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 March 31, 2007.
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 May 8, 2007, was:
Common Stock, $0.01 par value 8,002,587
Class Number of shares
PERCEPTRON, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2007
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 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 6. Exhibits 25
SIGNATURES 26
2
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, JUNE 30,
2007 2006
----------- --------
(In Thousands, Except Per Share Amount) (Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 15,880 $ 25,188
Receivables:
Billed receivables, net of allowance
for doubtful accounts of $408 and
$352, respectively 15,607 15,623
Unbilled receivables 1,375 994
Other receivables 996 577
Inventories, net of reserves of $891
and $554, respectively 10,858 6,433
Deferred taxes 1,481 1,481
Other current assets 612 521
-------- --------
Total current assets 46,809 50,817
PROPERTY AND EQUIPMENT
Building and land 6,013 6,013
Machinery and equipment 12,301 11,566
Furniture and fixtures 1,098 1,093
-------- --------
19,412 18,672
Less - Accumulated depreciation and
amortization (12,141) (11,264)
-------- --------
Net property and equipment 7,271 7,408
DEFERRED TAX ASSET 4,720 4,170
-------- --------
TOTAL ASSETS $ 58,800 $ 62,395
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,132 $ 1,667
Accrued liabilities and expenses 2,598 2,277
Accrued compensation 1,051 1,740
Income taxes payable 227 145
Deferred revenue 1,888 2,336
-------- --------
Total current liabilities 7,896 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 7,993 and 8,352,
respectively 80 84
Accumulated other comprehensive income
(loss) 745 (15)
Additional paid-in capital 35,843 39,111
Retained earnings 14,236 15,050
-------- --------
Total shareholders' equity 50,904 54,230
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 58,800 $ 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 NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
----------------- ------------------
(In Thousands, Except Per Share Amounts) 2007 2006 2007 2006
------- ------- -------- -------
NET SALES $15,954 $13,447 $38,898 $43,395
COST OF SALES 8,697 6,298 22,608 22,365
------- ------- ------- -------
GROSS PROFIT 7,257 7,149 16,290 21,030
OPERATING EXPENSES
Selling, general and administrative 4,219 3,850 12,284 10,794
Engineering, research and development 2,043 1,984 5,687 5,742
------- ------- ------- -------
Total operating expenses 6,262 5,834 17,971 16,536
------- ------- ------- -------
OPERATING INCOME (LOSS) 995 1,315 (1,681) 4,494
OTHER INCOME AND (EXPENSES)
Interest income, net 188 206 767 457
Foreign currency gain (loss) (2) 32 (23) (45)
Other -- 8 5 169
------- ------- ------- -------
Total other income (expenses) 186 246 749 581
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES 1,181 1,561 (932) 5,075
INCOME TAX EXPENSE (BENEFIT) (NOTE 9) 490 513 (118) 1,564
------- ------- ------- -------
NET INCOME (LOSS) $ 691 $ 1,048 $ (814) $ 3,511
======= ======= ======= =======
EARNINGS (LOSS) PER COMMON SHARE
Basic $ 0.09 $ 0.12 ($ 0.10) $ 0.41
Diluted $ 0.08 $ 0.12 ($ 0.10) $ 0.38
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 7,950 8,453 8,143 8,650
Dilutive effect of stock options 683 639 -- 608
------- ------- ------- -------
Diluted 8,633 9,092 8,143 9,258
======= ======= ======= =======
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)
NINE MONTHS ENDED
MARCH 31,
-----------------
(In Thousands) 2007 2006
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (814) $ 3,511
Adjustments to reconcile net income
(loss) to net cash provided from
(used for) operating activities:
Depreciation and amortization 960 919
Stock compensation expense 645 523
Deferred income taxes (550) 973
Other 177 (9)
Changes in assets and liabilities,
exclusive of changes shown
separately (5,194) 593
------- -------
Net cash provided from (used for)
operating activities (4,776) 6,510
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving credit borrowings 1,028 641
Revolving credit repayments (1,028) (641)
Proceeds from stock plans 1,267 304
Repurchase of company stock (5,184) (3,990)
