What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-04-01 compared with 2024-03-27 · 66 added, 65 removed, 166 unchanged (44% of the section changed)

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All statements other than statements of historical fact made in this Annual Report on Form 10-K are forward-looking.

In particular, statements herein regarding economic outlook, impact of COVID-19 including recovery from the shutdown in Shanghai, China;

industry prospects and trends;

In particular, statements herein regarding industry prospects and trends;

expected business recovery;

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

In 2023, most of the direct implications of COVID-19 had passed, and we were dealing with the follow-on impacts or indirect impacts from COVID-19 and the policies put in place to mitigate the disease.

We continued to manage inflation, supply chain impacts and shortages, and the post lock down economic transitions in China and elsewhere.

The strong dollar impact that started to reverse during the fourth quarter of 2022, provided tail winds for revenue in the first and second quarter of 2023, especially versus the Euro.

During the second half of 2023, the U.S.

dollar strengthened again causing revenue head winds.

However, we managed to achieve profitability for the year.

Macroeconomic news, while improving, continued to be fairly negative.

On a more positive note, inflation, while still elevated, is diminishing.

Interest rates continue to be higher, but an anticipated recession has not occurred outside of Germany with a current soft landing outlook causing expectations for avoiding a U.S.

COVID-19, semiconductor shortages, shipping & supply chain issues, and domestic labor tightness are improving situations.

Travel, trade shows, and face-to-face customer meetings are happening.

We believe our new supplier resilience, inventory holdings and production in multiple locations, and ability to leverage remote and virtual services, are capabilities to retain and build upon.

We continue to focus on managing our costs carefully and growth-oriented strategies.

We are focusing our research and development efforts in our 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.

Our customer focus has been on global and strategic high-volume manufacturers in key market segments like automotive electronics, IoT, industrial controls and consumer electronics, as well as programming centers.

Although the long-term prospects for our strategic growth markets should remain good, these markets and our business have been, and are likely to continue to be, adversely impacted by global political and economic factors.

In particular, 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.

On the product side, we continue to invest with a long-term focus towards expanding our markets and creating unique value for our customers.

This is true for both our traditional core business as well as the emerging security deployment business.

Our strong cash position and balance sheet, combined with our long-term view of the market, gives us the financial flexibility to make these investments.

The automotive and industrial electronics industry is cyclical.

With increased market uncertainty and customer capacity expansion slowing in 2024, automated systems shipments declined in the Americas and Europe which was partially offset by revenue growth in Asia.

Automotive electronics represented 59% of 2024 bookings compared to 63% for 2023.

While automotive system sales were below expectations, the Company continues to expand its sales to service providers (franchise distribution, contract manufacturers and independent providers) and reoccurring revenue offerings.

For the full year, consumable adapters and services revenue remained steady, representing 50% of total revenue and helping mitigate the decline in system sales.

COVID-19 impacts in past years were no longer an operational challenge with personnel staffing, inventory levels and supply chain and operational activities returning to normal levels.

However late in 2024 with the new incoming United States Administration, geo-political, economic and trade uncertainties have increased.

The resulting future impact on the Company’s markets, customers, supply chain and operations are uncertain.

However, the operational and manufacturing resiliencies gained from the COVID-19 impact and the experience of leadership and operational teams can be leveraged to navigate and mitigate these potential future challenges.

As our customers shift their supply chain and manufacturing locations to address changing economic and trade constraints, we will have the capacity and ability to adjust accordingly.

After a period of stability which lasted over a decade, key organizational leadership transition occurred in the fourth quarter of 2024 with the appointment of a new CEO and President, William Wentworth.

Subsequent changes have also occurred in the leadership of the Sales, Marketing and Engineering functions and corresponding changes in the strategic and operational direction of these groups.

We believe these changes will drive improved revenue growth, higher product innovation, greater operational efficiency and improved financial performance.

We continue to make investments in technologies, products and services to maintain market leadership in our Unified Programming Strategy.

This strategy supports our customers’ preprogramming supply chain needs, from design to manufacturing and beyond.

