DATA I/O CORPORATION 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 economic outlook, impact of COVID-19; industry prospects and trends; expected business recovery; industry partnerships; future results of operations or financial position; future spending; breakeven revenue point; expected market decline, bottom or growth; market acceptance of our newly introduced or upgraded products or services; the sufficiency of our cash to fund future operations and capital requirements; development, introduction and shipment of new products or services; changing foreign operations; trade issues and tariffs; expected inventory levels; expectations for unsupported platform or product versions and related inventory and other charges; and any other guidance on future periods are forward-looking statements Forward-looking statements reflect management's current expectations and are inherently uncertain. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, achievements, or other future events. Moreover, neitherData I/O nor anyone else assumes responsibility for the accuracy and completeness of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this Quarterly Report. The Reader should not place undue reliance on these forward-looking statements. The discussions above and in the section in Item 1A., Risk Factors "Cautionary Factors That May Affect Future Results" in our Annual report on Form 10-K for the year endedDecember 31, 2020 , describe some, but not all, of the factors that could cause these differences. OVERVIEW
In 2021, we have continued to react to and manage our business relative to the COVID-19 pandemic. During 2020, COVID-19 had impacted all aspects of our business, from customer demand, to supply chain integrity, employee safety, business processes, and financial management. As a global company, we had to manage each of these while working within the guidelines of local and national policy in theU.S. ,China andGermany . Our philosophy at the start of the outbreak was simple:
1. Keep our people and their families safe;
2. Keep our facilities safe and operational while we serve our customers as an essential business; and
3. Preserve cash
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We have managed the COVID-19 impact successfully to date, with no known employee
transmissions in the workplace and significant preservation of our cash and
working capital. Our resilient supply chain model kept our facilities in
Shanghai, China and Redmond, Washington open, and serving customers globally. We
face continued international travel restrictions, shipping delays, and inability
to meet with customers in person. As business has recovered we have been able to
respond by having the working capital needed and the workforce in place. In the
second quarter, we experienced a surge of demand as customers resumed operations
and adding capacity. In supply chains around the world with the re-openings and
now, in a believed ripple effect, factories are experiencing the impact of chip
shortages on their production plans. This appears to be a shorter-term issue and
the outlook for automotive electronics remains strong for a decade. Waves of
COVID-19 infection rates and variants have kept or re-imposed revised travel
restrictions. Customers largely have not permitted in-person sales and other
visits. Converting these interactions to remote and virtual means has meant
implementing new processes and technology usage.
In production, in addition to adding protective health measures for our
employees, we have focused on supply chain resilience and duplicating production
capability for some products in both our Shanghai, China and Redmond , USA
facilities. We implemented additional supplier financial and other monitoring,
as well as adding additional local suppliers and increasing inventory stock
levels of key parts. Other than production employees who necessarily are onsite,
most other Redmond employees are working remotely with hybrid flexibility to be
onsite as desired or needed and this is expected to continue through the summer.
China employees are generally onsite. We believe our exposure to COVID-19 risks
are reduced by vaccination coverage, which is mid 90% in Redmond with our China
and Germany facilities not far behind.