------- -------
Net cash used for financing
activities (3,917) (3,686)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (945) (1,008)
------- -------
Net cash used for investing
activities (945) (1,008)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 330 6
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (9,308) 1,822
CASH AND CASH EQUIVALENTS, JULY 1 25,188 20,374
------- -------
CASH AND CASH EQUIVALENTS, MARCH 31 $15,880 $22,196
======= =======
CHANGES IN ASSETS AND LIABILITIES,
EXCLUSIVE OF CHANGES SHOWN SEPARATELY
Receivables, net $ (361) $ 2,174
Inventories (4,424) (1,430)
Accounts payable 465 9
Other current assets and liabilities (874) (160)
------- -------
$(5,194) $ 593
======= =======
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 $891,000 and $554,000 at March 31, 2007 and June 30, 2006,
respectively, is comprised of the following (in thousands):
MARCH 31, JUNE 30,
2007 2006
--------- --------
Component Parts $ 3,013 $3,038
Work In Process 2,986 309
Finished Goods 4,859 3,086
------- ------
Total $10,858 $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 326,000 and 491,000 shares of common stock outstanding in
the three months ended March 31, 2007 and 2006, respectively, were not included
in the computation of diluted EPS because the effect would have been
anti-dilutive. Options to purchase 338,000 and 610,000 shares of common stock
outstanding in the nine months ended March 31, 2007 and 2006, respectively, were
not included in the computation of diluted EPS because the effect would have
been anti-dilutive.
6
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 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 March 31, 2007, the Company had forward exchange contracts to sell 3.0
million Euros ($4.0 million equivalent) at a weighted average settlement rate of
1.32 Euros to the United States Dollar. The contracts outstanding at March 31,
2007, mature through September 28, 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 $23,000 and $47,000 in other comprehensive income (loss) for the
unrealized change in value of the forward exchange contracts during the three
and nine months ended March 31, 2007, respectively. Offsetting these amounts 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 March 31, 2006, the Company had $4.8 million of forward exchange contracts
between the United States Dollar and the Euro with a weighted average settlement
price of 1.21 Euros to the United States Dollar. The Company recognized a charge
of $33,000 and income of $99,000 in other comprehensive income (loss) for the
unrealized and realized change in value of forward exchange contracts during the
three and nine months ended March 31, 2006, respectively.
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):
THREE MONTHS ENDED MARCH 31, 2007 2006
----- ------
Net Income $ 691 $1,048
Other Comprehensive Income (Loss):
Foreign currency translation adjustments 151 183
Forward contracts (23) (33)
----- ------
Total Comprehensive Income $ 819 $1,198
===== ======
NINE MONTHS ENDED MARCH 31, 2007 2006
----- ------
Net Income (Loss) $(814) $3,511
Other Comprehensive Income (Loss):
Foreign currency translation adjustments 807 (74)
Forward contracts (47) 99
----- ------
Total Comprehensive Income (Loss) $ (54) $3,536
===== ======
7
6. CREDIT FACILITIES
The Company had no debt outstanding at March 31, 2007.
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 non real estate 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 March 31, 2007)
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 7.23% as of March 31, 2007)
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 $39.8 million as of March 31, 2007 and to
have no advances outstanding for 30 consecutive days each calendar year.
At March 31, 2007, the Company's German subsidiary (GmbH) had an unsecured
credit facility totaling 500,000 Euros (equivalent to approximately $667,000 at
March 31, 2007). 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 March 31, 2007, GmbH had no borrowings
outstanding. At March 31, 2007, the facility supported outstanding letters of
credit totaling 54,300 Euros (equivalent to approximately $72,000).
