<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended MARCH 28, 1996 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 (206) 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
6,981,416 shares of no par value Common Stock outstanding as of May 1, 1996
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Page 1 of 14
No Exhibits
<PAGE>
DATA I/O CORPORATION
FORM 10-Q/A
(Amendment No. 1)
FOR THE QUARTER ENDED MARCH 28, 1996
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (unaudited) N/A
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (as
originally filed) 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (as amended) 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings N/A
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K N/A
Signatures 14
Exhibit Index N/A
Exhibit 11 N/A
<PAGE>
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (AS ORIGINALLY FILED)
GENERAL
AGREEMENT TO PURCHASE MINORITY INTEREST IN BUSINESS
On April 25, 1996 the Company announced it has reached an agreement in principle
to purchase a substantial minority interest in Needham's Electronics and to
enter into a worldwide distribution agreement for Needham's Electronics'
programmer products. Completion of the minority investment and creation of the
distribution rights are subject to negotiation of definitive agreements and
satisfaction of certain conditions, which the Company plans to complete during
the second quarter of 1996.
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 the Company
announced an extension of the share repurchase program. The extension
authorized the Company to repurchase up to an additional 8% (approximately
570,000 shares) 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. At May 7, 1996, March 28, 1996 and December 28,
1995 the Company had repurchased 978,700, 760,700 and 562,400 shares at a total
cost of approximately $6.9 million, $5.6 million and $4.1 million, respectively.
FORWARD-LOOKING STATEMENTS
Although most of the information contained in this report is historical, certain
of the 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 28, 1995, and
other risks identified from time to time in the Company's filings with the
Securities and Exchange Commission, press releases and other communications.
PROPERTY FOR SALE
The Company has listed its entire Redmond headquarters property as available for
sale for $14.6 million with long-term lease back provisions on the building.
RESTRUCTURE PROGRESS
During the fourth quarter of 1993, the Company recorded a pretax charge of $6.1
million related to the restructure of its sales and distribution channels,
downsizing its operations to a level consistent with anticipated lower sales and
product margins, and to consolidate and outsource certain manufacturing
processes. The purpose of the restructure was primarily to reduce expenses and
significantly lower the Company's break-even point in reaction to reduced sales
and gross margins in 1993. Additionally, the Company made several strategic
changes to its sales and distribution channels to better align distribution of
the Company's current and anticipated future products to their markets and
customers. The general downsizing of operations and restructure of the sales
and distribution system were substantially completed in 1994. The Company began
implementation of the planned changes to its manufacturing processes in 1994 for
completion in 1997. The manufacturing consolidation and relocation project was
completed in the first quarter of 1996, and the outsourcing of certain
manufacturing processes is scheduled to be completed in 1997.
<PAGE>
Of the original restructuring charge, approximately $965,000 remained as an
accrued liability at December 28, 1995. At March 28, 1996, the remaining
accrued liability was approximately $546,000. The reduction during the first
quarter of 1996 related primarily to implementation of changes in manufacturing
processes, facility consolidation and abandoned office space lease payments.
As of March 28, 1996, the Company's restructuring has proceeded approximately as
planned. No significant changes were made to the Company's restructuring plans
during the first quarter of 1996. The relocation to Redmond, Washington of the
Company's Anaheim, California manufacturing operations was completed during the
first quarter.
RESULTS OF OPERATIONS
- ---------------------
NET SALES
(in thousands) First Quarter First Quarter
1996 Change 1995
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Net sales $15,656 (3.4%) $16,208
- --------------------------------------------------------------------------------
Net sales decreased 3.4% in the first quarter of 1996 compared to 1995, with
U.S. sales decreasing 11% and international sales increasing 6.3%. Orders in
the first quarter of 1996 declined approximately 17% to $14.9 million, compared
with $17.9 million in 1995. Sales of the Company's Programming Systems products
decreased 11.5% compared to the first quarter of 1995. Partially offsetting
this decline was a 14% increase in sales in the Synario Design Automation
Division. In addition, the Semiconductor Equipment Division, obtained as part
of the Reel-Tech acquisition in August of 1995, contributed incremental sales
growth of approximately $1 million. The strengthening U.S. Dollar versus the
Japanese Yen and the German Mark also contributed to the decline in sales for
the first quarter.
