UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended December 31, 2006.
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
Incorporation or Organization) Identification No.)
47827 Halyard Drive, Plymouth, Michigan 48170-2461
(Address of Principal Executive Offices) (Zip Code)
(734) 414-6100
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer Accelerated filer Non-accelerated filer X
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
The number of shares outstanding of each of the issuer's classes of common stock
as of February 8, 2007, was:
Common Stock, $0.01 par value 7,944,836
Class Number of shares
PERCEPTRON, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2006
PAGE
NUMBER
------
COVER 1
INDEX 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits 26
SIGNATURES 27
2
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
2006 2006
(In Thousands, Except Per ------------ --------
Share Amount) (Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 19,045 $ 25,188
Receivables:
Billed receivables, net of allowance for
doubtful accounts of $387 and $352,
respectively 12,654 15,623
Unbilled receivables 1,048 994
Other receivables 1,245 577
Inventories, net of reserves of $829 and $554,
respectively 10,455 6,433
Deferred taxes 1,481 1,481
Other current assets 595 521
-------- --------
Total current assets 46,523 50,817
PROPERTY AND EQUIPMENT
Building and land 6,013 6,013
Machinery and equipment 12,337 11,566
Furniture and fixtures 1,098 1,093
-------- --------
19,448 18,672
Less - Accumulated
depreciation and amortization (12,005) (11,264)
-------- --------
Net property and equipment 7,443 7,408
DEFERRED TAX ASSET 4,595 4,170
-------- --------
TOTAL ASSETS $ 58,561 $ 62,395
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,438 $ 1,667
Accrued liabilities and expenses 2,258 2,277
Accrued compensation 955 1,740
Income taxes payable 107 145
Deferred revenue 2,209 2,336
-------- --------
Total current liabilities 7,967 8,165
SHAREHOLDERS' EQUITY
Preferred stock - no par value, authorized 1,000
shares, issued none -- --
Common stock, $0.01 par value, authorized 19,000
shares, issued and outstanding 8,000 and 8,352,
respectively 80 84
Accumulated other comprehensive income (loss) 617 (15)
Additional paid-in capital 36,352 39,111
Retained earnings 13,545 15,050
-------- --------
Total shareholders' equity 50,594 54,230
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 58,561 $ 62,395
======== ========
The notes to the consolidated financial statements are an integral part of these
statements.
3
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
(In Thousands, Except Per ------------------ -----------------
Share Amounts) 2006 2005 2006 2005
-------- -------- -------- -------
NET SALES $12,234 $17,188 $22,944 $29,948
COST OF SALES 7,688 8,890 13,911 16,067
------- ------- ------- -------
GROSS PROFIT 4,546 8,298 9,033 13,881
OPERATING EXPENSES
Selling, general and
administrative 4,178 3,652 8,065 6,944
Engineering, research and
development 1,912 1,886 3,644 3,758
------- ------- ------- -------
Total operating expenses 6,090 5,538 11,709 10,702
------- ------- ------- -------
OPERATING INCOME (LOSS) (1,544) 2,760 (2,676) 3,179
OTHER INCOME AND (EXPENSES)
Interest income, net 265 104 579 251
Foreign currency gain
(loss) (16) (126) (21) (77)
Other -- 162 5 161
------- ------- ------- -------
Total other income
(expenses) 249 140 563 335
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME
TAXES (1,295) 2,900 (2,113) 3,514
INCOME TAX EXPENSE (BENEFIT)
(NOTE 9) (431) 706 (608) 1,051
------- ------- ------- -------
NET INCOME (LOSS) $ (864) $ 2,194 $(1,505) $ 2,463
======= ======= ======= =======
EARNINGS (LOSS) PER COMMON
SHARE
Basic ($0.11) $ 0.25 ($0.18) $ 0.28
Diluted ($0.11) $ 0.24 ($0.18) $ 0.27
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic 8,136 8,668 8,239 8,749
Dilutive effect of stock
options -- 502 -- 474
------- ------- ------- -------
Diluted 8,136 9,170 8,239 9,223
======= ======= ======= =======
The notes to the consolidated financial statements are an integral part of these
statements.
4
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
----------------
(In Thousands) 2006 2005
------- -------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (Loss) $(1,505) $ 2,463
Adjustments to reconcile net income (loss) to net cash
provided from (used for) operating activities:
Depreciation and amortization 685 654
Stock compensation expense 451 383
Deferred income taxes (425) 33
Stock option income tax benefit -- 53
Other 104 (28)
Changes in assets and liabilities, exclusive of
changes shown separately (1,700) (1,639)
------- -------
Net cash provided from (used for) operating
activities (2,390) 1,919
CASH FLOWS FROM FINANCING
ACTIVITIES
Revolving credit borrowings 543 468
Revolving credit repayments (543) (468)
Proceeds from stock plans 487 162
Repurchase of company stock (3,701) (2,947)
------- -------
Net cash used for financing activities (3,214) (2,785)
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures (791) (591)
------- -------
Net cash used for investing activities (791) (591)
EFFECT OF EXCHANGE RATE
CHANGES ON CASH AND CASH EQUIVALENTS 252 (132)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,143) (1,589)
CASH AND CASH EQUIVALENTS, JULY 1 25,188 20,374
------- -------
CASH AND CASH EQUIVALENTS, DECEMBER 31 $19,045 $18,785
======= =======
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES
SHOWN
SEPARATELY
Receivables, net $ 2,617 $(1,985)
Inventories (4,021) (644)
Accounts payable 770 972
Other current assets and liabilities (1,066) 18
------- -------
$(1,700) $(1,639)
======= =======
The notes to the consolidated financial statements are an integral part of these
statements.
5
PERCEPTRON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements should be read in conjunction
with the Company's 2006 Annual Report on Form 10-K. In the opinion of
management, the unaudited information furnished herein reflects all adjustments
necessary, consisting of normal recurring adjustments, for a fair presentation
of the financial statements for the periods presented. The results of operations
for any interim period are not necessarily indicative of the results of
operations for a full year.
2. INVENTORY
Inventory is stated at the lower of cost or market. The cost of inventory is
determined by the first-in, first-out ("FIFO") method. The Company provides a
reserve for obsolescence to recognize the effects of engineering change orders,
age and use of inventory that affect the value of the inventory. When the
related inventory is disposed of, the obsolescence reserve is reduced. A
detailed review of the inventory is performed yearly with quarterly updates for
known changes that have occurred since the annual review. Inventory, net of
reserves of $829,000 and $554,000 at December 31, 2006 and June 30, 2006,
respectively, is comprised of the following (in thousands):
DECEMBER 31, JUNE 30,
2006 2006
------------ --------
Component Parts $ 3,311 $3,038
Work In Process 2,642 309
Finished Goods 4,502 3,086
------- ------
Total $10,455 $6,433
======= ======
3. EARNINGS PER SHARE
Basic earnings per share ("EPS") is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Other
obligations, such as stock options, are considered to be potentially dilutive
common shares. Diluted EPS assumes the issuance of potential dilutive common
shares outstanding during the period and adjusts for any changes in income and
the repurchase of common shares that would have occurred from the assumed
issuance, unless such effect is anti-dilutive. Effective with the adoption of
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment, ("SFAS 123R"), the calculation of diluted shares also takes into effect
the average unrecognized non-cash stock-based compensation expense and
additional adjustments for tax benefits related to non-cash stock-based
compensation expense.
Options to purchase 944,000 and 955,000 shares of common stock outstanding in
the three months ended December 31, 2006 and 2005, respectively, were not
included in the computation of diluted EPS because the effect would have been
anti-dilutive. Options to purchase 930,000 and 1,031,000 shares of common stock
outstanding in the six months ended December 31, 2006 and 2005, respectively,
were not included in the computation of diluted EPS because the effect would
have been anti-dilutive.
4. FOREIGN EXCHANGE CONTRACTS
The Company may use, from time to time, a limited hedging program to minimize
the impact of foreign currency fluctuations. These transactions involve the use
of forward contracts, typically mature within
6
one year and are designed to hedge anticipated foreign currency transactions.
