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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 SEPTEMBER 25, 1997 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
incorporation or organization) Identification No.)
10525 Willows Road N.E., Redmond, Washington, 98073-9746
(address of principal executive offices, Zip Code)
Registrant's telephone number, including area code (425) 881-6444
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
--- ---
6,977,036 shares of no par value Common Stock outstanding
as of November 4, 1997
Page 1 of 16
Exhibit Index on Page 15
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DATA I/O CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 25, 1997
INDEX
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
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 14
Exhibit Index 15
Exhibit 11 16
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DATA I/O CORPORATION
CONSOLIDATED BALANCE SHEETS
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Sept. 25, Dec. 26,
1997 1996
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(in thousands, except share data) (Unaudited) (note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,815 $ 4,048
Short-Term Investments 14,776 0
Trade accounts receivable,
less allowance for doubtful
accounts of $396 and $362 13,013 9,796
Inventories 8,160 8,260
Recoverable income taxes 0 474
Deferred income taxes 910 762
Other current assets 1,280 997
------- -------
TOTAL CURRENT ASSETS 42,954 24,337
Land held for sale 0 2,437
Property, plant and equipment - net 3,835 9,430
Other assets 2,745 3,115
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TOTAL ASSETS $49,534 $39,319
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------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,221 $ 1,906
Accrued compensation 3,954 2,587
Deferred revenue 5,071 5,494
Other accrued liabilities 4,414 3,102
Accrued costs of business restructuring 91 312
Income taxes payable 1,136 777
Notes payable 2,121 105
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TOTAL CURRENT LIABILITIES 20,008 14,283
LONG TERM DEBT 0 1,500
LONG TERM OTHER PAYABLES 546 503
DEFERRED INCOME TAXES 0 474
DEFERRED GAIN ON SALE OF PROPERTY 3,166 0
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, 6,972,944
and 6,777,720 shares, respectively 16,106 15,247
Retained earnings 9,256 6,845
Currency translation adjustments 452 467
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TOTAL STOCKHOLDERS' EQUITY 25,814 22,559
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $49,534 $39,319
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See notes to consolidated financial statements
Page 3
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarter Ended Nine Months Ended
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Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1997 1996 1997 1996
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(in thousands, except per share data)
Net sales $16,696 $14,529 $46,772 $45,493
Cost of goods sold 8,339 7,344 23,724 23,174
------- ------- ------- -------
Gross margin 8,357 7,185 23,048 22,319
Operating expenses:
Research and development 2,760 2,815 8,471 7,941
Selling, general and administrative 4,784 4,575 14,687 14,967
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Total operating expenses 7,544 7,390 23,158 22,908
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Operating income (loss) 813 (205) (110) (589)
Non-operating income (expense):
Interest income 240 46 438 147
Interest expense (55) (61) (164) (194)
Foreign currency exchange (13) (1) (27) (5)
Gain on sale of property 0 0 2,347 0
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Total non-operating income (expense) 172 (16) 2,594 (52)
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Income (loss) before taxes 985 (221) 2,484 (641)
Income tax expense 1 37 74 261
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Net income (loss) $984 ($258) $2,410 ($902)
------- ------- ------- -------
------- ------- ------- -------
Earnings per share:
Net income (loss) $0.14 ($0.04) $0.34 ($0.13)
------- ------- ------- -------
------- ------- ------- -------
Weighted average shares outstanding 7,186 6,773 7,039 6,884
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------- ------- ------- -------
See notes to consolidated financial statements.
