10-Q 1 fq10_qtr12001.txt FORM 10-Q =============================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended MARCH 31, 2001 Commission File No. 0-10394 DATA I/O CORPORATION (Exact name of registrant as specified in its charter) Washington 91-0864123 (State or other jurisdiction of (I.R.S. Employer Idenitfication No.) incorporation or organization) 10525 Willows Road N.E., Redmond, Washington, 98052 (address of principal executive offices, Zip Code) (425) 881-6444 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No 7,560,167 shares of no par value Common Stock outstanding as of May 10, 2001 Page 1 of 13 DATA I/O CORPORATION FORM 10-Q For the Quarter Ended March 31, 2001 INDEX Part I - Financial Information Page Item 1. Financial Statements (unaudited) 3 Item 2. Management's Discussion and Analysis of Financial 9 Condition and Results of Operations Item 3 Qantitative And Qualitative Disclosures About Market Risk 12 Part II - Other Information Item 1. Legal Proceedings 13 Item 2. Changes in Securities 13 Item 3. Defaults Upon Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 13 PART I - FINANCIAL INFORMATION Item 1. Financial Statements DATA I/O CORPORATION CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------------------------------------------------- Mar. 31, Dec. 28, 2001 2000 ----------------------------------------------------------------------------------------------------------------------- (in thousands, except share data) (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $2,238 $3,133 Marketable securities 2,251 1,944 Trade accounts receivable, less allowance for doubtful accounts of $351 and $350 9,320 10,627 Inventories 7,893 9,166 Recoverable income taxes 73 91 Other current assets 352 444 ----------- ------------- TOTAL CURRENT ASSETS 22,127 25,405 Property, plant and equipment - net 2,469 2,190 Other assets 889 1,151 ----------- ------------- TOTAL ASSETS $25,485 $28,746 =========== ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 922 $1,674 Accrued compensation 1,388 2,073 Deferred revenue 2,799 2,637 Other accrued liabilities 1,986 1,623 Accrued costs of business restructuring 102 117 Income taxes payable 350 489 ----------- ------------- TOTAL CURRENT LIABILITIES 7,547 8,613 Deferred gain on sale of property 2,012 2,094 ----------- ------------- TOTAL LIABILITIES 9,559 10,707 COMMITMENTS STOCKHOLDERS' EQUITY: Preferred stock - Authorized, 5,000,000 shares, including 200,000 shares of Series A Junior Participating Issued and outstanding, none - - Common stock, at stated value - Authorized, 30,000,000 shares Issued and outstanding, 7,560,000 and 7,495,000 shares 18,407 18,292 Accumulated losses (2,482) ( 163) Accumulated other comprehensive income (loss) 1 ( 90) ----------- ------------- TOTAL STOCKHOLDERS' EQUITY 15,926 18,039 ----------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,485 $28,746 =========== ============= See notes to consolidated financial statements.
DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
----------------------------------------------------------------------------------------------------------------------------- Mar. 31, Mar. 30, For the quarters ended 2001 2000 ----------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) As Restated 1 Net sales $7,883 $5,630 Cost of goods sold 5,147 3,384 ------------ ------------ Gross margin 2,736 2,246 Operating expenses: Research and development 1,939 2,421 Selling, general and administrative 2,996 2,525 ------------ ------------ Total operating expenses 4,935 4,946 ------------ ------------ Operating loss (2,199) (2,700) Non-operating income (expense): Interest income 65 176 Interest expense (7) (9) Foreign currency exchange (6) (3) ------------ ------------ Total non-operating income (expense) 52 164 ------------ ------------ Loss from operations before income taxes (2,147) (2,536) Income tax expense 2 13 ------------ ------------ Loss from operations (2,149) (2,549) Cumulative effect of change in accounting principle - (2,531) ------------ ------------ Net loss ($2,149) ($5,080) ============ ============ Basic and diluted loss per share: From continuing operations ($0.28) ($0.35) Cumulative effect of change in accounting principle 0.00 (0.34) ------------ ------------ Total basic and diluted loss per share ($0.28) ($0.69) ============ ============ Weighted average shares outstanding 7,560 7,347 ============ ============ Weighted average and potential shares outstanding 7,560 7,347 ============ ============ See notes to consolidated financial statements.