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 $194,000 and $645,000 in the three and nine months ended
March 31, 2007, respectively. This had the effect of decreasing net income by
$163,000, or $0.02 per diluted share, and $519,000, or $0.06 per diluted share,
for the three and nine months ended March 31, 2007, respectively. The Company
recognized as an operating expense non-cash stock-based compensation cost in the
amount of $140,000 and $523,000 in the three and nine months ended March 31,
2006, respectively. This had the effect of decreasing net income by $112,000, or
$0.01 per diluted share, and $423,000, or $0.05 per diluted share, for the three
and nine months ended March 31, 2006, respectively. As of March 31, 2007, the
total remaining unrecognized compensation cost related to non-vested stock
options amounted to $834,000. The Company expects to recognize this cost over a
weighted average vesting period of 1.58 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 March 31, 2007, 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 estimated fair value as of the date options were granted during the periods
presented, using the Black-Scholes option-pricing model, was as follows:
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
3/31/2007 3/31/2006 3/31/2007 3/31/2006
------------ ------------ ----------- -----------
Weighted Average Estimated Fair Value
Per Share of Options Granted
During the Period $ 3.05 $ 2.37 $ 3.04 $ 2.28
Assumptions:
Amortized Dividend Yield -- -- -- --
Common Stock Price Volatility 31.10% 29.49% 31.56% 30.16%
Risk Free Rate of Return 4.63% 4.25% 4.76% 4.02%
Expected Option Term (in years) 5 5 5 5
9
The Company received $726,000 and $1,056,000 in cash from option exercises under
all share-based payment arrangements during the three and nine months ended
March 31, 2007, 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 $5.8 million using a March 31, 2007
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 of this issue may be
different from the estimate recorded.
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 third quarter of fiscal 2007, the Company's German subsidiary
recorded a one-time tax benefit of approximately $98,000 related to new
corporate tax legislation. The tax benefit related to
10
corporate tax credits derived under previous tax regulations that under the new
legislation will be paid to the German subsidiary over a 10 year period.
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 February 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 159, "The Fair Value
Options for Financial Assets and Financial Liabilities - Including an amendment
of FASB Statement No. 115". This Statement permits entities to choose to measure
many financial instruments and certain other items at fair value. The objective
is to improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement is expected to expand the use of fair value
measurement, which is consistent with the Board's long-term measurement
objectives for accounting for financial instruments. 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 net yet been evaluated.
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 is currently being evaluated.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Perceptron, Inc. ("Perceptron" or the "Company") develops, produces 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 solutions for
scanning and inspection, serving industrial, trade and consumer applications.
The solutions offered by the Company are divided into three groups: 1) The
Automated Systems Group made up of AutoGauge(R), AutoFit(R), AutoScan(R),
AutoSpect(R) and AutoGuide(R) products; 2) The Technology Products Group made up
of ScanWorks(R), Non-Contact Wheel Alignment ("WheelWorks(R)"), TriCam(R)
sensors for the forest products industry and commercial products; and 3) The
Value Added Services Group offering consulting, training and non-warranty
support services. 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
$15.9 million of cash at March 31, 2007 available to support its growth plans.
Near-term the Company's focus is on the production 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 of increasing importance 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 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 MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH 31, 2006
For the third quarter of fiscal 2007, the Company reported net income of
$691,000, or $0.08 per diluted share, compared to net income of $1.0 million, or
$0.12 per diluted share, for the third quarter of fiscal 2006. Specific line
item results are described below.