Page 4
DATA I/O CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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For the nine months ended: Sept. 25, Sept. 26,
1997 1996
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(in thousands)
OPERATING ACTIVITIES:
Net income (loss) $2,410 ($902)
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,608 3,031
Deferred income taxes and tax refunds (329) (443)
Deferred revenue (423) 154
Gain on sale of property (2,347) 0
Changes in current items other
than cash and cash equivalents:
Trade accounts receivable (3,186) 3,786
Inventories 100 (503)
Other current assets (281) 361
Accounts payable and accrued liabilities 4,005 (320)
Business restructure (221) (564)
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Net cash provided by operating activities 2,336 4,600
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,468) (1,899)
Net proceeds on sale of property 13,298 0
Purchase of short-term investments (14,776) 0
(Additions to)/Dispositions of other assets (15) 0
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Cash used for investing activities (2,961) (1,899)
FINANCING ACTIVITIES:
Additions to/(repayment of) notes payable 526 (9)
Sale of common stock 345 154
Repurchase of common stock (3) (3,026)
Proceeds from exercise of stock options 517 574
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Cash provided by/(used for) financing activities 1,385 (2,307)
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Increase in cash and cash equivalents 760 394
Effects of exchange rate changes on cash 7 (13)
Cash and cash equivalents - Beginning of period 4,048 4,496
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Cash and cash equivalents - End of period $4,815 $4,877
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $124 $89
Income taxes $918 $517
See notes to consolidated financial statements.
Page 5
DATA I/O CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - FINANCIAL STATEMENT PREPARATION
The financial statements as of September 25, 1997 and September 26, 1996, 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 26, 1996 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 generally accepted accounting principles have been condensed or
omitted pursuant to such SEC rules and regulations. Operating results for the
quarter and nine months ended September 25, 1997 are not necessarily indicative
of the results that may be expected for the year ending December 25, 1997.
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 26, 1996.
NOTE 2 - CLASSIFICATIONS
Certain prior period's balances have been reclassified to conform to the
presentation used in the current period.
NOTE 3 - INVENTORIES
Inventories consisted of the following components (in thousands):
Sept. 25, Dec. 26,
1997 1996
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Raw material $3,997 $3,947
Work-in-process 2,698 2,480
Finished goods 1,465 1,833
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$8,160 $8,260
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NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following components (in
thousands):
Sept. 25, Dec. 26,
1997 1996
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Land $ 0 $ 910
Building and improvements 137 7,605
Equipment 22,060 21,554
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22,197 30,069
Less accumulated depreciation 18,362 20,639
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$ 3,835 $ 9,430
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Page 6
NOTE 5 - ACCOUNTING FOR INCOME TAXES
Statement of Financial Accounting Standards ("SFAS") 109 requires the
establishment of deferred tax assets and liabilities for expected future tax
consequences of events that have been recognized in the financial statements or
tax returns. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement carrying
amounts and the tax basis of assets and liabilities using currently enacted tax
rates which are expected to be in effect during the years in which the
differences are anticipated to reverse.
The Company's effective tax rate for the second quarter and the first six months
of 1997 differed from the statutory 34% tax rate primarily due to reversing
deferred tax valuation reserves. The valuation reserves decreased approximately
$200,000 during the third quarter and $1.2 million for the first nine months of
1997 primarily due to the Company's having recorded profits. The Company has
valuation reserves of $2.3 million that may increase should the Company
experience losses or reverse as the Company records income.
NOTE 6 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The FASB issued SFAS 130, "Reporting Comprehensive Income" and SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS 130
established standards for reporting comprehensive income in annual and interim
financial statements. SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS 130 and 131
are effective for financial statements for fiscal years beginning after December
15, 1997. The Company believes adoption of SFAS 130 or 131 will have no
material impact on the Company's consolidated results of operations, financial
position or cash flows.
Page 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
SHARE REPURCHASE PROGRAM
The Company announced on October 27, 1995 a share repurchase program which
authorized the Company to repurchase up to 7.5% (approximately 570,000 shares)
of its outstanding shares of common stock. On February 21, 1996 and May 13,
1997 the Company announced an extension of the share repurchase program which
authorized the Company to repurchase up to an additional 8% (approximately
570,000 shares) and approximately 14.5% (up to 1,000,000 shares) respectively 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. Purchases may commence or be discontinued at
any time. As of September 25, 1997, the Company had repurchased 1,016,200
shares at a total cost of approximately $7.1 million.