1 The restatement is due to the Company's adoption of SAB 101. DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------------ Mar. 31, Mar, 30 For the quarters ended 2001 2000 ------------------------------------------------------------------------------------------------------------------------------ (in thousands) As Restated 1 OPERATING ACTIVITIES: Loss from operations ($2,149) ($2,549 ) Adjustments to reconcile income (loss) from operations to net cash provided by (used in) operating activities: Depreciation and amortization 597 527 Net loss on dispositions 74 - Deferred revenue 162 5,638 Amortization of deferred gain on sale (82) (83) Net change in: Trade accounts receivable 1,307 (37) Inventories 1,005 (3,809) Recoverable income taxes 18 2 Other current assets 85 151 Business restructure (15) (60) Accounts payable and accrued liabilities (1,212) 178 ----------- -------------- Cash used in operating activities (210) (42) Cash used in cumulative effect of change in accounting principle - (2,531) ------------------------------- Net cash used in operating activities (210) (2,573) INVESTING ACTIVITIES: Additions to property, plant and equipment (413) (83) Purchases of marketable securities (2,679) (2,340) Proceeds from sales of marketable securities 2,369 2,999 ----------- -------------- Cash provided by investing activities (723) 576 FINANCING ACTIVITIES: Sale of common stock 115 82 Proceeds from exercise of stock options - 56 ----------- -------------- Cash provided by financing activities 115 138 Decrease in cash and cash equivalents (818) (1,859) Effects of exchange rate changes on cash (77) - Cash and cash equivalents at beginning of quarter 3,133 3,597 ----------- -------------- Cash and cash equivalents at end of quarter $2,238 $1,738 =========== ============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $8 $10 Income taxes $2 $38 See notes to consolidated financial statements. 1 The restatement is due to the Company's adoption of SAB 101.
DATA I/O CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - FINANCIAL STATEMENT PREPARATION The financial statements as of March 31, 2001 and March 30, 2000, have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). These statements are unaudited but, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the results for the periods presented. The balance sheet at December 28, 2000 has been derived from the audited financial statements at that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such SEC rules and regulations. Operating results for the quarter ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. These financial statements should be read in conjunction with the annual audited financial statements and the accompanying notes included in the Company's Form 10-K for the year ended December 28, 2000. NOTE 2 - INVENTORIES Inventories consisted of the following components (in thousands): Mar. 31, Dec. 28, 2001 2000 ---------------- ---------------- Raw material $4,416 $4,526 Work-in-process 2,206 2,756 Finished goods 1,271 1,884 ---------------- ---------------- $7,893 $9,166 ================ ================ NOTE 3 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following components (in thousands): Mar. 31, Dec. 28, 2001 2000 ---------------- ---------------- Building improvements $ 221 $ 205 Equipment 13,101 12,703 ---------------- ---------------- 13,322 12,908 Less accumulated depreciation 10,853 10,718 ---------------- ---------------- $ 2,469 $ 2,190 ================ ================ NOTE 4 - BUSINESS RESTRUCTURING PROGRESS During the third quarter of 1998, the Company recorded a restructuring charge of $2.0 million as the Company began the implementation of a plan to restructure its Redmond and foreign subsidiary operations to a level more in line with the lower sales it was experiencing. During the fourth quarter of 1998, the Company recorded further restructuring charges of $2.4 million related to the continuing restructure of the Company's Redmond operations and foreign subsidiaries and related to activities directly associated with the fourth quarter 1998 acquisition of SMS Holding GmbH ("SMS"). The acquisition of SMS created certain redundancies in product offerings and in the operations of the combined company. A restructuring plan was implemented after the acquisition was completed to eliminate such redundant operations and to phase out overlapping products. The total number of employees terminated due to the restructure was 133 (approximately 39% of the total workforce). Employees were terminated from almost all areas of the Company. Total involuntary termination benefits paid and charged against the restructure reserve were approximately $2.1 million. Total facility consolidation and abandonment costs incurred and charged against the restructure reserve were approximately $480,000. Other exit costs paid and charged against the restructure reserve, including legal and consulting fees, settlements with suppliers and fixed asset disposals, were approximately $1.7 million. The remaining reserve at March 31, 2001 of $102,000 relates to facility abandonment and foreign subsidiary operations realignment. NOTE 5 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands except per share data):
For the first quarter 2001 2000 ------------- ------------- Numerator for basic and diluted earnings per share: Income from operations before cum- ulative effect of change in accounting principle (2,149) (2,549) Cumulative effect of change in accounting principle - (2,531) ------------- ------------- Net income (loss) ($2,149) ($5,080) ============= ============= Denominator: Denominator for basic earnings per share - weighted-average shares 7,560 7,347 Employee stock options (1) - - ------------- ------------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversion of stock options 7,560 7,347 ============= ============= Basic and diluted earnings (loss) per share From continuing operations, after taxes before cumulative effect of change in accounting principle ($0.28) ($0.35) From change in accounting principle ($0.00) ($0.34) ------------- ------------- Total basic and diluted earnings per share ($0.28) ($0.69) ============= ============= (1) Excludes 73,258 and 249,395 employee stock options which were antidilutive in the first quarter of 2001 and 2000.
