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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 September 30, 2003.
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 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 November 7, 2003, was:
Common Stock, $0.01 par value 8,578,258
----------------------------- --------------------------
Class Number of shares
PERCEPTRON, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
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 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
(In Thousands, Except Per Share Amounts) 2003 2002
-------- --------
NET SALES $ 12,268 $ 10,777
COST OF SALES 6,657 6,081
-------- --------
GROSS PROFIT 5,611 4,696
-------- --------
OPERATING EXPENSES
Selling, general and administrative 2,485 2,553
Engineering, research and development 1,437 1,459
-------- --------
Total operating expenses 3,922 4,012
-------- --------
OPERATING INCOME 1,689 684
-------- --------
OTHER INCOME AND (DEDUCTIONS)
Interest expense - (119)
Interest income 51 67
Foreign currency and other (11) (125)
-------- --------
Total other income (deductions) 40 (177)
-------- --------
INCOME BEFORE INCOME TAXES 1,729 507
INCOME TAX EXPENSE 702 220
-------- --------
NET INCOME $ 1,027 $ 287
======== ========
EARNINGS PER COMMON SHARE
Basic $ 0.12 $ 0.03
Diluted $ 0.11 $ 0.03
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 8,430 8,244
Dilutive effect of stock options 804 3
-------- --------
Diluted 9,234 8,247
======== ========
The notes to the consolidated financial statements are an integral part of these
statements.
3
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
(In Thousands, Except Per Share Amount) 2003 2003
-------- --------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 14,939 $ 11,101
Receivables:
Billed receivables, net of allowance for doubtful accounts 17,391 22,955
of $580 and $674, respectively
Unbilled receivables 1,658 1,170
Other receivables 1,382 1,474
Inventories, net of reserves of $467 and $569, respectively 7,000 6,809
Deferred taxes and other current assets 1,295 1,365
-------- --------
Total current assets 43,665 44,874
-------- --------
PROPERTY AND EQUIPMENT
Building and land 6,004 6,004
Machinery and equipment 9,903 9,682
Furniture and fixtures 1,068 1,063
-------- --------
16,975 16,749
Less - Accumulated depreciation and amortization (8,813) (8,459)
-------- --------
Net property and equipment 8,162 8,290
-------- --------
DEFERRED TAX ASSETS 6,258 6,250
-------- --------
TOTAL ASSETS $ 58,085 $ 59,414
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,763 $ 1,754
Accrued liabilities and expenses 4,990 5,051
Deferred revenue 1,322 1,098
Income taxes payable 2,076 2,859
Accrued compensation 1,170 3,707
-------- --------
Total current liabilities 11,321 14,469
-------- --------
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 8,575 and 8,342, respectively 86 83
Accumulated other comprehensive loss (818) (961)
Additional paid-in capital 41,927 41,281
Retained earnings 5,569 4,542
-------- --------
Total shareholders' equity 46,764 44,945
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 58,085 $ 59,414
======== ========
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)
THREE MONTHS ENDED
SEPTEMBER 30,
(In Thousands) 2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,027 $ 287
Adjustments to reconcile net income to net cash provided from
(used for) operating activities:
Depreciation and amortization 345 330
Stock option income tax benefit 209 -
Deferred income taxes (9) 139
Other (98) (2)
Changes in assets and liabilities, exclusive of changes shown
separately 2,063 537
-------- --------
Net cash provided from operating activities 3,537 1,291
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving credit borrowings - 5,370
Revolving credit repayments - (2,835)
Proceeds from stock plans 440 12
-------- --------
Net cash provided from financing activities 440 2,547
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (212) (307)
-------- --------
Net cash used for investing activities (212) (307)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 73 (30)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,838 3,501
CASH AND CASH EQUIVALENTS, JULY 1 11,101 8,143
-------- --------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30 $ 14,939 $ 11,644
======== ========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
Receivables, net $ 5,425 $ 1,367
Inventories (192) (25)
Accounts payable 8 (598)
Other current assets and liabilities (3,178) (207)
-------- --------
$ 2,063 $ 537
======== ========
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 2003 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 2004 presentation. In the opinion of management, the unaudited
information furnished herein reflects all adjustments necessary, including
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
and other matters that affect the value of the inventory. When the related
inventory is disposed of, the obsolescence reserve is released. During the first
quarter of fiscal 2004, the Company disposed of $103,000 of inventory that had
been reserved for at June 30, 2003. Inventory, net of reserves of $467,000, is
comprised of the following (in thousands):
SEPTEMBER 30, JUNE 30,
2003 2003
------ ------
Component Parts $3,921 $3,525
Work In Process 335 516
Finished Goods 2,744 2,768
------ ------
Total $7,000 $6,809
====== ======
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.