The Company may use forward exchange contracts to hedge the net assets of
certain of its foreign subsidiaries to offset the translation and economic
exposures related to the Company's investment in these subsidiaries.
At December 31, 2006, the Company had forward exchange contracts to sell 6.0
million Euros ($7.8 million equivalent) at a weighted average settlement rate of
1.30 Euros to the United States Dollar. The contracts outstanding at December
31, 2006, mature through June 29, 2007. The objective of the hedge transactions
is to protect designated portions of the Company's net investment in its foreign
subsidiary against adverse changes in the Euro/U.S. Dollar exchange rate. The
Company assesses hedge effectiveness based on overall changes in fair value of
the forward contract. Since the critical risks of the forward contract and the
net investment coincide, there was no ineffectiveness. The accounting for the
hedges is consistent with translation adjustments where any gains and losses are
recorded to other comprehensive income. The Company recognized a charge of
approximately $97,000 and $24,000 in other comprehensive income (loss) for the
unrealized change in value of the forward exchange contracts during the three
and six months ended December 31, 2006, respectively. Offsetting this amount in
other comprehensive income (loss) was the translation effect of the Company's
foreign subsidiary. Because the forward contracts were effective, there was no
gain or loss recognized in earnings. The Company's forward exchange contracts do
not subject it to material risk due to exchange rate movements because gains and
losses on these contracts offset losses and gains on the assets, liabilities,
and transactions being hedged.
At December 31, 2005, the Company had approximately $3.6 million of forward
exchange contracts between the United States Dollar and the Euro with a weighted
average settlement price of 1.20 Euros to the United States Dollar. The Company
recognized income of approximately $92,000 and $132,000 in other comprehensive
income (loss) for the unrealized change in value of the forward exchange
contracts during the three and six months ended December 31, 2005.
5. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in common shareholder's equity
during a period from transactions and events from non-owner sources, including
net income. Other items of comprehensive income include revenues, expenses,
gains and losses that are excluded from net income. Total comprehensive income
for the applicable periods is as follows (in thousands):
2006 2005
------- ------
THREE MONTHS ENDED DECEMBER 31,
Net Income (Loss) $(864) $2,194
Other Comprehensive Income (Loss):
Foreign currency translation adjustments 506 (186)
Forward contracts (97) 92
----- ------
Total Comprehensive Income (Loss) $(455) $2,100
===== ======
2006 2005
------- ------
SIX MONTHS ENDED DECEMBER 31,
Net Income (Loss) $(1,505) $2,463
Other Comprehensive Income (Loss):
Foreign currency translation adjustments 656 (257)
Forward contracts (24) 132
------- ------
Total Comprehensive Income (Loss) $ (873) $2,338
======= ======
7
6. CREDIT FACILITIES
The Company had no debt outstanding at December 31, 2006.
The Company has a $7.5 million secured Credit Agreement with Comerica Bank,
which expires on November 1, 2008. Proceeds under the Credit Agreement may be
used for working capital and capital expenditures. The security for the loan is
substantially all assets of the Company held in the United States. Borrowings
are designated as a Prime-based Advance or as a Eurodollar-based Advance.
Interest on Prime-based Advances is payable on the last day of each month and is
calculated daily at a rate that ranges from a 1/2% below to a 1/4% above the
bank's prime rate (8.25% as of December 31, 2006) dependent upon the Company's
ratio of funded debt to earnings before interest, taxes, depreciation and
amortization ("EBITDA"). Interest on Eurodollar-based Advances is calculated at
a specific margin above the Eurodollar Rate offered at the time and for the
period chosen (approximately 7.24% as of December 31, 2006) dependent upon the
Company's ratio of funded debt to EBITDA and is payable on the last day of the
applicable period. Quarterly, the Company pays a commitment fee on the daily
unused portion of the Credit Agreement based on a percentage dependent upon the
Company's ratio of funded debt to EBITDA. The Credit Agreement prohibits the
Company from paying dividends. In addition, the Credit Agreement requires the
Company to maintain a Tangible Net Worth, as defined in the Credit Agreement, of
not less than $36.0 million as of December 31, 2006 and to have no advances
outstanding for 30 consecutive days each calendar year.
At December 31, 2006, the Company's German subsidiary (GmbH) had an unsecured
credit facility totaling 500,000 Euros (equivalent to approximately $660,000 at
December 31, 2006). The facility may be used to finance working capital needs
and equipment purchases or capital leases. Any borrowings for working capital
needs will bear interest at 9.0% on the first 100,000 Euros of borrowings and
2.0% for borrowings over 100,000 Euros. The German 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 December 31, 2006, GmbH had no borrowings
outstanding. At December 31, 2006, the facility supported outstanding letters of
credit totaling 82,700 Euros (equivalent to approximately $109,000).
7. STOCK-BASED COMPENSATION
The Company adopted SFAS 123R, effective July 1, 2005. SFAS 123R requires the
recognition of the fair value of stock-based compensation in the Company's
financial statements. Prior to July 1, 2005, the Company applied the
requirements of APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock-based plans.
Under APB 25, generally no compensation expense was recognized for the Company's
stock-based plans since the exercise price of granted employee stock options was
greater than or equal to the market value of the underlying common stock on the
date of grant.
The Company elected the modified prospective transition method for adopting SFAS
123R. Under this method, the provisions of SFAS 123R apply to all awards granted
or modified after the date of adoption. The Company continues to use the Black
Scholes model for determining stock option valuations. The provisions of SFAS
123R also apply to awards granted prior to July 1, 2005 that did not vest before
July 1, 2005 (transition awards). The compensation cost for the portion of the
transition awards that had not vested by July 1, 2005 is based on the grant-date
fair value of these transition awards as calculated for pro forma disclosures
under the provisions of SFAS 123. Compensation cost for these transition awards
are attributed to periods beginning July 1, 2005 and use the Black Scholes
method used under SFAS 123, except that an estimate of expected forfeitures is
used rather than actual forfeitures.
8
The Company recognized as an operating expense non-cash stock-based compensation
cost in the amount of $176,000 and $451,000 in the three and six months ended
December 31, 2006, respectively. This had the effect of decreasing net income by
$137,000, or $0.02 per diluted share, and $356,000, or $0.04 per diluted share,
for the three and six months ended December 31, 2006, respectively. The Company
recognized as an operating expense non-cash stock-based compensation cost in the
amount of $198,000 and $383,000 in the three and six months ended December 31,
2005, respectively. This had the effect of decreasing net income by $161,000, or
$0.02 per diluted share, and $311,000, or $0.03 per diluted share, for the three
and six months ended December 31, 2005, respectively. As of December 31, 2006,
the total remaining unrecognized compensation cost related to non-vested stock
options amounted to $1.0 million. The Company expects to recognize this cost
over a weighted average vesting period of 1.31 years.
The Company maintains a 1992 Stock Option Plan ("1992 Plan") and a 1998 Global
Team Member Stock Option Plan ("1998 Plan") covering substantially all company
employees and certain other key persons and a Directors Stock Option Plan
("Directors Plan") covering all non-employee directors. During fiscal 2005,
shareholders approved a new 2004 Stock Incentive Plan that replaced the 1992 and
Directors Stock Option Plans as to future grants. Options previously granted
under the 1992 and Directors Stock Option Plans will continue to be maintained
until all options are executed, cancelled or expire. The 2004, 1992 and
Directors Plans are administered by a committee of the Board of Directors, the
Management Development Compensation and Stock Option Committee (the "Management
Development Committee"). The 1998 Plan is administered by the President of the
Company.
Awards under the 2004 Stock Incentive Plan may be in the form of stock options,
stock appreciation rights, restricted stock or restricted stock units,
performance share awards, director stock purchase rights and deferred stock
units; or any combination thereof. The terms of the awards will be determined by
the Management Development Committee, unless specified in the 2004 Stock
Incentive Plan. As of December 31, 2006, the Company has only issued awards in
the form of stock options. Options outstanding under the 2004 Stock Incentive
Plan and 1992 and 1998 Stock Option Plans generally become exercisable at 25%
per year beginning one year after the date of grant and expire ten years after
the date of grant. Options outstanding under the Directors Stock Option Plan are
either an initial option or an annual option. Prior to December 7, 2004, initial
options of 15,000 shares were granted as of the date the non-employee director
was first elected to the Board of Directors and became exercisable in full on
the first anniversary of the date of grant. Prior to December 7, 2004, annual
options of 3,000 shares were granted as of the date of the respective annual
meeting to each non-employee director serving at least six months prior to the
annual meeting and become exercisable in three annual increments of 33 1/3%
after the date of grant. Options under the Directors Stock Option Plan expire
ten years from the date of grant. Option prices for options granted under these
plans must not be less than fair market value of the Company's stock on the date
of grant.
