20150630 10K FY

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

 

(Mark One)

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2015OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________.

 

 

 

 

 

Commission File Number: 0-20206

PERCEPTRON, INC.

(Exact Name of Registrant as Specified in Its Charter)

Michigan

 

38-2381442

(State or Other Jurisdiction of

 

(I.R.S. Employer Identification No.)

Incorporation or Organization)

 

 

47827 Halyard Drive

Plymouth, Michigan 48170-2461

(Address of Principal Executive Offices)

(734) 414-6100

(Registrant’s telephone number, including area code)

 

 

 

 

 

 

 

 

 

 

 

Securities registered pursuant to section 12(b) of the Act:

 

 

 

Title of Each Class

Common Stock, $0.01 par value

 

Name of Each Exchange on Which Registered

Rights to Purchase Preferred Stock

 

The NASDAQ Stock Market LLC

 

(NASDAQ Global Market)

 

 

 

Securities registered pursuant to section 12(g) of the Act:  None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

 

 

Yes

 

No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

 

 

 

Yes

 

No

 

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

 

No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

 

 

Yes

 

No

 

Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer          Accelerated Filer      Non-Accelerated Filer           Smaller Reporting Company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

 

Yes

 

No

 

 

 


 

 

The aggregate market value of the voting stock held as of the registrant’s most recently completed second fiscal quarter by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on December 31, 2014, as reported by the NASDAQ Global Market, was approximately  $88,000,000 (assuming, but not admitting for any purpose, that all directors and executive officers of the registrant are affiliates).

 

The number of shares of Common Stock, $0.01 par value, issued and outstanding as of September 8, 2015, was 9,350,210.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following document, to the extent specified in this report, are incorporated by reference in Part III of this report:

 

 

 

Document

 

Incorporated by reference in:

Proxy Statement for 2015

 

 

Annual Meeting of Shareholders

 

Part III, Items 10-14

 

 

 

 

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PART I

 

ITEM 1:BUSINESS

 

General

 

Perceptron, Inc. (“Perceptron” or the “Company”) develops, produces and sells a comprehensive range of automated industrial dimensional inspection and 3D scanning products.  Products include 3D machine vision solutions, robot guidance, coordinate measuring machines, laser scanning, and advanced analysis software. Automotive, aerospace and other manufacturing companies globally rely on Perceptron's metrology solutions to assist in managing their complex manufacturing processes to improve quality, shorten product launch times and reduce costs. More than 900 systems, 12,000 Perceptron measuring sensors and over 3,000 COORD3 coordinate measuring machines are in active daily use worldwide. Headquartered in Plymouth, Michigan, Perceptron has subsidiary operations in Brazil, China, Czech Republic, France, Germany, India, Italy, Japan, Singapore, Slovakia, Spain and the United Kingdom.

 

The Company’s products are categorized as follows:

 

In-Line, Near Line and Off-Line Measurement Solutions (“Measurement Solutions Products”).  Sales of these products involve the development, manufacture and installation of:

 

·

In-Line fixed and robot-mounted laser-based, non-contact dimensional gauging systems used in original equipment manufacturing plants and component supplier plants;

·

In-Line laser-based, non-contact systems that perform gauging and intelligent guidance of industrial robots in the performance of a variety of complex automated assembly operations;

·

Near-Line robot-mounted laser-based, non-contact dimensional gauging systems used in original equipment manufacturing plants and component supplier plants; and

·

Off-Line inspection and gauging cells comprising coordinate measuring machine, industrial and collaborative robotic solutions integrated with laser-based non-contact scanning sensors.

 

3D Scanning Products.  Sales of these products involve the development, manufacture and marketing of laser-based sensors and software for the following applications:

 

·

Laser scanning sensors and metrology software for 3-dimensional measurement on coordinate measuring machines (“CMM”) for the reverse engineering and automated component inspection markets;

·

Laser scanning sensors for 3-dimensional scanning on portable systems and portable CMMs for the reverse engineering and manual component inspection markets; and

·

Laser scanning sensors integrated into vehicle wheel-alignment machines installed in automotive assembly plants.

 

Value Added Services.  Perceptron offers the following value added services to customers:

 

·

Training;

·

Field Service and Calibration;

·

Launch Support Services;

·

Consulting Services; and

·

Equipment and Software Maintenance Agreements.

 

On January 29, 2015, the Company acquired Next Metrology Software s.r.o. (“NMS”), a technical leader in CMM operating software and the developer of TouchDMIS™, based in Prague, Czech Republic.

 

On February 27, 2015, the Company acquired the coordinate measuring machine (CMM) business of Coord3 Industries s.r.l. located in Bruzola, Torino, Italy, conducted through Coord3 s.r.l. (“Coord3”).  Coord3 is a leading innovative Italian-based supplier of a full range of CMMs with a growing global customer base. 

 

On August 30, 2012, the Company sold substantially all of the assets of its Commercial Products Business Unit (“CBU”).  The financial information in this Form 10-K presents CBU financial information as a discontinued operation for fiscal years 2013 and prior.

 

Markets

 

The Company has a long history servicing the global automotive manufacturing market with technology that the Company believes is applicable to a full spectrum of other manufacturing industries including aerospace.  In 2014, the Company embarked upon a diversification strategy and automotive sales now represent approximately 80% of total sales.  The Company has product offerings encompassing numerous manufacturing processes, including complex part assembly, automotive body construction, industrial robotic guidance for complex assembly applications, gauging cells, coordinate measuring solutions and reverse engineering.

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Products and Applications

 

Measurement Solutions

 

The Company’s In-Line and Near-Line measurement solutions are based on Perceptron’s scanning sensors and software developed by applying Helix® and TriCam® sensors with Vector software.  The Company’s Off-Line measurement solutions are based on Perceptron’s full line of coordinate measuring machines (“CMMs”) and measuring software.  Measurement Solutions in fiscal 2015, 2014, and 2013 represented 90%, 85% and 84% of total sales, respectively.

 

In-Line and Near-Line

 

AutoGauge®: These systems are used in assembly and fabrication plants to contain, correct and control the quality of complex assemblies. AutoGauge® systems are placed directly in the manufacturing line or near the line to automatically measure critical dimensional characteristics of parts using non-contact, laser triangulation sensors.  AutoGauge® can be installed with fixed-mounted sensors, with robot-mounted sensors, or as a hybrid system using both fixed and robot-mounted sensors.  This ability provides manufacturers with the flexibility to measure multiple part types on a single manufacturing line while maintaining high-speed production rates.

 

AutoFit®: These systems are primarily used in automotive manufacturing plants to contain, correct and control the fit of exterior body panels. The system automatically measures, records and displays the gap and flushness of parts most visible to the automobile consumer such as gaps between front and rear doors, hoods and fenders, and deck lids and rear quarter panels. These measurements can be conducted throughout the manufacturing process including in the body shop during assembly of non-painted vehicles, and in the final assembly area after the vehicle has been painted.  AutoFit® has the ability to measure vehicles while in motion along the assembly line or in a stationary position.

 

AutoScan®:  These systems are used by manufacturing companies to contain, correct and control the quality of manufactured components. These systems use robot-mounted sensors to scan a part as the robot moves throughout its path. The AutoScan® system collects the “point cloud data” required for contour analysis and dimensional feature extraction. This allows the part’s shape and geometric features to be automatically scanned and compared to CAD and to report specific measurements on the part. 

 

AutoGuide®:  These robot guidance systems are used by manufacturing companies for flexible, automated assembly applications. These systems utilize Perceptron sensors and measurement technology to guide and control robotic assembly operations.  AutoGuide® systems calculate the difference between theoretical and actual relationships of a robot and the part being assembled and communicate compensation data, in six degrees of freedom, to the robot. AutoGuide®  supports numerous robotic assembly applications including automotive windshield insertion, roof loading, hinge mounting, door attachment, and sealant application.

 

Helix®:  Helix® is an innovative and versatile 3D metrology sensor that enables manufacturers to perform their most challenging measurement tasks with greater ease and precision. Helix®  solutions offer Intelligent Illumination® allowing the user to choose the quantity, density and orientation of the sensor's laser lines on an individual inspection point level without moving the sensor. By customizing the sensor's laser lines through a simple user interface, image acquisition is optimized on a feature-by-feature basis. The user can configure tightly spaced laser lines for small, complex features, increase the number of laser lines to robustly measure challenging materials, and alter the orientation of the laser lines to accommodate the differences between multiple parts manufactured on the same assembly line. 

 

Off-Line

 

Coord3®:   The Coord3 CMM line includes bridge, gantry and horizontal style of machines and includes a range from bench-top CMMs for small part inspection to some of the largest CMMs in the market used in aerospace, defense and heavy equipment industries.  CMMs can be equipped with tactile scanning probes, the Company’s laser scanning sensors suitable for many measurement applicable manufacturing applications and TouchDMIS™ measuring software. 

 

TouchDMISTM :   TouchDMIS™ measuring software simplifies CMM measurement by incorporating a 100% Touch interface with the TouchCADTM quick programming module. TouchDMIS is the world’s first all-touch CMM softwareThe Company has integrated TouchDMIS™ with its ScanR sensor for reverse engineering and production part automated inspection applications and has incorporated automatic feature extraction intellect from the Company’s ScanWorks toolkit.

 

3D Scanning Products

 

3D Scanning Products in fiscal 2015, 2014, and 2013 represented 5%, 10% and 11% of total sales, respectively.

 

ScanWorks®:  The Company provides ScanWorks® products to a variety of markets through direct sales, resellers, and third party original equipment manufacturers. These products target the digitizing, reverse engineering, and inspection markets. ScanWorks® is a hardware/software component set that allows customers to add digitizing capabilities to their machines or systems. The use of ScanWorks® software and the ScanR sensor enables technicians to collect, display, manipulate and export point cloud and meshed data from portable optical tracking devices, portable CMMs or CMMs.  The majority of ScanWorks® sales occur outside of the automotive industry.

 

Smart3DTM:  Based on the Company’s revolutionary Helix sensor technology, the Smart3D scanning solution allows for configurable scan volume and line density. This functionality combined with the ScanWorks software make the process of scanning 3D objects both fast and

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easy. The software workflow takes the user through a step by step process to create scanned part data that can be exported as a polygonised mesh for both 3D printing and reverse engineering applications.

ScanRTMRepresenting the sixth generation of CMM laser scanner from Perceptron, this sensor extends the range of engineered materials that can be laser-scanned. With the fast-growing application of 3D laser scanning for reverse engineering, production part dimensional inspection, and as a compliment to 3D printing, Perceptron has introduced the world’s first green laser-line scanner that is able to scan highly reflective materials such as machined aluminum and carbon fiber composites.

WheelWorks®:  WheelWorks® software and sensors offer a fast, accurate, non-contact method of measuring wheel position for use in automated or manual wheel alignment machines in automotive assembly plants.  The Company supplies sensors and software to a number of wheel alignment equipment manufacturers in Europe, Asia and North America who in turn sell alignment systems to automotive manufacturers.

 

Value Added Services

 

Value Added Services:   Value Added Services sales in fiscal 2015, 2014, and 2013 represented 5%, 5% and 5% of total sales, respectively.  Value Added Services include training, field service, calibration, launch support services, consulting services, maintenance agreements and repairs.

 

Sales and Marketing

 

The Company markets its products directly to end user customers, through manufacturing line builders, system integrators, value-added resellers and original equipment manufacturers. 

 

The Company’s automotive sales are primarily managed by key account managers who develop a close consultative selling relationship with the customers.  The Company’s principal customers have historically been automotive manufacturing companies that the Company either sells to directly or through manufacturing line builders, system integrators or assembly equipment manufacturers.  The Company’s products are typically purchased for installation in connection with retooling programs undertaken by these companies.  Because sales are dependent on the timing of customers’ retooling programs, sales by customer vary significantly from year to year, as do the Company’s largest customers.  For the fiscal years 2015, 2014 and 2013, approximately 40%, 43% and 46%, respectively, of net sales were derived from the Company’s four largest automotive end user customers.  The Company also sells to manufacturing line builders, system integrators or original equipment manufacturers, who in turn sell to the Company’s automotive customers.  For the fiscal years 2015, 2014 and 2013, approximately 10%, 16% and 7%, respectively, of net sales were to manufacturing line builders, system integrators and original equipment manufacturers for the benefit of the same four largest automotive end user customers in each respective year.  During the fiscal year ended June 30, 2015, direct sales to Volkswagen Group accounted for approximately 23% of the Company’s total net sales and direct sales to General Motors Company accounted for approximately 12% of the Company’s total net sales. 

