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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, 2002.
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)
(734) 414-6100
(Registrant's telephone number, including area code)
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 proceeding 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 an accelerated filer (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 6, 2003, was:
Common Stock, $0.01 par value 8,310,357
----------------------------- ----------------
Class Number of shares
PERCEPTRON, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2002
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 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
(In Thousands, Except Per Share Amount) 2002 2002
------------ --------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,390 $ 8,143
Receivables:
Billed receivables, net of allowance for doubtful accounts 19,720 20,458
of $779 and $652, respectively
Unbilled and other receivables 577 1,041
Inventories, net of reserves of $522 and $1,173, respectively 8,280 7,751
Deferred taxes and other current assets 1,905 1,873
-------- --------
Total current assets 37,872 39,266
-------- --------
PROPERTY AND EQUIPMENT
Building and land 6,004 6,004
Machinery and equipment 9,279 8,690
Furniture and fixtures 1,060 1,061
-------- --------
16,343 15,755
Less - Accumulated depreciation and amortization (7,966) (7,272)
-------- --------
Net property and equipment 8,377 8,483
-------- --------
OTHER ASSETS
Deferred tax asset 6,102 6,944
-------- --------
Total other assets 6,102 6,944
-------- --------
TOTAL ASSETS $ 52,351 $ 54,693
======== ========
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,854 $ 2,600
Accrued liabilities and expenses 2,949 3,236
Deferred revenue 2,016 1,997
Notes Payable (Note 6) -- 5,833
Income taxes payable 254 352
Accrued compensation 1,304 424
-------- --------
Total current liabilities 8,377 14,442
-------- --------
LONG-TERM LIABILITIES
Notes payable (Note 6) 2,512 1,040
-------- --------
Total long-term liabilities 2,512 1,040
-------- --------
Total liabilities 10,889 15,482
-------- --------
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 8,284 and 8,232, respectively 83 82
Accumulated other comprehensive loss (2,194) (2,951)
Additional paid-in capital 41,191 41,120
Retained earnings 2,382 960
-------- --------
Total shareholders' equity 41,462 39,211
-------- --------
TOTAL LIABILITIES AND COMMON SHAREHOLDERS' EQUITY $ 52,351 $ 54,693
======== ========
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) 2002 2001 2002 2001
-------- -------- -------- --------
NET SALES $ 12,751 $ 13,123 $ 23,528 $ 23,554
COST OF SALES 5,941 6,985 12,022 12,827
-------- -------- -------- --------
GROSS PROFIT 6,810 6,138 11,506 10,727
-------- -------- -------- --------
OPERATING EXPENSES
Selling, general and administrative 3,289 3,060 5,842 5,613
Engineering, research and development 1,575 1,636 3,034 3,477
-------- -------- -------- --------
Total operating expenses 4,864 4,696 8,876 9,090
-------- -------- -------- --------
OPERATING INCOME 1,946 1,442 2,630 1,637
-------- -------- -------- --------
OTHER INCOME AND (DEDUCTIONS)
Interest expense (32) (150) (151) (337)
Interest income 16 30 83 50
Foreign currency and other 56 (158) (69) (173)
-------- -------- -------- --------
Total other income (deductions) 40 (278) (137) (460)
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1,986 1,164 2,493 1,177
INCOME TAX EXPENSE 851 453 1,071 298
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS 1,135 711 1,422 879
DISCONTINUED OPERATIONS
Loss from Forest Products business unit,
net of taxes of $183 and $697, respectively (Note 2) -- (471) -- (1,950)
-------- -------- -------- --------
NET INCOME (LOSS) $ 1,135 $ 240 $ 1,422 $ (1,071)
======== ======== ======== ========
BASIC EARNINGS (LOSS) PER COMMON SHARE
Continuing operations $ 0.14 $ 0.09 $ 0.17 $ 0.11
Discontinued operations -- $ (0.06) -- $ (0.24)
-------- -------- -------- --------
Net income (loss) $ 0.14 $ 0.03 $ 0.17 $ (0.13)
======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Continuing operations $ 0.14 $ 0.09 $ 0.17 $ 0.11
Discontinued operations -- $ (0.06) -- $ (0.24)
-------- -------- -------- --------
Net income (loss) $ 0.14 $ 0.03 $ 0.17 $ (0.13)
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 8,253 8,185 8,248 8,185