The Company did not grant any options during the quarter ended December 31,
2006. The estimated fair value as of the date options were granted during the
periods presented, using the Black-Scholes option-pricing model, was as follows:
9
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
12/31/2006 12/31/2005 12/31/2006 12/31/2005
------------ ------------ ---------- ----------
Weighted Average Estimated Fair Value
Per Share Of Options Granted
During The Period -- $ 2.23 $ 3.03 $ 2.23
Assumptions:
Amortized Dividend Yield -- -- -- --
Common Stock Price Volatility -- 30.57% 32.78% 30.57%
Risk Free Rate Of Return -- 3.88% 5.13% 3.88%
Expected Option Term (in years) -- 5 5 5
The Company received $101,000 and $330,000 in cash from option exercises under
all share-based payment arrangements during the three and six months ended
December 31, 2006, respectively.
8. COMMITMENTS AND CONTINGENCIES
Management is currently unaware of any significant pending litigation affecting
the Company, other than the matters set forth below.
The Company is a party to a suit filed by Industries GDS, Inc., Bois Granval GDS
Inc., and Centre de Preparation GDS, Inc. (collectively, "GDS") on or about
November 21, 2002 in the Superior Court of the Judicial District of Quebec,
Canada against the Company, Carbotech, Inc. ("Carbotech"), and U.S. Natural
Resources, Inc. ("USNR"), among others. The suit alleges that the Company
breached its contractual and warranty obligations as a manufacturer in
connection with the sale and installation of three systems for trimming and
edging wood products. The suit also alleges that Carbotech breached its
contractual obligations in connection with the sale of equipment and the
installation of two trimmer lines, of which the Company's systems were a part,
and that USNR, which acquired substantially all of the assets of the Forest
Products business unit from the Company, was liable for GDS' damages. USNR has
sought indemnification from the Company under the terms of existing contracts
between the Company and USNR. GDS seeks compensatory damages against the
Company, Carbotech and USNR of approximately $5.7 million using a December 31,
2006 exchange rate. GDS and Carbotech have filed for bankruptcy protection in
Canada. The Company intends to vigorously defend GDS' claims.
The Company has been informed that certain of its customers have received
allegations of possible patent infringement involving processes and methods used
in the Company's products. Certain of these customers, including one customer
who was a party to a patent infringement suit relating to this matter, have
settled such claims. Management believes that the processes used in the
Company's products were independently developed without utilizing any previously
patented process or technology. Because of the uncertainty surrounding the
nature of any possible infringement and the validity of any such claim or any
possible customer claim for indemnity relating to claims against the Company's
customers, it is not possible to estimate the ultimate effect, if any, of this
matter on the Company's financial statements.
Based upon a recent review by the Company of a third party licensing agreement
under which the Company licenses certain software included in its products, the
Company has begun discussions with the third party licensor to resolve potential
instances of non-compliance by the Company with the terms of the licensing
agreement. The Company anticipates that it will incur additional royalty costs
for prior periods and has recorded a reserve for the amount it believes will be
required to resolve the matter. The final resolution may be different from the
estimate recorded.
10
The Company may, from time to time, be subject to other claims and suits in the
ordinary course of its business.
To estimate whether a loss contingency should be accrued by a charge to income,
the Company evaluates, among other factors, the degree of probability of an
unfavorable outcome and the ability to make a reasonable estimate of the amount
of the loss. Since the outcome of claims and litigation is subject to
significant uncertainty, changes in these factors could materially impact the
Company's financial position or results of operations.
9. INCOME TAXES
During the second quarter of fiscal 2006, the Company recognized a $725,000 tax
benefit associated with reversing the valuation allowance related to net
operating losses in the United States. The Company continues to have a valuation
allowance for tax credit carryforwards that it still expects will more likely
than not expire prior to the tax benefit being realized.
During the second quarter of fiscal 2006, the Company recorded a $290,000 tax
expense related to the repatriation of $6.3 million of unremitted earnings of
certain of the Company's European subsidiaries under the provisions of The
American Jobs Creation Act of 2004.
10. NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Current Year Misstatement." This bulletin
requires analysis of misstatements using both an income statement (rollover)
approach and a balance sheet (iron curtain) approach in assessing materiality
and provides for a one-time cumulative effect transition adjustment. This
bulletin is effective for the Company's 2007 fiscal year annual financial
statements. The Company is currently assessing the potential impact that the
adoption of this bulletin will have on the Company's financial statements
although the impact is not expected to be material.
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements". This statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (GAAP), and
expands disclosures about fair value measurements. This statement does not
require any new fair value measurements, but does provide guidance on how to
measure fair value by providing a fair value hierarchy used to classify the
source of the information. This statement is effective for fiscal years
beginning after November 15, 2007. The impact of adopting this statement on the
Company's financial statements has not yet been evaluated.
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109". This interpretation prescribes a
recognition threshold and a measurement attribute for the financial statement
reporting of tax positions taken in tax returns. The interpretation is effective
for fiscal years beginning after December 15, 2006. The impact of adopting this
statement on the Company's financial statements has not yet been evaluated.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Perceptron, Inc. ("Perceptron" or the "Company") designs, develops, manufactures
and markets non-contact metrology solutions for manufacturing process control as
well as sensor and software technologies for non-contact measurement and
inspection applications. Perceptron's product offerings are designed to improve
quality, increase productivity and decrease costs in manufacturing and product
development. Perceptron also produces innovative technology products for trade
professionals and consumers. The solutions offered by the Company are divided
into four groups: 1) The Automated Systems Group made up of AutoGauge(R),
AutoFit(R), AutoScan(R), AutoSpect(R) and AutoGuide(R) products; 2) The
Technology Components Group made up of ScanWorks(R), Non-Contact Wheel Alignment
and TriCam(R) sensors for the forest products industry; 3) The Value Added
Services Group providing consulting, training and non-warranty support services,
and 4) The Commercial Products Group providing electronic inspection products
for trade professionals and consumers. The Company services multiple markets,
with the largest being the automotive industry. The Company's primary operations
are in North America, Europe and Asia.
The Company's financial base remained strong, with no debt and approximately
$19.0 million of cash at December 31, 2006 available to support its growth
plans. Near-term the Company will focus on the successful production and release
of its recently announced new line of electronic inspection products and its
previously announced growth strategy in untapped geographic markets, principally
in Asia.
The Company's growth strategies in Asia are generating customer interest in this
region. This region represents approximately one-third of global light vehicle
production and sales and with the development of China's light vehicle market
will become more important to the Company. As a result, the Company will
continue to hire sales and technical personnel during fiscal 2007 to support its
long term growth opportunities in Asia.
The Company's sales are principally derived from the sale of products for use in
the automotive industry. New vehicle tooling programs are the most important
selling opportunity for the Company's Automated Systems Group. The number and
timing of new vehicle tooling programs can be influenced by economic conditions.
Therefore, the Company continues to assess the global economy and its likely
effect on the Company's automotive customers and markets served to determine if
actions are required. The Company views 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 its automotive Automated Systems Group business. The Company is
continuing its efforts to identify opportunities outside the automotive
industry, principally through its Technology Components Group and Commercial
Products Group.
The foregoing statements in this "Overview" section are "forward-looking
statements" within the meaning of the Securities Exchange Act of 1934, as
amended. See Item 2 "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Safe Harbor Statement" for a discussion of a number
of uncertainties which could cause actual results to differ materially from
those set forth in the forward-looking statements.
12
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2006 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2005
For the second quarter of fiscal 2007, the Company reported a net loss of
$864,000, or $0.11 per diluted share, compared to net income of $2.2 million or
$0.24 per diluted share, for the second quarter of fiscal 2006. Specific line
item results are described below.