During the first quarter of 1996, net sales for the Company's non-automated
programming systems declined by $3.8 million or 38% compared to 1995. Orders
for non-automated programming systems declined 15% compared to the first quarter
of 1995. The Company believes these decreases were primarily due to the
slowdown in electronics consumer goods manufacturing capital spending in the
United States and Europe which reduced the demand for the Company's programming
systems. In addition, the Company believes the declines also reflect the
continuing market shift away from the Company's traditional line of higher-
priced IC programmers for the engineering market toward lower-priced project
specific programmers.
The Company believes the market shift toward lower-priced IC programmers has
been caused in part by advances in semiconductor processing technology that have
lowered the barriers to entry in the programmer business over the last several
years. This has caused new market entrants to appear regularly, each trying to
carve out a niche. New entrants cause downward price pressure, and each cycle
of new competitors lowers the acceptable price of a conventional IC programmer
in the customer's view. In addition, the Company believes that technological
improvements in personal computers and design software tools have caused a shift
in the demand for IC design tools by engineering design teams away from hardware
tools in favor of increased software design tools. These industry changes had,
and are continuing to have, an adverse effect on the Company's IC programmer
sales and gross margins, especially since the Company's products historically
have been oriented toward hardware tools and, within hardware tools, toward
higher-priced IC programmers. However, the Company believes these trends are
creating and will continue to generate increased sales for its newer products
including ChipLab, 2700 and Synario.
Sales of the Company's ProMaster line of automated handling systems for the
manufacturing environment increased by approximately 13% for the first quarter
of 1996 compared to the first quarter of 1995. A market shift in the ProMaster
product mix toward higher-priced models contributed to the sales increase.
Automated handling systems accounted for approximately 29% of total revenues
during the first quarter compared with 25% for the first quarter of 1995.
Orders for the ProMaster line decreased 42% compared to the first quarter of
1995. The Company believes this decrease was primarily due to the slowdown in
electronics consumer goods manufacturing capital spending in the United States
and Europe during the first quarter, and greater use of in-circuit programming
by ATE testers in some very high-volume manufacturing applications.
The Company believes the increase in sales of the Company's ProMaster products
reflects the expanded use of programmable integrated circuits in the mid- to
high-volume manufacturing environment. The Company believes that in the
electronic manufacturing market, the proliferation of hard-to-handle surface-
mount packages in a variety of types is causing a worldwide
<PAGE>
trend toward automation and integration of manufacturing processes. Although,
during the first quarter orders have slowed due to what the Company believes is
the soft capital spending market, the Company still feels that its line of
automated handling systems is well positioned to capitalize on the trend toward
automation and integration of manufacturing processes.
Sales of the Company's Programming Systems software products decreased by 48% in
the first quarter of 1996 compared to 1995. The Company's older software design
tool, ABEL, declined due to competitive pricing pressures and product aging.
First quarter sales and orders of the Company's Semiconductor Equipment
products, acquired as part of the Reel-Tech acquisition, were approximately $1
million. The Company believes the market for semiconductor equipment has
experienced strong growth as semiconductor manufacturers have expanded capacity
in response to increased demand for ICs. The Company is in the process of
expanding its personnel, space and systems to meet expected demand for its
semiconductor equipment. The Company believes that if this strong demand
continues and the Company executes well in integrating the Reel-Tech
acquisition, the Company's Semiconductor Equipment products may provide a
significant revenue growth opportunity. Due to the cyclical nature of demand
for ICs, the activities of competitors and other factors, there can be no
assurance that strong demand for this equipment will continue.
Partially offsetting the increase in international sales was the negative impact
of foreign currency exchange rate changes. These changes reduced sales by
approximately $360,000 during the first quarter of 1996 compared to 1995, which
was due primarily to rate changes for the German Mark and the Japanese Yen.
International sales were 48% of total net sales for the first quarter of 1996
compared to 44% of total net sales in the first quarter of 1995.