SALES - Net sales of $16.0 million for the third quarter of fiscal 2007 were up
$2.6 million, compared with 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) THIRD QUARTER THIRD QUARTER INCREASE/
(in millions) 2007 2006 (DECREASE)
-------------------- ------------- ------------- -------------
Automated Systems $10.5 65.6% $10.7 79.9% $(0.2) (1.9)%
Technology Products 4.3 26.9% 2.0 14.9% 2.3 115.0%
Value Added Services 1.2 7.5% 0.7 5.2% 0.5 71.4%
----- ----- ----- ----- -----
Totals $16.0 100.0% $13.4 100.0% $ 2.6 19.4%
===== ===== ===== ===== =====
SALES (BY LOCATION) THIRD QUARTER THIRD QUARTER INCREASE/
(in millions) 2007 2006 (DECREASE)
-------------------- ------------- ------------- -------------
North America $ 7.4 46.3% $10.8 80.6% $(3.4) (31.5)%
Europe 8.0 50.0% 2.3 17.2% 5.7 247.8%
Asia 0.6 3.7% 0.3 2.2% 0.3 100.0%
----- ----- ----- ----- -----
Totals $16.0 100.0% $13.4 100.0% $ 2.6 19.4%
===== ===== ===== ===== =====
Automated Systems sales in the third quarter of fiscal 2007 were comparable to
those of the third quarter of fiscal 2006. The sales increase in the Technology
Products Group was primarily due to higher sales of the Company's commercial
products. The first deliveries of the Company's new commercial products occurred
in the third quarter of fiscal 2007, which is the first quarter that the Company
recognized revenues from commercial products sales. Sales of WheelWorks(R) and
Forest Products also contributed to the increase in Technology Products Group
revenues. Sales of Value Added Services were up $500,000 compared with the same
period one year ago. This increase was due to higher support and training
services for the third quarter. North American sales of $7.4 million were $3.4
million lower compared to the third quarter of fiscal 2006 primarily as a result
of lower Automated Systems sales, offset by increased Technology Products sales
including the Company's new commercial products. The changes in both North
America and Europe primarily reflected the timing of new vehicle programs. The
sales increase in Europe reflected the high level of new order bookings for
Automated Systems in the second quarter of fiscal 2007 with several of those
orders shipping in the third quarter of fiscal 2007 as well as the shipment of
customer orders for Automated Systems that were delayed from the second quarter
and shipped in the third quarter. The increase in Europe was also due to the
strengthening Euro that, based on conversion rates in effect this quarter,
resulted in $730,000 more in sales than the comparable rates in the third
quarter of fiscal 2006 would have yielded. Asian sales were up $300,000 from the
same quarter in fiscal 2006.
BOOKINGS - The Company had new order bookings during the quarter of $20.0
million compared with new order bookings of $17.2 million in the quarter ended
December 31, 2006 and $8.5 million for the quarter ended March 31, 2006. The
amount of new order bookings during any particular period is not
13
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) THIRD QUARTER THIRD QUARTER INCREASE/
(in millions) 2007 2006 (DECREASE)
-------------------- ------------- ------------- -------------
Automated Systems $ 9.4 47.0% $4.9 57.7% $ 4.5 91.8%
Technology Products 9.7 48.5% 2.8 32.9% 6.9 246.4%
Value Added Services 0.9 4.5% 0.8 9.4 0.1 12.5%
----- ----- ---- ----- -----
TOTALS $20.0 100.0% $8.5 100.0% $11.5 135.3%
===== ===== ==== ===== =====
BOOKINGS (BY
LOCATION) (in THIRD QUARTER THIRD QUARTER INCREASE/
millions) 2007 2006 (DECREASE)
-------------------- ------------- ------------- -------------
North America $14.1 70.5% $5.7 67.0% $ 8.4 147.4%
Europe 5.6 28.0% 2.3 27.1% 3.3 143.5%
Asia 0.3 1.5% 0.5 5.9% (0.2) (40.0)%
----- ----- ---- ----- -----
TOTALS $20.0 100.0% $8.5 100.0% $11.5 135.3%
===== ===== ==== ===== =====
New orders in North America were $8.4 million higher than in the third quarter
of fiscal 2006 primarily as a result of higher orders for Technology Products,
in particular, the Company's new commercial products. European new order
bookings primarily represented increased Automated Systems orders. Additionally,
European bookings during the third 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
order bookings for the fourth quarter of fiscal 2007 to be comparable to the
level of new orders received in the third 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 $26.6 million as of March 31, 2007 compared
with $22.6 million as of December 31, 2006 and $17.0 million as of March 31,
2006. The following tables set forth comparison data for the Company's backlog
by product groups and geographic location.