SALES - Net sales of $12.2 million for the second quarter of fiscal 2007 were
$5.0 million lower than the same period one year ago. The following tables set
forth comparison data for the Company's net sales by product groups and
geographic location.
SALES (BY GROUP) SECOND QUARTER SECOND QUARTER
(in millions) 2007 2006 INCREASE/(DECREASE)
---------------- -------------- -------------- -------------------
Automated Systems $ 8.0 65.6% $13.2 76.7% $(5.2) (39.4)%
Technology Components 3.1 25.4% 3.0 17.5% 0.1 3.3%
Value Added Services 1.1 9.0% 1.0 5.8% 0.1 10.0%
----- ----- ----- ----- -----
Totals $12.2 100.0% $17.2 100.0% $(5.0) (29.1)%
===== ===== ===== ===== =====
SALES (BY LOCATION) SECOND QUARTER SECOND QUARTER
(in millions) 2007 2006 INCREASE/(DECREASE)
------------------- -------------- -------------- -------------------
North America $ 6.9 56.6% $12.0 69.8% $(5.1) (42.5)%
Europe 4.8 39.3% 4.9 28.5% (0.1) (2.0)%
Asia 0.5 4.1% 0.3 1.7% 0.2 66.7%
----- ----- ----- ----- -----
Totals $12.2 100.0% $17.2 100.0% $(5.0) (29.1)%
===== ===== ===== ===== =====
Automated Systems sales in the second quarter of fiscal 2007 were lower than the
second quarter of fiscal 2006 primarily for AutoGauge(R) systems. AutoGauge(R)
systems sales in the second quarter of fiscal 2006 were unusually high
reflecting the strong backlog at the beginning of that quarter and the high rate
of new orders received during that quarter. Sales of Technology Components and
Value Added Services were comparable from quarter to quarter. The sales decline
in the second quarter reflected customer delays in both North America and
Europe, as customers in both of these regions delayed some of their tooling
programs as a result of restructuring efforts and as programs were reassessed in
response to demand for more fuel efficient models. Some existing orders in
Europe that were expected to be shipped during the second quarter were delayed,
however, the Company expects that these orders will be shipped during the
remainder of the fiscal year and during the first part of fiscal 2008. The sales
decrease in Europe was mitigated by the strengthening Euro that, based on
conversion rates in effect this quarter, resulted in $440,000 more in sales than
the comparable rates in the second quarter of fiscal 2006 would have yielded.
BOOKINGS - The Company had new order bookings during the quarter of $17.2
million compared with new order bookings of $9.6 million in the first quarter of
fiscal 2007 and $18.9 million for the quarter ended December 31, 2005. The
amount of new order bookings during any particular period is not necessarily
indicative of the future operating performance of the Company. The following
tables set forth comparison data for the Company's bookings by product groups
and geographic location.
13
BOOKINGS (BY GROUP) SECOND QUARTER SECOND QUARTER
(in millions) 2007 2006 INCREASE/(DECREASE)
------------------- -------------- -------------- -------------------
Automated Systems $11.2 65.1% $15.5 82.0% $(4.3) (27.7)%
Technology Components 3.9 22.7% 1.9 10.1% 2.0 105.3%
Value Added Services 1.2 7.0% 1.5 7.9% (0.3) (20.0)%
Commercial Products 0.9 5.2% -- -- 0.9 100.0%
----- ----- ----- ----- -----
TOTALS $17.2 100.0% $18.9 100.0% $(1.7) (9.0)%
===== ===== ===== ===== =====
BOOKINGS (BY LOCATION) SECOND QUARTER SECOND QUARTER
(in millions) 2007 2006 INCREASE/(DECREASE)
---------------------- -------------- -------------- -------------------
North America $ 7.1 41.3% $14.9 78.8% $(7.8) (52.3)%
Europe 9.2 53.5% 3.8 20.1% 5.4 142.1%
Asia 0.9 5.2% 0.2 1.1% 0.7 350.0%
----- ----- ----- ----- -----
TOTALS $17.2 100.0% $18.9 100.0% $(1.7) (9.0)%
===== ===== ===== ===== =====
Both Automated Systems and North American new order bookings were lower in the
second quarter of fiscal 2007 compared to the same quarter of fiscal 2006 when
new order bookings included several large orders for AutoGauge(R) systems to
support a customer's new vehicle platform at several assembly plants in North
America. New order bookings for Technology Components increased for all products
compared to the second quarter of fiscal 2006. The Company received its first
order of $900,000 in the second quarter of fiscal 2007 for its new commercial
product and began shipments of this product during the third quarter of fiscal
2007. North American new order bookings were also negatively impacted by
customer delays as a result of customer restructuring efforts and as programs
were reassessed by customers in response to demand for more fuel efficient
models. European new order bookings were strong in the second quarter of fiscal
2007. Additionally, European bookings during the second quarter of fiscal 2006
reflected the generally weak state of many European economies. Historically, the
Company's rate of new orders has varied from quarter to quarter. Based on the
timing of current customer programs that the Company is quoting, the Company
expects new automotive order bookings for the third and fourth quarters of
fiscal 2007 to be comparable to the level of new automotive orders received in
the second quarter of fiscal 2007. The foregoing statements are "forward-looking
statements" within the meaning of the Securities Exchange Act of 1934, as
amended. See Item 2 "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Safe Harbor Statement" for a discussion of a number
of uncertainties which could cause actual results to differ materially from
those set forth in the forward-looking statements.
BACKLOG - The Company's backlog was $22.6 million as of December 31, 2006
compared with $17.7 million as of September 30, 2006 and $22.0 million as of
December 31, 2005. The following tables set forth comparison data for the
Company's backlog by product groups and geographic location.
BACKLOG (BY GROUP) SECOND QUARTER SECOND QUARTER
(in millions) 2007 2006 INCREASE/(DECREASE)
------------------ -------------- -------------- -------------------
Automated Systems $16.8 74.3% $19.1 86.8% $(2.3) (12.0)%
Technology Components 2.7 12.0% 1.2 5.5% 1.5 125.0%
Value Added Services 2.2 9.7% 1.7 7.7% 0.5 29.4%
Commercial Products 0.9 4.0% -- -- 0.9 100.0%
----- ----- ----- ----- -----
TOTALS $22.6 100.0% $22.0 100.0% $ 0.6 2.7%
===== ===== ===== ===== =====
14
BACKLOG (BY LOCATION) SECOND QUARTER SECOND QUARTER
(in millions) 2007 2006 INCREASE/(DECREASE)
--------------------- -------------- -------------- -------------------
North America $10.1 44.7% $15.6 70.9% $(5.5) (35.3)%
Europe 11.9 52.6% 6.2 28.1% 5.7 91.9%
Asia 0.6 2.7% 0.2 1.0% 0.4 200.0%
----- ----- ----- ----- -----
TOTALS $22.6 100.0% $22.0 100.0% $ 0.6 2.7%
===== ===== ===== ===== =====
The Company expects to be able to fill substantially all of the orders in
backlog during the next twelve months. 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.
GROSS PROFIT - Gross profit was $4.5 million, or 37.2% of sales, in the second
quarter of fiscal year 2007, as compared to $8.3 million, or 48.3% of sales, in
the second quarter of fiscal year 2006. The gross profit margin reduction was
primarily due to under absorbed fixed installation labor and manufacturing cost
as a percent of sales at the relatively low level of sales for the second
quarter of fiscal 2007. The reduction was mitigated in part by the benefit from
the strengthening Euro exchange rate this quarter and a favorable product mix
compared with the second quarter of fiscal 2006.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES - SG&A expenses were $4.2
million in the quarter ended December 31, 2006 compared to $3.7 million in the
second quarter a year ago. SG&A expenses were higher primarily due to salary and
benefit increases, recruiting and relocation costs and travel of approximately
$470,000. These increases primarily related to the Company's new sales growth
opportunities in Asia and to support the new commercial products business
initiatives. The increase was also due to higher costs for various expenses
including the unfavorable effect of the strengthening Euro on expenses that were
partially offset by lower Michigan Single Business Taxes and commission expense.