SALE OF HEADQUARTERS PROPERTY
On May 13, 1997 the Company announced the completion of the sale of land and
building comprising its Redmond, Wash., corporate headquarters and excess land
that had been held for resale for approximately $13.8 million. The sale
includes a 10 year lease-back of the building to the Company, with an option to
renew the lease for an additional 10 years. The Company realized approximately
$12 million in cash after payment of transaction fees and taxes. The sale
resulted in an overall pre-tax gain of approximately $5.6 million, and of which
approximately $2.3 million related to the excess land was recognized in the
second quarter of 1997. The remainder will be amortized over the life of the
lease.
FORWARD-LOOKING STATEMENTS
Although most of the information contained in this report is historical, certain
statements contain forward-looking information. To the extent these statements
express or imply, without limitation, product development and introduction
plans, the Company's expectations for growth, estimates of future revenue,
expenses, profit, cash flow, balance sheet items, sell-through or backlog,
forecasts of demand or market trends for the Company's various product
categories and for the industries in which the Company operates or any other
guidance on future periods, these statements are forward-looking and involve
matters which are subject to a number of known and unknown risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward-looking statements. Readers of this report should
consider, along with other relevant information, the risk factors identified by
the Company under the caption "Risk Factors" in Item 1 and elsewhere in the
Company's Annual Report on Form 10-K for the year ended December 26, 1996, and
other risks identified from time to time in the Company's filings with the
Securities and Exchange Commission, press releases and other communications.
Page 8
RESULTS OF OPERATIONS
NET SALES
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Third Quarter First Nine Months
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Net sales by division (in thousands) 1997 1996 % Change 1997 1996 % Change
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Programming Systems Division:
Non-automated programming systems $7,550 $8,217 (8.1%) $22,626 $25,009 (9.5%)
Automated programming systems 4,212 3,310 27.3% 12,401 12,067 2.8%
----------- --------- -------- ----------- --------- --------
Total Programming Systems Division 11,762 11,527 2.0% 35,027 37,076 (5.5%)
Synario Design Automation Division 2,093 2,306 (9.2%) 5,545 5,637 (1.6%)
Semiconductor Equip. Div. (Reel-Tech) 2,841 696 308.2% 6,200 2,780 123.0%
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Net sales $16,696 $14,529 14.9% $46,772 $45,493 2.8%
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Third Quarter First Nine Months
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Net sales by location (in thousands) 1997 1996 % Change 1997 1996 % Change
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United States $8,496 $7,889 7.7% $23,595 $22,687 4.0%
% of total 50.9% 54.3% 50.4% 49.9%
International $8,200 $6,640 23.5% $23,177 $22,806 1.6%
% of total 49.1% 45.7% 49.6% 50.1%
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The increase in sales in the third quarter of 1997 compared to 1996 was due
primarily to the increased revenues of the Company's Reel-Tech division, which
offset the decline in sales of the Company's Electronic Design Automation (EDA)
software products and the relatively flat sales of the Programming System
Division.
Sales by the Reel-Tech Semiconductor Equipment Division increased to
approximately $2.8 million for the third quarter of 1997, a 308% improvement
over the comparable quarter in 1996. Sales for the Synario Design Automation
Division were down 9% to $2.1 million compared to the same quarter in 1996 due
to a decline in sales of older products which were partially offset by a 38%
increase in Synario product sales. Sales from the Programming System Division's
ProMaster line increased approximately 28% from the comparable quarter in 1996.
Engineering programmer sales, however, remained under pressure awaiting new
product introductions scheduled for 1998. Overall sales from the Programming
Systems Division were up 2% from the third quarter of 1996.