BACKLOG (BY GROUP) THIRD QUARTER THIRD QUARTER INCREASE/
(in millions) 2007 2006 (DECREASE)
-------------------- ------------- ------------- -------------
Automated Systems $15.5 58.3% $13.2 77.6% $ 2.3 17.4%
Technology Products 9.1 34.2% 2.0 11.8% 7.1 355.0%
Value Added Services 2.0 7.5% 1.8 10.6% 0.2 11.1%
----- ----- ----- ----- -----
TOTALS $26.6 100.0% $17.0 100.0% $ 9.6 56.5%
===== ===== ===== ===== =====
BACKLOG (BY
LOCATION) THIRD QUARTER THIRD QUARTER INCREASE/
(in millions) 2007 2006 (DECREASE)
-------------------- ------------- ------------- -------------
North America $16.8 63.1% $10.3 60.6% $ 6.5 63.1%
Europe 9.5 35.7% 6.2 36.5% 3.3 53.2%
Asia 0.3 1.2% 0.5 2.9% (0.2) (40.0)%
----- ----- ----- ----- -----
TOTALS $26.6 100.0% $17.0 100.0% $ 9.6 56.5%
===== ===== ===== ===== =====
14
The $26.6 million backlog at March 31, 2007, is the highest backlog the Company
has had since 1999. The increase in backlog was primarily due to increased
orders for Technology Products, principally for the new commercial products. 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 $7.3 million, or 45.5% of sales, in the third
quarter of fiscal year 2007, as compared to $7.1 million, or 53.2% of sales, in
the third quarter of fiscal year 2006. The gross profit margin reduction was
primarily due to the mix of product sales that included the higher volume
commercial products this quarter and, to a lesser extent, Forest Products sales,
both of which are sold at a lower gross margin than the Company's other
products. The stronger Euro in the quarter mitigated the impact.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES - SG&A expenses were $4.2
million in the quarter ended March 31, 2007 compared to $3.9 million in the
third quarter a year ago. SG&A expenses were higher primarily due to personnel
additions to support growth opportunities in the Far East, to support the new
commercial products business initiatives, and salary and benefit increases. The
increase was also due to the effect of the strengthening Euro on costs. These
SG&A costs 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 $2.0 million in both quarters ended March 31, 2007 and 2006 as
salary and benefit increases in the current quarter were offset by decreased
spending on engineering materials.
INTEREST INCOME, NET - Net interest income was $188,000 in the third quarter of
fiscal 2007 compared with net interest income of $206,000 in the third quarter
of fiscal 2006. The decrease was primarily due to a lower cash balance compared
to one year ago.
FOREIGN CURRENCY - There was a net foreign currency transaction loss of $2,000
this quarter compared to a net foreign currency gain of $32,000 last year due to
foreign currency changes, particularly the Euro.
INCOME TAXES - The effective tax rate this quarter of 41.5% included a one time
tax benefit of approximately $98,000 recorded by the Company's German subsidiary
that related to new corporate tax legislation. The tax benefit related to
corporate tax credits derived under previous tax regulations that under the new
legislation will be paid to the German subsidiary over a 10 year period. The
benefit had the effect of reducing the effective tax rate for the third quarter
by 8.3%. Excluding this benefit, the effective tax rate this quarter would have
been 49.8% compared to 32.9% in the third quarter of fiscal 2006 and primarily
reflected the effect of pretax losses in North America being offset by pretax
income in the Company's European subsidiaries which are taxed at higher rates.