Our manual programmer offerings, such as LumenX and FlashCore, provide preprogramming solutions for our customers’ design, engineering, new product introduction, low-to-medium production, and test needs while our PSV system of products support medium-to-high volume production needs.

Our strong cash position and balance sheet, combined with our long-term view of the market, gives us financial flexibility to make these investments.

CRITICAL ACCOUNTING POLICY JUDGMENTS AND ESTIMATES

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These systems are standard products with published product specifications and are configurable with standard options.

The evidence that these systems could be deemed as accepted was based upon having standardized factory production of the units, results from batteries of tests of product performance to our published specifications, quality inspections and installation standardization, as well as past product operation validation with the customer and the history provided by our installed base of products upon which the current versions were based.

The evidence that these systems could be deemed accepted was based upon having standardized factory production of the units, results from batteries of tests of product performance to our published specifications, quality inspections and installation standardization, as well as past product operation validation with the customer and the history provided by our installed base of products upon which the current versions were based.

The revenue related to products requiring installation, that is perfunctory, is recognized upon transfer of control of the product to customers, which generally is at the time of shipment.

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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 with standard equipment warranty provided and are conducted as sales in our normal and ordinary course of business.

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.

Allowance for Credit Losses:

We base the allowance for credit losses on our assessment of the losses collectively expected for the future, as well as collectability of specific customer accounts and the aging of accounts receivable.

Allowance for credit losses is based on our assessment of the losses collectively expected for the future, as well as collectability of specific customer accounts and the aging of accounts receivable.

If there is deterioration of a major customer’s credit worthiness or actual defaults are higher than historical experience, or events forecast that collectively indicate some impairment is expected, our estimates of the recoverability of amounts due to us could be adversely affected.

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Tax Valuation Allowances:

Given the uncertainty created by our loss history, as well as the current and ongoing cyclical and COVID-19 related uncertain economic outlook for our industry and capital and geographic spending, as well as income and current net deferred tax assets by entity and country, we expect to continue to limit the recognition of net deferred tax assets and accounting for uncertain tax positions and maintain the tax valuation allowances.

Given the uncertainty created by our loss history capital and geographic spending, as well as income and current net deferred tax assets by entity and country, we expect to continue to limit the recognition of net deferred tax assets and accounting for uncertain tax positions and maintain the tax valuation allowances.

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.

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Share-based Compensation:

We account for share-based awards made to our employees and directors, including employee stock option awards, performance stock unit awards and restricted stock unit awards, using the estimated grant date fair value method of accounting.

We account for share-based awards provided to our employees and directors, including employee stock option awards, performance stock unit awards and restricted stock unit awards, using the estimated grant date fair value method of accounting.

For options, we estimate the fair value using the Black-Scholes valuation model and an estimated forfeiture rate.

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Software and Maintenance Sales *

Net sales for the year ended December 31, 2023 increased approximately 16%, to $28.1 million, compared to 2022, primarily as a result of COVID-19 China shutdown in the first half of 2022, economic uncertainty resulting from the war in Ukraine, semiconductor shortages and a stronger dollar, offset in part during the second half of the 2022 and continuing in 2023 by fulfilling the backlog built up during the shutdown, improved semiconductor supply, and higher demand in automotive electronics and industrial/IoT.

Order bookings were $25.8 million in 2023, down approximately 2% compared to $26.4 million in 2022.

Automotive Electronics were 63% of total bookings, up 2% from 61% in 2022.

Backlog at December 31, 2023 and 2022 was $2.8 million and $4.8 million, respectively.

Deferred revenue was $1.6 million at December 31, 2023 compared to $1.8 million at December 31, 2022.

* includes an insignificant amount of service and parts sales

Net sales for the year ended December 31, 2024 decreased approximately 22%, to $21.8 million, compared to 2023.

In 2024, automotive electronics uncertainty persisted and customer capacity expansion slowed, resulting in lower system shipments in the Americas and Europe which were partially offset by growth in Asia.

Automotive electronics represented 59% of 2024 bookings compared to 63% for 2023.

