15
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Or the transition period from ___________ to ______________
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 Identification 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
7,613,574 shares of no par value Common Stock issued and outstanding as of
November 3, 2001
DATA I/O CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 2001
INDEX
Part I - Financial Information Page
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
Part II - Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------------
Sept. 30, Dec. 28,
2001 2000
- -----------------------------------------------------------------------------------------------------------------------
(in thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $6,335 $3,133
Marketable securities 1,406 1,944
Trade accounts receivable, less allowance for
doubtful accounts of $349 and $350 6,116 10,627
Inventories 6,707 9,166
Recoverable income taxes 0 91
Other current assets 394 444
----------- -------------
TOTAL CURRENT ASSETS 20,958 25,405
Property, plant and equipment - net 1,800 2,190
Other assets 363 1,151
----------- -------------
TOTAL ASSETS $23,121 $28,746
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,897 $1,674
Accrued compensation 867 2,073
Deferred revenue 2,053 2,637
Other accrued liabilities 2,109 1,623
Accrued costs of business restructuring 395 117
Income taxes payable 417 489
----------- -------------
TOTAL CURRENT LIABILITIES 7,738 8,613
Deferred gain on sale of property 1,847 2,094
----------- -------------
TOTAL LIABILITIES 9,585 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, 7,613,754
and 7,494,592 shares 18,500 18,292
Accumulated deficit (4,967) (163)
Accumulated other comprehensive income/(loss) 3 (90)
----------- -------------
TOTAL STOCKHOLDERS' EQUITY 13,536 18,039
-----------
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $23,121 $28,746
=========== =============
See accompanying notes
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Quarters Ended Nine Months Ended
- ------------------------------------------------------------------------ ------------------------ -- --------------------------
Sept. 30, Sept. 28, Sept. 30, Sept. 28,
2001 2000 2001 2000
- ------------------------------------------------------------------------ ---------- -- ---------- -- ----------- -- -----------
(in thousands, except per share data) Restated 1 Restated 1
Net sales $6,479 $12,981 $20,849 $32,705
Cost of goods sold 3,124 6,845 11,949 17,549
---------- ---------- ----------- -----------
Gross margin 3,355 6,136 8,900 15,156
Operating expenses:
Research and development 1,450 2,360 5,153 6,893
Selling, general and administrative 2,011 2,361 7,457 7,943
Net provision (reversal) for business restructuring 499 - 959 (255)
---------- ---------- ----------- -----------
Total operating expenses 3,960 4,721 13,569 14,581
---------- ---------- ----------- -----------
Operating income/(loss) (605) 1,415 (4,669) 575
Non-operating income/(expense):
Interest income 77 94 195 398
Interest expense (2) (3) (13) (23)
Foreign currency exchange 29 (11) (61) (25)
---------- ---------- ----------- -----------
Total non-operating income 104 80 121 350
---------- ---------- ----------- -----------
Income/(loss) from operations before income taxes
and cumulative effect of accounting changes (501) 1,495 (4,548) 925
Income tax expense 70 4 92 34
---------- ---------- ----------- -----------
Income/(loss) from operations and before cumulative
effect of accounting changes (571) 1,491 (4,640) 891
Cumulative effect of change in accounting principle - - - (2,531)
---------- ---------- ----------- -----------
Net income/(loss) ($571) $1,491 ($4,640) ($1,640)
========== ========== =========== ===========
Basic income/(loss) per share:
From operations ($0.08) $0.20 ($0.61) $0.12
From cumulative effect of change in accounting principle 0.00 0.00 0.00 (0.34)
---------- ---------- ----------- -----------
Total basic income/(loss) per share ($0.08) $0.20 ($0.61) ($0.22)
========== ========== =========== ===========
Diluted income/(loss) per share:
From operations ($0.08) $0.20 ($0.61) $0.12
From cumulative effect of change in accounting principle 0.00 0.00 0.00 (0.34)
---------- ---------- ----------- -----------
Total diluted income/(loss) per share ($0.08) $0.20 ($0.61) ($0.22)