OUTLOOK - The Company expects total revenues for fiscal year 2007, including
anticipated sales of the Company's new commercial product, to be comparable to
fiscal year 2006. Based on business currently being quoted, the Company expects
new order bookings for the fourth quarter of fiscal 2007 to be comparable to the
level of new orders received in the third quarter of fiscal 2007. The Company
continually reviews its cost structures in each geographic region, particularly
as they relate to system installation and support, to ensure that the Company's
resources allow for future growth and are consistent with the requirements of
each business and geographic region. As a result, the Company took steps during
the fourth quarter of fiscal 2007 to reduce expenses in its North American and
European Automotive businesses by over $1.4 million annually. To fuel long-term
growth, the Company intends to continue to make investments in Asia and to
support its new commercial products initiatives. See Item 2
15
"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 demand.
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.
NINE MONTHS ENDED MARCH 31, 2007 COMPARED TO NINE MONTHS ENDED MARCH 31, 2006
The Company reported a net loss of $814,000, or $0.10 per diluted share, for the
nine months ended March 31, 2007, compared with net income of $3.5 million, or
$0.38 per diluted share for the nine months ended March 31, 2006.
SALES - Net sales in the nine months ended March 31, 2007 were $38.9 million,
compared to $43.4 million for the nine months ended March 31, 2006. The
following tables set forth comparison data for the Company's net sales by
product groups and geographic location.
SALES (BY GROUP) NINE MONTHS NINE MONTHS INCREASE/
(in millions) ENDED 3/31/07 ENDED 3/31/06 (DECREASE)
---------------- ------------- ------------- -------------
Automated Systems $25.3 65.0% $33.0 76.0% $(7.7) (23.3)%
Technology Products 10.2 26.2% 7.9 18.2% 2.3 29.1%
Value Added Services 3.4 8.8% 2.5 5.8% 0.9 36.0%
----- ----- ----- ----- -----
Totals $38.9 100.0% $43.4 100.0% $(4.5) (10.4)%
===== ===== ===== ===== =====
SALES (BY LOCATION) NINE MONTHS NINE MONTHS INCREASE/
(in millions) ENDED 3/31/07 ENDED 3/31/06 (DECREASE)
------------------- ------------- ------------- --------------
North America $18.7 48.1% $29.2 67.3% $(10.5) (36.0)%
Europe 18.4 47.3% 13.1 30.2% 5.3 40.1%
Asia 1.8 4.6% 1.1 2.5% 0.7 63.6%
----- ----- ----- ----- ------
Totals $38.9 100.0% $43.4 100.0% $ (4.5) (10.4)%
===== ===== ===== ===== ======
Sales of Automated Systems products during the nine-months ended March 31, 2007
reflected changes in original delivery schedules made by the Company's customers
that accelerated delivery of several orders into the fourth quarter of fiscal
2006. The sales increase in the Technology Products Group was
16
primarily due to higher sales of the Company's commercial products and
ScanWorks(R). 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 nine-month period
ended March 31, 2007 reflected customer delays primarily in North America, as
customers 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. The sales increase in Europe was due to increased sales for
Automated Systems in fiscal 2007. The increase in Europe was also due in part to
a favorable strengthening of the Euro during the first nine months of fiscal
2007 that based on conversion rates in effect during the nine-month period,
resulted in approximately $1.4 million of higher sales than rates in effect in
the corresponding period of fiscal 2006 would have yielded.