ENGINEERING, RESEARCH AND DEVELOPMENT (R&D) EXPENSES - Engineering and R&D
expenses were $1.9 million in both quarters ended December 31, 2006 and 2005 as
salary and benefit increases were offset by decreased spending on engineering
materials.
INTEREST INCOME, NET - Net interest income was $265,000 in the second quarter of
fiscal 2007 compared with net interest income of $104,000 in the second quarter
of fiscal 2006. The increase was primarily due to higher interest rates on cash
invested in short term securities compared to one year ago. Additionally, the
second quarter of fiscal 2006 had interest expense of approximately $53,000 on
additional taxes related to a tax audit in Germany for fiscal years 2001 through
2003.
FOREIGN CURRENCY - There was a net foreign currency transaction loss of $16,000
this quarter compared to a net foreign currency loss of $126,000 last year due
to foreign currency changes, particularly the Euro and Yen, within the
respective quarters.
OTHER - Other income of $162,000 in the second quarter of fiscal 2006 primarily
reflected the value of stock received by the Company when a mutual life
insurance company was demutualized.
INCOME TAXES - The effective tax rate for the second quarter of fiscal 2007 was
33.3% and reflected the effect of the mix of operating profit and loss among the
Company's various operating entities and their countries' respective tax rates.
The second quarter of fiscal 2006 included the recognition of a $725,000 tax
benefit associated with reversing a valuation allowance related to net operating
losses in North America that the Company determined would be utilized, and a
$290,000 tax expense related to the repatriation of $6.3 million of unremitted
earnings of certain of the Company's European subsidiaries
15
under the provisions of the American Jobs Creation Act of 2004. The effective
tax rate excluding these two items was 39.3% for the second quarter of fiscal
2006.
OUTLOOK - The Company expects total revenues for fiscal year 2007, including
anticipated sales of the Company's new commercial product, to be at least
comparable to fiscal year 2006. Any revenue increase for fiscal 2007 over fiscal
2006 will depend on how rapidly sales increase for the new commercial product
over anticipated levels. As customers in North America firm up their plans with
respect to new vehicle models, the Company expects a higher rate of new orders
in North America for the second half of fiscal 2007 but does not expect new
orders in Europe to continue at the level achieved in the second quarter of
fiscal 2007. As a result, based on business currently being quoted, the Company
expects new automotive order bookings for the third and fourth quarter of fiscal
2007 to be comparable to the level of new orders received in the second quarter
of fiscal 2007. To fuel long-term growth, the Company intends to continue to
make investments in Asia and to support its new commercial products. See Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Safe Harbor Statement" for a discussion of the uncertainties
regarding the expansion into new markets and the development and introduction of
new products.
The Company's new order bookings and sales forecast for its products sold to the
automotive industry is based on a thorough assessment of the probable size,
system content, and timing of each of the programs being considered by its
automotive customers. These factors are difficult to quantify accurately because
over time the Company's customers weigh changes in the economy and the probable
effect of these changes on their business, and on occasion adjust the number and
timing of their new vehicle programs to reflect changing business conditions.
The Company continues 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. The Company's new order bookings and sales forecast relating to
its new electronic inspection products is based upon preliminary customer and
internal forecasts. The actual level of orders will depend on the market
reaction after the product is introduced.
The foregoing statements in this "Outlook" section are "forward-looking
statements" within the meaning of the Securities Exchange Act of 1934, as
amended. See Item 2 "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Safe Harbor Statement" for a discussion of a number
of uncertainties which could cause actual results to differ materially from
those set forth in the forward-looking statements.
SIX MONTHS ENDED DECEMBER 31, 2006 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2005
The Company reported a net loss of $1.5 million, or $0.18 per diluted share, for
the first half of fiscal 2007, compared with net income of $2.5 million, or
$0.27 per diluted share for the six months ended December 31, 2005.
SALES - Net sales in the first six months of fiscal 2007 were $22.9 million,
compared to $29.9 million for the six months ended December 31, 2005. The
following tables set forth comparison data for the Company's net sales by
product groups and geographic location.
16
SALES (BY GROUP) SIX MONTHS SIX MONTHS
(in millions) ENDED 12/31/06 ENDED 12/31/05 INCREASE/(DECREASE)
---------------- -------------- -------------- -------------------
Automated Systems $14.7 64.2% $22.3 74.6% $(7.6) (34.1)%
Technology Components 6.0 26.2% 5.9 19.7% 0.1 1.7%
Value Added Services 2.2 9.6% 1.7 5.7% 0.5 29.4%
----- ----- ----- ----- -----
Totals $22.9 100.0% $29.9 100.0% $(7.0) (23.4)%
===== ===== ===== ===== =====
SALES (BY LOCATION) SIX MONTHS SIX MONTHS
(in millions) ENDED 12/31/06 ENDED 12/31/05 INCREASE/(DECREASE)
------------------- -------------- -------------- -------------------
North America $11.4 49.8% $18.3 61.2% $(6.9) (37.7)%
Europe 10.4 45.4% 10.8 36.1% (0.4) (3.7)%
Asia 1.1 4.8% 0.8 2.7% 0.3 37.5%
----- ----- ----- ----- -----
Totals $22.9 100.0% $29.9 100.0% $(7.0) (23.4)%
===== ===== ===== ===== =====
Sales of Automated Systems products during the first half of fiscal 2007
reflected changes in original delivery schedules made by the Company's customers
that both accelerated delivery of several orders into the fourth quarter of
fiscal 2006 and delayed delivery of orders originally scheduled to ship during
the second quarter of fiscal 2007. The sales increase in the Technology
Components Group was primarily due to higher sales of the Company's ScanWorks(R)
products. Sales of other products within the Technology Components Group were
down compared to last year due to lower customer demand. The Company has focused
resources on the sale of Value Added Services and believes that the sales
improvement for this group is beginning to reflect the results from this effort.
The sales decline in the first half of fiscal 2007 reflected customer delays in
both North America and Europe, as customers in both of these regions delayed
some of their tooling programs as a result of restructuring efforts and as
programs were reassessed in response to demand for more fuel efficient models.
Some existing orders in Europe that were expected to be shipped during the
second quarter were delayed, however, the Company expects that these orders will
be shipped during the remainder of the fiscal year and during the first part of
fiscal 2008. The sales decrease in Europe was mitigated by a favorable
strengthening of the Euro during the first half of fiscal 2007 that based on
conversion rates in effect during the six-month period, resulted in
approximately $710,000 of higher sales than rates in effect in the corresponding
period of fiscal 2006 would have yielded.
BOOKINGS - New order bookings for the six months ended December 31, 2006 were
$26.7 million compared to $33.9 million for the same period one year ago. The
amount of new order bookings during any particular period is not necessarily
indicative of the future operating performance of the Company. The following
tables set forth comparison data for the Company's bookings by product groups
and geographic location.