========== ========== =========== ===========
Shares used in calculation of net income/(loss) per share
Basic 7,596 7,431 7,572 7,378
========== ========== =========== ===========
Diluted 7,596 7,642 7,572 7,378
========== ========== =========== ===========
See accompanying notes
1 The restatement is due to the Company's adoption of SAB 101.
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------
Sept. 30, Sept. 28,
For the nine months ended 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES:
Net loss ($4,640) ($1,640)
Adjustments to reconcile loss from operations to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,720 1,603
Net loss on dispositions 141 -
Amortization of deferred gain on sale of property (247) (248)
Net change in:
Trade accounts receivable 4,477 (3,442)
Inventories 2,448 (3,695)
Recoverable income taxes 91 132
Other current assets 50 289
Accrued cost of business restructuring 271 (362)
Accounts payable and accrued liabilities (569) 152
Deferred revenue (584) (272)
------------ -------------
Net cash provided by (used in) operating activities 3,158 (7,483)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (687) (850)
Purchases of marketable securities (2,505) (2,345)
Proceeds from sales of marketable securities 3,042 9,019
------------ -------------
Cash provided by (used in) investing activities (150) 5,824
FINANCING ACTIVITIES:
Proceeds from shares issued through employee stock purchase plan 209 171
Proceeds from exercise of stock options - 123
------------ -------------
Cash provided by financing activities 209 294
Effects of exchange rate changes on cash and cash equivalents (15) -
------------ -------------
Increase/(decrease) in cash and cash equivalents 3,202 (1,365)
Cash and cash equivalents at beginning of period 3,133 3,597
------------ -------------
Cash and cash equivalents at end of period $6,335 $2,232
============ =============
See accompanying notes
DATA I/O CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - FINANCIAL STATEMENT PREPARATION
The financial statements as of September 30, 2001 and September 28, 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 nine months ended September 30, 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):
Sept. 30, Dec. 28,
2001 2000
---------------- ----------------
Raw material $3,986 $4,526
Work-in-process 1,509 2,756
Finished goods 1,212 1,884
---------------- ----------------
$6,707 $9,166
================ ================
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following components (in
thousands):
Sept 30, Dec. 28,
2001 2000
---------------- ----------------
Building improvements $ 226 $ 205
Equipment 12,305 12,703
---------------- ----------------
12,531 12,908
Less accumulated depreciation 10,731 10,718
---------------- ----------------
$ 1,800 $ 2,190
================ ================
NOTE 4 - BUSINESS RESTRUCTURING PROGRESS
On July 12, 2001 the Company announced that it would take further strategic
actions to reduce its breakeven point. These actions included: the closure of a
manufacturing facility in Germany and its operations moved to other locations
within the Company; the Company's four product families were combined into two
groups; service groups across the organization consolidated to create a team
more responsive to global customer needs; and certain other expense reductions
were targeted for the third quarter, including a closure of the Company's
Redmond facility for one week. A restructuring charge of $499,000 was recorded
in the third quarter of 2001 and is primarily related to lease abandonment
charges and employee severance. Of this amount $312,000 remains unpaid at
September 30, 2001.
In the second quarter of 2001, the Company recorded a restructuring charge of
$460,000 associated with actions taken to reduce the Company's breakeven point
and realign the Company with growth activities. This operational repositioning
was mandated by the impact which the current economic slowdown and decline in
capital spending across a high number of customer groups has had on general
demand for programming equipment. The Company's repositioning included the
following four components: a reduction in the Company's global workforce of
approximately 40 persons or 20% of the workforce; discontinuance or reallocation
of numerous projects and activities not essential to the Company's long-term
goals; streamlining of activities to decrease discretionary marketing,
distribution and promotional expenses; and consolidation of numerous functions
across the organization to create a team which is more productive and able to
respond faster to global customer needs. At September 30, 2001 all restructuring
expenses associated with these activities had been paid except approximately
$18,000.
During the third quarter and fourth quarters of 1998, the Company recorded total
restructuring charges of $4.4 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 and related to activities
directly associated with the fourth quarter 1998 acquisition of SMS Holding GmbH
("SMS"). The remaining reserve at September 30, 2001 is $65,000 that relates
primarily to lease abandonment expenses.
On October 22, 2001 the Company announced that it planned to take additional
cost reductions actions in the fourth quarter to bring the quarterly breakeven
point to approximately $6 million in quarterly revenue.