GROSS MARGIN
(in thousands) First Quarter First Quarter
1996 Change 1995
- --------------------------------------------------------------------------------
Gross Margin $7,551 (14.5%) $8,837
Percentage of net sales 48.2% 54.5%
- --------------------------------------------------------------------------------
Gross margin for the first quarter of 1996 decreased compared to the first
quarter of 1995 due primarily to lower volumes, lower product margins and
increases in inventory reserves. The relatively high fixed component of cost of
goods sold causes any swing in total volume to have a significant impact on
gross margin. The shift in mix of product revenues from software to hardware
and from higher-priced and higher-margin non-automated programming systems to
the lower-priced alternatives has lowered the overall product gross margins. In
addition, the gross margin on the ProMaster 9500 was below that of the Company's
traditional handlers due to higher material and labor costs. The Company
expects these costs to decline in future periods due to anticipated improvements
in the proficiency of manufacturing and service personnel in building and
servicing the ProMaster 9500 as a result of the Reel-Tech acquisition in August
1995. Additionally, the Company completed the relocation of its Anaheim
manufacturing facility to its Redmond headquarters and expects labor and
overhead costs to decline in future quarters as a result of this consolidation.
RESEARCH AND DEVELOPMENT
(in thousands) First Quarter First Quarter
1996 Change 1995
- --------------------------------------------------------------------------------
Research and development $2,465 5.6% $2,334
Percentage of net sales 15.7% 14.4%
- --------------------------------------------------------------------------------
The increase in research and development spending compared to the first quarter
of 1995 is primarily due to increased compensation and personnel costs, as well
as the addition of the Semiconductor Equipment division obtained as part of the
Reel-Tech acquisition in August 1995. The Company expects to continue its
significant investment in research and development activities.
<PAGE>
The Company believes it is essential to invest in research and development to
support its existing products and to create new products as markets develop and
technologies change. The Company is focusing its research and development
efforts in its strategic growth markets, namely automated handling systems for
the manufacturing environment, Windows-based EDA software design tools, lower-
priced IC programmers and semiconductor equipment.
SELLING, GENERAL AND ADMINISTRATIVE
(in thousands) First Quarter First Quarter
1996 Change 1995
- --------------------------------------------------------------------------------
Selling, general & administrative $5,014 (1.8%) $5,104
Percentage of net sales 32.0% 31.5%
- --------------------------------------------------------------------------------
The decrease in selling, general and administrative expenditures in the first
quarter of 1996 is due primarily to lower sales commissions due to the lower
volume of sales during the quarter and lower performance bonuses and incentive
compensation. In addition, the increased value of the U.S. Dollar versus the
Japanese Yen and German Mark also contributed to the decrease in expenditures
during the quarter. These reductions were partially offset by increased
personnel costs and increased marketing and promotion expenditures.
INTEREST
(in thousands) First Quarter First Quarter
1996 Change 1995
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Interest income $63 (36.4%) $99
Interest expense $54 (12.9%) $62
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Net interest income decreased during the first quarter of 1996 compared with
1995, primarily due to a decrease in the average level of funds available for
investment as a result of the Company's share repurchase program. Interest
rates were also slightly lower during the first quarter of 1996 compared to
1995.
INCOME TAXES
(in thousands) First Quarter First Quarter
1996 Change 1995
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Income taxes $21 (92.8%) $293
Effective tax rate 25.3% 20.4%
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The Company's effective tax rate for the first quarter of 1996 differed from the
statutory 34% tax rate primarily due to the benefits related to the foreign
sales corporation. Tax valuation reserves increased by approximately $100,000
during the quarter. The Company has valuation reserves of $2.7 million that may
reverse as the Company records income. The Company believes the potential
reversal of these valuation reserves may substantially reduce its effective tax
rate from the statutory rate during the balance of 1996.
<PAGE>
NET INCOME AND EARNINGS PER SHARE
(in thousands) First Quarter First Quarter
1996 Change 1995
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Net income $62 (94.6%) $1,141
Earnings per share $0.01 (93.3%) $0.15
- --------------------------------------------------------------------------------
The decrease in net income and earnings per share compared with the first
quarter of 1995 is primarily due to decreased sales volume, a lower gross margin
percentage, and increased research and development expenses.
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 only one-third of the Company's sales are made by foreign
subsidiaries and independent currency fluctuations tend to minimize the 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.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
(in thousands) March 28, Dec. 28,
1996 Change 1995
- --------------------------------------------------------------------------------
Working capital $11,731 ($274) $12,005
Total debt $1,613 ($4) $1,617
- --------------------------------------------------------------------------------
Working capital decreased during the first quarter of 1996 primarily due to
funds used to repurchase common stock as discussed above. This decrease was
partially offset by funds provided by operations.