 

To support sales of new CMM, 3D and Near-Line products and to diversify our customer and industry base, the Company has implemented and grown a non-key account sales force led by Regional Sales Managers who have responsibility for all direct and reseller sales activity in their region.  Regional Sales Managers are active in the US, Southeast Asia, China, Italy, United Kingdom and Germany.

 

The Company also implemented a major corporate rebranding initiative that included a new web page, logos, and tagline as well as a major effort to expand its brand and product awareness across multiple manufacturing industries.  This also included the incorporation of the Coord3 and Next Metrology Software brands into its portfolio of offerings to the market. 

 

Manufacturing and Suppliers

 

The Company’s manufacturing operations consist primarily of final assembly of hardware components and the testing and integration of the Company’s software with the hardware components.  The Company builds its products from a combination of commercially available parts and uniquely designed manufactured parts.  The components are primarily manufactured by third parties.  Individual components such as printed circuit boards are manufactured and supplied by third parties.  The Company believes a low level of vertical integration gives it significant manufacturing flexibility and minimizes total product costs. 

 

The Company purchases certain component parts and assemblies from single and multi-source suppliers.  With respect to most of its components, the Company believes that alternative suppliers are readily available.  Component supply shortages in certain industries, including the electronics industry, have occurred in the past and are possible in the future due to imbalances in supply and demand.  The Company uses global purchasing sources to minimize the risk of part shortages.  The Company has not experienced significant component supply shortages from single source suppliers in recent years. Significant delays or interruptions in the delivery of components, assemblies or products by suppliers, or difficulties or delays in shifting manufacturing capacity to new suppliers, could have a material adverse effect on the Company. 

 

International Operations

 

Europe:  The Company’s European operations contributed approximately 40%, 47% and 43%, of the Company’s net sales during the fiscal years ended June 30, 2015, 2014, and 2013, respectively.  The Company’s wholly-owned subsidiary, Perceptron Europe B.V. (“Perceptron B.V.”), formed in The Netherlands, holds a 100% equity interest in Perceptron (Europe) GmbH (“Perceptron GmbH”).  Perceptron GmbH is located in Munich, Germany and is the operational headquarters for the European market.  The Company owns subsidiaries that operate

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direct sales, application and support offices in Voisins le Bretonneux, France and Barcelona, Spain.  The Company owns a CMM designer and manufacturer, Coord3 s.r.l in Torino, Italy and a software development company, Next Metrology Software s.r.o in Prague, Czech Republic. At June 30, 2015, the Company employed 139 people in its European operations.    

 

Asia:  The Company’s Asian operations contributed approximately 22%, 23% and 21% of the Company’s net sales during the fiscal years ended June 30, 2015, 2014, and 2013, respectively. The Company owns subsidiaries that operate direct sales, application and support offices in Tokyo, Japan; Shanghai and Beijing, China; Singapore; and Delhi and Chennai, India to service customers in Asia.  At June 30, 2015, the Company employed 59 people in its Asian operations.

 

South America:  The Company has a direct sales, application and support office in Sao Paulo, Brazil to service customers in South America. At June 30, 2015, the Company employed 5 people in its Brazilian operations.

 

The Company’s foreign operations are subject to certain risks typically encountered in such operations, including fluctuations in foreign currency exchange rates and controls, expropriation and other economic and local policies of foreign governments, and the laws and policies of the U.S. and local governments affecting foreign trade and investment.  For information regarding net sales and identifiable assets of the Company’s foreign operations, see Note 13 of the Notes to the Consolidated Financial Statements, “Segment and Geographic Information”, included in item 8 of this report.

 

Competition

 

The Company believes that its products provide the best and most complete solutions for its customers in terms of system capabilities, levels of support, and competitive pricing for the value provided, which it believes are the principal competitive factors in its markets. The Company also believes it is further along in the development of its technology for certain of its products than any of its competition.

 

There are a number of companies that sell similar and/or alternative technologies and methods into the same markets and regions as the Company. The Company believes that there may be other entities, some of which may be larger and have greater resources than the Company, that could develop technology and products, which could prove to be competitive with those of the Company.   The Company also believes that certain existing or potential customers may be capable of internally developing their own technology.  See Item 1A: “Risk Factors” titled “There are a number of companies offering competitive products in our markets, or developing products to compete with our products, which could result in a reduction in our revenues through lost sales or a reduction in prices”.

 

Backlog

 

As of June 30, 2015, the Company had a backlog of $38.9 million, compared to $39.3 million at June 30, 2014.  Most of the backlog is subject to cancellation or delay by the customer, often with limited or no penalties.  The level of order backlog at any particular time is not necessarily indicative of the future operating performance of the Company.  The Company expects to be able to fill substantially all of the orders in its backlog by June 30, 2016.

 

Research and Development

 

In fiscal 2015 the research and development focus was to expand the application reach of Perceptron technology outside of the automotive sector and to provide a renewed focus on the next generation of 3D products.  Two 3D Solutions products were launched to the market in late 2015, including the Smart3D portable laser scanning solution to support the reverse engineering and 3D Printing markets and the Company’s 6th generation of laser scanning sensor ScanR for use on both coordinate measuring machines (CMM) and portable coordinate measuring machines (PCMM). The Company’s Helix® 3D metrology sensor range was further extended to include a HDR (High Dynamic Range) version that is able to scan a wide variety of materials including highly reflective machined aluminum and carbon fiber parts.   The Company’s patented Helix® sensor technology is unique in the industry.  The Company believes this technology provides significant competitive advantages.  As such, Helix is being leveraged extensively across all new product development and is expected, over time, to replace the Company’s legacy TriCam sensors. 

 

As of June 30, 2015, 48 persons employed by the Company were focused primarily on research, development and engineering.  For the fiscal years ended June 30, 2015, 2014 and 2013, the Company’s research, development and engineering expenses were $7.9 million, $6.7 million and $6.8 million, respectively.

 

Patents, Trade Secrets and Confidentiality Agreements

 

As of June 30, 2015, the Company owns 20 U.S. patents that have been granted to it, and has 4 U.S. patent applications pending, which relate to various products and processes manufactured, used, and/or sold by the Company.  The Company also owns 4 foreign patents that have been granted to it in Europe, China and Japan and has 14 patent applications pending in foreign locations.  The U.S. and foreign patents expire from 2016 through 2031.  In addition, the Company holds perpetual licenses to more than 25 other U.S. patents including rights to practice 7 U.S. patents for non-forest product related applications that were assigned to USNR in conjunction with the sale of the Forest Products business unit in 2002, and rights to practice 9 U.S. patents that were sold in conjunction with the sale of CBU in August 2012.  The expiration dates for these licensed patents range from 2015 to 2032.

 

The Company has registered, and continues to register, various trade names and trademarks including Perceptron®, Powered by Perceptron®, AutoGauge®, AutoFit®, AutoGuide®, AutoScan®, Contour Probe®, ScanWorks®, TriCam®, WheelWorks®, Visual Fixturing®, Helix®, Smart3D™, Intelligent Illumination®, ScanR™, TouchDMIS™, and Coord3™, among others, which are used in connection with the conduct of its business. 

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The Company’s software products are copyrighted and generally licensed to customers pursuant to license agreements that restrict the use of the products to the customer’s own internal purposes on designated Perceptron equipment.

 

The Company also uses proprietary information and invention agreements and non-disclosure agreements with employees, consultants and other parties to protect its intellectual property.

 

There can be no assurance that any of the above measures will be adequate to protect the Company’s intellectual property or other proprietary rights.  Effective patent, trademark, copyright and trade secret protection may be unavailable in certain foreign countries.

 

In the past, the Company had been informed that certain customers had received allegations of possible patent infringement involving processes and methods used in the Company’s products and that all related matters had been resolved.  Management believes that the processes used in the Company’s products were independently developed without utilizing any previously patented process or technology.

 

Employees

 

As of June 30, 2015, the Company employed 346 persons, 344 of whom were employed on a full-time basis with 143 located in North America and the remainder distributed across the globe as identified above in International Operations.  In Italy, the Company has 58 employees covered by Italy’s National Collective Bargaining Agreement for employees in the mechanical engineering industry.  The agreement was signed in December 2012 and will expire on December 31, 2015.  None of the Company’s other employees are covered by a collective bargaining agreement.  The Company believes its relations with its employees to be good.

 

Available Information

 

The Company’s Internet address is www.perceptron.com.  On the website, the Company makes available, free of charge, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”).  These reports can be accessed through the “Investors” section of the Company’s website under “SEC Filings”.  The information found on the Company’s website is not part of this or any report the Company files with, or furnishes to, the SEC.

 

 

ITEM 1A:RISK FACTORS 

 

An investment in our Common Stock involves numerous risks and uncertainties.  You should carefully consider the following information about these risks.  Any of the risks described below could result in a significant or material adverse effect on our future results of operations, cash flows or financial condition.  The risks and uncertainties described below are not the only ones we face.  Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that adversely affect our business in the future.  We believe that the most significant of the risks and uncertainties we face are as follows:

 

Our revenues are highly influenced by the sale of products for use in the global automotive market, particularly by manufacturers based in the United States, China, and Western Europe.  These manufacturers have experienced periodic downturns in their businesses that could adversely affect their level of purchases of our products.

 

Due to our significant revenue from the automotive industry, our ability to sell our systems and solutions to automotive manufacturers and suppliers is affected by periodic downturns in the global automotive industry, such as those that occurred in 2009-2010 in the United States automotive industry.

 

New vehicle tooling programs are the most important selling opportunity for our automotive-related sales.  The number and timing of new vehicle tooling programs can be influenced by a number of economic factors.  Our customers only launch a limited number of new car programs in any given year because of the time and financial resources required.  From a macro perspective we continue to assess the global economy and its likely effect on our automotive customers and markets served.  We continue to view the automotive industry’s focus on introducing new vehicles more frequently to satisfy their customers’ changing requirements, as well as their continuing focus on improved quality, as positive indicators for new business.  However, because of periodic economic downturns experienced by our customers, our customers could determine to reduce their number of new car programs.  The automobile industry is a very cost competitive industry.  Pricing pressures could adversely affect the margins we realize on the sale of our products, and ultimately, our profitability. 

 

The Company has embarked on a strategy to grow its business through diversification into other non-automotive manufacturing sectors where the Company believes significant opportunity exists for the Company’s existing and new products.  Because of the inherent difficulties in diversification, the Company may not be successful in its efforts.  See “Our future success is dependent upon our ability to implement our long-term growth strategy.”

 

Global economic conditions may negatively impact our results of operations.

Our revenue levels are impacted by global economic conditions, as we have a significant business in many countries throughout the world.  In fiscal 2015, 38% of sales were generated in North America and as a result, a significant decline in global economic conditions could have a material adverse impact on our results of operations.

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Current levels of market volatility adversely impact the market price of our Common Stock.

The capital and credit markets are subject to volatility and disruption. During such a period, the volatility and disruption could reach unprecedented levels, which would exert downward pressures on stock prices, including the market price of our Common Stock.

 

Our future success is dependent upon our ability to implement our long-term growth strategy.

 

Our future success is dependent upon our ability to implement our long-term strategy that includes growing our customer base in the automotive market and expanding into new markets.  We have embarked on a diversification strategy to expand into non-automotive markets through our existing and new products.  However, there are a number of uncertainties involved in our long-term strategy over which we have no or limited control, including:

 

The quality and cost of competitive products already in existence or developed in the future.

The level of interest existing and potential new customers may have in our existing and new products and technologies.