Dilutive effect of stock options 86 1 28 --
-------- -------- -------- --------
Diluted 8,339 8,186 8,276 8,185
======== ======== ======== ========
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) 2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations $ 1,422 $ 879
Adjustments to reconcile income from continuing operations
to net cash provided from (used for) operating activities:
Depreciation and amortization 639 594
Deferred income taxes 842 (669)
Other (1) (27)
Changes in assets and liabilities, exclusive of changes shown
separately 836 34
-------- --------
Net cash provided from operating activities 3,738 811
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving credit borrowings 10,841 15,989
Revolving credit repayments (14,162) (16,583)
Repayment of long-term note payable (1,040) --
Proceeds from stock plans 71 --
-------- --------
Net cash used for financing activities (4,290) (594)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (532) (151)
-------- --------
Net cash used for investing activities (532) (151)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 331 263
-------- --------
NET CASH USED FOR DISCONTINUED OPERATIONS -- (909)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (753) (580)
CASH AND CASH EQUIVALENTS, JULY 1 8,143 6,680
-------- --------
CASH AND CASH EQUIVALENTS, DECEMBER 31 $ 7,390 $ 6,100
======== ========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
Receivables, net $ 1,630 $ (519)
Inventories (529) 2,583
Accounts payable (746) (2,482)
Other current assets and liabilities 481 452
-------- --------
$ 836 $ 34
======== ========
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 2002 Annual Report on Form 10-K. Certain reclassifications
may have been made to the prior year's financial statements to conform with the
fiscal year 2003 presentation. In the opinion of management, the unaudited
information furnished herein reflects all adjustments necessary, including
normal recurring adjustments and restatements for the effect of discontinued
operations (see Note 2 below), 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. DISCONTINUED OPERATIONS
On March 15, 2002, the Company sold substantially all of the assets of its
Forest Products business unit for $4.6 million in cash at closing and a
promissory note for approximately $343,000. The purchaser also assumed certain
liabilities of the Forest Products business unit. The operations of the Forest
Products business unit have been reported separately as a component of
discontinued operations. Prior year consolidated financial statements have been
restated to present the Forest Products business unit as a discontinued
operation. During the six-month period ended December 31, 2001, the Forest
Products business unit had sales of $2.7 million. Corporate interest expense has
been allocated to discontinued operations based on the ratio of the net assets
of the Forest Products business unit to the consolidated net assets of the
Company plus consolidated debt, excluding the net assets of the European
subsidiaries. The European subsidiaries were excluded because they were cash
flow positive and did not directly use the proceeds from the debt outstanding
during the periods covered by the financial statements. The interest allocation
had the effect of increasing the net loss from discontinued operations for the
six-month period ended December 31, 2001 by $54,000.
3. 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
and other matters that affect the value of the inventory. When the related
inventory is disposed of, the obsolescence reserve is released. During the six
months ended December 31, 2002, the Company disposed of $651,000 of inventory
that had been reserved for at June 30, 2002. Inventory, net of reserves, is
comprised of the following (in thousands):
DECEMBER 31, JUNE 30,
2002 2002
------------ ---------
Component Parts $ 4,086 $ 4,190
Work In Process 822 851
Finished Goods 3,372 2,710
---------- ---------
Total $ 8,280 $ 7,751
========== =========
6
4. 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. Options to purchase 1,104,000 and
1,734,000 shares of common stock were outstanding in the three months ended
December 31, 2002 and 2001, respectively, and were not included in the
computation of diluted EPS because the effect would have been anti-dilutive.