For the full year, consumable adapters and services revenue remained steady, representing 50% of total revenue and helping mitigate the decline in system sales.

Order bookings were $22.5 million in 2024, down approximately 12.6% compared to $25.8 million in 2023 due to similar market challenges noted for revenue.

The order backlog on December 31, 2024, was $3.5 million, up $0.7 million from the fourth quarter of 2023, which will benefit revenue recognition in the first half of 2025 as systems are shipped.

Additionally, deferred revenue was approximately $1.6 million on December 31, 2024.

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Gross margin as a percentage of sales for the year ended December 31, 2024, was 53.3%, compared to 57.7% in 2023.

The increase in gross margin percentage was due to the impact of sale volume relative to fixed costs;

product mix, channel mix, and lower inventory levels (which contributed to lower freight, tariffs, and obsolescence costs.)

The decrease in gross margin as a percentage of sales primarily reflects lower sales volume and lower related absorption of fixed manufacturing and service operating costs.

Actual 2024 production and service spending decreased by $250,000 or 4% from the prior year.

RESEARCH AND DEVELOPMENT

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Percentage of net sales

Research and development (“R&D”) expense increased $441,000 for the year ended December 31, 2023 compared to 2022.

The increase was primarily related contracted services and incentive compensation.

We believe it is essential to invest in R&D to significantly enhance our existing products and to create new products as markets develop and technologies change.

During 2023, we continued strategically investing in supporting SentriX, ConneX and our LumenX programmer capabilities.

In addition to product development, a significant part of R&D spending is on creating software and support for new devices introduced by the semiconductor companies.

We are currently focusing our research development efforts on strategic growth markets, including automotive electronics and IoT.

We are developing technology and the SentriX product line to securely program new categories of semiconductors, including Secure Microcontrollers, Secure Elements, and Authentication Chips.

Research and development (“R&D”) expense decreased $284,000 for the year ended December 31, 2024 compared to 2023.

The decrease was primarily related to contracted services and incentive compensation.

We believe it is essential to invest in R&D to significantly enhance our existing solutions and create new products as markets develop and technologies change.

During 2024, we continued to invest in the creation of new and enhancement of existing capabilities for our PSV family of automated systems, LumenX and FlashPAK family of non-automated programmers and related software.

In addition to product development, a significant part of R&D spending is on creating algorithm software and support for new devices introduced by the semiconductor companies.

Our R&D spending fluctuates based on the number, type, and the development stage of our product initiatives and projects.

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Percentage of net sales

Selling, General and Administrative (“SG&A”) expenses increased approximately $1.3 million for the year ended December 31, 2023 compared to 2022.

The increase was primarily related to higher sales commissions, contracted services and incentive compensation.

Selling, General and Administrative (“SG&A”) expenses decreased approximately $810,000 thousand for the year ended December 31, 2024 compared to 2023.

The decrease was primarily related to lower sales commissions on lower revenue and lower outside services from efficiency improvements and cost controls.

Cost control measures remain in effect.

Salary and wages remained flat with lower headcount savings offset by staff separation charges of approximately $430,000 in the fourth quarter of 2024.

(in thousands)

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Income tax (expense) benefit

Income tax (expense) decreased by $489,000 for the year ended December 31, 2023 compared to 2022.

The decrease was primarily a result of the withholding tax of $442,000 on the repatriation of cash from subsidiaries in 2022.

Income tax (expense) increased by $192,000 for the year ended December 31, 2024 compared to 2023.

The increase was primarily a result of the withholding tax of $337,000 on the repatriation of cash from China subsidiary in 2024.

Income tax (expense) in 2024 and 2023 is primarily the result of foreign subsidiary income tax and minimal U.S.

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Dollar accounts held by foreign subsidiaries and sales by our German subsidiary to certain customers, which were invoiced in U.S.

Because approximately 90% of our sales are to international markets, volatile exchange rates may also impact our competitiveness and margins.

We increased prices in response to cost increases caused by inflation and part shortages.

Because approximately 94% of sales are to international markets, volatile exchange rates may also impact our competitiveness and margins.