Our short-term challenge continues to be operating in a cyclical, COVID-19
impacted, and rapidly evolving industry environment, which saw significant
improvement in the first quarter of 2021, which continued to improve in the
second quarter of 2021. In particular the surge in demand with bookings of $8.9
million that provided a $5 million backlog at the end of the second quarter. Our
focus has been dealing with COVID-19 related issues, especially supply chain
shortages and lead-times, which have been managed though carefully maintaining
inventory levels. We also continue to balance a host of current issues including
industry changes, industry partnerships, new technologies, business geography
shifts, travel and customer restrictions, customer shut downs, exchange rate
volatility, trade issues and tariffs, semiconductor chip shortages, , shipping
challenges, increasing costs and strategic investments in our business with the
level of demand and mix of business we expect. We continue to manage our costs
carefully and execute strategies for cash preservation, protecting our employee
base and cost reductions. These actions have ensured that with the recovery we
are able to finance and resume growth
We are focusing our research and development efforts in our strategic growth
markets, namely automotive electronics and IoT new programming technologies,
secure supply chain solutions, automated programming systems and their
enhancements for the manufacturing environment and software. At Data I/O , we are
investing for the long-term to retain and extend our leadership position in
automotive electronics and security deployment. We are continuing to develop
technology to securely provision new categories of semiconductors, including
Secure Elements, Authentication Chips, and Secure Microcontrollers. In late
2020, we released updated SentriX hardware and tools which simplify the customer
acquisition process, and reduce dependency on third party suppliers. We also
upgraded SentriX® security deployment systems in the field to this new
architecture. We plan to deliver new programming technology and automated
handling systems for managed and secure programming in the manufacturing
environment. We continue to focus on extending the capabilities and support for
our product lines and supporting the latest semiconductor devices, including
various configurations of NAND Flash, e-MMC, UFS and microcontrollers on our
newer products.
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Our customer focus has been on global and strategic high-volume manufacturers in
key market segments like automotive electronics, IoT, industrial controls and
consumer electronics as well as programming centers.
Although the long-term prospects for our strategic growth markets should be
good, these markets and our business have been, and are likely to continue to
be, adversely impacted by the global pandemic of COVID-19. Chip shortages are
causing issues and some automotive plant or production shutdowns. This appears
to be temporary and in some cases, for us, drives consumable adapter demand in
order to support alternative chips.
As a global company with 93% of our 2020 sales in international markets, we have
been and expect to continue to be significantly impacted by the COVID-19
pandemic. Although our facilities in Shanghai , Redmond and Germany are currently
operating in some pandemic related restricted ways, we believe that our
classification as essential by certain U.S. customer groups will continue to
keep operations open. We source some components from China and other countries
that are used to manufacture our equipment in China and in our Redmond,
Washington facility and these components may not be readily available or subject
to delays. Our manufacturing facilities in Shanghai and Redmond have helped us
to be part of a resilient supply chain to our customers with dual production of
some products and local sourcing of many suppliers. Many of our employees and
executives are still working from home and we are limiting visitors to our
facilities as the pandemic continues. All of our facilities are subject to
restrictions, rapid regulation changes, and closure by governmental entities.
The pandemic has and may continue to impact our revenues in some geographies,
our ability to obtain key components and to manufacture our products, as well as
sell, install and support our products around the world. We expect wide-spread
vaccinations to help restore business interactions with customers, however we
expect continued customer site restrictions on sales and service visits, travel
restrictions, closed borders, cancelled trade shows and industry gatherings, and
modifications in our operations. See also the detailed discussion of the impacts
of COVID-19 on our business and markets in Item 1A, Risk Factors in our annual
report on Form 10-K. The pandemic could have the effect of heightening many of
the other risks described in it. Annual projections on spending, growth, mix,
and profitability have been and are likely to be further revised substantially
as new information is obtained.