Options to purchase 579,000 and 1,984,000 shares of common stock outstanding in
the three months ended September 30, 2003 and 2002, respectively, were not
included in the computation of diluted EPS because the effect would have been
anti-dilutive.
4. FOREIGN EXCHANGE CONTRACTS
The Company may use, from time to time, a limited hedging program to minimize
the impact of foreign currency fluctuations. These transactions involve the use
of forward contracts, typically mature within 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. Changes in the fair value of these contracts
are included in other comprehensive income until they are recognized in earnings
at the time the forecasted transaction occurs.
6
At September 30, 2003, the Company had forward exchange contracts between the
United States Dollar and the Euro in the notional amount of $8.0 million. The
hedges are accounted for as cash flow hedges and have a weighted average
settlement price of 1.11 Euros to the United States Dollar. The contracts
outstanding at September 30, 2003, mature through June 30, 2004 and are intended
to hedge the Company's investment in its German subsidiary. The Company
recognized a charge of $213,000 in other comprehensive income (loss) for the
unrealized change in value of these forward exchange contracts during the
quarter ended September 30, 2003. 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. The Company did not engage in any hedging
activities during the first quarter of fiscal year 2003.
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 SEPTEMBER 30, 2003 2002
------- -------
Net Income $ 1,027 $ 287
Other Comprehensive Income (Loss):
Foreign currency translation adjustments 356 1
Forward Contracts (213) -
------- -------
Total Comprehensive Income $ 1,170 $ 288
======= =======
6. CREDIT FACILITIES
The Company has a $7.5 million collateral-based Credit Agreement with Comerica
Bank, which expires on November 1, 2005. Proceeds under the Credit Agreement may
be used for working capital and capital expenditures. 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 (4.00% as of November 1, 2003) 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 3.0% as of November 1, 2003) 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 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 $2.0 million, 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 $31.2 million as of September 30, 2003.
The borrowing base at September 30, 2003 was $7.5 million with no borrowings
outstanding.
7
At September 30, 2003, the Company's German subsidiary (GmbH) had an unsecured
credit facility totaling 500,000 Euros. 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 September 30,
2003, GmbH had no borrowings outstanding. The facility supported outstanding
letters of credit totaling 258,000 Euros.
7. STOCK BASED COMPENSATION
The Company has stock option plans, which are described more fully in Note 13 in
the Company's 2003 Annual Report. The Company applies APB Opinion No. 25 ("APB
25"), "Accounting for Stock Issued to Employees," and related interpretations in
accounting for these plans. Accordingly, compensation cost for stock options has
been recognized under the provisions of APB 25. No stock-based compensation cost
is reflected in net income, as all options granted under these plans had an
exercise price greater than or equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the pro forma
effect on net income and earnings per share for the periods indicated if the
Company had applied the fair value recognition provisions of FASB Statement 123,
"Accounting for Stock-Based Compensation," to its stock option plans as
indicated below (in thousands except per share amounts):
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
-----------------------------------------
Net income:
As reported $ 1,027 $ 287
Pro forma $ 927 $ 201
Earnings per share:
Basic - as reported $ 0.12 $ 0.03
Basic - pro forma $ 0.11 $ 0.02
Diluted - as reported $ 0.11 $ 0.03
Diluted - pro forma $ 0.10 $ 0.02
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
ENDED ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
-----------------------------------------
Weighted average estimated fair value per
share of options granted during the period $ 4.59 $ 0.97
Assumptions:
Amortized dividend yield - -
Common stock price volatility 89.87% 115.96%
Risk free rate of return 3.13% 3.00%
Expected option term (in years) 5 5
8
8. COMMITMENTS AND CONTINGENCIES
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 2003 Annual Report on Form 10-K.
On October 15, 2003, the Company entered into a Settlement Agreement
("Agreement") with LMI Technologies, Inc. ("LMI"), Diffracto Limited, Sensor
Adaptive Machines, Inc., Leonard Metcalfe, Neil Hummel and others that resolved
all pending litigation matters between the parties. The Agreement settled the
May 10, 2002 action the Company commenced against LMI et al. in the Ontario
Superior Court of Justice-Commercial List, the February 21, 2003 suit filed by
the Company against LMI in the United States District Court for the Eastern
District of Michigan and the May 30, 2003 suit filed by LMI against the Company
in the United States District Court for the Eastern District of Michigan that
are discussed more fully in the Company's Form 10-K for the year ended June 30,
2003 under Item 3, Legal Proceedings. As part of the settlement, LMI agreed to
pay the Company a cash settlement and the parties agreed to cross license
certain intellectual property, including intellectual property that was the
subject of the disputes.