Options to purchase 1,563,000 and 1,793,000 shares of common stock were
outstanding in the six months ended December 31, 2002 and 2001, respectively,
and were not included in the computation of diluted EPS because the effect would
have been anti-dilutive.
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 DECEMBER 31, 2002 2001
------- -------
Net Income (Loss) $ 1,135 $ 240
Other Comprehensive Income (Loss):
Foreign currency translation adjustments 756 (278)
------- -------
Total Comprehensive Income (Loss) $ 1,891 $ (38)
======= =======
SIX MONTHS ENDED DECEMBER 31, 2002 2001
------- -------
Net Income (Loss) $ 1,422 $(1,071)
Other Comprehensive Income (Loss):
Foreign currency translation adjustments 757 737
------- -------
Total Comprehensive Income (Loss) $ 2,179 $ (334)
======= =======
6. CREDIT FACILITIES
On October 24, 2002, the Company entered into a new collateral-based Credit
Agreement with Comerica Bank and terminated its Revolver with Bank One, N.A. The
new Credit Agreement provides for borrowings of up to $7.5 million and expires
on November 1, 2004. Proceeds under the Credit Agreement may be used for working
capital, capital expenditures, to repay existing indebtedness owed to Bank One
and to repay amounts owing under a long-term note payable acquired in 1998 as
part of the Sonic transaction. The collateral for the loan is substantially all
U.S. assets of the Company. 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 (4.25% as of February 6, 2003)
dependant 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 3.7% as of February 6, 2003)
dependant 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
7
Credit Agreement based on a percentage dependant upon the Company's ratio of
funded debt to EBITDA. The aggregate principal amount outstanding at any one
time cannot exceed the lesser of $7.5 million or the borrowing base which is
comprised of 80% of eligible accounts receivable billed in the United States,
aged up to 180 days, plus the lesser of 25% of raw material located in the
United States or $2,000,000, plus the lesser of 50% of finished goods inventory
or $750,000 plus $4.2 million representing 60% of the appraised value of the
Company's real property located in Plymouth, Michigan. 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 $29.6 million as of December 31, 2002. The borrowing
base at December 31, 2002 was $7.5 million with $2.5 million of borrowings
outstanding and a $149,000 letter of credit outstanding.
In October, the Company also paid off its $1,040,000 long-term note payable from
proceeds received under the Company's new credit facility with Comerica Bank.
The note payable required quarterly payments of interest at 7.5% per annum on
the outstanding principal balance and was due in full on November 1, 2003 but
allowed for prepayments in whole or in part at anytime without penalty.
7. FOREIGN EXCHANGE CONTRACTS
The Company may use, from time to time, a limited hedging program to minimize
the impact of foreign currency fluctuations. As the Company exports products, it
may enter into limited hedging transactions relating to the accounts receivable
arising as a result of such shipments. These transactions involve the use of
forward contracts. During the periods presented, the Company did not engage in
any hedging activities.
8. COMMITMENTS AND CONTINGENCIES
The Company may, from time to time, be subject to legal proceedings and claims.
Litigation involves many uncertainties. Management is currently unaware of any
significant pending litigation affecting the Company, other than the matters set
forth below and those discussed in the Company's 2002 Annual Report on Form
10-K.
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. GDS seeks compensatory damages against
the Company, Carbotech and USNR of approximately $4.4 million. The Company
intends to vigorously defend GDS' claims.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2002, COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 2001
Overview - The Company reported net income of $1.1, or $0.14 per share, for the
second quarter of fiscal 2003, compared to income from continuing operations of
$711,000 or $0.09 per share in the quarter ended December 31, 2001. In the third
quarter of fiscal 2002, the Company sold substantially all of the assets of its
Forest Products business unit to U.S. Natural Resources ("USNR"). Financial
results for the second quarter of fiscal year 2002 have been restated to show
the Forest Products business unit separately as a discontinued operation. In the
first quarter of fiscal year 2003, the Company's European operation implemented
a new accounting system that enhanced its financial reporting capabilities. The
new accounting system was better able to segregate costs between cost of sales,
engineering, research and development and selling, general and administrative.