CRITICAL ACCOUNTING POLICY JUDGMENTS AND ESTIMATES
Our critical accounting policies have not changed from those discussed in our
2020 Form 10-K.
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Results of Operations:
Net Sales
Three Months Ended Six Months EndedNet sales by product June 30, June 30, June 30, June 30, line 2021 Change 2020 2021 Change 2020 (in thousands) Automated programming systems$ 5,379 52.3 %$ 3,531 $ 10,289 48.1 %$ 6,949 Non-automated (1.3 programming systems 1,354 20.5 % 1,124 2,459 %) 2,491 Total programming systems$ 6,733 44.6 %$ 4,655 $ 12,748 35.0 %$ 9,440 Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, Net sales by location 2021 Change 2020 2021
Change 2020
(in thousands)
United States $ 469 61.7 % $ 290 $ 753 34.0 % $ 562
% of total 7.0 % 6.2 % 5.9 % 6.0 %
International $ 6,264 43.5 % $ 4,365 $ 11,995 35.1 % $ 8,878
% of total 93.0 % 93.8 % 94.1 % 94.0 %
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
Net sales by type 2021 Change 2020 2021 Change 2020
(in thousands)
Equipment sales $ 4,130 66.8 % $ 2,476 $ 7,477 47.7 % $ 5,063
Adapter sales 1,942 46.7 % 1,324 3,850 44.2 % 2,669
Software and (22.7 (16.8
maintenance 661 %) 855 1,421 %) 1,708
Total programming
systems $ 6,733 44.6 % $ 4,655 $ 12,748 35.0 % $ 9,440
Net sales in the second quarter of 2021 were $6.7 million , up 45% as compared
with $4.7 million in the second quarter of 2020. The increase from the prior
year period primarily reflects higher overall demand for equipment and higher
adapter sales associated with the increased usage and growing installed base of
machines throughout the world. Recurring and consumable revenues which includes
adapter sales represented $2.6 million or 39% of total revenues in the second
quarter 2021, as compared with $2.2 million or 47% of the lower second quarter
2020 total. Total capital equipment sales were 61.4% of revenues, adapters were
28.8% and software and services revenues were 9.8% of revenues respectively in
the second quarter of 2021 compared with 53.2% and 28.4% and 18.4% respectively
for the second quarter of 2020.
On a geographic basis, international sales represented approximately 93.0% of
total net sales for the second quarter of 2021 compared with 93.8% in the prior
year period.
Second quarter 2021 bookings were
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Backlog at June 30, 2021 was approximately $5.0 million , up from $3.0 million at
March 31, 2021 and $2.8 million at June 30, 2020 . Data I/O had $1.4 million in
deferred revenue at the end of the second quarter of 2021 as compared with $1.1
million at the end of fourth quarter of 2020.
Gross Margin
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2021 Change 2020 2021 Change 2020
(in thousands)
Gross margin $ 3,837 57.3 % $ 2,439 $ 7,175 37.4 % $ 5,223
Percentage of net
sales 57.0 % 52.4 % 56.3 % 55.3 %
Gross margin as a percentage of sales was 57.0% in the second quarter of 2021,
as compared to 52.4% in the same period of the prior year. The difference in
gross margin as a percentage of sales primarily reflects the leverage on fixed
production costs from higher revenues, improved factory variances and channel
and product mix.
Research and Development
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2021 Change 2020 2021 Change 2020
(in thousands)
Research and
development $ 1,673 3.7 % $ 1,614 $ 3,279 2.6 % $ 3,196
Percentage of net
sales 24.8 % 34.7 % 25.7 % 33.9 %
Research and development ("R&D") expenses in the second quarter of 2021 were relatively consistent compared to the same period in 2020.
Selling, General and Administrative
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2021 Change 2020 2021 Change 2020
(in thousands)
Selling, general &
administrative $ 2,054 20.6 % $ 1,703 $ 4,116 17.1 % $ 3,514
Percentage of net
sales 30.5 % 36.6 % 32.3 % 37.2 %
Selling, General and Administrative ("SG&A") expenses in the second quarter of
2021 increased by approximately $351,000 from the prior year period primarily
due to higher sales commissions associated with the channel mix and sharply
increased demand for programming equipment as well as higher incentive
compensation as the Company returned to profitability on an operating income
basis.
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Interest
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2021 Change 2020 2021 Change 2020
(in thousands)
Interest income $ 0 (100.0 %) $ 1 $ 3 (66.7 %) $ 9 Interest income was lower in the second quarter 2021 compared to the same period in 2020 primarily due to lower invested funds and lower interest yields.
Income Taxes
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2021 Change 2020 2021 Change 2020
(in thousands)
Income tax
benefit (22.7
(expense) $ (75 ) %) $ (97 ) $ (107 ) 4.9 % $ (102 ) Income tax benefit (expense) for the second quarter of both 2021 and 2020, primarily related to foreign and state taxes.