An analysis of the restructuring is as follows (in thousands)
Reserve 2001 Reserve
Balance at 2001 Payments/ Balance at
Description 12/28/00 Expenses Write-offs 09/30/2001
-------------- ------------- ----------- ------------- -----------------
Downsizing U.S. Operations:
Employee severance $ - $305 $301 $ 4
Redmond facility consolidation and abandonment 107 - 42 65
Consulting and legal expenses - 41 27 14
Downsizing Foreign Operations 10 613 311 312
------------- ----------- ------------- -----------------
Total $117 $959 $681 $395
============= =========== ============= =================
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):
Third Quarter First Nine Months
----------------------------- ---------------------------
2001 2000 2001 2000
----------- ------------- ----------- -----------
Restated 1 Restated 1
Numerator for basic and diluted earnings per share:
Income /(loss) from operations before cumulative
effect of change in accounting principle ($571) $1,491 ($4,640) $ 891
Cumulative effect of change in accounting principle - - - (2,531)
----------- ------------- ----------- -----------
Net income/(loss) ($571) $1,491 ($4,640) ($1,640)
=========== ============= =========== ===========
Denominator:
Denominator for basic earnings per share -
weighted-average shares 7,596 7,431 7,572 7,378
Employee stock options (1) - 211 - -
----------- ------------- ----------- -----------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions of stock options 7,596 7,642 7,572 7,378
=========== ============= =========== ===========
Basic and diluted earnings/(loss) per share
From operations, after taxes before cumulative
effect of change in accounting principle ($0.08) $0.20 ($0.61) $0.12
From change in accounting principle 0.00 0.00 0.00 (0.34)
----------- ------------- ----------- -----------
Total basic and diluted earnings/(loss) per share ($0.08) $0.20 ($0.61) ($0.22)
=========== ============= =========== ===========
(1) Excludes 4,000 and 44,000 employee stock options which were antidilutive for the third quarter and the nine months ended
September 30, 2001, respectively, and 251,000 which were antidilutive for the nine months ended September 28, 2000.
NOTE 6 - ACCOUNTING FOR INCOME TAXES
The Company's effective tax rate for the first nine months 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 $255,000
during the third quarter. As of September 30, 2001 the Company has valuation
reserves of $8.8 million.
NOTE 7 - COMPREHENSIVE INCOME
During the third quarter and the first nine months of 2001 and 2000 total
comprehensive income (loss) was comprised of the following (in thousands):
For the Third Quarter For the Nine Months
------------------------------- ----------------------------------
2001 2000 2001 2000
------------- -------------- ------------- -----------------
Restated 1 Restated 1
Net income /(loss) ($571) $1,491 ($4,640) ($1,640)
Foreign currency translation gain/(loss) 171 43 93 (4)
------------- -------------- ------------- -----------------
Total comprehensive income /(loss) ($400) $1,534 ($4,547) ($1,644)
============= ============== ============= =================
1 The restatement is due to the Company's adoption of SAB 101.
NOTE 8 - CHANGE IN FISCAL YEAR
Previously, the Company 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 third quarter covers the period
July 1, 2001 to September 30, 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 designated
as fair value hedges and as of September 30, 2001 are considered to be highly
effective. Generally, these contracts have maturities less than one year and
require the Company to exchange foreign currencies for U.S. dollars at maturity.
The change in fair value of open hedge contracts as of September 30, 2001
resulted in a realized loss of $74,000 and is included in accounts payable on
the balance sheet.
NOTE 10 - REVENUE RECOGNITION
Sales of the Company's automated 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).
NOTE 11 - RECENT ACCOUNTING PRONIUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and No.
142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is no longer permitted. SFAS No. 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination that is completed after
June 30, 2001.
SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived
intangible assets. Instead, these assets must be reviewed annually (or more
frequently under certain conditions) for impairment in accordance with this
statement. This impairment test uses a fair value approach rather than the
undiscounted cash flows approach previously required by SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." We are required to adopt SFAS No. 142 effective January 1,
2002. We do not believe the adoption of SFAS No. 142 will have a material
impact.