For comparability purposes, the second quarter of fiscal year 2002 results were
reclassified to conform to the 2003 presentation. As a result, approximately
$800,000 of costs previously reported as selling, general and administrative in
the second quarter of fiscal 2002, were reclassified to cost of sales for
$700,000 and to engineering, research and development for $100,000.
Sales - Net sales of $12.8 million for the second quarter of fiscal 2003 were
down $372,000, compared with the same period one year ago. Sales by region
reflected an improvement in Europe that was offset by slightly lower sales in
Asia and North America. Sales of the Company's systems and technology component
product lines were as follows: AutoGauge(TM) sales of $9.5 million were up
$900,000 and accounted for approximately 74% of sales this year compared to
approximately 65% last year. AutoGuide(TM) sales of $200,000 were down $500,000
and accounted for approximately 2% of sales this year compared to approximately
5% last year. AutoSpect(R) sales of $100,000 were down $300,000 and accounted
for approximately 1% of sales this year compared to approximately 3% last year.
NCA sales of $800,000 were down $500,000 and accounted for approximately 6% of
sales this year compared to approximately 10% last year. ScanWorks(TM) sales of
$800,000 were unchanged and accounted for approximately 6% of sales in both
years. Other product sales including service, training and sensor sales to USNR
accounted for the remainder of net sales in both years. The variance between
years in product line sales was primarily attributable to the timing of customer
orders.
Bookings & Backlog - New order bookings for the three months ended December 31,
2002, were $17.0 million compared with $5.8 million one year ago. AutoGauge
bookings totaled $13.9 million for the quarter ended December 31, 2002 compared
to $3.8 million in the comparable quarter last year. New orders this quarter
were very high, particularly in the Company's European subsidiary that received
orders for approximately $10.0 million of AutoGauge(TM) systems related to new
vehicle programs. Approximately 50% of the European AutoGauge orders were from
one customer. The low level of new orders last year reflected the uncertainty in
the global economy following the September 11 terrorist attack and the
cancellation of a $1.2 million order by a European automotive customer that had
been shown as a booking in the first quarter of fiscal 2002. Backlog at December
31, 2002, was $20.5 million compared to $14.9 million at December 31, 2001. The
Company expects to be able to fill substantially all of the orders in its
backlog during the following twelve months. The amount of new order bookings and
the level of backlog during any particular period are not necessarily indicative
of the future operating performance of the Company.
9
Gross Profit - Gross profit was $6.8 million, or 53.4% of sales, in the second
quarter of fiscal year 2003, as compared to $6.1 million, or 46.7% of sales, in
the second quarter of fiscal year 2002. The improvement was primarily due to
higher than normal revenues in Europe related to customer buy-off on completed
system installations with nominal associated costs. To a lesser extent, gross
profit was impacted by the incremental effect related to the strengthening
euro that yielded higher gross margins in Europe and lower labor and overhead
costs related to prior period cost reduction programs.
Selling, General and Administrative (SG&A) Expenses - SG&A expenses of $3.3
million in the quarter ended December 31, 2002 were $229,000 higher than the
second quarter of fiscal 2001. The increase reflected approximately $400,000 of
accruals for reinstated Company 401K plan matching contributions and employee
profit sharing that were partially offset by lower costs related to prior period
restructuring programs.
Engineering, Research and Development (R&D) Expenses - Engineering and R&D
expenses of $1.6 million in the quarter ended December 31, 2002 were $61,000
lower than the second quarter of fiscal 2001. The decrease in expenses reflected
the benefit from manpower, contract design service and engineering supply
reductions that were implemented during fiscal years 2001 and 2002, partially
offset by approximately $200,000 of accruals for reinstated Company 401K plan
matching contributions and employee profit sharing.