Our ability to resolve technical issues inherent in the development of new products and technologies.

Our ability to identify and satisfy market needs.

Our ability to identify satisfactory distribution networks.

General product development and commercialization difficulties.

Rapid or unexpected technological changes.

General product demand and market acceptance risks.

Our ability to successfully compete with alternative and similar technologies.

Our ability to attract the appropriate personnel to effectively represent, install and service our products.

The effect of economic conditions. 

 

Even if we are able to expand our customer base and markets, the new revenues we derive may not offset declines in revenues from our current products.  We also may not be able to generate profits from these new customers or markets at the same level as we generate from our current business. There can be no assurance that we will be able to expand our customer base and markets or successfully execute our strategies in a fashion to maintain or increase our revenues and profits.

 

A significant percentage of our revenues are derived from a small number of customers, so that the loss of any one of these customers could result in a significant reduction in our revenues and profits.

 

A majority of our revenues in fiscal 2015 were derived from the sale of systems and solutions to a small number of customers that consist primarily of automotive manufacturers and suppliers in North America, Western Europe and Asia. 

 

With such a large percentage of our revenues coming from such a small and highly concentrated group of customers, we are susceptible to a substantial risk of losing revenues if these customers stop purchasing our products or reduce their purchases of our products.  In addition, we have no control over whether these customers will continue to purchase our products, systems and solutions in volumes or at prices sufficient to generate profits for us. 

 

Our future commercial success depends upon our ability to maintain a competitive technological position in our markets, which are characterized by continual technological change.

 

Technology plays a key role in the systems and solutions that we produce.  Our ability to sell our products to customers is directly influenced by the technology used in our systems and solutions.  With the rapid pace at which technology is changing, there is a possibility that our customers may require more technologically advanced systems and solutions than what we may be capable of producing. 

 

Technological developments could render actual and proposed products or technologies of ours uneconomical or obsolete.  There also is a possibility that we may not be able to keep pace with our competitors’ products.  In that case, our competitors may make technological improvements to their products that make them more desirable than our products.

 

Our growth and future financial performance depend upon our ability to introduce new products and enhance existing products that include the latest technological advances and customer requirements.  We may not be able to introduce new products successfully or achieve market acceptance for such products.  Any failure by us to anticipate or respond adequately to changes in technology and customer preferences, or any significant delays in product development or introduction, could have a material adverse effect on our business.  Accordingly, we believe that our future commercial success will depend upon our continued ability to develop and introduce new cost-effective products and maintain a competitive technological position. 

 

We are dependent on proprietary technology.  If our competitors develop competing products that do not violate our intellectual property rights or successfully challenge those rights, our revenues and profits may be adversely affected.

 

Our products contain features that are protected by patents, trademarks, trade secrets, copyrights, and contractual rights.  Despite these protections, there is still a chance that competitors may use these protected features in their products as a result of our inability to keep our trade secrets confidential, or in violation of our intellectual property rights or following a successful challenge to those rights.  The prosecution of infringement claims against third parties and the defense of legal actions challenging our intellectual property rights could be costly and require significant attention from management.  Because of the small size of our management team, this could result in the diversion of management’s attention from day-to-day operations.

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There also is a chance that competitors may develop technology that performs the same functions as our products without infringing upon our exclusive rights.  It is possible that competitors may reverse engineer those features of our products that are not protected by patents, trademarks and trade secrets.  If a competitor is able to reverse engineer an unprotected feature successfully, the competitor may gain an understanding of how the feature works and introduce similar products to compete with our products.

 

Because our products are sold globally, we are at risk of competitors misappropriating our intellectual property included in those products or reverse engineering those products.  As a result, we may have a more limited ability, and significantly greater costs, to enforce our intellectual property rights in those products.  Constant technological improvement of those products will be particularly important to keep the products competitive in their markets.

 

From time to time, we make “forward-looking statements” regarding our business, including our future revenues, order bookings, backlog and operating results.  Because these “forward-looking statements” are based on estimates and assumptions, actual results could be materially different.

 

From time to time, we make “forward-looking statements” within the meaning of the Securities Exchange Act of 1934, including our expectations as to its future new order bookings, revenue, expenses, net income and backlog levels, trends affecting our future revenue levels, the rate of new orders, the timing of revenue and income from new products which we have recently released or have not yet released, and the timing of the introduction of new products.  When we use words such as “will,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “prospects”, “outlook” or similar expressions, we are making forward-looking statements.  We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for our forward-looking statements.  While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which speak only as of the date made. 

 

Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different.  Factors that might cause such a difference include, without limitation, the risks and uncertainties discussed from time to time in our reports filed with the Securities and Exchange Commission, including those listed in “Item 1A – Risk Factors” of this Form 10-K.  Other factors not currently anticipated by management may also materially and adversely affect our financial condition, liquidity or results of operations.  Except as required by applicable law, we do not undertake, and expressly disclaim, any obligation to publicly update or alter our statements whether as a result of new information, events or circumstances occurring after the date of this report or otherwise. 

 

Our expectations regarding future bookings and revenues are projections developed based upon information from a number of sources, including, but not limited to, customer data and discussions.  These projections are subject to change based upon a wide variety of factors.  Certain of these new orders have been delayed in the past and could be delayed in the future.  Because our products are typically integrated into larger systems or lines, the timing of new orders is dependent on the timing of completion of the overall system or line.  In addition, because our products have shorter lead times than other components and are required later in the process, orders for products tend to be given later in the integration process. 

 

A significant portion of our projected revenues and net income depends upon our ability to successfully develop and introduce new products, expand into new geographic markets, successfully negotiate new sales or supply agreements with new customers and otherwise continue sales with current and new customers. 

 

Because a significant portion of our revenues are denominated in foreign currencies and are translated for financial reporting purposes into U.S. dollars, the level of our reported new order bookings, revenues, operating profits, net income and order backlog are affected by changes in currency exchange rates, principally between the U.S. Dollar, euro, Chinese Yuan and Japanese Yen.  Currency exchange rates are subject to significant fluctuations, due to a number of factors beyond our control, including general economic conditions in the United States and other countries.  Because our expectations regarding future revenues, order bookings, backlog and operating results are based upon assumptions as to the levels of such currency exchange rates, actual results could differ materially from the Company’s expectations.

 

We are subject to risks related to litigation.

 

From time to time, we are subject to lawsuits and other claims arising out of our business operations.  Adverse judgments in one or more of these lawsuits could require us to pay significant damage amounts.  The outcome of lawsuits is inherently uncertain and typically a loss cannot be reasonably estimated or accrued by us relating to lawsuits. Accordingly, if the outcome of a legal proceeding is adverse to the Company, we would have to record a charge for the matter at the time the legal proceeding is resolved and generally in the full amount at which it is resolved.  In addition, the expenses related to these lawsuits may be significant.  Lawsuits can have a material adverse effect on our business and operating results, particularly where we have not established an accrual or a sufficient accrual for damages, settlements, or expenses.  See “Item 3 – Legal Proceedings” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Litigation and Other Contingencies” below for a discussion of the Company’s policies in accounting for lawsuits and other claims.

 

We could become involved in costly litigation alleging patent infringement.

 

In the past, we had been informed that certain of our customers have received allegations of possible patent infringement involving processes and methods used in our products.  Certain of these customers, including one customer who was a party to a patent infringement suit relating to this matter, settled such claims.  We believe that the processes used in our products were independently developed without utilizing any

8


 

 

previous patented process or technology.  However, it is possible that in the future we or our customers could receive allegations of possible patent infringement or could be parties to patent infringement litigation relating to our products.

 

The defense of patent infringement litigation could be costly and require significant attention from management.  Because of the small size of our management team, this could result in the diversion of management’s attention from day-to-day operations.

 

There are a number of companies offering competitive products in our markets, or developing products to compete with our products, which could result in a reduction in our revenues through lost sales or a reduction in prices.

 

We are aware of a number of companies in our markets selling products using similar or alternative technologies and methods.  We believe that there may be other companies, some of whom may be substantially larger and have substantially greater resources than us, which may be engaged in the development of technology and products for some of our markets that could prove to be competitive with ours.  We believe that the principal competitive factor in our markets is the total capability that a product offers.  In some markets, a competitive price for the level of functionality and reliability provided are the principal competitive factors.  While we believe that our products compete favorably, it is possible that these competitors could capture some of our sales opportunities or force us to reduce prices in order to complete the sale. 

 

We believe that certain existing and potential customers may be capable of internally developing their own technology.  This could cause a decline in sales of our products to those customers.

 

Our business depends on our ability to attract and retain key personnel.

 

Our success depends in large part upon the continued service of our executives and key employees, including those in engineering, technical, sales and marketing positions, as well as our ability to attract such additional employees in the future.  At times and in certain geographic markets, competition for the type of highly skilled employees we require can be significant.  The loss of key personnel or the inability to attract new qualified key employees could adversely affect our ability to implement our long-term growth strategy and have a material adverse effect on our business.

 

Our ability to increase sales of our new product lines depends on our ability to successfully expand our distribution channels.

 

With the acquisition of Coord3 and NMS in fiscal 2015, we expanded our product lines to include the design, manufacture and sale of CMMs.  We market our line of CMMs directly to end users and through distributors and resellers.  Growth of our sales of this product line will depend upon our ability to expand our distribution channels by identifying, developing and maintaining relationships with distributors and resellers.  In addition, our distributors and resellers can potentially sell products offered by our competitors.  If we are not able to successfully expand our distribution channels for our CMM products, or if our distributors or resellers do not or are not able to successfully sell our CMM products, our strategic plan to expand our revenues will be adversely affected.

 

We may not be able to complete business opportunities and acquisitions and our profits could be negatively affected if we do not successfully operate those that we do complete.

 

We will evaluate from time to time business opportunities that fit our strategic plans.  There can be no assurance that we will identify any opportunities that fit our strategic plans or will be able to enter into agreements with identified business opportunities on terms acceptable to us.  The Company may incur significant due diligence and legal costs with no assurance that an acquisition or business opportunity will be consummated after incurring these costs.  If we are unable to identify and complete acquisitions that fit our strategic plans, we may not be able to fully implement our expansion plans for the Company.

 

There is also no assurance that we will be able to effectively integrate businesses that we may acquire due to the significant challenges in consolidating functions and integrating procedures, personnel, product lines, technologies and operations in a timely and efficient manner.  The integration process may require significant attention from management and devotion of resources.  Because of the small size of our management team, this could result in the diversion of management’s attention from day-to-day operations and impair our relationships with current employees and customers.

 

We intend to finance any such business opportunities from available cash on hand, existing credit facilities, issuance of additional stock or additional sources of financing, as circumstances warrant.  We could use a significant portion of our available cash on hand and incur substantial debt or other contingent liabilities in connection with these acquisition opportunities.  The issuance of additional equity securities to finance an acquisition could be substantially dilutive to our stockholders.  In addition, our profitability may suffer because of acquisition-related costs, debt service requirements or amortization costs for acquired intangible assets.  In addition, if the business opportunities do not perform as expected, we could incur impairment charges related to goodwill or other intangibles acquired by us.  If we are not successful in generating additional profits from these transactions, this dilution and these additional costs could cause our Common Stock price to drop.

 

We are expanding our foreign operations, increasing the possibility that our business could be adversely affected by risks of doing business in foreign countries.

 

We have significant operations outside of the United States and are currently implementing a strategy to expand our global operations.

 

Our foreign operations are subject to risks customarily encountered in such foreign operations.  For instance, we may encounter fluctuations in foreign currency exchange rates, differences in the level of protection available for our intellectual property, the impact of differences in language and local business and social customs on our ability to market and sell our products in these markets, the inability to recruit qualified personnel in a specific country or region, more stringent employment regulations and local labor conditions and difficulties in repatriating

9


 

 

cash earned in other countries back to the United States.  In addition, we may be affected by U.S. laws and policies that impact foreign trade and investment.  Finally, we may be adversely affected by laws and policies imposed by foreign governments in the countries where we have business operations or sell our products.  These laws and policies vary from jurisdiction to jurisdiction.