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 or the general economy; future
results of operations or financial position; changes in gross margin
percentages; market acceptance of the Company's newly introduced or upgraded
products; development, introduction and shipment of new products; success of
restructuring efforts; expected spending levels; 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 discussions and discussions 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)
Third Quarter First Nine Months
----------------------------------------- ------------------------------------------
Net sales by product line 2001 % Change 2000 2001 % Change 2000
- ----------------------------------------------------------------------------------- ------------------------------------------
Restated 1 Restated 1
Non-automated programming systems $3,147 (24.0) $4,143 $9,196 (29.5) $13,053
Automated programming systems 3,332 (62.3) 8,838 11,653 (40.7) 19,652
----------------------------------------- ------------- -----------------------------
Total programming systems $6,479 (50.0) $12,981 $20,849 (36.3) $32,705
========================================= ==========================================
Third Quarter First Nine Months
----------------------------------------- ------------------------------------------
Net sales by location 2001 % Change 2000 2001 % Change 2000
----------------------------------------------------------------------------------- ------------------------------------------
Restated 1 Restated 1
United States $2,116 (52.7%) $4,473 $7,394 (34.7%) $11,331
% of total 32.7% 34.5% 35.5% 35.6%
International $4,363 (48.7%) $8,508 $13,455 (37.0%) $21,374
% of total 67.3% 65.5% 64.5% 65.4%
1 The restatement is due to the Company's adoption of SAB 101.
Booked orders for the quarter were $5,426; automated systems totaled $2,619 and
bookings for non-automated systems were $2,807. Shipments exceeded bookings by
$1,053 resulting in a decrease in backlog to $1,566 at September 30, 2001.
Sales for the third quarter and the first nine months of 2001 are substantially
lower for both automated and non-automated systems compared to the same periods
in 2000. The decline is attributed to the Company experiencing a reduction in
orders due primarily to a general economic slowing in the wireless
communications industry, among contract manufacturers and in other sectors of
the electronics industry.
Gross Margin
Third Quarter First Nine Months
---------------------------------------------------------------------------
(in thousands) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Restated 1 Restated 1
Gross Margin $3,355 $6,136 $8,900 $15,156
Percentage of net sales 51.8% 47.3% 42.7% 46.3%
- ----------------------------------------------------------------------------------------------------------------------
1 The restatement is due to the Company's adoption of SAB 101.
Gross margin dollars decreased $2,781 or 45.3% on a 50.0% revenue decrease
during the third quarter 2001 versus the same quarter in 2000. The gross margin
percentage increased from 47.3% to 51.8%. The increase in the gross margin
percentage reflects the savings from the cost savings and restructuring efforts
that the Company has implemented during the year.
Research and Development
Third Quarter First Nine Months
---------------------------------------------------------------------------
(in thousands) 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------------------
Research and development $1,450 $2,360 $5,153 $6,893
Percentage of net sales 22.4% 18.2% 24.7% 21.1%
---------------------------------------------------------------------------------------------------------------------
The decrease in research and development (R&D) spending for the third quarter
and first nine months of 2001 as compared to the first nine months of 2000
reflects lower headcount and lower development spending. R&D spending was high
in the first half of 2000 due to PP100 and ProLINE RoadRunner development
activities.
Selling, General and Administrative
Third Quarter First Nine Months
---------------------------------------------------------------------------
(in thousands) 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------------------
Restated 1 Restated 1
Selling, general & administrative $2,011 $2,361 $7,457 $7,943
Percentage of net sales 30.1% 18.2% 35.8% 24.3%
---------------------------------------------------------------------------------------------------------------------
1 The restatement is due to the Company's adoption of SAB 101.
Selling, general and administrative (SG&A) expenses decreased ($350) in the
third quarter of 2001 versus 2000 and ($486) for the first nine months of 2001
versus last year. Tight internal spending controls, coupled with the reduced
costs of the restructuring activities undertaken during the year has led to a
significant reduction in SG&A spending. The increase in SG&A expense as a
percentage of net sales is due to the drop in revenue being a greater percentage
than the reduction in spending.
Interest
Third Quarter First Nine Months
---------------------------------------------------------------------------
(in thousands) 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------------------
Interest income $77 $94 $194 $398
Interest expense ($2) ($3) ($13) ($23)
---------------------------------------------------------------------------------------------------------------------
The decrease in interest income for the first nine months as compared to the
same period in 2000, is due to the decrease in cash, cash equivalents and
marketable securities during the first six months of the year and lower interest
rates. In the third quarter, the Company's cash, cash equivalents and marketable
security position increased to a level greater than the prior year, but lower
interest rates received on investments still resulted in lower interest income
versus the prior year.