Other Income and Deductions - Net interest expense was $16,000 in the second
quarter of fiscal 2003 compared with $120,000 in the second quarter of fiscal
2002. The reduction primarily reflected lower average borrowings related to the
pay-down of debt in March of 2002 from proceeds of the sale of the Company's
Forest Products business unit and the transfer of approximately $4.9 million
from the Company's European subsidiary in October 2002. There was a foreign
currency gain of $64,000 this quarter due to the strengthening euro and yen
compared with a foreign currency loss of $157,000 last year when these
currencies were declining in value compared to the U.S. dollar.
Income Taxes - Income tax expense for the three-month periods ended December 31,
2002 and 2001 reflected the mix of operating profit and loss among the Company's
various operating entities.
Outlook - Based on the high level of new order bookings received in the second
quarter, the Company expects revenues for each quarter in the second half of
fiscal 2003 to remain comparable to those of the second quarter of fiscal 2003.
The uncertain global economy along with the possibility of a war with Iraq could
cause our customers to postpone or cancel orders received or pending, and as a
result, revenues would not meet current expectations. 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.
SIX MONTHS ENDED DECEMBER 31, 2002, COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 2001
Overview - The Company reported net income of $1.4 million, or $0.17 per share,
for the first half of fiscal 2003, compared with income from continuing
operations of $879,000, or $0.11 per share for the six months ended December 31,
2001. In the third quarter of fiscal 2002, the Company sold substantially all of
the assets of its Forest Products business unit to USNR. Financial results for
the six months ended December 31, 2001 have been restated to show the Forest
Products business unit separately as a discontinued operation. In the first
quarter of fiscal year 2003, the Company's European operation implemented a new
accounting system that enhanced its financial reporting capabilities. The new
10
accounting system was better able to segregate costs between cost of sales,
engineering, research and development and selling, general and administrative.
For comparability purposes, the first half of fiscal year 2002 results were
reclassified to conform to the 2003 presentation. As a result, approximately
$1.5 million of costs in the Company's European operations previously reported
as selling, general and administrative in the six months ended December 31,
2001, were reclassified to cost of sales for $1.3 million and to engineering,
research and development for $200,000.
Sales - Sales in the first six months of fiscal 2003 were $23.5 million,
approximately the same compared to the six months ended December 31, 2001. Sales
by region reflected an improvement in North America offset by lower sales in
Asia and slightly lower sales in Europe. Sales of the Company's systems and
technology component product lines were as follows: AutoGauge(TM) sales of $15.8
million were up $400,000 and accounted for approximately 67% of net automotive
sales in the first half of fiscal 2003 compared to approximately 65% last year.
AutoGuide(TM) sales of $500,000 were down $500,000 and accounted for
approximately 2% of net automotive sales in the first half of fiscal 2003
compared to approximately 4% last year. AutoSpect(TM) sales of $300,000 were
down $400,000 and accounted for 1% of net sales in the six months ended December
31, 2002 compared to 3% last year. NCA sales of $2.0 million were down $700,000
and accounted for approximately 9% of net sales in the six months ended December
31, 2002 compared to 11% last year. ScanWorks(TM) sales of $1.5 million were up
$100,000 and accounted for approximately 6% of sales in both years. Other
product sales including $800,000 of sensor sales to USNR in the first six months
of fiscal year 2003, and service and training accounted for the remainder of net
sales in both years. The variance between years in product line sales was
primarily attributable to the timing of customer orders.
Bookings & Backlog - New order bookings for the six months ended December 31,
2002 were $28.8 million compared to $18.7 million for the same period one year
ago. The improvement reflected the strong rate of new orders in the second
quarter due to bookings for approximately $10.0 million of AutoGauge(TM) systems
by the Company's European subsidiary. During the six months ended December 31,
2002, new order bookings by product line were comprised of 78% AutoGauge(TM), 2%
AutoGuide(TM), less than 1% AutoSpect(TM), 6% NCA and 6% ScanWorks(TM).