The Company believes that sales for the Programming Systems Division will
continue to experience pressure due primarily to delays in new product
introductions by the Company. The Company believes that increased competition
in the areas where new Data I/O product introductions are not scheduled to occur
until late 1997 and 1998, or where products are nearing the end of their product
life cycles, is also adversely affecting sales. The Company's expectation is
that these new products will not be available in production quantities until
late 1997 and 1998. In addition, the Company believes the declines in
non-automated programming systems also reflect the continuing market shift away
from the Company's traditional line of higher-price IC programmers for the
engineering market, toward lower-price programmers. As a result, the Company
believes that until its new products are released and shipping in production
quantities, overall demand for its programming systems will continue to be flat.
The Company believes that recent changes in programmable IC technology, such as
increasingly complex logic ICs, lower voltage requirements and higher pin
counts, and the increasing need for higher quality and high-volume programming
by users of programmable ICs means that there is a significant market need for
more sophisticated programmers with new programming technology and automated
programming systems. The Company currently has development projects underway
for new programmer and automation technology designed to address the needs
created by these technology changes. In addition, the Company released four new
low-cost programming products late in the second quarter, consisting of the
ChipWriter-TM-, the ChipWriter-TM- Portable, the ChipWriter-TM- Gang and the
LabSite-TM- Programming System.
Page 9
GROSS MARGIN
Third Quarter First Nine Months
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(in thousands) 1997 1996 1997 1996
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Gross Margin $8,357 $7,185 23,048 $22,319
Percentage of net sales 50.1% 9.5% 49.3% 49.1%
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Gross margins have increased in amount and as a percentage of net sales for the
third quarter and first nine months of 1997 as compared to the prior year as a
result of increased volumes and manufacturing efficiencies.
RESEARCH AND DEVELOPMENT
Third Quarter First Nine Months
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(in thousands) 1997 1996 1997 1996
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Research and development $2,760 $2,815 $8,471 $7,941
Percentage of net sales 16.5% 19.4% 18.1% 17.5%
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The decrease in research and development spending compared to the third quarter
of 1996 is due primarily to reduced R&D materials expense associated with the
Company's programming systems projects. The higher R&D expense in the first
nine months of 1997 as compared to the same period in 1996 is primarily due to
increased personnel and product development costs related to the Company's
continued significant investment in new technology. The Company expects to
continue its significant investment in research and development activities for
the remainder 1997 in preparation for the anticipated new product releases.
SELLING, GENERAL AND ADMINISTRATIVE
Third Quarter First Nine Months
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(in thousands) 1997 1996 1997 1996
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Selling, general &
administrative $4,783 $4,575 $14,687 $14,967
Percentage of net sales 28.7% 31.5% 31.4% 32.9%
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The increase in selling, general and administrative expenditures for the third
quarter of 1997 as compared to the same quarter in 1996 is due primarily to
increased marketing promotion and incentive compensation. The decline as a
percentage of sales is due to the increased sales volume.
INTEREST
Third Quarter First Nine Months
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(in thousands) 1997 1996 1997 1996
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Interest income $240 $46 $438 $147
Interest expense $55 $61 $164 $194
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The increase in interest income is due primarily to increased funds available
for investment, primarily as a result of the sale of the corporate headquarters
property in May 1997.
Page 10
INCOME TAXES
Third Quarter First Nine Months
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(in thousands) 1997 1996 1997 1996
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Income taxes $1 $37 $74 $261
Effective tax rate N/A N/A N/A N/A
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The Company's effective tax rate for the second quarter and the first six months
of 1997 differed from the statutory 34% tax rate primarily due to reversing
deferred tax valuation reserves. The valuation reserves decreased approximately
$200,000 during the third quarter and $1.2 million for the first nine months of
1997 primarily due to the Company's having recorded profits. The Company has
valuation reserves of $2.3 million that may increase should the Company
experience losses or reverse as the Company records income.