NOTE 6 - ACCOUNTING FOR INCOME TAXES The Company's effective tax rate for the first quarter of 2001 differed from the statutory 34% tax rate primarily due to operating losses for which no tax benefit was recorded. Tax valuation reserves increased by approximately $525,000 during the quarter. As of March 31, 2001 the Company has valuation reserves of $7,907,000. NOTE 7 - COMPREHENSIVE INCOME (LOSS) During the first quarter of 2001 and 2000 total comprehensive income (loss) was comprised of the following (in thousands):
For the first quarter 2001 2000 ------------ ------------- As Restated Net loss ($2,149) ($5,080) Foreign currency translation gain (loss) (2) 1 ------------ ------------- Total comprehensive loss ($2,151) ($5,079) ============ =============
NOTE 8 - CHANGE IN FISCAL YEAR The Company has reported on a fifty-two, fifty-three week basis. The last reporting period using this fiscal period was the year ended December 28, 2000. The Company's board of directors approved a resolution on March 12, 2001 to change the Company's reporting period to a calendar year and calendar quarter basis effective for the current fiscal year. The first quarter of 2001 covers the period December 29, 2000 to March 31, 2001. NOTE 9 - FOREIGN CURRENCY TRANSLATION AND DERIVATIVES Assets and liabilities of foreign subsidiaries are translated at the exchange rate on the balance sheet date. Revenues, costs and expenses of foreign subsidiaries are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are charged or credited to stockholders' equity, net of taxes. Realized and unrealized gains and losses resulting from the effects of changes in exchange rates on assets and liabilities denominated in foreign currencies are included in non-operating expense as foreign currency transaction gains and losses. The Company utilizes forward foreign exchange contracts to reduce the impact of foreign currency exchange rate risks where natural hedging strategies cannot be effectively employed. All hedging instruments held by the Company are fair value hedges. Generally, these contracts have maturities less than one year and require the Company to exchange foreign currencies for U.S. dollars at maturity. The fair value of open hedge contracts as of March 31, 2001 is a loss of $106,000 and is included in accounts payable on the balance sheet. NOTE 10 - REVENUE RECOGNITION Sales of the Company's semiconductor programming equipment products requiring installation by the Company that is other than perfunctory are recorded when installation is complete, or at the later of customer acceptance or installation, if an acceptance clause is specified in the sales terms. Revenue from other product sales is recognized at the time of shipment. Revenue from the sale of service and update contracts is recorded as deferred revenue and recognized on a straight-line basis over the contractual period. The Company previously recognized revenue from product sales at the time of shipment, or at customer acceptance, if an acceptance clause was specified in the sales terms. Effective December 31, 1999, the Company changed its method of accounting for product sales requiring Company installation, when installation is other than perfunctory, to recognize such revenues when installation is complete, or at the later of customer acceptance or installation, if an acceptance clause is specified in the sales terms. The Company believes the change in accounting principle is preferable based on guidance provided in SEC Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. The cumulative effect on prior years resulted in a charge to year 2000's income of $2,531,000 (or $0.34 per share, basic and diluted). The net quarterly effect on previously reported revenues for year 2000 was: Quarter 1 ($972,000), Quarter 2 $3,966,000, and Quarter 3 $1,643,000. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Forward-Looking Statements This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves as long as they identify these statements as forward looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact made in this Quarterly Report on Form 10-Q are forward looking. In particular, statements herein regarding industry prospects; future results of operations or financial position; integration of acquired products and operations; market acceptance of the Company's newly introduced or upgraded products; development, introduction and shipment of new products; and any other guidance on future periods are forward-looking statements. Forward-looking statements reflect management's current expectations and are inherently uncertain. The Company's actual results may differ significantly from management's expectations. The following discussion and discussion under the caption "Business - Cautionary Factors That May Affect Future Results" in Item 1 in the Company's Annual report on Form 10-K for the year ended December 28, 2000, describe some, but not all, of the factors that could cause these differences.