The Company's trade accounts receivable decreased by approximately $2 million
during the first quarter. This decrease was primarily due to decreased sales
volume during the first quarter of 1996. The Company increased its inventory
level by approximately $772,000 during the first quarter. This increase was
primarily to support anticipated growth in the Semiconductor Equipment products
as well as to provide a level of safety stock during the Anaheim factory
relocation which was completed in March 1996. The Company reduced its accrued
expenses primarily due to payments of approximately $419,000 of restructure
related accruals and payments of 1995 incentive compensation, contributions to
the Company's employee retirement savings plan and payments of 1995 income
taxes. Funding for these changes was provided primarily by operations and
approximately $471,000 in stock sale proceeds under the Company's employee stock
benefit plans.
As of March 28, 1996, the Company had total debt of $1.6 million or
approximately 6% of its $25 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 $113,000 is current debt, consisting entirely of
borrowings on the Company's $1.5 million foreign line of credit. No borrowings
were outstanding under the Company's $8.0 million U.S. line of credit.
<PAGE>
The U.S. line of credit matures May 31, 1996. The foreign line of credit
matures in August 1996. Historically, these credit lines have been structured
as short-term and have been renewed on their maturity dates. The Company
currently expects to be able to renew these lines of credit on maturity 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 1996 will be approximately $1.5 million. Such
expenditures are currently expected to be funded from internally generated funds
and, if necessary, borrowings under the Company's existing credit lines.
Although the Company fully expects that such expenditures will be made, it has
purchase commitments for only a small portion of this amount.
At March 28, 1996, the Company's material short-term unused sources of liquidity
consisted of approximately $4.3 million in cash and cash equivalents, available
borrowings of $8.0 million under its U.S. line of credit and available
borrowings of approximately $1.4 million under its foreign line of credit. The
Company believes that cash, cash flow from operations and borrowings available
under its U.S. and foreign lines of credit will be sufficient to fund working
capital needs, service existing debt, finance planned capital expenditures, fund
the Company's share repurchase program, fund its remaining restructure accrued
liabilities, fund the minority investment in Needham's Electronics and fund the
Reel-Tech contingent payment obligations. In addition, if the Company is
successful in selling its property held for sale, additional capital will be
available.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (AS AMENDED)
GENERAL
AGREEMENT TO PURCHASE MINORITY INTEREST IN BUSINESS
On April 25, 1996 the Company announced it has reached an agreement in principle
to purchase a substantial minority interest in Needham's Electronics and to
enter into a worldwide distribution agreement for Needham's Electronics'
programmer products. Completion of the minority investment and creation of the
distribution rights are subject to negotiation of definitive agreements and
satisfaction of certain conditions, which the Company plans to complete during
the second quarter of 1996.
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 the Company
announced an extension of the share repurchase program. The extension
authorized the Company to repurchase up to an additional 8% (approximately
570,000 shares) 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. At May 7, 1996, March 28, 1996 and December 28,
1995 the Company had repurchased 978,700, 760,700 and 562,400 shares at a total
cost of approximately $6.9 million, $5.6 million and $4.1 million, respectively.
FORWARD-LOOKING STATEMENTS
Although most of the information contained in this report is historical, certain
of the 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 28, 1995, 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>
PROPERTY FOR SALE
The Company has listed its entire Redmond headquarters property as available for
sale for $14.6 million with long-term lease back provisions on the building.
RESTRUCTURE PROGRESS
During the fourth quarter of 1993, the Company recorded a pretax charge of $6.1
million related to the restructure of its sales and distribution channels,
downsizing its operations to a level consistent with anticipated lower sales and
product margins, and to consolidate and outsource certain manufacturing
processes. The purpose of the restructure was primarily to reduce expenses and
significantly lower the Company's break-even point in reaction to reduced sales
and gross margins in 1993. Additionally, the Company made several strategic
changes to its sales and distribution channels to better align distribution of
the Company's current and anticipated future products to their markets and
customers. The general downsizing of operations and restructure of the sales
and distribution system were substantially completed in 1994. The Company began
implementation of the planned changes to its manufacturing processes in 1994 for
completion in 1997. The manufacturing consolidation and relocation project was
completed in the first quarter of 1996, and the outsourcing of certain
manufacturing processes is scheduled to be completed in 1997.