Automotive bookings for the comparable 2001 six-month period were comprised of
67% AutoGauge(TM), 5% AutoGuide(TM), 5% AutoSpect(TM), 11% NCA and 6%
ScanWorks(TM). Backlog at December 31, 2002, was $20.5 million compared to $14.9
million at December 31, 2001. The Company expects to be able to fill
substantially all of the orders in backlog during the following twelve months.
The amount of new order bookings and the level of backlog during any particular
period are not necessarily indicative of the future operating performance of the
Company.
Gross Profit - Gross profit was $11.5 million, or 48.9% of sales, in the first
half of fiscal year 2003, as compared to $10.7 million, or 45.5% of sales, in
the first half of fiscal year 2002. The improvement was primarily due to higher
than normal revenues in Europe related to customer buy-off on completed system
installations with nominal associated costs. To a lesser extent, gross profit
was impacted by the incremental effect related to the strengthening euro that
yielded higher gross margins in Europe and lower labor and overhead costs
related to prior period cost reduction programs. The improvement was partially
offset by sensor sales to USNR, primarily in the first quarter that were
generally at lower margins.
Selling, General and Administrative (SG&A) Expenses - SG&A expenses increased
$229,000 to $5.8 million in the six months ended December 31, 2002, from
approximately $5.6 million in the comparable 2001 period. The increase reflected
approximately $400,000 of accruals for reinstated Company 401K plan matching
contributions and employee profit sharing that were partially offset by lower
costs related to prior period restructuring programs.
11
Engineering, Research and Development (R&D) Expenses - Engineering and R&D
expenses decreased $443,000 to $3.0 million in the six months ended December 31,
2002, from approximately $3.5 million in the first half of fiscal 2002. The
decrease in expenses reflected product development cost reduction initiatives
implemented during fiscal years 2001 and 2002 that were partially offset by
approximately $200,000 of accruals for reinstated Company 401K plan matching
contributions and employee profit sharing.
Other Income and Deductions - Net interest expense was $68,000 in the first half
of fiscal 2003 compared with $287,000 in the first half of fiscal 2002. The
reduction primarily reflected lower average borrowings related to the pay-down
of debt in March 2002 from proceeds of the sale of the Company's Forest Products
business unit and the transfer of $4.9 million in October 2002 from the
Company's European subsidiary. Foreign currency losses of $89,000, in the first
half of fiscal 2003 were $88,000 lower than the first half of fiscal 2002 due to
the increase in value of the Euro and yen against the dollar.
Income Taxes - Income tax expense for the six-month periods ended December 31,
2002 and 2001 reflected the mix of operating profit and loss among the Company's
various operating entities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $7.4 million at December 31, 2002,
of which $7.3 million was in the Company's European subsidiaries, compared to
$8.1 million at June 30, 2002, of which $7.8 million was in the Company's
European subsidiaries. The European subsidiaries had favorable cash flow
primarily from a reduction in accounts receivables and operating income that
almost offset $4.9 million that was transferred to the Company to repay bank
debt in the US. Domestic use of cash primarily related to repayments of
additional debt and capital spending.
Cash flows from operating activities of $3.7 million reflected net income from
the Company's operations, plus adjustments for non-cash items, including the use
of the Company's deferred tax asset to offset its domestic tax expense for the
six-month period, and working capital reductions described above. During the
six-month period, the Company's reserve for doubtful accounts increased $127,000
to $779,000 reflecting an additional accrual for potential bad debts. During the
six months ended December 31, 2002, the Company disposed of $651,000 of
inventory that had been reserved for at June 30, 2002.