Results of Operations Net Sales (in thousands) First Quarter First Quarter Net Sales by Product Line: 2001 Change 2000 ---------------------------------------------------------------------------------------------------- ------------------- Non-automated programming systems $4,690 8.3% $4,331 Automated programming systems 3,193 145.8% 1,299 ------------------ ------------------- ------------------- Total Programming Systems Division $7,883 40.0% $5,630 ================== =================== =================== Net Sales by location: United States $2,920 15.2% $2,535 % of total 37.0% 45.0% International $4,963 60.4% $3,095 % of total 63.0% 55.0% ---------------------------------------------------------------------------------------------------------------------------
Revenues for the first quarter of 2001 increased $2.3 million or 40% compared to the first quarter of 2000. The company adopted SAB 101 in the first quarter of 2000, resulting in the deferral of recognizing $972,000 in revenues for the quarter. The balance of the increased sales relates to higher shipment volumes of PP100's and the introduction of the ProLINE-RoadRunner automated programming system. Most of the revenue deferred in 2000 related to international shipments, but international revenue in 2001 still increased $900,000 over the prior year and accounted for 63% of the quarter's shipments. The Company has experienced a decline in sales for the first quarter 2001 from the third and fourth quarters of 2000. The decline is attributed to the Company experiencing a reduction in the orders for automated programming equipment. The Company believes this to be primarily due to a general economic slowing in the wireless communications industry, among contract manufacturers and in other sectors of the electronics industry.
Gross Margin (in thousands) First Quarter First Quarter 2001 Change 2000 ---------------------------------------------------------------------------------------------------------------------------- Gross Margin $2,736 21.7% $2,248 Percentage of net sales 34.7% 39.9% ----------------------------------------------------------------------------------------------------------------------------
Gross margin dollars increased 21.7% on a 40% revenue increase during the first quarter 2001 versus the same quarter in 2000. The gross margin percentage decreased from 39.9% to 34.7%. The adoption of SAB 101 reduced the margin dollars in the first quarter of 2000 by $409,000 but did not materially impact the margin percentage. A $630,000 charge was recorded in the first quarter of 2001 to reserve for excess or obsolete inventory due primarily to the slower sales volume than the preceding quarters. This charge reduced the gross margin percentage by 8.0%. Without this charge for excess or obsolete inventory, the gross margin percentage would have increased from year to year. Research and Development
(in thousands) First Quarter First Quarter 2001 Change 2000 -------------------------------------------------------------------------------------------------------------------------- Research and development $1,939 (19.9%) $2,421 Percentage of net sales 24.6% 43.0% --------------------------------------------------------------------------------------------------------------------------
The decrease in research and development (R&D) spending for the first quarter of 2001 as compared to the first quarter of 2000 reflects lower headcount and lower development spending. R&D spending was very high in the first quarter of 2000 due to PP100 and ProLINE RoadRunner development activities. During 2001 the Company plans to continue spending at its current rate to develop new products and technology. Selling, General and Administrative
(in thousands) First Quarter First Quarter 2001 Change 2000 -------------------------------------------------------------------------------------------------------------------------- Selling, general & administrative $2,996 18.5% $2,528 Percentage of net sales 38.0% 44.9% --------------------------------------------------------------------------------------------------------------------------
The increase in Selling, General and Administrative (SG&A) expense relates primarily to increases in selling expenses. Internal sales personnel were hired to generate sales and the Company staffed a direct sales force in China. The discount in 2000 for sales distributors was recorded as a net reduction to revenue, while the internal sales costs are recorded as selling expense. G&A costs are slightly higher than the prior year. Under the reorganization into business units done last fall, certain management costs became part of G&A that had previously been charged to COGS and R&D in 2000. Interest
(in thousands) First Quarter First Quarter 2001 Change 2000 -------------------------------------------------------------------------------------------------------------------------- Interest income $65 (63.1%) $176 Interest expense $7 (22.2%) $9 --------------------------------------------------------------------------------------------------------------------------
The decrease in interest income for the first quarter of 2001 as compared to the first quarter of 2000 is due to the decrease in cash, cash equivalents and marketable securities, due primarily to the funding of operating losses during the past year. Income Taxes