BOOKINGS - New order bookings for the nine months ended March 31, 2007 were
$46.7 million compared to $42.4 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) NINE MONTHS NINE MONTHS INCREASE/
(in millions) ENDED 3/31/07 ENDED 3/31/06 (DECREASE)
------------------- ------------- ------------- -------------
Automated Systems $25.7 55.0% $31.9 75.2% $(6.2) (19.4)%
Technology Products 17.5 37.5% 7.3 17.2% 10.2 139.7%
Value Added Services 3.5 7.5% 3.2 7.6% 0.3 9.4%
----- ----- ----- ----- -----
TOTALS $46.7 100.0% $42.4 100.0% $ 4.3 10.1%
===== ===== ===== ===== =====
BOOKINGS (BY LOCATION) NINE MONTHS NINE MONTHS INCREASE/
(in millions) ENDED 3/31/07 ENDED 3/31/06 (DECREASE)
---------------------- ------------- ------------- -------------
North America $27.4 58.7% $30.5 71.9% $(3.1) (10.2)%
Europe 17.6 37.7% 10.7 25.3% 6.9 64.5%
Asia 1.7 3.6% 1.2 2.8% 0.5 41.7%
----- ----- ----- ----- -----
TOTALS $46.7 100.0% $42.4 100.0% $ 4.3 10.1%
===== ===== ===== ===== =====
The decrease in new order bookings for both the Automated Systems Group and
North America for the nine-months ended March 31, 2007 was primarily due to the
significantly high 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 Products Group for the
nine-months ended March 31, 2007 primarily represented increased bookings of
commercial products. Bookings for WheelWorks(R) and ScanWorks(R), also increased
on a comparable basis. 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 nine-month
period ended March 31, 2007, reflected strong orders received in the second and
third quarters 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 order bookings for the
fourth quarter of fiscal 2007 to be comparable to the level of new orders
received in the third 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.
17
GROSS PROFIT - Gross profit was $16.3 million, or 41.9% of sales, for the nine
months ended March 31, 2007, as compared to $21.0 million, or 48.5% of sales,
for the nine months ended March 31, 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 nine months 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 in fiscal
2007.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES - SG&A expenses were $12.3
million for the nine months ended March 31, 2007 compared to $10.8 million in
the period one year ago. SG&A expenses were higher primarily due to salary and
benefit increases, recruiting and relocation costs and travel of approximately
$550,000. These increases primarily related to the Company's new sales growth
opportunities in Asia and to support the new commercial products 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 $5.7 million in both nine-month periods ended March 31, 2007 and
2006 as salary and benefit increases in the current period were offset by
decreased spending on engineering materials.
INTEREST INCOME, NET - Net interest income was $767,000 in the nine months ended
March 31, 2007 compared with net interest income of $457,000 in the nine months
ended March 31, 2006. The increase was due to higher interest rates compared to
one year ago and also reflected in the nine-month period of fiscal 2006 interest
expense of approximately $53,000 on additional taxes related to a tax audit in
Germany covering fiscal years 2001 through 2003.
FOREIGN CURRENCY - There was a net foreign currency loss of $23,000 in the
fiscal 2007 nine-month period compared with a net foreign currency loss of
$45,000 a year ago and represents foreign currency changes, particularly the
Euro and Yen, within the respective periods.
OTHER - Other income in the fiscal 2006 nine-month period of $169,000 primarily
reflected the value of stock received by the Company when a mutual life
insurance company was demutualized.
INCOME TAXES - The income tax benefit for the nine months ended March 31, 2007
included a one time tax benefit of approximately $98,000 recorded by the
Company's German subsidiary that related to new corporate tax legislation. The
tax benefit related to corporate tax credits derived under previous tax
regulations that under the new legislation will be paid to the German subsidiary
over a 10 year period. The benefit had the effect of reducing the effective tax
rate for the nine-month period by 10.5%. Excluding this benefit, the effective
tax rate for the fiscal 2007 nine-month period would have been 2.2% and
primarily reflected the effect of pretax losses in North America being offset by
pretax income in the Company's European subsidiaries which are taxed at higher
rates.
Income tax expense for the nine-month period ended March 31, 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
believed 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 under the provisions of the American Jobs Creation Act of
2004. The effective tax rate excluding these two items was 39.4% for the fiscal
2006 nine-month period and 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.
18
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $15.9 million at March 31, 2007,
compared to $25.2 million at June 30, 2006. The cash decrease of $9.3 million
for the nine months ended March 31, 2007 resulted primarily from $5.2 million
used to repurchase shares of the Company's common stock and $4.8 million used
for operations. The Company also used $945,000 for capital expenditures and
received $1.3 million from the Company's stock plans. Depreciation and
amortization was $960,000 during the nine months ended March 31, 2007.