Of the original restructuring charge, approximately $965,000 remained as an
accrued liability at December 28, 1995. At March 28, 1996, the remaining
accrued liability was approximately $546,000. The reduction during the first
quarter of 1996 related primarily to implementation of changes in manufacturing
processes, facility consolidation and abandoned office space lease payments.
As of March 28, 1996, the Company's restructuring has proceeded approximately as
planned. No significant changes were made to the Company's restructuring plans
during the first quarter of 1996. The relocation to Redmond, Washington of the
Company's Anaheim, California manufacturing operations was completed during the
first quarter.
RESULTS OF OPERATIONS
NET SALES
(in thousands) First Quarter First Quarter
1996 Change 1995
- --------------------------------------------------------------------------------
Net sales $15,656 (3.4%) $16,208
- --------------------------------------------------------------------------------
Net sales decreased 3.4% in the first quarter of 1996 compared to 1995, with
U.S. sales decreasing 11% and international sales increasing 6.3%. Orders in
the first quarter of 1996 declined approximately 17% to $14.9 million, compared
with $17.9 million in 1995. Sales of the Company's Programming Systems products
decreased 11.5% compared to the first quarter of 1995. Partially offsetting
this decline was a 14% increase in sales in the Synario Design Automation
Division. In addition, the Semiconductor Equipment Division, obtained as part
of the Reel-Tech acquisition in August of 1995, contributed incremental sales
growth of approximately $1 million. The strengthening U.S. Dollar versus the
Japanese Yen and the German Mark also contributed to the decline in sales for
the first quarter.
During the first quarter of 1996, net sales for the Company's non-automated
programming systems declined by $1.8 million or 18% compared to 1995. Orders
for non-automated programming systems declined 12% compared to the first quarter
of 1995. The Company believes these decreases were primarily due to the
slowdown in electronics consumer goods manufacturing capital spending in the
United States and Europe which reduced the demand for the Company's programming
systems. In addition, the Company believes the declines also reflect the
continuing market shift away from the Company's traditional line of higher-
priced IC programmers for the engineering market toward lower-priced project
specific programmers.
The Company believes the market shift toward lower-priced IC programmers has
been caused in part by advances in semiconductor processing technology that have
lowered the barriers to entry in the programmer business over the last several
years. This has caused new market entrants to appear regularly, each trying to
carve out a niche. New entrants cause downward price pressure, and each cycle
of new competitors lowers the acceptable price of a conventional IC programmer
in
<PAGE>
the customer's view. In addition, the Company believes that technological
improvements in personal computers and design software tools have caused a shift
in the demand for IC design tools by engineering design teams away from hardware
tools in favor of increased software design tools. These industry changes had,
and are continuing to have, an adverse effect on the Company's IC programmer
sales and gross margins, especially since the Company's products historically
have been oriented toward hardware tools and, within hardware tools, toward
higher-priced IC programmers. However, the Company believes these trends are
creating and will continue to generate increased sales for its newer products
including ChipLab, 2700 and Synario.
Sales of the Company's ProMaster line of automated handling systems for the
manufacturing environment increased by approximately 13% for the first quarter
of 1996 compared to the first quarter of 1995. A market shift in the ProMaster
product mix toward higher-priced models contributed to the sales increase.
Automated handling systems accounted for approximately 29% of total revenues
during the first quarter compared with 25% for the first quarter of 1995.
Orders for the ProMaster line decreased 42% compared to the first quarter of
1995. The Company believes this decrease was primarily due to the slowdown in
electronics consumer goods manufacturing capital spending in the United States
and Europe during the first quarter, and greater use of in-circuit programming
by ATE testers in some very high-volume manufacturing applications.
The Company believes the increase in sales of the Company's ProMaster products
reflects the expanded use of programmable integrated circuits in the mid- to
high-volume manufacturing environment. The Company believes that in the
electronic manufacturing market, the proliferation of hard-to-handle surface-
mount packages in a variety of types is causing a worldwide trend toward
automation and integration of manufacturing processes. Although, during the
first quarter orders have slowed due to what the Company believes is the soft
capital spending market, the Company still feels that its line of automated
handling systems is well positioned to capitalize on the trend toward automation
and integration of manufacturing processes.