(in thousands) First Quarter First Quarter 2001 2000 -------------------------------------------------------------------------------------------------------------------------- Income tax expense $2 $13 Effective tax rate 0.1% 0.2% --------------------------------------------------------------------------------------------------------------------------
Tax expense recorded for the first quarter of 2001 was due to foreign taxes. Tax valuation reserves increased by approximately $525,000 during the quarter. As of March 31, 2001 the Company has valuation reserves of $7,907,000. Financial Condition Liquidity and Capital Resources
Mar. 31 Dec. 28, (in thousands) 2001 Change 2000 ------------------------------------------------------------- --------------------- -------------------- ------------------- Working capital $14,580 ($2,212) $16,792 Total debt $0 $0 $0 ------------------------------------------------------------- --------------------- -------------------- -------------------
Working capital decreased during the first quarter of 2001 due to funding of the loss for the quarter. Cash, cash equivalents and marketable securities, which decreased approximately $600,000 during the quarter, were used to reduce the accounts payable balance. Accounts receivable and inventory each decreased approximately $1.3 million. As of March 31, 2001, the Company had no debt outstanding. The Company estimates that capital expenditures for property, plant and equipment during the remainder of 2001 will be between $750,000 and $1.75 million. The Company's future capital requirements will depend on a number of factors costs associated with R&D, successful launch of new products and the potential use of funds for strategic purposes. The Company believes that its existing working capital, together with amounts anticipated from operations will provide the Company with sufficient funds to finance its operations for at least the next 12 months. Share repurchase program Under a previously announced share repurchase program, the Company is authorized to repurchase up to 1,123,800 shares (approximately 15.2%) of its outstanding common stock. These purchases may be executed through open market purchases at prevailing market prices, through block purchases or in privately negotiated transactions, and may commence or be discontinued at any time. As of March 31, 2001, the Company has repurchased 1,016,200 shares under this repurchase program at a total cost of approximately $7.1 million. The Company has not repurchased shares under this plan since the second quarter of 1997 although it still has the authority to do so. RESTRUCTURING The Company announced on April 17, 2001 a restructuring plan to realign the company with growth opportunities. The plan refocuses the company's investment in long-term growth markets by streamlining worldwide operations. The restructuring program is meant to reduce the Company's breakeven operations at least 20% by reducing the global workforce by 20%; discontinue or reallocate numerous projects and activities not essential to the company's long-term goals; decrease discretionary marketing, distribution and promotional expenses; and consolidate numerous functions across the organization. The Company estimates that the restructuring charges will be approximately $500,000. General European Monetary Conversion On January 1, 1999, the European Economic and Monetary Union (the "EMU") introduced the Euro, which became a functional legal currency of the EMU countries. From 1999 to 2001 business in the EMU member states has been and will be conducted in both the existing national currency, such as the Franc or Deutsche Mark, and the Euro. The Company has taken certain steps to ensure that its financial and other software systems are capable of processing transactions and properly handling EMU currencies, including the Euro. The Company will continue to assess what further impact the EMU formation will have on both its internal systems and its products sold. The costs related to addressing this issue have not been determined, however, management believes that this issue and its related costs will not have a material adverse effect on the Company's business, financial condition and operating results. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company has experienced no material changes in market risk. The Company currently uses only foreign currency hedge derivative instruments, which, at a given date, are not material. However, the Company is exposed to interest rate risks. The Company generally invests in high-grade commercial paper with original maturity dates of twelve months or less and conservative money market funds to minimize its exposure to interest rate risk on its marketable securities, which are classified as available-for-sale as of March 31, 2001 and December 28, 2000. PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K A report on Form 8-K dated March 19, 2001 was filed related to a change in the company's fiscal period. The Company previously reported on a fifty-two, fifty-three week basis. The board of directors approved on March 12, 2001 a resolution to change the Company's reporting to a calendar year and calendar quarter basis. A report on Form 8-K dated March 19, 2001 was filed related to the election of Steven M. Quist to the company's board of directors on March 12, 2001 and the appointment of Irene Bjorklund as the vice president of sales and marketing. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATA I/O CORPORATION (REGISTRANT) DATED: May 10, 2001 By://S//Joel S. Hatlen Joel S. Hatlen Vice President - Finance Chief Financial Officer Secretary and Treasurer