What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-13 compared with 2024-11-12 · 46 added, 93 removed, 151 unchanged (48% of the section changed)

28 unchanged sentences

The following discussions and the 2024 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.

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.

Data I/O continued to make progress in key operational areas during the first quarter, despite a challenging global economic environment.

The period represents a first step in proving the growth and market expansion strategies being implementing over the past several months.

The Company achieved strong first quarter results, reporting increases in revenue, net income and EBITDA on a sequential and year-over-year comparison basis.

At the same time, efficiency improvements and streamlining operations resulted in a lower cost basis for manufacturing and overhead.

Furthermore, we are encouraged to see customers increase the utilization of their existing systems which results in a greater need for engineering and maintenance services and heightened demand for consumable adapters, which represent a high margin source of revenue.

We continue to grow our pipeline of opportunities beyond the automotive sector including a revitalization of our activities with semiconductor companies and forging strategic product development relationships with leading firms serving the memory and microcontroller sectors.

Combined with continued efforts to expand our market reach, we expect to deliver revenue growth through end market diversification and an enhanced consultative sales process.

As the tariff and trade scenarios evolve, Data I/O is well prepared having implemented a resilient supply chain with dual manufacturing capabilities in both the United States and China during COVID which provides an advantage to manage emerging tariff policies.

With the flexibility to manufacture at either location, we are well positioned to cost-effectively support customers globally.

Efforts are underway to enhance our redundancies between our two manufacturing locations.

Additional manufacturing locations are being considered for placement within our European headquarters in Germany and with select distribution partners.

Significant progress has been made in a short period of time against a backdrop of significant economic and cross-border trade uncertainty.

We remain cautious given the near-term headwinds, as this has created additional strain on the economy and stalled capital investments.

We remain focused on setting the business up for sustainable growth by driving innovation, enhancing our products and improving our value proposition.

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, 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.

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.

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

During the current and prior period quarters, the impact of capitalization of incremental costs for obtaining contracts were 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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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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Net sales by product line

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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 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.

Net sales in the first quarter of 2025 were $6.2 million, as compared with $6.1 million in the prior year period and $5.2 million in the fourth quarter of 2024.

The improvements were driven by business recovery and backlog deliveries in the Americas and Europe with growth from the prior year period of 32% and 44%, respectively.

Asia revenue declined 40% due to strong prior year performance and bookings delay due to trade, tariffs and economic uncertainties.

New bookings activities were strong at the start and slowed at the end of the first quarter as customers delayed purchase decisions due to global trade and tariff concerns and related automotive electronics uncertainty.

First quarter 2025 bookings were $4.6 million, up from $4.1 million in fourth quarter 2024 and down from $8.1 million in first quarter 2024 due to a large $2.8 million contract from a single customer for multiple system deliveries that has spanned nearly 15 months.

Backlog on March 31, 2025 was $2.9 million, down $0.6 million from December 31, 2024.

Additionally, deferred revenue was approximately $1.5 million on March 31, 2025.

On a geographic basis, international sales represented approximately 88% of total net sales for the first quarter of 2025 compared with 96% in the prior year period.

Total equipment sales were 54% of revenues, adapters were 32% and software and services revenues were 14% of revenues in the first quarter of 2025 compared with 55% and 30% and 15% respectively for the first quarter of 2024.

Automotive electronics represented 66% of orders followed by 26% for IoT and 8% for programming centers for the first quarter of 2025.

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Percentage of net sales

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.

Gross margin as a percentage of sales in the first quarter of 2025 was 51.6% as compared to 52.8% in the same period last year and 52.2% in the fourth quarter of 2024.

The change in gross margin percentage primarily reflects a higher mix of system sales revenue and lower spending absorption from related inventory reductions in the first quarter of 2024.

RESEARCH AND DEVELOPMENT

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1 unchanged sentence

Percentage of net sales

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.

Research and development (“R&D”) expenses decreased in the first quarter of 2025 as compared to the same period in 2024.

The slight decrease is due to transition from prior to new R&D programs and the associated changes in project and outside services spending.

SELLING, GENERAL AND ADMINISTRATIVE

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2 unchanged sentences

Percentage of net sales

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.

Selling, General and Administrative (“SG&A”) expenses were lower in the first quarter of 2025 as compared to the same period in 2024.

First quarter spending reduction reflects primarily lower sales commissions related to lower first quarter bookings and lower compensation expenses from headcount reductions which occurred in fourth quarter 2024.

Continued efficiency improvements and cost reduction efforts remain a focus, offset in part by inflationary increases and seasonal first quarter public company costs.

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September 30, 2024

September 30, 2023

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Interest income

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.

Interest income was lower in the first quarter of 2025 compared to the same period in 2024 due to lower interest rates and invested balances.

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Income tax benefit (expense)

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.

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 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.

Income tax benefit (expense) for the first quarter of 2025 and 2024 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, 2025.

As of March 31, for both 2025 and 2024, our deferred tax assets and valuation allowance have been reduced by approximately $444,000 and $434,000, 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

September 30,

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Working capital

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.

At March 31, 2025, our principal sources of liquidity consisted of existing cash and cash equivalents.

Cash at $10.5 million increased $159,000 from December 31, 2024 primarily due to higher sales, an improved costs structure and lower inventory levels, partially offset by higher cash expenses paid annually in the first quarter.

Correspondingly, working capital of approximately $16.0 million on March 31, 2025, remained relatively flat as compared to December 31, 2024.

The Company continues to have no debt.

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

Although we have no significant capital expenditure plans currently, 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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NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURES

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.

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was ($272,000) in the first quarter of 2025 compared to ($645,000) in the first quarter of 2024.

Adjusted EBITDA, excluding equity compensation (a non-cash item), was ($98,000) in the first quarter of 2025, compared to ($364,000) in the first quarter of 2024.

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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Interest (income)

Depreciation & amortization

EBITDA earnings (loss)

Depreciation and amortization

Equity compensation

Adjusted EBITDA, excluding equity compensation

Recently Adopted Accounting Pronouncements

See Note 1 of Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1 for a discussion of recently adopted accounting pronouncements.

Quantitative and Qualitative Disclosures About Market Risk

1 unchanged sentence

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