 

Because of our significant foreign operations, our revenues and profits can vary significantly as a result of fluctuations in the value of the United States dollar against foreign currencies.

 

Products that we sell in foreign markets are sometimes priced in currency of the country where the customer is located.  To the extent that the dollar fluctuates against these foreign currencies, the prices of our products in U.S. dollars also will fluctuate.  As a result, our return on the sale of our products may vary based on these fluctuations. Accordingly, we could experience unanticipated foreign currency gains or losses that could have a material impact on our results of operations.

 

We face various risks arising from the legal, regulatory and tax requirements imposed on our operations in the various countries in which we conduct our business operations.

 

We are subject to various risks relating to our compliance with existing and new laws, rules and regulations implemented in the countries in which we conduct our business operations, including anti-corruption, anti-bribery, tax, material composition of our products, such as restrictions on lead and other substances, environmental, safety and export control regulations. 

 

We are subject to the United States Foreign Corrupt Practices Act, or FCPA, which generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business or other benefits.  As a result of our foreign operations, we may have contact with persons who are considered foreign officials under the FCPA, putting us at an increased risk of potential FCPA violations.

 

Our failure or inability to comply with any of these laws, rules or regulations could subject us to civil or criminal penalties, other remedial measures or financial or regulatory obligations that may adversely affect our results of operations, financial position, reputation or ability to conduct business.  We may receive audit notices or other inquiries from governmental or regulatory authorities, and we may participate in voluntary disclosure programs, related to legal, regulatory or tax compliance matters.  These audits, inquiries or disclosure programs or any non-compliance with applicable laws, rules or regulations could result in our incurring material expense, including investigation costs, defense costs, assessments and penalties, or other consequences that could materially adversely affect our results of operations, financial position, reputation or ability to conduct business.

 

Failure to comply with federal, state and international laws and regulations relating to privacy or data protection, or the expansion of current or the enactment of new laws or regulations relating to privacy or data protection, could adversely affect our business and our financial condition.

 

A variety of federal, state and international laws and regulations govern the collection, use, retention, sharing and security of data.  Laws and regulations relating to privacy and data protection are evolving and subject to potentially differing interpretations.  These requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices.  As a result, our practices may not have complied or many not comply in the future with all such laws, regulations, requirements and obligations.  Any failure, or perceived failure, by us to comply with our posted privacy policies or with any federal, state or international privacy or data protection related laws, regulations, industry self-regulatory principles, industry standards or codes of conduct, regulatory guidance, orders to which we may be subject or other legal obligations relating to privacy or data protection could adversely affect our reputation and business, and may result in claims, proceedings or actions against us by governmental entities or others or other liabilities or require us to change our operations and/or cease using certain data sets.  Any such claim, proceeding or action could hurt our reputation and business, force us to incur significant expenses in defense of such proceedings, distract our management, increase our costs of doing business, result in a loss of customers and suppliers and may result in the imposition of monetary penalties.  We may also be contractually required to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any laws, regulations or other legal obligations relating to privacy or data protection or any inadvertent or unauthorized use or disclosure of data that we store or handle as part of operating our business.

 

Foreign data protection, privacy and other laws and regulations are often more restrictive than those in the United States.  The European Union, for example, traditionally has imposed stricter obligations under its laws and regulations relating to privacy and data protection than the United States.  Individual European Union member countries have discretion with respect to their interpretation and implementation of these laws and the penalties for breach and have their own regulators with differing attitudes towards enforcement, which results in varying privacy standards and enforcement risk from country to country. 

 

Because a large portion of our revenues are generated from a limited number of sizeable orders, our revenues and profits may vary widely from quarter to quarter and year to year.

 

A large portion of our revenues are generated from a limited number of sizeable orders that are placed by a small number of customers.  If the timing of these orders is delayed from one quarter to the next or from one year to the next, we may experience fluctuations in our quarterly and annual revenues and operating results.  Because our order terms vary from project to project, the application of the Company’s revenue recognition accounting policies to those orders can cause the timing for our recognition of revenue from an order to vary significantly between orders.  This may cause our revenues and operating results to vary significantly from quarter to quarter and year to year.

 

10


 

 

The amount of revenues that we earn in any given quarter may vary based in part on the timing of new vehicle programs in the global automotive industry.  In contrast, many of our operating expenses are fixed and will not vary from quarter to quarter.  As a result, our operating results may vary significantly from quarter to quarter and from year to year.

 

We could experience losses in connection with sales of our investments.

 

The Company has a long-term investment that was exchanged for preferred stock of a reinsurance company.  This investment has not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.  The issuer of this security is not obligated to register the security.  There is no regular trading market for these securities.  As a result, we will have limited ability to liquidate the investment.  This lack of liquidity, as well as negative changes in the financial condition of the issuer of the security and credit rating, has adversely impacted the value of the security.  In the event that the financial condition of the issuer should continue to deteriorate, we may have to record additional impairment charges relating to the security, which would negatively impact our stockholders’ equity and net income.  See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”. 

 

A significant amount of our assets represents goodwill and intangible assets, and our net income would be reduced if our goodwill or intangible assets become impaired.

 

As of June 30, 2015, we had $7.5 million of net goodwill and $6.7 million of net intangible assets.  The Company’s acquisition of Coord3 and NMS resulted in goodwill as the cost exceeded the fair value of the net tangible and identifiable intangible assets acquired.  Goodwill is subject to an impairment analysis at least annually based on the fair value of the reporting unit.  Intangible assets relate primarily to  trademarks, customer relationships, and software acquired and are subject to an impairment analysis whenever events or changes in circumstances exist that indicate that the carrying value of the intangible asset might not be recoverable.  If we determine that any intangible assets or goodwill is impaired, we would be required to take a related charge to earnings that could have a material adverse effect on our results of operations.

 

The trading price of our stock has been volatile.

 

The following factors may affect the market price of our Common Stock, which can vary widely over time:

 

announcements of new products by us;

announcements of new products by our competitors;

variations in our operating results;

market conditions in the electronic and sensing industry and/or automotive industry;

market conditions and stock prices in general; and

the volume of our Common Stock traded.

 

Because of the limited trading in our Common Stock, it may be difficult for shareholders to dispose of a large number of shares of our Common Stock in a short period of time or at then current prices.

 

Because of the limited number of shares of our Common Stock outstanding and the limited number of holders of our Common Stock, only a limited number of shares of our Common Stock trade on a daily basis.  This limited trading in our Common Stock makes it difficult to dispose of a large number of shares in a short period of time.  In addition, it is likely that the sale by a shareholder of a large number of shares of our Common Stock over an extended period would depress the price of our Common Stock.

 

As permitted under Michigan law, our directors are not liable to Perceptron for monetary damages resulting from their actions or inactions.

 

Under our articles of incorporation, as permitted under the Michigan Business Corporation Act, members of our Board of Directors are not liable for monetary damages for any negligent or grossly negligent action that the director takes, or for any negligent or grossly negligent failure of a director to take any action.  However, a director will remain liable for:

 

intentionally inflicting harm on the Company or its shareholders;

distributions that the director makes in violation of the Michigan Business Corporation Act; and

intentional criminal acts that the director commits.

 

However, we or our shareholders may seek an injunction, or other appropriate equitable relief, against a director.  Finally, liability may be imposed against members of the Board of Directors under the federal securities laws.

 

We are required to indemnify our officers and directors if they are involved in litigation as a result of their serving as officers or directors of the Company or as officers or directors of other corporations at our behest, which could reduce our profits and cash available to operate our business.

 

Our by-laws require us to indemnify our officers and directors.  We may be required to pay judgments, fines and expenses incurred by an officer or director, including reasonable attorneys’ fees, as a result of actions or proceedings in which such officers or directors are involved by reason of being or having been an officer or director of the Company or other corporations at our behest.

 

11


 

 

Funds paid in satisfaction of judgments, fines and expenses would reduce our profits and may be funds we need for the operation of our business and the development of products.  This could cause our stock price to drop.

 

A change in our effective tax rate can have a significant adverse impact on our business.  

 

A number of factors may adversely impact our future effective tax rates, such as the future valuation of our deferred tax assets which are predominantly in the United States and are dependent on our ability to generate sufficient future taxable income in the United States; the geographic composition of our pre-tax income and the various tax rates in those countries; changes in available tax credits, changes in tax laws and rates, and the repatriation of earnings from outside the United States for which we have not previously provided for United States taxes.  A change in our effective tax rate can adversely impact our net income.

 

We may have additional tax liabilities, which could adversely affect our results of operations.

We are subject to income taxes in the United States and foreign jurisdictions, including Germany, Italy and China.  In determining our provisions for income taxes, we make judgments regarding various tax positions reported on our tax returns.  As a result, there are transactions and calculations where the ultimate tax determination is uncertain.  Our tax returns are regularly under audit by tax authorities.  Because of these uncertain tax positions, the final determination of these tax audits could be materially different than is reflected in our financial statements and could have a material adverse effect on our provisions for income taxes, results of operations, or cash flows.

 

Our profits could be reduced as a result of our compliance with SEC rules relating to our internal control over financial reporting.

 

Current SEC rules require our independent registered public accounting firm auditing our financial statements to provide an attestation report on our internal control over financial reporting in our annual reports.

 

For the fiscal years 2009 through 2013, the Company was not required to have an attestation report from our independent registered public accounting firm on our internal controls.  Because the Company’s common stock held by non-affiliates exceeded $75 million at December 31, 2013, we have to comply with these requirements in fiscal year 2014 and thereafter.  We may have to expend significant resources in future fiscal years in connection with ongoing compliance with these requirements, which could adversely affect our profitability.

 

If management is not able to provide a positive report on our internal control over financial reporting, and our independent registered public accounting firm is not able to provide an unqualified opinion regarding our internal control over financial reporting, shareholders and others may lose confidence in our financial statements, which could cause our stock price to drop.

 

Because of our relatively small size, we are unable to have financial personnel in positions that are devoted solely to internal controls over financial reporting.  However, management has had a continuous program in effect to evaluate and test internal controls through the utilization of outside, independent accountants.

 

In fiscal 2008 through fiscal 2015, management provided positive reports on our internal control over financial reporting and we received in fiscal 2008, 2014 and 2015 an unqualified opinion from our independent registered public accounting firm regarding our internal control over financial reporting.  In fiscal 2009 through fiscal 2013, our auditors were not required to give an opinion on our internal control over financial reporting following SEC rules for companies that had a market value of common stock held by non-affiliates that was less than $75 million as of the companies’ second fiscal quarter in any given fiscal year. The Company’s Common Stock held by non-affiliates exceeded $75 million at December 31, 2013.  Accordingly, we have complied with these requirements beginning in fiscal year 2014. 

 

In fiscal 2016, we will have to begin to comply with these requirements for our newly acquired subsidiaries, Coord3 and NMS, which could result in additional expenses if this involves more effort or outside resources than is currently expected.

 

There can be no positive assurance that, in the future, management will provide a positive report on our internal control over financial reporting.  In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner, investors and others may lose confidence in the reliability of our financial statements.  This could cause our stock price to drop.

 

Our operations could be disrupted and our profits reduced as a result of difficulties encountered in the implementation of a new global enterprise resource planning (“ERP”) system.

 

The Company is in the process of implementing a global ERP system that is planned to be completed in phases.  ERP implementations are complex and time-consuming projects.  The Company’s ERP implementation requires substantial internal resources and involves expenditures for software and external consulting activities.   During the conversion period, the Company may encounter difficulties that could disrupt our operations, including the ability to timely ship customer orders, determine inventory requirements, manage the supply chain, and otherwise adequately service customers.  If these difficulties were encountered, the implementation could require significantly more management time and higher implementation costs than currently estimated and our profitability could be adversely affected.

 

If the subcontractors we rely on for component parts or products delay deliveries or fail to deliver parts or products meeting our requirements, we may not be able to deliver products to our customers in a timely fashion and our revenues and profits could be reduced.