Financing activities during the period primarily reflected net revolving credit
repayments of $3.3 million primarily as a result of the $4.9 million transferred
from Europe. In October, the Company also paid off its $1,040,000 long-term note
payable from proceeds received under the Company's new credit facility with
Comerica Bank. The note payable required quarterly payments of interest at 7.5%
per annum on the outstanding principal balance and was due in full on November
1, 2003 but allowed for prepayments in whole or in part at anytime without
penalty.
On October 24, 2002, the Company entered into a new collateral-based Credit
Agreement with Comerica Bank and terminated its Revolver with Bank One, N.A. The
new Credit Agreement provides for borrowings of up to $7.5 million and expires
on November 1, 2004. Proceeds under the Credit Agreement may be used for working
capital, capital expenditures, to repay existing indebtedness owed to Bank One
and to repay amounts owing under a long-term note payable acquired in 1998 as
part of the Sonic transaction. The collateral for the loan is substantially all
U.S. assets of the Company. 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 (4.25% as of February 6, 2003)
dependant upon the Company's ratio of funded debt to earnings before interest,
taxes, depreciation and amortization
12
("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 3.7% as of February 6, 2003) dependant 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 dependant upon the Company's ratio
of funded debt to EBITDA. The aggregate principal amount outstanding at any one
time cannot exceed the lesser of $7.5 million or the borrowing base which is
comprised of 80% of eligible accounts receivable billed in the United States,
aged up to 180 days, plus the lesser of 25% of raw material located in the
United States or $2,000,000, plus the lesser of 50% of finished goods inventory
or $750,000 plus $4.2 million representing 60% of the appraised value of the
Company's real property located in Plymouth, Michigan. 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 $29.6 million as of December 31, 2002. The borrowing
base at December 31, 2002 was $7.5 million with $2.5 million of borrowings
outstanding and a $149,000 letter of credit outstanding.
See Part II Item 4 "Legal Proceedings" and Item 3, "Legal Proceedings" and
Note 9 to the Consolidated Financial Statements, "Contingencies", of the
Company's Annual Report on Form 10-K for fiscal year 2002, for a discussion of
certain contingencies relating to the Company's liquidity, financial position
and results of operations, including the outcome of the damages phase of a
pending arbitration matter involving claims on which the arbitrator found in
favor of Speroni, S. p. A., a former distributor of the Company.
The Company believes that available cash on hand and existing credit facilities
will be sufficient to fund its currently anticipated fiscal 2003 cash flow
requirements. 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.
MARKET RISK INFORMATION
Perceptron's primary market risks are related to foreign exchange rates and
interest rate risk in connection with its borrowings. The foreign exchange risk
is derived from sales by its international operations, which are primarily
located in Germany and for which products are produced in the U.S. During the
periods presented the Company did not use any market risk instruments for
trading purposes.
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-U.S. currencies. For sales commitments entered into in the non-U.S.
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, 2002, the
Company's percentage of sales commitments in non-U.S. currencies was 70% or
$14.3 million.
The Company may use, from time to time, a limited hedging program to minimize
the impact of foreign currency fluctuations. As the Company exports products, it
may enter into limited hedging transactions relating to the accounts receivable
arising as a result of such shipment. These transactions involve the use of
forward contracts. During the periods presented the Company did not engage in
any hedging activities.
13
INTEREST RATE RISK
The Company is subject to interest rate risk in connection with borrowings under
its variable rate revolving line of credit. The Company's exposure to interest
rate risk arises primarily from changes in the prime rate and changes in
Eurodollar rates in the London interbank market. The Company would not expect
its operating results or cash flows to be affected to any significant degree by
a hypothetical 10 percent change in market interest rates. See Note 6 of "Notes
to Consolidated Statements" for a description of the Company's outstanding debt.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure", which amends SFAS No.