Income Taxes
Third Quarter First Nine Months
---------------------------------------------------------------------------
(in thousands) 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------------------
Income tax expense from operations $70 $4 $92 $34
---------------------------------------------------------------------------------------------------------------------
Tax expense recorded for both the third quarter and first nine months of 2001
was due to foreign taxes. Tax valuation reserves increased by approximately $255
during the quarter. The Company has valuation reserves of $8,779 and $7,430 as
of September 30, 2001 and September 28, 2000 respectively.
Financial Condition
Liquidity and Capital Resources
Sept. 30, Dec. 28,
(in thousands) 2001 Change 2000
- ------------------------------------------------------------- --------------------- -------------------- -------------
Working capital $13,220 ($3,572) $16,792
- ------------------------------------------------------------- --------------------- -------------------- -------------
Working capital decreased during the first nine months of 2001 primarily due to
funding of the losses for the period. Cash, cash equivalents and marketable
securities increased approximately $2.7 million during the period, inventory
decreased $2.5 million, and accounts receivable has decreased $4.5 million. The
lower level of sales and focused collection and buying efforts led to the
decrease in accounts receivable and inventory levels and the resulting increase
in cash and cash equivalents.
The Company estimates that capital expenditures for property, plant and
equipment during the remainder of 2001 will be between $100 and $200. Although
the Company expects that such expenditures will be made, it has purchase
commitments for only a small portion of this amount.
At September 30, 2001, the Company had no debt and the Company's material
short-term sources of liquidity consisted of approximately $7.7 million in cash,
cash equivalents and available-for-sale marketable securities. The Company
believes that its existing cash, cash equivalents and marketable securities will
be sufficient to meet its operating requirements for the next twelve 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 September
30, 2001, the Company has repurchased all except for 107,600 shares authorized
by the repurchase program. 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
In the second quarter of 2001, the Company recorded a restructuring charge of
$460,000 associated with actions taken to reduce the Company's breakeven point
and realign the Company with growth activities. This operational repositioning
was mandated by the impact which the current economic slowdown and decline in
capital spending across a high number of customer groups has had on general
demand for programming equipment. The Company's repositioning included the
following four components: a reduction in the Company's global workforce of
approximately 40 persons or 20% of the workforce; discontinuance or reallocation
of numerous projects and activities not essential to the Company's long-term
goals; streamlining of activities to decrease discretionary marketing,
distribution and promotional expenses; and consolidation of numerous functions
across the organization to create a team which is more productive and able to
respond faster to global customer needs. At September 30, 2001 all restructuring
expenses associated with these activities had been paid except approximately
$18,000.
On July 12, 2001 the Company announced that it would take further strategic
actions to reduce its breakeven point. These actions included: the closure of a
manufacturing facility in Germany and its operations moved to other locations
within the Company; the Company's four product families were combined into two
groups; service groups across the organization consolidated to create a team
more responsive to global customer needs; and certain other expense reductions
were targeted for the third quarter, including a closure of the Company's
Redmond facility for one week. A restructuring charge of $499,000 was recorded
in the third quarter of 2001 and is primarily related to lease abandonment
charges and employee severance. Of this amount $312,000 remains unpaid at
September 30, 2001.
On October 22, 2001 the Company announced that it planned to take additional
cost reduction actions in the fourth quarter to further reduce its operating
breakeven point to approximately $6 million in quarterly revenue.
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 exchange forward contracts to offset the exchange
rate risk resulting in sales denominated in foreign currencies, which are not
material as of September 30, 2001. The Company is exposed to interest rate risks
on its short-term investments in marketable securities. 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 September 30, 2001 and December 28, 2000.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
DEPARTURE OF OFFICER
Jim Rounds, the Company's Chief Technology Officer will not
be returning to the Company from the leave of absence that
he began earlier this year. This position has been
eliminated as part of the Company's restructuring.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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: November 12, 2001
By://S//Joel S. Hatlen
Joel S. Hatlen
Vice President - Finance
Chief Financial Officer
Secretary and Treasurer