 

We rely on subcontractors for certain components of our products, including outside subcontracting assembly houses to produce the circuit boards that we use in our products.  As a result, we have limited control over the quality and the delivery schedules of components or products

12


 

 

purchased from third parties.  In addition, we purchase a number of component parts from single source suppliers.  If our supplies of component parts or products meeting our requirements are significantly delayed or interrupted, or our subcontractors choose to terminate their supply contracts, we may not be able to deliver products to our customers in a timely fashion.  This could result in a reduction in revenues and profits for these periods.  The termination of or material change in the purchase terms of any single source supplier could have a similar impact on us.  It is also possible, if our delay in delivering products to our customer is too long, the customer could cancel its order, resulting in a permanent loss of revenue and profit from that sale.  Although we have not experienced significant supply shortages from single source suppliers in recent years, from time to time, we have experienced significant delays in the receipt of certain components.

 

Finally, although we believe that alternative suppliers are available, difficulties or delays may arise if we shift manufacturing capacity to new suppliers.

 

New regulations related to conflict minerals may adversely affect us.

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires us to disclose whether our products contain “conflict minerals” mined from the Democratic Republic of Congo and adjoining countries (“DRC”), whether or not the components of our products are manufactured by us or third parties.  In 2014, to meet the initial disclosure requirements, we began due diligence to determine the sources of the conflict minerals in our products.  Because our supply chain is very complex, we may not be able to verify all the metals used in our products or the origin of all metals used in our products.  The pricing, sourcing and availability of conflict minerals used in the manufacture of our products could be impacted by these new requirements.  There are additional costs associated with complying with the disclosure requirements, such as costs related to our due diligence to determine the source of any conflict minerals used in our products.  We may not be able to sufficiently verify the origins of all conflict metals used in our products and confirm that they are DRC conflict mineral free, which may adversely affect our reputations with our customers and shareholders. 

 

Our failure to accurately forecast customer demand could result in excess or obsolete inventory and related write-downs or charges.

From time to time, we may strategically enter into non-cancelable commitments with vendors to purchase materials for our products in advance of demand to take advantage of favorable pricing or address concerns about long lead times for components used in our products that are purchased from third parties.  Our failure to accurately forecast customer demand has led to, and may again in the future lead to, an increased risk of excess or obsolete inventory. This could result in write-downs of inventory and other related charges that would negatively affect our results of operations.

The occurrence of business system disruptions or information security breaches could adversely affect our business.

To our knowledge, we have not been subject to information security breaches; however, many other companies have experienced such breaches because of illegal hacking, computer viruses, or acts of vandalism or terrorism.  While we have implemented security measures to protect against such breaches, it is possible that our security measures may not detect or prevent such breaches.  Any such compromise to our information security could result in an interruption in our operations, the unauthorized publication of our confidential business or proprietary information, the unauthorized release of customer, vendor, or employee data, the violation of privacy or other laws, and the exposure to litigation, any of which could harm our business and operating results.  A disruption to our management information systems could cause significant disruption to our business, including our ability to receive and ship orders, receive and process payments and timely report our financial results.  Any disruption occurring with these systems may have a material adverse effect on our results of operations.

 

The Board of Directors has the right to issue up to 1,000,000 shares of preferred stock without further action by shareholders.  The issuance of those shares could cause the market price of our Common Stock to drop significantly and could be used to prevent or frustrate shareholders’ attempts to replace or remove current management.

 

Although no preferred stock currently is outstanding, we are authorized to issue up to 1,000,000 shares of preferred stock.  Preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by shareholders, and may include voting rights (including the right to vote as a series on particular matters), the dividends payable thereon, liquidation payments, preferences as to dividends and liquidation, conversion rights and redemption rights.  In the event that preferred stock is issued, the rights of the common stockholders may be adversely affected.  This could result in a reduction in the value of our Common Stock.

 

The preferred stock could be issued to discourage, delay or prevent a change in control of the Company.  This may be beneficial to our management or Board of Directors in a hostile tender offer or other takeover attempt and may have an adverse impact on shareholders who may want to participate in the tender offer or who favor the takeover attempt.

 

Our rights plan could be used to discourage hostile tender offers.

 

We maintain a rights plan.  Under the plan, if any person acquires 20% or more of our outstanding Common Stock, our shareholders, other than the acquirer, will have the right to purchase shares of our Common Stock at half their market price.  The rights plan discourages potential acquirers from initiating tender offers for our Common Stock without the approval of the Board of Directors.  This may be beneficial to our management or Board of Directors in a hostile tender offer or other takeover attempt and may have an adverse impact on shareholders who may want to participate in the tender offer or who favor the takeover attempt.

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ITEM 1B:UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 2:PROPERTIES

 

Perceptron’s principal domestic facility consists of a 70,000 square foot building located in Plymouth, Michigan, owned by the Company.  In addition, the Company leases a 3,100 square meter facility in Torino, Italy, a 1,576 square meter facility in Munich, Germany, a 209 square meter facility in Prague, Czech Republic, and leases office space in Voisins le Bretonneux, France; Sao Paulo, Brazil; Tokyo, Japan; Singapore; Shanghai and Beijing, China; and Chennai, India.  The Company believes that its current facilities are sufficient to accommodate its requirements through fiscal 2016.

 

ITEM 3:LEGAL PROCEEDINGS

 

The Company is a party to a civil suit filed by 3CEMS, a Cayman Islands and People’s Republic of China corporation, in the U.S. District Court for the Eastern District of Michigan and served on the Company on or about January 7, 2015.  The suit alleges that the Company breached its contractual obligations by failing to pay for component parts to be used to manufacture optical video scopes for the Company’s discontinued Commercial Products Business Unit.  3CEMS alleged that it purchased the component parts in advance of the receipt of orders from the Company based upon instructions they claimed to have received from the Company.  The suit alleged damages of not less than $4.0 million.  The Company intends to vigorously defend against 3CEMS’ claims.  See Note 6 of the Notes to the Consolidated Financial Statements, “Contingencies”.

 

ITEM 4:MINE SAFETY DISCLOSURES

 

Not applicable.

 

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PART II

 

ITEM 5:MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER

PURCHASES OF EQUITY SECURITIES

 

Perceptron’s Common Stock is traded on The NASDAQ Stock Market’s Global Market under the symbol “PRCP”.  The following table shows the reported high and low sales prices of Perceptron’s Common Stock for fiscal 2015 and 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prices

Fiscal 2015

Low

 

High

Quarter through September 30, 2014

$

9.61 

 

$

13.46 

Quarter through December 31, 2014

$

8.34 

 

$

10.90 

Quarter through March 31, 2015

$

9.73 

 

$

13.55 

Quarter through June 30, 2015

$

9.25 

 

$

14.21 

 

 

 

 

 

 

Fiscal 2014

 

 

 

Quarter through September 30, 2013

$

6.86 

 

$

11.73 

Quarter through December 31, 2013

$

9.01 

 

$

14.89 

Quarter through March 31, 2014

$

11.53 

 

$

18.24 

Quarter through June 30, 2014

$

10.00 

 

$

13.60 

 

In fiscal 2015, the Board of Directors elected to not pay a dividend and to end our dividend program for the foreseeable future. Based upon a review of its capital allocations, the Company believes it is better to invest in its growth and diversification strategy rather than a dividend strategy.  On May 21, 2014, the Board of Directors declared an annual dividend of fifteen cents ($0.15) per share of Common Stock.  The annual dividend was paid on June 26, 2014, to shareholders of record at the close of business on June 5, 2014.  See “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources” – for restrictions on the Company’s ability to pay dividends in the Company’s Amended and Restated Credit Agreement.

 

The approximate number of shareholders of record on September 8, 2015, was 153.

 

The information pertaining to the securities the Company has authorized for issuance under equity plans is hereby incorporated by reference to Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters – Equity Compensation Plan Information”.  For more information about the Company’s equity compensation plans, see Note 9 of the Notes to the Consolidated Financial Statements, “Stock Based Compensation”, included in Item 8 of this report.

 

STOCK PRICE PERFORMANCE GRAPH

 

The following graph compares the cumulative 5-year total return attained by shareholders on the Company’s Common Stock relative to the cumulative total returns of The Nasdaq Stock Market (U.S.) Index (the “Nasdaq U.S. Index”) and a peer group of companies consisting of all U.S. exchange traded companies with standard industrial classification codes 3823 (Industrial Instruments for Measurement, Display, and Control of Process Variables; and Related Products), 3827 (Optical Instruments and Lenses) and 3829 (Measuring and Controlling Devices) (the “Peer Group Index”).  The returns of each company in the Peer Group Index have been weighted according to their respective stock market capitalization.  The graph assumes that the value of the investment in the Company’s Common Stock, the Peer Group Index and the Nasdaq U.S. Index was $100 on June 30, 2010 and that all dividends were reinvested.

15


 

 

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Perceptron, Inc., the Nasdaq U.S. Index,

and a Peer Group Index

 

Picture 1

 

* $100 invested on June 30, 2010 in stock or index, including reinvestment of dividends. Fiscal year ending June 30.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CUMULATIVE TOTAL RETURN

 

6/30/2010

 

6/30/2011

 

6/30/2012

 

6/30/2013

 

6/30/2014

 

6/30/2015

Perceptron, Inc.

100.00 

 

144.55 

 

125.00 

 

187.14 

 

308.13 

 

258.61 

Nasdaq U.S. Index

100.00 

 

133.27 

 

145.10 

 

170.81 

 

223.11 

 

255.91 

Peer Group Index

100.00 

 

148.89 

 

138.97 

 

179.45 

 

236.66 

 

251.61 

 

The graph displayed above is presented in accordance with applicable legal requirements.  Shareholders are cautioned against drawing any conclusions from the data contained in the graph, as past results are not necessarily indicative of future performance.  The graph in no way reflects the Company’s forecast of future financial performance.

 

The Peer Group consists of the following companies: Schmitt Industries, Inc. (SMIT), Esterline Technologies Corp. (ESL), MKS Instruments, Inc. (MKSI), Sensata Technologies Holding NV (ST), Hurco Companies Inc. (HURC), Abaxis, Inc. (ABAX), II-VI Inc. (IIVI), Electro-Sensors, Inc. (ELSE), KLA–Tencor Corp. (KLAC), Orbotech Ltd. (ORBK), Mocon Inc. (MOCO), Thermo Fisher Scientific, Inc. (TMO), Nova Measuring Instruments Ltd.  (NVMI), Sypris Solutions Inc. (SYPR), Camtek, Ltd (CAMT), Mesa Laboratories Inc. (MLAB), Rudolph Technologies Inc. (RTEC), Cognex Corp. (CGNX), Faro Technologies Inc. (FARO), Clearsign Combustion Corp. (CLIR), Keysight Technologies, Inc. (KEYS), Geospace Technologies Corporation (GEOS), Rockwell Automation Inc. (ROK), Cubic Corporation (CUB), Landauer Inc. (LDR), Trimble Navigation Limited (TRMB), Roper Technologies Inc. (ROP), MTS Systems Corporation (MTSC), CyberOptics Corp. (CYBE), Sequenom Inc. (SQNM), Danaher Corp. (DHR), Image Sensing Systems, Inc. (ISNS) and Nanometrics Incorporated (NANO).

 

The following companies that were included in the Peer Group used in preparing the Stock Price Performance Graph contained in the Company’s 2014 Form 10-K were excluded from the Peer Group used in preparing the graph displayed above because they are no longer traded on a U.S. exchange:  Measurement Specialties Inc. (MEAS), Metal Storm Limited (MTSXY) and Sutron Corporation (STRN).