NET INCOME AND EARNINGS PER SHARE
Third Quarter First Nine Months
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(in thousands) 1997 1996 1997 1996
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Net income $984 ($258) $2,410 ($902)
Earnings per share $0.14 ($0.04) $0.34 ($0.13)
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The increase in net income and earnings per share compared with the third
quarter of 1996 is due primarily to increased revenues, improved margins, and
increased interest income. The increase in net income and earnings per share in
the first nine months over the same period in 1996 also includes a gain on the
sale and lease back of the corporate headquarters property of $2.3 million.
INFLATION AND CHANGES IN FOREIGN CURRENCY EXCHANGE RATES
Historically, the Company has been able to offset the impact of inflation
through efficiency increases and price adjustments. Increasing price
competition, especially in IC programmers, is currently diminishing and may
continue to diminish the Company's ability to offset the impacts of inflation in
the future.
Sales and expenses incurred by foreign subsidiaries are denominated in the
subsidiary's local currency and translated into U.S. Dollar amounts at average
rates of exchange during the year. To date the foreign currency rate changes
have not significantly impacted the Company's profitability. This is because
approximately 20% of the Company's sales are made by foreign subsidiaries and
independent currency fluctuations tend to minimize the translation effect of any
individual currency exchange fluctuations, and the effect of individual rate
changes on sales and expenses tend to offset each other. Additionally, the
Company hedges its foreign currency exposure on the sales of inventory and
certain loans to its foreign subsidiaries through the use of foreign exchange
contracts.
Page 11
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Sept. 25, Dec. 26,
(in thousands) 1997 Change 1996
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Working capital $22,946 $12,892 $10,054
Total debt $2,121 $516 $1,605
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Working capital increased during the first nine months of 1997 primarily due to
the funds received from the sale of the corporate headquarters property.
The Company's trade accounts receivable increased approximately 27% in the third
quarter of 1997 compared to the prior quarter due primarily to higher sales and
a change in the sales mix to slower paying geography's. Net inventory is up 13%
compared to the prior quarter in 1997 primarily to support increased ProMaster
and Reel-Tech product sales.
As of September 25, 1997, the Company had total debt of $2.1 million or
approximately 8% of its $26 million in equity. Of this debt, $1.5 million is a
note payable due in 1998 for the balance of the purchase price of the CAD/CAM
Group. The remaining $600,000 is current debt, consisting entirely of
borrowings on the Company's $1.3 million foreign line of credit. No borrowings
were outstanding under the Company's $8.0 million U.S. line of credit.
The U.S. line of credit expires on May 31, 1998. The foreign line of credit
expires in November 1997. Historically, these credit lines have been structured
as short-term and have been renewed by their expiration dates. The Company
currently expects to be able to renew these lines of credit before expiration
under substantially the same terms as those presently in place.
The Company estimates that capital expenditures for property, plant and
equipment during the remainder of 1997 will be less than $1 million. Such
expenditures are currently expected to be funded from internally generated
funds. Although the Company fully expects that such expenditures will be made,
it has purchase commitments for only a small portion of this amount.
At September 25, 1997, the Company's material short-term unused sources of
liquidity consisted of approximately $19.6 million in cash, cash equivalents,
and short-term investments, available borrowings of $8.0 million under its U.S.
line of credit and available borrowings of approximately $700,000 under its
foreign line of credit. The Company believes these sources of working capital
will be sufficient to fund working capital needs, service existing debt, finance
planned capital expenditures, fund the Company's share repurchase program, and
fund the Reel-Tech contingent payment obligations.
Page 12
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 Page
----
(a) Exhibits
11. Statement Regarding Computation of Earnings
Per Share 16
(b) Reports on Form 8K
None
Page 13
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 6, 1997
By: //S// Alan J. Beauchamp
------------------------
Alan J. Beauchamp
Vice President
Finance and Administration
Chief Financial Officer
Secretary and Treasurer
Page 14
EXHIBIT INDEX
EXHIBIT NUMBER TITLE PAGE NUMBER
- -------------- ----------------------------------------------------- -----------
11 Statement Regarding Computation of Earnings per Share 16
Page 15