123, "Accounting for Stock-Based Compensation". The Company did not adopt SFAS
123 but is required to disclose stock-based compensation information in its
footnotes as if SFAS 123 had been adopted. SFAS 148 amends the disclosure
requirements of SFAS No. 123 and these disclosure requirements will be effective
for the Company in its quarterly report for the period ended March 31, 2003.
SAFE HARBOR STATEMENT
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations may be "forward-looking statements" within
the meaning of the Securities Exchange Act of 1934, including the Company's
expectation as to fiscal 2003 and future revenue, order booking levels and
earnings levels and the ability of the Company to fund its currently anticipated
fiscal 2003 cash flow requirements. The Company assumes no obligation for
updating any such forward-looking statements to reflect actual results, changes
in assumptions or changes in other factors affecting such forward-looking
statements. Actual results could differ materially from those in the
forward-looking statements due to a number of uncertainties, including, but not
limited to, the dependence of the Company's revenue on a number of sizable
orders from a small number of customers, the timing of orders and shipments
which can cause the Company to experience significant fluctuations in its
quarterly and annual revenue and operating results, timely receipt of required
supplies and components which could result in delays in anticipated shipments,
general product demand and market acceptance risks, the ability of the Company
to successfully compete with alternative and similar technologies, the timing
and continuation of the Automotive industry's retooling programs, 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, general product development and commercialization difficulties,
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, the level of interest existing and
potential new customers may have in new products and technologies generally,
rapid or unexpected technological changes, 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 level of the damage award in a pending arbitration matter
with a former distributor of the Company, variations in the amount of cost
savings anticipated from the cost reduction initiatives and the impact of cost
reduction initiatives on the Company's revenues, order bookings and earnings.
The Company's expectations regarding future bookings and revenues are based upon
oral discussions with customers and are subject to change based upon a wide
variety of factors, including economic conditions and system implementation
delays. 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
14
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.
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
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and 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
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are 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 or in other
factors that could significantly affect internal controls subsequent to the date
the Company carried out its evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. GDS seeks compensatory damages against
the Company, Carbotech and USNR of approximately $4.4 million. The Company
intends to vigorously defend GDS' claims.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on December 9, 2002 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 6,764,788 806,702 --
Kenneth R. Dabrowski 6,880,501 690,989 --
Philip J. DeCocco 6,880,401 691,089 --
W. Richard Marz 6,880,501 690,989 --
Robert S. Oswald 6,880,501 690,989 --
Alfred A. Pease 6,879,593 691,897 --
Terryll R. Smith 6,880,501 690,989 --
2. The Shareholders approved an amendment to the Company's 1992 Stock Option
Plan to increase the shares of Common Stock available for grant under such
plan by 400,000 shares from 2,414,286 to 2,814,286. As to this proposal,
5,382,503 shares voted "for", 1,481,437 shares voted "against", and 707,550
shares "abstained" and 0 shares were "broker non-votes".
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
10.38 Summary of 2003 Team Member 401k Restoration and
Profit Sharing Plan.
(B) Reports on Form 8-K:
On November 13, 2002, the Company filed a Form 8-K under Item
9, disclosing that certifications from the Company's Chief
Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350) had accompanied the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2002.
16
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 11, 2003 By: /S/ Alfred A. Pease
------------------------------------------
Alfred A. Pease
President and Chief Executive Officer
Date: February 11, 2003 By: /S/ John J. Garber
------------------------------------------
John J. Garber
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: February 11, 2003 By: /S/ Sylvia M. Smith
------------------------------------------
Sylvia M. Smith
Controller and Chief Accounting Officer
(Principal Accounting Officer)
17
CERTIFICATIONS
I, Alfred A. Pease, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Perceptron, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003
/s/ Alfred A. Pease
-------------------
Alfred A. Pease
Chairman of the Board, President
Chief Executive Officer
18
I, John J. Garber, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Perceptron, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003
/s/ John J. Garber
------------------
John J. Garber
Vice President and Chief Financial Officer
Principal Financial Officer
19