16


 

 

ITEM 6:SELECTED FINANCIAL DATA

 

The selected statement of operations and balance sheet data presented below are derived from the Company’s consolidated financial statements and should be read in conjunction with the Company’s consolidated financial statements and notes thereto and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Years Ended

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Operations Data

2015

 

2014

 

2013

 

2012

 

2011

 

 

 

 

 

(In Thousands, Except Per Share Amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

74,405 

 

$

59,612 

 

$

60,886 

 

$

57,379 

 

$

50,847 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

28,271 

 

 

24,849 

 

 

28,120 

 

 

24,170 

 

 

22,622 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(37)

 

 

2,942 

 

 

6,866 

 

 

5,596 

 

 

3,386 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

before income taxes

 

(835)

 

 

3,002 

 

 

7,531 

 

 

5,375 

 

 

4,103 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

(461)

 

 

2,427 

 

 

6,130 

 

 

2,827 

 

 

2,650 

 

Discontinued operations

 

 -

 

 

 -

 

 

80 

 

 

(3,160)

 

 

(824)

 

Net income (loss)

 

(461)

 

 

2,427 

 

 

6,210 

 

 

(333)

 

 

1,826 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per basic share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

(0.05)

 

$

0.27 

 

$

0.72 

 

$

0.34 

 

$

0.30 

 

Discontinued operations

 

 -

 

 

 -

 

 

0.01 

 

 

(0.38)

 

 

(0.09)

 

Net income (loss)

$

(0.05)

 

$

0.27 

 

$

0.73 

 

$

(0.04)

 

$

0.21 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per diluted share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

(0.05)

 

$

0.26 

 

$

0.71 

 

$

0.34 

 

$

0.29 

 

Discontinued operations

 

 -

 

 

 -

 

 

0.01 

 

 

(0.38)

 

 

(0.09)

 

Net income (loss)

$

(0.05)

 

$

0.26 

 

$

0.72 

 

$

(0.04)

 

$

0.20 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

9,252 

 

 

8,983 

 

 

8,512 

 

 

8,433 

 

 

8,879 

 

Diluted

 

9,252 

 

 

9,210 

 

 

8,588 

 

 

8,433 

 

 

9,050 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30,

Balance Sheet Data

2015

 

2014

 

2013

 

2012

 

2011

 

 

 

 

 

(In Thousands, Except Per Share Amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

$

32,978 

 

$

46,454 

 

$

41,294 

 

$

35,923 

 

$

40,349 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

94,938 

 

 

80,066 

 

 

73,639 

 

 

66,259 

 

 

69,301 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term taxes payable

 

3,056 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

60,792 

 

 

62,780 

 

 

56,895 

 

 

52,259 

 

 

55,480 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Annual dividend declared per common share

$

 -

 

$

0.15 

 

$

0.15 

 

$

 -

 

$

 -

 

Special dividend declared per common share

 

 -

 

 

 -

 

 

0.25 

 

 

 -

 

 

 -

 

Total dividends declared per common share

$

 -

 

$

0.15 

 

$

0.40 

 

$

 -

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17


 

 

ITEM 7:MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

SAFE HARBOR STATEMENT

 

Certain statements in this report, including statements made in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, may be “forward-looking statements” within the meaning of the Securities Exchange Act of 1934, including the Company’s expectation as to its fiscal year 2016 and future results, operating data, new order bookings, revenue, expenses, net income and backlog levels, trends affecting its future revenue levels, the rate of new orders, the timing of revenue and net income increases from new products which we have recently released or have not yet released, the timing of the introduction of new products, and our ability to fund our fiscal year 2016 and future cash flow requirements.  We may also make forward-looking statements in our press releases or other public or shareholder communications.  Whenever possible, we have identified these forward-looking statements by words such as “will,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “prospects,” “outlook” or similar expressions.  We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of our forward-looking statements.  While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which speak only as of the date made.  Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different.  Factors that might cause such a difference include, without limitation, the risks and uncertainties discussed from time to time in our periodic reports filed with the Securities and Exchange Commission, including those listed in “Item 1A – Risk Factors” of this report.  Except as required by applicable law, we do not undertake, and expressly disclaim, any obligation to publicly update or alter our statements whether as a result of new information, events or circumstances occurring after the date of this report or otherwise. 

 

Overview

 

Perceptron, Inc. (“Perceptron” or the “Company”) develops, produces and sells a comprehensive range of industrial metrology products and solutions to manufacturing organizations for dimensional gauging, dimensional inspection and 3D scanning.  The Company’s primary operations are in North America, Europe and Asia.  While the Company has one operating segment, its products are divided into In-Line Measurement, Off-Line Measurement and 3D Scanning Solutions Products.  In-Line Measurement Solutions consist of engineered metrology systems for industrial automated process control and assembly using fixed and robot mounted laser scanners.  Off-Line Measurement Solutions consist of tailored metrology products for industrial gauging and dimensional inspection using standalone robot mounted laser scanners and Coordinate Measuring Machines (“CMM”).  3D Scanning Solutions consist of laser scanner products that target the digitizing, reverse engineering, inspection and original equipment manufacturers wheel alignment markets.  The Company also provides a number of Value Added Services including service, support, training, calibration services, and spare parts.  The largest market served by the Company is the automotive industry.

 

New vehicle tooling programs represent the most important selling opportunity for the Company’s In-Line and Near-Line Measurement Solutions Products, which consist primarily of automotive-related sales.  The number and timing of new vehicle tooling programs varies in accordance with individual automotive manufacturers’ plans.  The existing installed base of In-Line and Near-Line Measurement Solutions Products also provides a continuous revenue stream in the form of system additions, upgrades, modifications, and Value Added Services such as customer training and support.  The Company’s 3D Scanning products and newly acquired CMM products are used by and targeted to a wide variety of industrial customers, with the automotive industry representing the largest market for industrial metrology products.  The Company has developed a number of new products in the past year for the 3D Scanning and CMM markets.  The marketing and sales of these new products is in the early stages and the acceptance and adoption rate in the market will be better understood over the next several quarters.

 

In fiscal 2015 and 2014, the Company added new members to its management team and put in place a strategic plan designed to expand revenues and increase shareholder value over the longer term.  Because of a tremendous effort by the Company’s leadership and global teams, the Company made significant progress in fiscal 2015 in implementing its strategic plan.  The Company completed its first acquisitions in over 15 years, introduced more new, market-leading products than in any similar historical period, launched a global ERP system implementation and diversified the Company’s business in a meaningful fashion with approximately 20% of future full-year revenue expected to be derived from non-automotive sector customers.  The Company sees these results as tangible evidence that the strategic plan put in place in fiscal 2014 is working.

 

On January 29, 2015, the Company acquired all of the share capital of Next Metrology Software s.r.o. (“NMS”) for total cash consideration of $2.3 million, and deferred payments of $228,000 payable 12 months from closing.  NMS is a Czech Republic company that develops CMM operating software.  On February 27, 2015, the Company acquired all of the share capital of Coord3 s.r.l. (“Coord3”), a wholly owned subsidiary of Coord3 Industries s.r.l., for $1.9 million in cash and deferred payments of $338,000 payable 18 months from closing.  Coord3 is an Italian company that designs and manufactures a full range of coordinate measuring machines.  The purchase transactions are denominated in euros and have been converted to U.S dollars reflecting actual rates on the day of the closing.  See “Liquidity and Capital Resources” below and Note 2 to the Consolidated Financial Statements, “Acquisitions”, contained in this Annual Report on Form 10-K for further information regarding these acquisitions.

 

On August 30, 2012, the Company completed the sale of substantially all of the assets of its Commercial Products Business Unit (“CBU”).    CBU’s financial results are reported as a discontinued operation and prior year results are presented on a consistent basis.  See Note 12 of the Notes to the Consolidated Financial Statements, “Discontinued Operations” for further information regarding the sale of the CBU assets.

18


 

 

 

Results of Operations

 

Fiscal Year Ended June 30, 2015, Compared to Fiscal Year Ended June 30, 2014

 

 

Overview – Fiscal 2015 was a transition year that included the acquisition of two companies during the third quarter of fiscal 2015.  As a result, fiscal 2015 had expenditures for large, one-time acquisition-related costs and only a partial year of operations of the two acquired companies.    The Company reported a net loss of $0.5 million, or $0.05 per diluted share, for the fiscal year ended June 30, 2015 compared with net income of $2.4 million, or $0.26 per diluted share, for the fiscal year ended June 30, 2014.  Specific line item results are described below.

 

Bookings – Bookings represent new orders received from customers.  During fiscal 2015, the Company had the highest recorded bookings from its continuing operations, with bookings totaling $69.1 million.  This compares with $68.5 million in fiscal 2014, the second highest year of bookings from continuing operations in the Company’s history.  For comparability to the Company’s current continuing operations, prior period bookings have been adjusted to exclude bookings for operations that have been discontinued.  It should be noted that the Company’s level of new orders fluctuates from period to period and the amount of new order bookings during any particular period is not necessarily indicative of the future operating performance of the Company.  The following table sets forth comparison data for the Company’s bookings by geographic location.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bookings (by location)

 

 

 

 

 

 

 

(in millions)

2015

2014

Increase/(Decrease)

Americas

 

$

28.5 

 

41.2% 

 

 

$

20.4 

 

29.8% 

 

 

$

8.1 
39.7% 

 

Europe

 

 

22.9 

 

33.1% 

 

 

 

31.9 

 

46.6% 

 

 

 

(9.0)

(28.2)%

 

Asia

 

 

17.7 

 

25.7% 

 

 

 

16.2 

 

23.6% 

 

 

 

1.5 
9.3% 

 

Totals

 

$

69.1 

 

100.0% 

 

 

$

68.5 

 

100.0% 

 

 

$

0.6 
0.9% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The record bookings level this year was achieved despite a $3.5 million reduction in bookings as a result of re-valuing the European backlog to reflect the lower Euro exchange rate in fiscal 2015 compared to fiscal 2014.  Bookings for fiscal 2015 included $4.6 million for CMM products related to the Company’s newly acquired Coord3 brand.   On a geographic basis, the increase in bookings for the Americas and Asia represented higher orders for the Company’s Measurement Solutions Products.  Asia also had its second year in a row of record bookings.  Bookings in Europe were severely impacted by the lower Euro exchange rate this year versus fiscal 2014.  Europe’s $9.0 million decrease from the record level set in fiscal 2014 was primarily due to lower orders for Measurement Solutions Products that were partially offset by $3.8 million in orders from the Company’s CMM product line.  

 

Backlog  Backlog represents orders or bookings received by the Company that have not yet been filled.  The Company's backlog was $38.9 million at June 30, 2015 and was the second highest fiscal year ending backlog for the Company.  This compares with a backlog of $39.3 million at June 30, 2014, which was a record fiscal year ending backlog for the Company.  The level of backlog during any particular period is not necessarily indicative of the future operating performance of the Company.  Most of the backlog is subject to cancellation by the customer.  The Company generally expects to be able to fill substantially all of the orders in backlog during the following twelve months.  The following table sets forth comparison data for the Company’s backlog by geographic location.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Backlog (by location)

 

 

 

 

 

 

 

(in millions)

2015

2014

Increase/(Decrease)

Americas

 

$

10.4 

 

26.7% 

 

 

$

10.3 

 

26.2% 

 

 

$

0.1 
1.0% 

 

Europe

 

 

15.4 

 

39.6% 

 

 

 

17.3 

 

44.0% 

 

 

 

(1.9)

(11.0)%

 

Asia

 

 

13.1 

 

33.7% 

 

 

 

11.7 

 

29.8% 

 

 

 

1.4 
12.0% 

 

Totals

 

$

38.9 

 

100.0% 

 

 

$

39.3 

 

100.0% 

 

 

$

(0.4)

(1.0)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The current year ending backlog was down slightly from the same period a year ago.  The backlog of new CMM product orders was $3.8 million and offset a decrease in other Measurement Solution  Products of $3.7 million.  Lower Value Added Services and other 3D scanning products also contributed to the decrease.    On a geographic basis, Asia’s backlog increased as a result of higher orders for Measurement Solution Products.  Europe’s backlog decreased primarily as a result of the re-valuation effect of the lower Euro in fiscal 2015 versus fiscal 2014, which reduced orders in the European backlog by approximately $3.5 million.  Partially offsetting the decrease in Europe were higher orders for CMM products.