BOOKINGS (BY GROUP) SIX MONTHS SIX MONTHS
(in millions) ENDED 12/31/06 ENDED 12/31/05 INCREASE/(DECREASE)
------------------- -------------- -------------- -------------------
Automated Systems $16.3 61.1% $27.1 80.0% $(10.8) (39.9)%
Technology Components 6.9 25.8% 4.5 13.3% 2.4 53.3%
Value Added Services 2.6 9.7% 2.3 6.7% 0.3 13.0%
Commercial Products 0.9 3.4% -- -- 0.9 100.0%
----- ----- ----- ----- ------
TOTALS $26.7 100.0% $33.9 100.0% $ (7.2) (21.2)%
===== ===== ===== ===== ======
17
BOOKINGS (BY LOCATION) SIX MONTHS SIX MONTHS
(in millions) ENDED 12/31/06 ENDED 12/31/05 INCREASE/(DECREASE)
---------------------- -------------- -------------- -------------------
North America $13.3 49.8% $24.9 73.4% $(11.6) (46.6)%
Europe 11.9 44.6% 8.4 24.8% 3.5 41.7%
Asia 1.5 5.6% 0.6 1.8% 0.9 150.0%
----- ----- ----- ----- ------
TOTALS $26.7 100.0% $33.9 100.0% $ (7.2) (21.2)%
===== ===== ===== ===== ======
The decrease in new order bookings for both the Automated Systems Group and
North America in the first half of fiscal 2007 was primarily due to the
significant level of AutoGauge(R) systems booked in the first half of fiscal
2006, principally as a result of several large orders to support a customer's
new vehicle platform at several assembly plants in North America. Increased new
order bookings in the Technology Components Group during the first half of
fiscal 2007 primarily represented increased bookings of WheelWorks(R) and
ScanWorks(R) products. The Company received its first order of $900,000 in
fiscal 2007 for its new commercial product and began shipments of this product
during the third quarter of fiscal 2007. North American new order bookings were
also negatively impacted by customer delays as a result of customer
restructuring efforts and as programs were reassessed by customers in response
to demand for more fuel efficient models. Increased new order bookings in Europe
in the six-month period ended December 31, 2006, reflected strong orders
received in the second quarter of fiscal 2007 and the generally weak state of
many European economies in the 2006 period. Historically, the Company's rate of
new orders has varied from quarter to quarter. Based on the timing of current
customer programs that the Company is quoting, the Company expects new
automotive order bookings for the third and fourth quarters of fiscal 2007 to be
comparable to the level of new automotive orders received in the second quarter
of fiscal 2007. The foregoing statements are "forward-looking statements" within
the meaning of the Securities Exchange Act of 1934, as amended. See Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Safe Harbor Statement" for a discussion of a number of
uncertainties which could cause actual results to differ materially from those
set forth in the forward-looking statements.
GROSS PROFIT - Gross profit was $9.0 million, or 39.4% of sales, in the first
half of fiscal year 2007, as compared to $13.9 million, or 46.4% of sales, in
the first half of fiscal year 2006. The gross profit margin reduction was
primarily due to higher installation labor and manufacturing costs as a percent
of sales at the lower level of sales for the first half of fiscal 2007 and
included a reserve for royalty costs, see note 8 to the Consolidated Financial
Statements, "Commitments and Contingencies". The reduction was mitigated by the
benefit from the strengthening Euro exchange rate this period and a favorable
product mix compared with the first half of fiscal 2006.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES - SG&A expenses were $8.1
million in the first half of fiscal 2007 compared to $6.9 million in the same
period one year ago. SG&A expenses were higher primarily due to salary and
benefit increases, recruiting and relocation costs and travel of approximately
$660,000. These increases primarily related to the Company's new sales growth
opportunities in Asia and to support the new commercial products business
initiatives. The increase was also due to higher costs for various expenses
including the unfavorable effect of the strengthening Euro on expenses and legal
and auditing fees that were partially offset by lower commission expense and
Michigan Single Business taxes.
ENGINEERING, RESEARCH AND DEVELOPMENT (R&D) EXPENSES - Engineering and R&D
expenses were $3.6 million for the six months ended December 31, 2006 compared
to $3.8 million for the six-month period a year ago. The decrease was
principally due to lower expenses related to engineering materials and contract
services and offset increases in salary and benefits.
18
INTEREST INCOME, NET - Net interest income was $579,000 in the first half of
fiscal 2007 compared with net interest income of $251,000 in the first half of
fiscal 2006. The increase was due to higher interest rates compared to one year
ago and also reflected in the six-month period of fiscal 2006 interest expense
of approximately $53,000 on additional taxes related to a tax audit in Germany
covering fiscal years 2001through 2003.
FOREIGN CURRENCY - There was a net foreign currency loss of $21,000 in the first
half of fiscal 2007 compared with a net loss of $77,000 a year ago and
represents foreign currency changes, particularly the Euro and Yen, within the
respective periods.
OTHER - Other income in the first half of fiscal 2006 of $161,000 primarily
reflected the value of stock received by the Company when a mutual life
insurance company was demutualized.
INCOME TAXES - The effective tax rates for the six months ended December 31,
2006 of 28.8% primarily reflected the effect of the mix of operating profit and
loss among the Company's various operating entities and their countries'
respective tax rates. Tax rates are higher in Europe than in the United States.
Income tax expense in the first half of fiscal 2006 included the recognition of
a $725,000 tax benefit associated with reversing a valuation allowance related
to net operating losses in North America that the Company now believes will be
utilized, and a $290,000 tax expense related to the repatriation of $6.3 million
of unremitted earnings of certain of the Company's European subsidiaries under
the provisions of the American Jobs Creation Act of 2004. The effective tax rate
excluding these two items was 42.3% for the first half of fiscal 2006.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $19.0 million at December 31, 2006,
compared to $25.2 million at June 30, 2006. The cash decrease of $6.1 million
for the six months ended December 31, 2006 resulted primarily from $3.7 million
used to repurchase shares of the Company's common stock and $2.4 million used
for operations. The Company also used $791,000 for capital expenditures and
received $487,000 from the Company's stock plans. Depreciation and amortization
was $685,000 during the six months ended December 31, 2006.
The $2.4 million used for operations was primarily related to $4.0 million of
inventory purchases and $690,000 reflecting the net loss including the add back
of non-cash items such as depreciation and non-cash stock based compensation
expense that were partially offset by collections on receivables of $2.6
million. The increase in inventory of $4.0 million was primarily to support the
initial production of the new commercial product, purchases of long lead time
items to fulfill existing and anticipated orders and finished goods inventory
related to shipments that were delayed by our customers and not shipped during
the second quarter of fiscal 2007. The $2.6 million decrease in receivables
reflected cash collections and the lower level of sales achieved in the first
half of fiscal 2007.
The Company provides a reserve for obsolescence to recognize the effects of
engineering change orders, age and use of inventory that affect the value of the
inventory. A detailed review of the inventory is performed yearly with quarterly
updates for known changes that have occurred since the annual review. When
inventory is deemed to have no further use or value, the Company disposes of the
inventory and the reserve for obsolescence is reduced. During fiscal 2007, the
Company's German subsidiary made a change to separate its reserve for
obsolescence from its inventory value to reflect the methodology used by the
rest of the Company. As a result, the inventory of the German subsidiary is
reported at a gross value and the reserve for obsolescence increased by
$273,000, which had no effect on net income. Also during the first half of
fiscal 2007, the Company disposed of $2,000 of inventory that had previously
been reserved for at June 30, 2006.
19
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. The Company increased its
allowance for doubtful accounts by $49,000 and wrote off $14,000 of receivables
during the first half of fiscal 2007.
The Company had no debt outstanding at December 31, 2006.
The Company has a $7.5 million secured Credit Agreement with Comerica Bank,
which expires on November 1, 2008. Proceeds under the Credit Agreement may be
used for working capital and capital expenditures. The security for the loan is
substantially all assets of the Company held in the United States. Borrowings
are designated as a Prime-based Advance or as a Eurodollar-based Advance.
Interest on Prime-based Advances is payable on the last day of each month and is
calculated daily at a rate that ranges from a 1/2% below to a 1/4% above the
bank's prime rate (8.25% as of December 31, 2006) dependent upon the Company's
ratio of funded debt to earnings before interest, taxes, depreciation and
amortization ("EBITDA"). Interest on Eurodollar-based Advances is calculated at
a specific margin above the Eurodollar Rate offered at the time and for the
period chosen (approximately 7.24% as of December 31, 2006) dependent upon the
Company's ratio of funded debt to EBITDA and is payable on the last day of the
applicable period. Quarterly, the Company pays a commitment fee on the daily
unused portion of the Credit Agreement based on a percentage dependent upon the
Company's ratio of funded debt to EBITDA. The Credit Agreement prohibits the
Company from paying dividends. In addition, the Credit Agreement requires the
Company to maintain a Tangible Net Worth, as defined in the Credit Agreement, of
not less than $36.0 million as of December 31, 2006 and to have no advances
outstanding for 30 consecutive days each calendar year.
At December 31, 2006, the Company's German subsidiary (GmbH) had an unsecured
credit facility totaling 500,000 Euros (equivalent to approximately $660,000 at
December 31, 2006). The facility may be used to finance working capital needs
and equipment purchases or capital leases. Any borrowings for working capital
needs will bear interest at 9.0% on the first 100,000 Euros of borrowings and
2.0% for borrowings over 100,000 Euros. The German 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 December 31, 2006, GmbH had no borrowings
outstanding. At December 31, 2006, the facility supported outstanding letters of
credit totaling 82,700 Euros (equivalent to approximately $109,000).