The effective tax rate differed from the statutory tax rate primarily due to the effect of valuation allowances, as well as foreign taxes. We have a valuation allowance of$9.5 million as ofJune 30, 2021 . As ofJune 30 , for both 2021 and 2020, our deferred tax assets and valuation allowance have been reduced by approximately$376,000 and$363,000 , respectively, associated with the requirements of accounting for uncertain tax positions. Given the uncertainty created by our loss history, as well as the volatile and uncertain economic outlook for our industry and capital spending, we have limited the recognition of net deferred tax assets including our net operating losses and credit carryforwards and continue to maintain a valuation allowance for the full amount of the net deferred tax asset balance. Financial Condition
Liquidity and Capital Resources
June 30, December 31,
2021 Change 2020
(in thousands)
Working capital $ 18,159 $ 100 $ 18,059 At
Net working capital at the end of the second quarter of 2021 compared to
Although we have no significant external capital expenditure plans currently, we
expect that we will continue to make and manage carefully capital expenditures
to support our business. We plan to increase our internally developed rental,
security provisioning, sales demonstration and test equipment as we develop and
release new products. Capital expenditures are currently expected to be funded
by existing and internally generated funds.
As a result of our cyclical and seasonal industry, significant product
development, customer support and selling and marketing efforts, we have
required substantial working capital to fund our operations. We have tried to
balance our level of development spending with the goal of profitable operations
or managing the impact on business levels related to COVID-19. We have
implemented or have initiatives to implement geographic shifts in our
operations, optimize real estate usage, reduce exposure to the impact of
currency volatility and tariffs, increase product development differentiation,
and reduce costs.
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We believe that we have sufficient cash or working capital available under our operating plan to fund our operations and capital requirements through at least the next one-year period. We expect that cash will be needed to fund the business growth as operations recover to previous levels. We may require additional cash at theU.S. headquarters, which could cause potential repatriation of cash that is held in our foreign subsidiaries. For any repatriation, there may be tax and other impediments to any repatriation actions. Our working capital may be used to fund possible losses, business growth, project initiatives, share repurchases and business development initiatives including acquisitions, which could reduce our liquidity and result in a requirement for additional cash before that time. Any substantial inability to achieve our current business plan could have a material adverse impact on our financial position, liquidity, or results of operations and may require us to reduce expenditures and/or seek possible additional financing.
OFF-BALANCE SHEET ARRANGEMENTS
Except as noted in the accompanying consolidated financial statements in Note 5, "Leases" and Note 6, "Other Commitments", we have no off-balance sheet arrangements.
NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURES
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") was
$196,000 in the second quarter of 2021 compared to ($712,000 ) in the second
quarter of 2020. Adjusted EBITDA, excluding equity compensation (a non-cash
item), was $597,000 in the second quarter of 2021, compared to ($231,000 ) in the
second quarter of 2020.
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") was
$90,000 in the six months ended June 30, 2021 compared to ($1,071,000 ) in the
same period of 2020. Adjusted EBITDA, excluding equity compensation (a non-cash
item) was $770,000 in the six months ended June 30, 2021 compared to ($341,000 )
in the same period of 2020.
Non-GAAP financial measures, such as EBITDA and adjusted EBITDA, should not be
considered a substitute for, or superior to, measures of financial performance
prepared in accordance with GAAP. We believe that these non-GAAP financial
measures provide meaningful supplemental information regarding the Company's
results and facilitate the comparison of results. A reconciliation of net income
to EBITDA and adjusted EBITDA follows:
NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURE
RECONCILIATION
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
(in thousands)
Net Income (loss) $ (29 ) $ (1,057 ) $ (362 ) $ (1,611 )
Interest (income) - (1 ) (3 ) (9 )
Taxes 75 97 107 102
Depreciation & amortization 150 249 348 447
EBITDA earnings (loss) $ 196 $ (712 ) $ 90 $ (1,071 )
Equity compensation 401 481 680 730
Adjusted EBITDA earnings (loss),
excluding equity compensation $ 597 $ (231 ) $ 770 $ (341 )
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New Accounting Pronouncements
See Note 1 of Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1 for a discussion of new accounting pronouncements.
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