 

19


 

 

Sales – Net sales of $74.4 million for fiscal 2015 increased $14.8 million, or 24.8%, compared with the same period a year ago.  The following table sets forth comparison data for the Company’s net sales by geographic location.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales (by location)

 

 

 

 

 

(in millions)

2015

2014

Increase/(Decrease)

Americas

 

$

28.4 

 

38.2% 

 

 

$

18.3 

 

30.7% 

 

 

$

10.1 
55.2% 

 

Europe

 

 

29.7 

 

39.9% 

 

 

 

27.8 

 

46.6% 

 

 

 

1.9 
6.8% 

 

Asia

 

 

16.3 

 

21.9% 

 

 

 

13.5 

 

22.7% 

 

 

 

2.8 
20.7% 

 

Totals

 

$

74.4 

 

100.0% 

 

 

$

59.6 

 

100.0% 

 

 

$

14.8 
24.8% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New CMM product sales represented $5.8 million of the $14.8 million improvement over fiscal 2014.  The balance of $9.0 million came from strong global growth in the Company’s other products.  Sales in fiscal 2015 also increased in all geographic locations over fiscal 2014.  The sales increase in the Americas and Asia was primarily from higher sales of Measurement Solutions Products.  Partially offsetting increased sales for the new CMM products in Europe were lower sales of Measurement Solutions Products.  The weaker Euro exchange rate in fiscal 2015 compared to fiscal 2014 had the effect of decreasing European sales by approximately $3.4 million. 

 

Gross Profit – Gross profit was $28.3 million, or 38.0% of sales, in the fiscal year ended June 30, 2015, as compared to $24.8 million, or 41.7% of sales, in the fiscal year ended June 30, 2014.    The lower gross margin percent this year versus last year included the effect of the lower Euro exchange rate, which reduced gross profit approximately $1.7 million dollars.  In fiscal 2015, the Company also had additional costs related to an accrual of $536,000 relating to employment status and withholding in a foreign jurisdiction.  Product mix also affected the comparison as the new CMM product sales in fiscal 2015 are at a lower gross margin percentage than the Company’s other products.

 

Selling, General and Administrative (SG&A) Expenses – SG&A expenses of $20.4 million in fiscal 2015 were $5.2 million higher than SG&A costs in fiscal 2014.    The increase represented one-time costs totaling $1.6 million for legal and consulting fees related to the acquisition of Coord3 and NMS by the Company in the third quarter of fiscal 2015.  Also contributing to the increase was $1.4 million related to SG&A activities of these two new businesses since they were acquired.  Costs related to implementing the Company’s new ERP system in the United States were $500,000 and will continue into fiscal 2016 as the new ERP system is rolled out globally.  The balance of the cost increase related to higher professional services for legal and consulting and higher personnel related costs.  The weaker Euro exchange rate in fiscal 2015 compared to fiscal 2014 decreased costs in fiscal 2015 by approximately $700,000. 

 

Engineering, Research and Development (R&D) Expenses  Engineering and R&D expenses were $7.9 million in fiscal 2015, compared with $6.7 million in fiscal 2014.  The $1.2 million increase in fiscal 2015 primarily related to a $500,000 for higher engineering materials in support of product development efforts, $250,000 related to activities of Coord3 and NMS and the balance of the increase related to higher salary, bonus and other personnel related costs.

 

Interest Income, net  Net interest income was $138,000 in fiscal 2015, compared with $188,000 in fiscal 2014.  The decrease in interest income for fiscal year 2015 compared to fiscal 2014 was principally due to higher interest expense related to debt acquired as part of the acquisition of Coord3.  Also contributing to the lower interest income was lower average invested cash balances in 2015 compared to fiscal 2014.

 

Foreign Currency Gain (Loss) – There was a net foreign currency loss of $1,186,000 in fiscal 2015 compared with a loss of $127,000 in fiscal 2014.  The loss in fiscal 2015 primarily related to the Japanese Yen, Brazilian Real and the Euro.  The loss in fiscal 2014 related primarily to the Yen and Euro.  Foreign currency effects are primarily due to the difference in foreign exchange rates between the time the Company’s foreign subsidiaries receive material or services denominated in U.S. dollars and when funds are converted to U.S. dollars to pay for the material or services received. 

 

Income Tax Expense – The effective income tax rate in fiscal 2015 was 44.7% compared to 19.2% in fiscal 2014.  Both fiscal 2015 and 2014 reflected the effect of the mix of pre-tax income and loss across the Company’s tax jurisdictions and their respective tax rates.  Affecting the unusual effective tax rate in the fiscal 2014 year was the fact that the United States had a pre-tax loss at an effective tax rate of 40.8% that was partially offset by foreign pre-tax income at a lower effective tax rate of 28.1%.  See Note 10 of the Notes to the Consolidated Financial Statements, “Income Taxes”.

 

 

Results of Operations

 

Fiscal Year Ended June 30, 2014, Compared to Fiscal Year Ended June 30, 2013

 

Overview – The Company reported net income of $2.4 million, or $0.26 per diluted share, for the fiscal year ended June 30, 2014 compared with a net income of $6.2 million, or $0.72 per diluted share, for the fiscal year ended June 30, 2013.  Income from continuing operations was $2.4 million, or $0.26 per diluted share, in the current fiscal year compared with $6.1 million, or $0.71 per diluted share, for the prior fiscal year.  Specific line item results are described below.

 

Bookings – Bookings represent new orders received from customers.  During fiscal 2014 the Company had its highest year of bookings at that time from its continuing operations with $68.5 million.  This compares with $61.1 million in fiscal 2013, the third highest year of

20


 

 

bookings from continuing operations in the Company’s history.  For comparability to the Company’s current continuing operations, prior period bookings have been adjusted to exclude bookings for operations that have been discontinued.  It should be noted that the Company’s level of new orders fluctuates from period to period and the amount of new order bookings during any particular period is not necessarily indicative of the future operating performance of the Company.  The following table sets forth comparison data for the Company’s bookings by geographic location.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bookings (by location)

 

 

 

 

 

 

 

(in millions)

2014

2013

Increase/(Decrease)

Americas

 

$

20.4 

 

29.8% 

 

 

$

18.2 

 

29.8% 

 

 

$

2.2 
12.1% 

 

Europe

 

 

31.9 

 

46.6% 

 

 

 

29.3 

 

47.9% 

 

 

 

2.6 
8.9% 

 

Asia

 

 

16.2 

 

23.6% 

 

 

 

13.6 

 

22.3% 

 

 

 

2.6 
19.1% 

 

Totals

 

$

68.5 

 

100.0% 

 

 

$

61.1 

 

100.0% 

 

 

$

7.4 
12.1% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The $7.4 million bookings increase from fiscal 2013 was primarily due to an $8.2 million increase in orders for Measurement Solutions Products, partially offset by a $1.1 million decrease in orders for 3D Scanning Products.  On a geographic basis, booking records were set in both Europe and Asia.  Increased orders for Measurement Solutions products in Asia, Europe and the Americas were partially offset by a decrease in orders for 3D Scanning Products, primarily in Asia. 

 

Backlog  Backlog represents orders or bookings received by the Company that have not yet been filled.  The Company's backlog was $39.3 million at June 30, 2014 compared with $30.4 million at June 30, 2013.  The level of backlog during any particular period is not necessarily indicative of the future operating performance of the Company.  Most of the backlog is subject to cancellation by the customer.  The Company generally expects to be able to fill substantially all of the orders in backlog during the following twelve months.  The following table sets forth comparison data for the Company’s backlog by geographic location.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Backlog (by location)

 

 

 

 

 

 

 

(in millions)

2014

2013

Increase/(Decrease)

Americas

 

$

10.3 

 

26.2% 

 

 

$

8.2 

 

27.0% 

 

 

$

2.1 
25.6% 

 

Europe

 

 

17.3 

 

44.0% 

 

 

 

13.1 

 

43.1% 

 

 

 

4.2 
32.1% 

 

Asia

 

 

11.7 

 

29.8% 

 

 

 

9.1 

 

29.9% 

 

 

 

2.6 
28.6% 

 

Totals

 

$

39.3 

 

100.0% 

 

 

$

30.4 

 

100.0% 

 

 

$

8.9 
29.3% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The $39.3 million backlog at June 30, 2014 represented a record year ending backlog for the Company which followed a previous record year ending backlog at June 30, 2013 of $30.4 million.  The increased backlog of $8.9 million was primarily related to $8.8 million in backlog related to the Company’s Measurement Solution Products.  The Company’s backlog increased in all geographic locations.  Europe’s backlog also increased approximately $780,000 due to the valuation effect of the higher Euro at June 30, 2014 than at June 30, 2013.

 

Sales – Net sales of $59.6 million for fiscal 2014 decreased $1.3 million, or 2.1%, compared with the same period a year ago and represented a record sales level for the Company’s continuing operations.  The following tables set forth comparison data for the Company’s net sales by geographic location.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales (by location)

 

 

 

 

 

(in millions)

2014

2013

Increase/(Decrease)

Americas

 

$

18.3 

 

30.7% 

 

 

$

22.2 

 

36.4% 

 

 

$

(3.9)

(17.6)%

 

Europe

 

 

27.8 

 

46.6% 

 

 

 

26.1 

 

42.9% 

 

 

 

1.7 
6.5% 

 

Asia

 

 

13.5 

 

22.7% 

 

 

 

12.6 

 

20.7% 

 

 

 

0.9 
7.1% 

 

Totals

 

$

59.6 

 

100.0% 

 

 

$

60.9 

 

100.0% 

 

 

$

(1.3)

(2.1)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The sales decrease of $1.3 million was primarily due to lower sales of 3D Scanning Products and to a lesser extent lower Measurement Solution Products.  Also impacting the year-over-year comparison was that fiscal 2013 had been a record sales level for the Company’s continuing operations.  On a geographic basis, sales in the Americas decreased $3.9 million from the prior year, primarily related to lower sales of Measurement Solutions Products.  Higher sales in Europe of $1.7 million over the prior year were primarily the result of higher sales of Measurement Solutions Products.  The stronger Euro exchange rate in fiscal 2014 compared to fiscal 2013 had the effect of increasing European sales by approximately $1.4 million.  Sales in Asia increased $900,000 primarily due to an increase in sales of Measurement Solutions Products of $2.0 million that was partially offset by a decrease in sales of 3D Scanning Products of $1.1 million.

 

21


 

 

Gross Profit – Gross profit was $24.8 million, or 41.7% of sales, in the fiscal year ended June 30, 2014, as compared to $28.1 million, or 46.2% of sales, in the fiscal year ended June 30, 2013.  The $3.3 million gross profit decrease primarily reflected the lower sales levels in fiscal 2014 compared to fiscal 2013.  The increase in cost of sales in fiscal 2014 was primarily due to product mix and higher operating costs for year-over-year salary increases, project-related travel, warranty costs and project-related overtime.  Also affecting the comparison was higher profit sharing expense of $586,000 in fiscal 2013.  The stronger Euro average exchange rate in fiscal year 2014 compared to fiscal 2013 also had the effect of increasing operating costs in fiscal 2014 by approximately $430,000.

 

Selling, General and Administrative (SG&A) Expenses – SG&A expenses of $15.2 million in fiscal 2014 were approximately $740,000 higher than SG&A costs in fiscal 2013.  The increase in costs was primarily due to higher recruiting and contract services costs principally related to the recent changes in the Company’s executive officers, and to a lesser extent, year-over-year salary increases and higher costs related to Sarbanes-Oxley compliance.  Also impacting the year-over-year comparison was higher profit sharing expense of $840,000 in fiscal 2013 that was not incurred in fiscal 2014.  The stronger average foreign exchange rate of the Euro for fiscal year 2014 compared to fiscal year 2013 increase costs in fiscal 2014 by approximately $210,000.

 

Engineering, Research and Development (R&D) Expenses  Engineering and R&D expenses were $6.7 million in fiscal 2014, compared with $6.8 million in fiscal 2013.  The higher costs incurred in fiscal 2013 primarily related to a $400,000 profit sharing accrual that was not incurred in fiscal 2014.  Partially offsetting the reduction in profit sharing costs were higher year-over-year salary increases and salary related costs of approximately $380,000 in fiscal 2014.  Fiscal 2014 also had lower engineering materials of $140,000 compared to fiscal 2013.