Sales of the Company's Programming Systems software products decreased by 48% in
the first quarter of 1996 compared to 1995. The Company's older software design
tool, ABEL, declined due to competitive pricing pressures and product aging.
First quarter sales and orders of the Company's Semiconductor Equipment
products, acquired as part of the Reel-Tech acquisition, were approximately $1
million. The Company believes the market for semiconductor equipment has
experienced strong growth as semiconductor manufacturers have expanded capacity
in response to increased demand for ICs. The Company is in the process of
expanding its personnel, space and systems to meet expected demand for its
semiconductor equipment. The Company believes that if this strong demand
continues and the Company executes well in integrating the Reel-Tech
acquisition, the Company's Semiconductor Equipment products may provide a
significant revenue growth opportunity. Due to the cyclical nature of demand
for ICs, the activities of competitors and other factors, there can be no
assurance that strong demand for this equipment will continue.
Partially offsetting the increase in international sales was the negative impact
of foreign currency exchange rate changes. These changes reduced sales by
approximately $360,000 during the first quarter of 1996 compared to 1995, which
was due primarily to rate changes for the German Mark and the Japanese Yen.
International sales were 48% of total net sales for the first quarter of 1996
compared to 44% of total net sales in the first quarter of 1995.
GROSS MARGIN
(in thousands) First Quarter First Quarter
1996 Change 1995
- --------------------------------------------------------------------------------
Gross Margin $7,551 (14.5%) $8,837
Percentage of net sales 48.2% 54.5%
- --------------------------------------------------------------------------------
Gross margin for the first quarter of 1996 decreased compared to the first
quarter of 1995 due primarily to lower volumes, lower product margins and
increases in inventory reserves. The relatively high fixed component of cost of
goods sold causes any swing in total volume to have a significant impact on
gross margin. The shift in mix of product revenues from software to hardware
and from higher-priced and higher-margin non-automated programming systems to
the lower-priced alternatives has lowered the overall product gross margins. In
addition, the gross margin on the ProMaster 9500 was below that of the Company's
traditional handlers due to higher material and labor costs. The Company
expects these costs to decline in future periods due to anticipated improvements
in the proficiency of manufacturing and service personnel in building and
servicing the ProMaster 9500 as a result of the Reel-Tech acquisition in August
1995. Additionally, the Company completed the
<PAGE>
relocation of its Anaheim manufacturing facility to its Redmond headquarters and
expects labor and overhead costs to decline in future quarters as a result of
this consolidation.
RESEARCH AND DEVELOPMENT
(in thousands) First Quarter First Quarter
1996 Change 1995
- --------------------------------------------------------------------------------
Research and development $2,465 5.6% $2,334
Percentage of net sales 15.7% 14.4%
- --------------------------------------------------------------------------------
The increase in research and development spending compared to the first quarter
of 1995 is primarily due to increased compensation and personnel costs, as well
as the addition of the Semiconductor Equipment division obtained as part of the
Reel-Tech acquisition in August 1995. The Company expects to continue its
significant investment in research and development activities.
The Company believes it is essential to invest in research and development to
support its existing products and to create new products as markets develop and
technologies change. The Company is focusing its research and development
efforts in its strategic growth markets, namely automated handling systems for
the manufacturing environment, Windows-based EDA software design tools, lower-
priced IC programmers and semiconductor equipment.
SELLING, GENERAL AND ADMINISTRATIVE
(in thousands) First Quarter First Quarter
1996 Change 1995
- --------------------------------------------------------------------------------
Selling, general & administrative $5,014 (1.8%) $5,104
Percentage of net sales 32.0% 31.5%
- --------------------------------------------------------------------------------
The decrease in selling, general and administrative expenditures in the first
quarter of 1996 is due primarily to lower sales commissions due to the lower
volume of sales during the quarter and lower performance bonuses and incentive
compensation. In addition, the increased value of the U.S. Dollar versus the
Japanese Yen and German Mark also contributed to the decrease in expenditures
during the quarter. These reductions were partially offset by increased
personnel costs and increased marketing and promotion expenditures.