On August 7, 2006, the Company's Board of Directors ("Board") approved a stock
repurchase program authorizing the Company to repurchase up to $3.0 million of
the Company's Common Stock through August 2007. On November 13, 2006, the Board
approved a $2.0 million increase to the stock repurchase program bringing the
total repurchase authority to $5.0 million through August 2007. The Company may
buy shares of its Common Stock on the open market or in privately negotiated
transactions from time to time, based on market prices. The program may be
discontinued at any time. The Company also announced that it had entered into a
Rule 10b5-1 trading plan ("Repurchase Plan") with Barrington Research
Associates, Inc. to purchase up to $5.0 million of the Company's Common Stock
through August 2007 (less the dollar amount of purchases by the Company outside
the Repurchase Plan), in open market or privately negotiated transactions, in
accordance with the requirements of Rule 10b-18. See Part II Item 2
"Unregistered Sales of Equity Securities and Use of Proceeds" for a discussion
of the Repurchase Plan.
See Note 8 to the Consolidated Financial Statements, "Commitments and
Contingencies", contained in this Quarterly Report on Form 10-Q, Item 3, "Legal
Proceedings" and Note 6 to the Consolidated
20
Financial Statements, "Contingencies", of the Company's Annual Report on Form
10-K for fiscal year 2006, for a discussion of certain 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" of the Company's Annual Report on Form 10-K for fiscal year 2006.
The Company expects to spend approximately $1.5 million during fiscal year 2007
for capital equipment, although there is no binding commitment to do so.
Based upon the Company's current business plan, the Company believes that
available cash on hand and existing credit facilities will be sufficient to fund
its currently anticipated fiscal 2007 cash flow requirements and its cash flow
requirements for at least the next few years, 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. The foregoing statements are "forward-looking
statements" within the meaning of the Securities Exchange Act of 1934, as
amended. See Item 2 "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Safe Harbor Statement" for a discussion of a number
of uncertainties which could cause actual results to differ materially from
those set forth in the forward-looking statements.
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 intends to finance any such business opportunities from
available cash on hand, existing credit facilities, issuance of additional
shares of its stock or additional sources of financing, as circumstances
warrant.
CRITICAL ACCOUNTING POLICIES
A summary of critical accounting policies is presented in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Critical Accounting Policies" of the Company's Annual Report on Form 10-K for
fiscal year 2006.
MARKET RISK INFORMATION
The Company's primary market risk is related to foreign exchange rates. The
foreign exchange risk is derived from the operations of its international
subsidiaries, which are primarily located in Germany and for which products are
produced in the United States. The Company may from time to time have interest
rate risk in connection with its investment of its cash.
FOREIGN CURRENCY RISK
The Company has foreign currency exchange risk in its international operations
arising from the time period between sales commitment and delivery for contracts
in non-United States currencies. For sales commitments entered into in the
non-United States currencies, the currency rate risk exposure is predominantly
less than one year with the majority in the 120 to 150 day range. At December
31, 2006, the Company's percentage of sales commitments in non-United States
currencies was approximately 58.9% or $13.3 million, compared to 31.1% or $6.8
million at December 31, 2005.
The Company may use, from time to time, a limited hedging program to minimize
the impact of foreign currency fluctuations. These transactions involve the use
of forward contracts, typically mature within
21
one year and are designed to hedge anticipated foreign currency transactions.
The Company may use forward exchange contracts to hedge the net assets of
certain of its foreign subsidiaries to offset the translation and economic
exposures related to the Company's investment in these subsidiaries.
At December 31, 2006, the Company had forward exchange contracts to sell 6.0
million Euros ($7.8 million equivalent) at a weighted average settlement rate of
1.30 Euros to the United States Dollar. The contracts outstanding at December
31, 2006, mature through June 29, 2007. The objective of the hedge transactions
is to protect designated portions of the Company's net investment in its foreign
subsidiary against adverse changes in the Euro/U.S. Dollar exchange rate. The
Company assesses hedge effectiveness based on overall changes in fair value of
the forward contract. Since the critical risks of the forward contract and the
net investment coincide, there was no ineffectiveness. The accounting for the
hedges is consistent with translation adjustments where any gains and losses are
recorded to other comprehensive income. The Company recognized a charge of
approximately $97,000 and $24,000 in other comprehensive income (loss) for the
unrealized change in value of the forward exchange contracts during the three
and six months ended December 31, 2006, respectively. Offsetting this amount in
other comprehensive income (loss) was the translation effect of the Company's
foreign subsidiary. Because the forward contracts were effective, there was no
gain or loss recognized in earnings. The Company's forward exchange contracts do
not subject it to material risk due to exchange rate movements because gains and
losses on these contracts offset losses and gains on the assets, liabilities,
and transactions being hedged.
At December 31, 2005, the Company had $3.6 million of forward exchange contracts
between the United States Dollar and the Euro with a weighted average settlement
price of 1.20 Euros to the United States Dollar. The Company recognized income
of approximately $92,000 and $132,000 in other comprehensive income (loss) for
the unrealized change in value of the forward exchange contracts during the
three and six months ended December 31, 2005.
The Company's potential loss in earnings that would have resulted from a
hypothetical 10% adverse change in quoted foreign currency exchange rates
related to the translation of foreign denominated revenues and expenses into
U.S. dollars for the three and six months ended December 31, 2006 would have
been approximately $51,000 and $69,000, respectively. The potential loss in
earnings for the comparable periods in fiscal 2006 would have been approximately
$12,000 and $73,000, respectively.
INTEREST RATE RISK
The Company invests its cash and cash equivalents in high quality, short-term
investments with primarily a term of three months or less. Given the short
maturities and investment grade quality of the Company's investment holdings at
December 31, 2006, a 100 basis point rise in interest rates would not be
expected to have a material adverse impact on the fair value of the Company's
cash and cash equivalents. As a result, the Company does not currently hedge
these interest rate exposures.
NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new accounting pronouncements, see Note 10 to the
Consolidated Financial Statements, "New Accounting Pronouncements".
