ending September 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