The $4.8 million used for operations was primarily related to $4.4 million of
increased inventory purchases. The increase in inventory of $4.4 million was
related to an increase of $2.7 million in work in process primarily to support
the initial production of the new commercial products and an increase of $1.7
million in finished goods inventory to fulfill existing and anticipated orders
primarily in Europe.
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
$332,000, which had no effect on net income. During the nine months ended March
31, 2007, the Company disposed of $5,000 of inventory that had previously been
reserved for at June 30, 2006.
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 $101,000 and wrote off $45,000 of receivables
during the nine months ended March 31, 2007.
The Company had no debt outstanding at March 31, 2007.
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 non real estate 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 March 31, 2007)
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 7.23% as of March 31, 2007)
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 $39.8 million as of March 31, 2007 and to
have no advances outstanding for 30 consecutive days each calendar year.
19
At March 31, 2007, the Company's German subsidiary (GmbH) had an unsecured
credit facility totaling 500,000 Euros (equivalent to approximately $667,000 at
March 31, 2007). 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 March 31, 2007, GmbH had no borrowings
outstanding. At March 31, 2007, the facility supported outstanding letters of
credit totaling 54,300 Euros (equivalent to approximately $72,000).
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. The Company completed its repurchase plan during the
third quarter of fiscal 2007.
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 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 $1.4 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.
20
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 March 31,
2007, the Company's percentage of sales commitments in non-United States
currencies was approximately 39.5% or $10.5 million, compared to 41.5% or $7.1
million at March 31, 2006.
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 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 March 31, 2007, the Company had forward exchange contracts to sell 3.0
million Euros ($4.0 million equivalent) at a weighted average settlement rate of
1.32 Euros to the United States Dollar. The contracts outstanding at March 31,
2007, mature through September 28, 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 $23,000 and $47,000 in other comprehensive income (loss) for the
unrealized change in value of the forward exchange contracts during the three
and nine months ended March 31, 2007, respectively. Offsetting this amount was
an increase in other comprehensive income (loss) for 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 March 31, 2006, the Company had $4.8 million of forward exchange contracts
between the United States Dollar and the Euro with a weighted average settlement
price of 1.21 Euros to the United States Dollar. The Company recognized a charge
of $33,000 and income of $99,000 in other comprehensive income (loss) for the
unrealized and realized change in value of forward exchange contracts during the
three and nine months ended March 31, 2006, respectively.
21
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 nine months ended March 31, 2007 would have been
approximately $99,000 and $48,000, respectively. The potential loss in earnings
for the comparable periods in fiscal 2006 would have been approximately $71,000
and $2,000, 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
March 31, 2007, 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 fiscal 2008 and future 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 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
22
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 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.
23
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 March 31, 2007, 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 March 31, 2007 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.
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 March 31, 2007. 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 PART VALUE OF SHARES THAT
SHARES PRICE PAID OF PUBLICLY MAY YET BE PURCHASED
PERIOD PURCHASED PER SHARE ANNOUNCED PROGRAM UNDER THE PROGRAM
------ --------- ----------- ----------------- ----------------------
January 1-31, 2007 104,200 $8.84 104,200 $561,415
February 1-28, 2007 61,600 $8.99 61,600 $ 7,365
------- -------
Total 165,800 $8.90 165,800 $ 7,365
======= =======
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
24
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. The Company completed the stock repurchase program during the third
quarter of fiscal 2007.
ITEM 6. EXHIBITS
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.
25
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: May 14, 2007 By: /S/ Alfred A. Pease
------------------------------------
Alfred A. Pease
Chairman of the Board, President and
Chief Executive Officer
Date: May 14, 2007 By: /S/ Sylvia M. Smith
------------------------------------
Sylvia M. Smith
Acting Chief Financial Officer,
Controller and Chief Accounting
Officer
(Principal Financial Officer)
(Principal Accounting Officer)
26