 

Interest Income, net  Net interest income was $188,000 in fiscal 2014, compared with $173,000 in fiscal 2013.  The increase in interest income for fiscal year 2014 compared to fiscal 2013 was principally due to higher average invested cash balances in 2014.

 

Foreign Currency Gain (Loss) – There was a net foreign currency loss of $127,000 in fiscal 2014 compared with a loss of $647,000 in fiscal 2013.  The loss in fiscal 2014 primarily related to the Yen and the Euro.  The loss in fiscal 2013 related primarily to the Yen and the Real that were partially offset by a foreign currency gain in the Euro.  Foreign currency effects are primarily due to the difference in foreign exchange rates between the time the Company’s foreign subsidiaries receive material or services denominated in U.S. dollars and when funds are converted to U.S. dollars to pay for the material or services received. 

 

Gain on Redemption of Investment – In June 2013, a long-term investment was redeemed, at par, for $2.6 million.  The Company recorded an impairment charge on the carrying value of this investment in fiscal 2009 of $1.1 million, establishing a new cost basis of $1.5 million.  As a result of the redemption at par, the Company recorded a gain of $1.1 million in fiscal 2013.

 

Income Tax Expense – The effective income tax rate in fiscal 2014 was 19.2% compared to 18.6% in fiscal 2013.  Both fiscal 2014 and 2013 reflected the effect of the mix of pre-tax income and loss across the Company’s tax jurisdictions and their respective tax rates.  Fiscal 2013 was also favorably impacted by the reversal of $468,000 in the Company’s valuation allowance related to the long-term investment redemption and improved operations in a foreign subsidiary.  The effective tax rate for fiscal 2013 excluding the valuation allowance reversal, was 24.8%.  See Note 9 of the Notes to the Consolidated Financial Statements, “Income Taxes”.

 

Discontinued Operations

 

On August 30, 2012, the Company completed the sale of substantially all of the assets of its Commercial Products Business Unit (“CBU”).  During fiscal 2013, the Company reported as discontinued operations $80,000 of income, net of taxes, related to CBU operations and the sale of CBU assets.   See Note 12 of the Notes to the Consolidated Financial Statements, “Discontinued Operations”.

 

Liquidity and Capital Resources  

 

The Company’s cash and cash equivalents were $11.5 million at June 30, 2015 compared to $23.1 million at June 30, 2014.  The $11.6 million decrease in cash primarily related to the two acquisitions made in fiscal 2015.  The cash outlay to acquire 100% of the share capital of both companies was $4.2 million.  Following the closing of the transactions, the Company paid off a short-term bank facility maintained by Coord3 for approximately $2.1 million and paid down certain acquired tax liabilities of Coord3 for $2.3 million.  Additional uses of cash were $4.9 million used for operations, $1.8 million used for capital expenditures and $900,000 used for other long-term asset purchases.  Partially offsetting the use of cash were cash provided from net sales of short-term investments of $5.8 million and proceeds from stock plans of $910,000.  Unfavorable foreign exchange rates decreased cash and cash equivalents by $2.1 million.

 

Cash used from operations resulted from a net loss of $461,000 and the add-back of non-cash items. Working capital changes reflected a favorable change in other current assets and liabilities of $5.4 million and increased accounts payable of $205,000 that were partially offset by an increase in receivables of $7.8 million and a use of cash of $2.3 million for inventories. The increase in receivables reflects the higher sales in fiscal 2015.  Inventories increased primarily due to increases in work-in-progress and finished goods to meet backlog requirements, and to a lesser extent, increases in raw material inventory to support new products nearing release and an increase in stock levels to support reduced order lead times. The decrease in accounts payable represents normal fluctuations in the timing of payments.  The change in other current assets and liabilities related primarily to an increase in deferred revenue and accrued liabilities as a result of the normal timing of revenue recognition and payment of accrued expenses. 

 

The Company provides a reserve for obsolescence to recognize inventory impairment for the effects of engineering change orders, age and use of inventory that affect the value of the inventory.  The reserve for obsolescence creates a new cost basis for the impaired inventory.   When inventory that has previously been impaired is sold or disposed of, the related obsolescence reserve is reduced resulting in the reduced cost basis being reflected in cost of goods sold.  A detailed review of the inventory is performed annually with quarterly updates for known changes that have occurred since the annual review.  During fiscal year 2015, the Company increased its reserve for inventory obsolescence

22


 

 

by a net $251,000.  See Note 1,  of the Notes to the Consolidated Financial Statements, “Summary of Significant Accounting Policies - Inventory”, contained in this Annual Report on Form 10-K.

 

The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole.  The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.  During fiscal year 2015, the Company increased its allowance for doubtful accounts reserve by a net $68,000.  See Note 1,  of the Notes to the Consolidated Financial Statements, “Summary of Significant Accounting Policies – Accounts Receivable and Concentration of Credit Risk”, contained in this Annual Report on Form 10-K.

 

At June 30, 2015, the Company had $15.6 million in cash, cash equivalents and short-term investments of which $12.2 million or 78% was held in foreign bank accounts.  The Company does not repatriate its foreign earnings.  Based on its business plan, the Company believes its level of cash, cash equivalents, short-term investments, credit facilities and expected cash flows in each jurisdiction is sufficient to fund operations.

 

Financing activities during fiscal year 2015 reflected $4.4 million of cash paid to extinguish acquired short-term debt and certain acquired tax liabilities of Coord3 and cash received under the Company’s stock plans of $910,000.

 

At June 30, 2015, the Company had short-term investments totaling $4.1 million, a long-term investment recorded at $725,000 and long-term time deposits of $102,000.  At June 30, 2015, the Company had a long-term investment valued at $725,000.  See Note 1 to the Consolidated Financial Statements, “Short-term and Long-term Investments”, for further information on the Company’s investments and their current valuation.  The market for the long-term investment is currently illiquid.  The long-term time deposits serve as collateral for bank guarantees that provide financial assurance that the Company will fulfill certain customer obligations in China.  The cash is restricted as to withdrawal or use while the related bank guarantee is outstanding.  Interest is earned on the restricted cash and recorded as interest income.

 

The Company acquired bank debt of $2.1 million as part of the purchase of Coord3.  The Company paid $1.7 million of this debt in March 2015 and the remaining balance was paid in June 2015.

 

The Company had no bank debt outstanding at June 30, 2015 and June 30, 2014.  The Company has a $6.0 million secured credit agreement with Comerica Bank (“Credit Agreement”) which expires on November 2, 2015.  Proceeds under the Credit Agreement may be used for working capital and capital expenditures.  Security for the Credit Agreement is substantially all non-real estate assets of the Company held in the United States.  Borrowings are designated as a Libor-based Advance or as a Prime-based Advance if the Libor-based Advance is not available.  Interest on Libor-based Advances is calculated at 2.35% above the Libor Rate offered at the time for the period chosen, and is payable on the last day of the applicable period.  Quarterly, the Company pays a commitment fee of 0.15% per annum on the average daily unused portion of the revolving credit commitment.  The Company is required to maintain a minimum Tangible Net Worth of $31.0 million.  The Company was in compliance with the Tangible Net Worth financial covenant at June 30, 2015.  The Credit Agreement limits borrowings to the lesser of $6.0 million or 80% of eligible accounts receivable, which was $4.7 million at June 30, 2015.  The Company is permitted to declare dividends of up to $2.5 million in any fiscal year provided the Company maintains the required minimum Tangible Net Worth.  The Company is also required to have no advances outstanding under the Credit Agreement for 30 days (which need not be consecutive) during each calendar year. 

 

June 30, 2015, the Company's German subsidiary (“GmbH”) had an unsecured credit facility totaling 350,000 euros (equivalent to approximately $388,000).  The facility allows 100,000 euros to be used to finance working capital needs and equipment purchases or capital leases.  The facility allows up to 250,000 euros to be used for providing bank guarantees.  Any borrowings for working capital needs will bear interest at 4.25%.  Amounts exceeding the limit of 100,000 euros will bear interest at 7.15%.  Any outstanding bank guarantees will bear interest at 2.0%.  The GmbH credit facility is cancelable at any time by either GmbH or the bank and any amounts then outstanding would become immediately due and payable.  At June 30, 2015 and June 30, 2014, GmbH had no borrowings or bank guarantees outstanding.

 

The Company expects to spend up to approximately $2.2 million during fiscal year 2016 for capital equipment and to acquire Coord3’s headquarters building, although there is no binding commitment to do so.  Based on the Company’s current business plan, the Company believes that available cash on hand and existing credit facilities will be sufficient to fund anticipated fiscal year 2016 cash flow requirements, except to the extent that the Company implements new business development opportunities, which would be financed as discussed below.  The Company does not believe that inflation has significantly impacted historical operations and does not expect any significant near-term inflationary impact.

 

On January 29, 2015, the Company consummated the acquisition of 100% of the share capital of NMS, a Czech Republic company, (the “NMS Transactions”).  The aggregate purchase price payable in the NMS Transactions for all of the share capital of NMS is €2.25 million.  The purchase price was paid €1.8 million at closing, €250,000 upon the closing of the Coord3 Transaction, and €200,000 payable 12 months following the closing of the NMS Transactions to the extent not used to cover indemnification obligations of certain of the sellers.  The Company funded the purchase price from cash on hand.  A deal consummation fee of €250,000 was paid to an affiliate of one of the NMS sellers upon the closing of the Coord3 Transaction.  See Note 2 of the Notes to the Consolidated Financial Statements, “Acquisitions”, contained in this Annual Report on Form 10-K for further information regarding the NMS Transactions

 

On February 27, 2015, a wholly owned subsidiary of the Company acquired 100% of the share capital of Coord3, a wholly owned subsidiary of Coord3 Industries s.r.l., an Italian company, (“Coord3 Transaction”).  The aggregate purchase price payable in the Coord3 Transaction for all of the share capital of Coord3. is €2.0 million.  The purchase price was paid €1.7 million at closing and €300,000 payable 18 months

23


 

 

following the closing of the Coord3 Transactions to the extent not used to cover indemnification obligations of the sellers.  The Company funded the purchase price from cash on hand.  See Note 2 of the Notes to the Consolidated Financial Statements, “Acquisitions”, contained in this Annual Report on Form 10-K for further information regarding the Coord3 Transaction. 

 

The Company will consider evaluating business opportunities that fit its strategic plans.  There can be no assurance that the Company will identify any opportunities that fit its strategic plans or will be able to enter into agreements with identified business opportunities on terms acceptable to the Company.  The Company anticipates that it would finance any such business opportunities from available cash on hand, issuance of additional shares of its stock or additional sources of financing, as circumstances warrant.

 

As part of routine evaluation procedures, the Company identified a potential concern regarding the employment status and withholding for several individuals in one of the Company’s foreign jurisdictions.  During fiscal 2015, the Company estimated a range of the potential financial liability related to this matter of 486,000 euros to 1 million euros.  The Company is not able to reasonably estimate the amount within this range that it will be required to pay for this matter.  As a result, the Company recorded a reserve of 486,000 euros (equivalent to approximately $536,000) representing the minimum amount the Company estimates will be paid.  The Company expects final resolution of this matter in the next few months. The Company does not expect that the resolution of this matter will have a detrimental effect on the conduct of the Company’s business in this foreign jurisdiction.  See Item 3, “Legal Proceedings” and Note 6 of the Notes to the Consolidated Financial Statements, “Contingencies”, contained in this Form 10-K Quarterly Report on Form 10-Q, and Item 3, “Legal Proceedings” and Note 5, of the Notes to the Consolidated Financial Statements, “Contingencies”, for a discussion of certain other contingencies relating to the Company’s liquidity, financial position and results of operations.  See also, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies - Litigation and Other Contingencies”.

 

Contractual Obligations

 

The following summarizes the Company’s contractual obligations at June 30, 2015, and the effect such obligations are expected to have on its liquidity and cash flow in future periods (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than

 

 

 

 

 

 

 

More than

 

 

Total

 

1 Year

 

1-3 Years

 

3-5 Years

 

5 Years