SAFE HARBOR STATEMENT
We make statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations that may be "forward-looking statements"
within the meaning of the Securities Exchange Act of 1934, including the
Company's expectation as to fiscal 2007 and future new order bookings,
22
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 and from our plans to make important new investments, largely for
personnel, for newly introduced products and geographic growth opportunities in
the U.S., Europe, Eastern Europe, Asia, our ability to fund our fiscal year 2007
cash flow requirements and customers' current and future interest in our Value
Added Services. We may also make forward-looking statements in our press
releases or other public or shareholder communications. When we use words such
as "will," "should," "believes," "expects," "anticipates," "estimates" 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 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 reports filed with the
Securities and Exchange Commission, including those listed in "Item 1A - Risk
Factors" of the Company's Annual Report on Form 10-K for fiscal year 2006. Other
factors not currently anticipated by management may also materially and
adversely affect our financial condition, liquidity or results of operations, as
well as the following: the dependence of the Company's revenue on a number of
sizable orders from a small number of customers concentrated in the Automotive
industry, particularly in the United States and Europe, the dependence of the
Company's net income levels on increasing revenues, continued pricing pressures
from the Company's customers, the timing of orders and shipments which can cause
the Company to experience significant fluctuations in its quarterly and annual
revenue, order bookings, backlog and operating results, timely receipt of
required supplies and components which could result in delays in anticipated
shipments, continued access to third party components for our ScanWorks(R)
systems, the ability of the Company to successfully compete with alternative and
similar technologies, the timing, number and continuation of the Automotive
industry's retooling programs, including the risk that the Company's customers
postpone new tooling programs as a result of economic conditions or otherwise,
the ability of the Company to develop and introduce new products, the ability of
the Company to expand into new markets in Eastern Europe and Asia, the ability
of the Company to attract and retain key personnel, especially technical
personnel, the quality and cost of competitive products already in existence or
developed in the future, rapid or unexpected technological changes, the ability
of the Company to identify and satisfy demand for the Company's Value Added
Services, the ability of the Company to identify business opportunities that fit
the Company's strategic plans, the ability to implement identified business
opportunities on terms acceptable to the Company and the effect of economic
conditions, particularly economic conditions in the domestic and worldwide
Automotive industry, which has from time to time been subject to cyclical
downturns due to the level of demand for, or supply of, the products produced by
companies in this industry. The ability of the Company to develop and introduce
new products, especially in markets outside of automotive, is subject to a
number of uncertainties, including general product demand and market acceptance
risks, the ability of the Company to resolve technical issues inherent in the
development of new products and technologies, the ability of the Company to
identify and satisfy market needs, the ability of the Company to identify
satisfactory distribution networks, the ability of the Company to develop
internally or identify externally high quality cost effective manufacturing
capabilities for the products, general product development and commercialization
difficulties, and the level of interest existing and potential new customers may
have in new products and technologies generally. The ability of the Company to
expand into new geographic markets is subject to a number of uncertainties,
including the timing of customer acceptance of the Company's products and
technologies, the impact of changes in local economic conditions, the ability of
the Company to attract the appropriate personnel to effectively represent,
install and service the Company's products in the market and uncertainties
inherent in doing business in foreign markets, especially those that are less
well developed than the Company's
23
traditional markets, such as the impact of fluctuations in foreign currency
exchange rates, foreign government controls, policies and laws affecting foreign
trade and investment, differences in the level of protection available for the
Company's intellectual property and differences in language and local business
and social customs. The ability of the Company to identify and satisfy demand
for the Company's Value Added Services is subject to a number of uncertainties
including that these services represent discretionary spending by customers and
so tend to decline during economic downturns even if product sales do not
decline. 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. The Company's expectations regarding
future bookings and revenues are projections developed by the Company 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, a number of which are discussed above. Certain of these new
orders have been delayed in the past and could be delayed in the future. Because
the Company's 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 the Company's products have shorter lead
times than other components and are required later in the process, orders for
the Company's products tend to be given later in the integration process. A
significant portion of the Company's projected revenues and net income depends
upon the Company's ability to successfully develop and introduce new products
and expand into new geographic markets. Because a significant portion of the
Company's revenues are denominated in foreign currencies and are translated for
financial reporting purposes into U.S. Dollars, the level of the Company's
reported net sales, operating profits and net income are affected by changes in
currency exchange rates, principally between U.S. Dollars and Euros. Currency
exchange rates are subject to significant fluctuations, due to a number of
factors beyond the control of the Company, including general economic conditions
in the United States and other countries. Because the Company's 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required pursuant to this item is incorporated by reference herein
from Item 2 "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Market Risk Information".
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including its Chief Executive Officer
and Acting Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to Rule
13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the
Company's Chief Executive Officer and Acting Chief Financial Officer concluded
that, as of December 31, 2006, the Company's disclosure controls and procedures
were effective in causing the material information required to be disclosed by
the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 to be recorded, processed, summarized and reported, to the
extent applicable, within the time periods required for the Company to meet the
Securities and Exchange Commission's ("SEC") filing deadlines for these reports
specified in the SEC's rules and forms. There have been no significant changes
in the Company's internal controls over financial reporting during the quarter
ended December 31, 2006 identified in connection with the Company's evaluation
that has materially affected, or is reasonably likely to materially affect, the
Company's internal controls over financial reporting.
24
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
No material changes were made to the risk factors listed in "Item 1A - Risk
Factors" of the Company's Annual Report on Form 10-K for fiscal year 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth information concerning the Company's repurchases
of its common stock during the quarter ended December 31, 2006. All shares were
purchased pursuant to the Company's stock repurchase program described below.
(C) TOTAL NUMBER
(A) TOTAL OF SHARES (D) APPROXIMATE DOLLAR
NUMBER OF (B) AVERAGE PURCHASED AS VALUE OF SHARES THAT
SHARES PRICE PAID PART OF PUBLICLY MAY YET BE PURCHASED
PERIOD PURCHASED PER SHARE ANNOUNCED PROGRAM UNDER THE PROGRAM
------ --------- ----------- ----------------- ----------------------
October 1-31, 2006 124,900 $8.25 124,900 $3,204,486
November 1-30, 2006 95,200 $8.23 95,200 $2,421,008
December 1-31, 2006 111,900 $8.39 111,900 $1,482,477
------- -------
Total 332,000 $8.29 332,000 $1,482,477
======= =======
On August 7, 2006, the Company's Board of Directors ("Board") approved a stock
repurchase program authorizing the Company to repurchase up to $3.0 million of
the Company's Common Stock through August 2007. On November 13, 2006, the Board
approved a $2.0 million increase to the stock repurchase program bringing the
total repurchase authority to $5.0 million through August 2007. The Company may
buy shares of its Common Stock on the open market or in privately negotiated
transactions from time to time, based on market prices. The program may be
discontinued at any time. The Company also announced that it had entered into a
Rule 10b5-1 trading plan ("Repurchase Plan") with Barrington Research
Associates, Inc. to purchase up to $5.0 million of the Company's Common Stock
through August 2007 (less the dollar amount of purchases by the Company outside
the Repurchase Plan), in open market or privately negotiated transactions, in
accordance with the requirements of Rule 10b-18.
25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on November 13, 2006 at
which the following action was taken:
1. The Shareholders elected the following persons as the Company's Board of
Directors, and the results of the vote on this matter were as follows:
Name For Withheld Broker Non-Votes
---- --------- -------- ----------------
David J. Beattie 7,424,412 82,130 --
Kenneth R. Dabrowski 7,446,936 59,605 --
Philip J. DeCocco 7,397,462 109,080 --
W. Richard Marz 7,424,436 82,105 --
Robert S. Oswald 7,430,976 75,565 --
Alfred A. Pease 7,433,092 73,450 --
James A. Ratigan 7,405,070 101,472 --
Terryll R. Smith 7,431,792 74,750 --
ITEM 6. EXHIBITS
4.12 Seventh Amendment to Credit Agreement dated October 24, 2002, between
Perceptron, Inc. and Comerica Bank is incorporated by reference to Exhibit
10.1 of the Company's Report on Form 8-K filed on December 21, 2006.
10.44 Summary of 2007 Team Member Profit Sharing Plan is incorporated by
reference to Exhibit 10.1 of the Company's Report on Form 8-K filed on
November 17, 2006.
31.1 Certification by the Chief Executive Officer of the Company pursuant to
Rule 13a-14(a) and Rule 15d-14(a).
31.2 Certification by the Acting Chief Financial Officer of the Company
pursuant to Rule 13a-14(a) and Rule 15d-14(a).
32.1 Certification by the Chief Executive Officer of the Company pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by the Acting Chief Financial Officer of the Company
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERCEPTRON, INC.
(Registrant)
Date: February 13, 2007 By: /S/ Alfred A. Pease
------------------------------------
Alfred A. Pease
Chairman of the Board, President and
Chief Executive Officer
Date: February 13, 2007 By: /S/ Sylvia M. Smith
------------------------------------
Sylvia M. Smith
Acting Chief Financial Officer,
Controller and Chief Accounting
Officer
(Principal Financial Officer)
(Principal Accounting Officer)
27
Exhibit Index
Exhibit
No. Description
------- -----------
4.12 Seventh Amendment to Credit Agreement dated October 24, 2002, between
Perceptron, Inc. and Comerica Bank is incorporated by reference to
Exhibit 10.1 of the Company's Report on Form 8-K filed on December 21,
2006.
10.44 Summary of 2007 Team Member Profit Sharing Plan is incorporated by
reference to Exhibit 10.1 of the Company's Report on Form 8-K filed on
November 17, 2006.
31.1 Certification by the Chief Executive Officer of the Company pursuant
to Rule 13a-14(a) and Rule 15d-14(a).
31.2 Certification by the Acting Chief Financial Officer of the Company
pursuant to Rule 13a-14(a) and Rule 15d-14(a).
32.1 Certification by the Chief Executive Officer of the Company pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by the Acting Chief Financial Officer of the Company
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.