Product and service price increases have been increased in response to cost increases caused by inflation, tariffs and part shortages.

FINANCIAL CONDITION:

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Cash at December 31, 2024 and 2023 was $10.3 million and $12.3 million, respectively.

Our working capital increased by $846,000 during 2023 due primarily to revenue growth and operating profit improvement.

Our current ratio was 4.0 and 3.8 for December 31, 2023 and 2022, respectively.

Working capital decreased by $2.3 million during 2024 due primarily to the revenue decline and resulting operating loss.

Our current ratio improved and was 4.2 and 4.0 for December 31, 2024 and 2023, respectively.

The company continues to have no debt.

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

We plan to increase our internally developed rental, security provisioning, sales demonstration and test equipment as we develop and release new products.

We plan to increase our internally developed rental, sales demonstration and test equipment as we develop and release new products.

Capital expenditures are currently expected to be funded by existing and internally generated funds.

As a result of our cyclical and seasonal industry, significant product development, factory resilience strategies, customer support and selling and marketing efforts, we require substantial working capital to fund our operations.

We have implemented or have initiatives to implement geographic shifts in our operations, optimize real estate usage, adjusting pricing for cost inflation, lower unit costs, lower tariff expenses, reduce exposure to the impact of currency volatility, increase product development differentiation, and reduce other costs.

We have implemented or have initiatives to implement geographic shifts in our operations, optimize real estate usage, adjust pricing for cost inflation, lower unit costs, lower tariff expenses, reduce exposure to the impact of currency volatility, increase product development differentiation, and reduce other costs.

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.

We may require additional cash at the U.S.

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

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

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.

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.

OFF-BALANCE SHEET ARRANGEMENTS

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NEW ACCOUNTING PRONOUNCEMENTS - STANDARDS ISSUED AND IMPLEMENTED

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326).

Topic 326 is effective (Smaller Reporting Company) for reporting periods beginning after December 15, 2022.

Topic 326 replaces the incurred loss impairment methodology under current Generally Accepted Accounting Principles ("GAAP") with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments.

We adopted the new credit loss standard on January 1, 2023.

The new credit loss standard has not had a material impact on our financial condition, results of operations and cash flows, or financial statement disclosures.

Effective January 1, 2024, the Company adopted ASU 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures.

This update requires entities, including those with a single reportable segment, to disclose significant segment expenses regularly provided to the Chief Operating Decision Maker (CODM) and included in the reported measure of segment profit or loss.

The Company operates as a single reportable segment.

The CODM evaluates the Company's performance based on operating income, as presented in the consolidated statements of operations.

Significant segment expenses are those that are already disclosed in operating income and regularly reviewed by the CODM for purposes of assessing performance and allocating resources.

Additional significant single segment expense categories are provided in Note 13 – Segment Information.

NEW ACCOUNTING PRONOUNCEMENTS - STANDARDS ISSUED AND NOT YET IMPLEMENTED

In November 2023, the FASB issued ASU 2023-07 "Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures" which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses.

ASU 2023-07 is effective for our annual periods beginning January 1, 2024, and for interim periods beginning January 1, 2025, with early adoption permitted.

We are currently evaluating the potential effect that the updated standard will have on our financial statement disclosures.

In December 2023, the FASB issued ASU 2023-09 "Income Taxes (Topics 740):

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We are currently evaluating the potential effect that the updated standard will have on our financial statement disclosures.

In November 2024, FASB issued ASU 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation (Subtopic 220-40), which requires disclosure of specific information about costs and expenses within relevant expense captions on the face of the income statement, qualitative descriptions for expense captions not specifically disaggregated quantitatively, and the total amount and definition of selling expenses for interim and annual reporting periods.

This standard is effective for the annual reporting period beginning January 1, 2027 and interim reporting periods beginning January 1, 2028 and should be applied retrospectively to all comparative periods.

Early adoption is permitted.

The Company is currently evaluating the effects of adopting this new accounting guidance.

Quantitative and Qualitative Disclosures About Market Risk

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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-K

Item 7. Management’s Discussion and Analysis