INTEREST
(in thousands) First Quarter First Quarter
1996 Change 1995
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Interest income $63 (36.4%) $99
Interest expense $54 (12.9%) $62
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Net interest income decreased during the first quarter of 1996 compared with
1995, primarily due to a decrease in the average level of funds available for
investment as a result of the Company's share repurchase program. Interest
rates were also slightly lower during the first quarter of 1996 compared to
1995.
<PAGE>
INCOME TAXES
(in thousands) First Quarter First Quarter
1996 Change 1995
- --------------------------------------------------------------------------------
Income taxes $21 (92.8%) $293
Effective tax rate 25.3% 20.4%
- --------------------------------------------------------------------------------
The Company's effective tax rate for the first quarter of 1996 differed from the
statutory 34% tax rate primarily due to the benefits related to the foreign
sales corporation. Tax valuation reserves increased by approximately $100,000
during the quarter. The Company has valuation reserves of $2.7 million that may
reverse as the Company records income. The Company believes the potential
reversal of these valuation reserves may substantially reduce its effective tax
rate from the statutory rate during the balance of 1996.
NET INCOME AND EARNINGS PER SHARE
(in thousands) First Quarter First Quarter
1996 Change 1995
- --------------------------------------------------------------------------------
Net income $62 (94.6%) $1,141
Earnings per share $0.01 (93.3%) $0.15
- --------------------------------------------------------------------------------
The decrease in net income and earnings per share compared with the first
quarter of 1995 is primarily due to decreased sales volume, a lower gross margin
percentage, and increased research and development expenses.
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 only one-third of the Company's sales are made by foreign
subsidiaries and independent currency fluctuations tend to minimize the 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>
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
(in thousands) March 28, Dec. 28,
1996 Change 1995
- --------------------------------------------------------------------------------
Working capital $11,731 ($274) $12,005
Total debt $1,613 ($4) $1,617
- --------------------------------------------------------------------------------
Working capital decreased during the first quarter of 1996 primarily due to
funds used to repurchase common stock as discussed above. This decrease was
partially offset by funds provided by operations.
The Company's trade accounts receivable decreased by approximately $2 million
during the first quarter. This decrease was primarily due to decreased sales
volume during the first quarter of 1996. The Company increased its inventory
level by approximately $772,000 during the first quarter. This increase was
primarily to support anticipated growth in the Semiconductor Equipment products
as well as to provide a level of safety stock during the Anaheim factory
relocation which was completed in March 1996. The Company reduced its accrued
expenses primarily due to payments of approximately $419,000 of restructure
related accruals and payments of 1995 incentive compensation, contributions to
the Company's employee retirement savings plan and payments of 1995 income
taxes. Funding for these changes was provided primarily by operations and
approximately $471,000 in stock sale proceeds under the Company's employee stock
benefit plans.
As of March 28, 1996, the Company had total debt of $1.6 million or
approximately 6% of its $25 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 $113,000 is current debt, consisting entirely of
borrowings on the Company's $1.5 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 matures May 31, 1996. The foreign line of credit
matures in August 1996. Historically, these credit lines have been structured
as short-term and have been renewed on their maturity dates. The Company
currently expects to be able to renew these lines of credit on maturity 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 1996 will be approximately $1.5 million. Such
expenditures are currently expected to be funded from internally generated funds
and, if necessary, borrowings under the Company's existing credit lines.
Although the Company fully expects that such expenditures will be made, it has
purchase commitments for only a small portion of this amount.
At March 28, 1996, the Company's material short-term unused sources of liquidity
consisted of approximately $4.3 million in cash and cash equivalents, available
borrowings of $8.0 million under its U.S. line of credit and available
borrowings of approximately $1.4 million under its foreign line of credit. The
Company believes that cash, cash flow from operations and borrowings available
under its U.S. and foreign lines of credit will be sufficient to fund working
capital needs, service existing debt, finance planned capital expenditures, fund
the Company's share repurchase program, fund its remaining restructure accrued
liabilities, fund the minority investment in Needham's Electronics and fund the
Reel-Tech contingent payment obligations. In addition, if the Company is
successful in selling its property held for sale, additional capital will be
available.
<PAGE>
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: July 1, 1996
By://S//Steven M. Gordon
---------------------
Steven M. Gordon
Vice President
Finance and Administration
Chief Financial Officer
Chief Accounting Officer
Secretary and Treasurar