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 litigation
is subject to significant uncertainty, changes in these factors could materially
impact the Company's financial position or results of operations.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview -- The Company reported net income of $1.0 million, or $0.12 per share,
for the first quarter of fiscal 2004, compared to net income of $287,000, or
$0.03 per share, for the first quarter of fiscal 2003.
Sales -- Net sales of $12.3 million for the first quarter of fiscal 2004 were up
approximately $1.5 million, or 14% compared with $10.8 million for the same
period one year ago. Higher sales of the Company's Automated Systems products of
$9.2 million compared to $7.2 million last year were the basis for the sales
increase. Technology Components sales were $2.2 million compared to $2.6 million
last year. Value Added Services sales were $900,000 compared to $1.0 million
last year. Sales by geographic region were as follows: North American sales were
approximately $6.8 million in both years, European sales were $5.0 million this
year compared to $3.3 million last year, and Asian sales were $400,000 this year
compared to $700,000 last year. The sales increase in Europe resulted primarily
from higher AutoGauge(R) product line sales and the strong Euro that based on
conversion rates in effect this quarter added approximately $650,000 more in
sales than the comparable rates in the first quarter of fiscal 2003 would have
yielded.
Bookings & Backlog -- The Company had new order bookings during the quarter of
$12.0 million compared with new order bookings of $14.8 million in the fourth
quarter of fiscal 2003 and $11.9 million for the quarter ended September 30,
2002. New order bookings for each of the Company's product line groupings were
comparable to the same period one year ago. Orders for Automated Systems
products were $9.2 million in the fiscal 2004 first quarter compared to $9.1
million in fiscal 2003. Orders for Technology Components were $1.9 million in
the fiscal 2004 first quarter compared to $2.0 million in fiscal 2003. Orders
for Value Added Services were $900,000 in the fiscal 2004 first quarter compared
to $800,000 in fiscal 2003. The Company's backlog was $17.9 million as of
September 30, 2003 compared with $18.2 million as of June 30, 2003 and $16.3
million as of September 30, 2002. 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 $5.6 million, or 45.7% of sales, in the first
quarter of fiscal year 2004, as compared to $4.7 million, or 43.6% of sales, in
the first quarter of fiscal year 2003. The gross profit percentage improvement
was primarily due to the benefit from incremental gross profit of approximately
$500,000 that resulted from the strong Euro when Euro denominated sales were
converted to U.S. Dollars while most of the material in cost of sales was
purchased from the United States under dollar denominated contracts.
Selling, General and Administrative (SG&A) Expenses -- SG&A expenses of $2.5
million in the quarter ended September 30, 2003 were slightly lower than the
first quarter a year ago. Manpower and spending levels were generally consistent
for both periods except for bad debt and legal expenses that were $325,000 below
last year offsetting approximately $110,000 of cost increases in Europe related
to the stronger Euro.
Engineering, Research and Development (R&D) Expenses -- Engineering and R&D
expenses of $1.4 million in the quarter ended September 30, 2003 were also
slightly lower than the first quarter a year ago as manpower and spending levels
were generally consistent for both periods.
10
Interest Income/Expense, net. -- Net interest income was $51,000 in the first
quarter of fiscal 2004 compared with net interest expense of $52,000 in the
first quarter of fiscal 2003. There was no debt during this quarter, and excess
cash was invested in an overnight money market account. Interest expense during
the first quarter of fiscal 2003 was on an average outstanding debt of $8.5
million.
Foreign Currency and Other -- The Foreign currency and other losses of $11,000
and $125,000 in the first quarter of fiscal years 2004 and 2003 respectively,
were primarily the result of net foreign currency gains and losses related to
the Euro, Yen and Real.
Income Taxes -- Income taxes for both first quarters of fiscal 2004 and 2003
reflected the effect of the mix of operating profit and loss among the Company's
various operating entities and their countries' respective tax rates.
Outlook -- The Company expects that second quarter fiscal 2004 revenue will be
comparable to the fiscal 2004 first quarter revenue and that sales for fiscal
2004 will be in the range of $46.0 million to $50.0 million. The Company also
expects to be profitable for fiscal 2004, although not at the same level as
fiscal 2003. As previously reported, the very strong sales and profits for the
third and fourth quarters of fiscal 2003 were in part the result of a single
unusually large tooling program by a single European customer that encompassed a
number of plants around Europe. Programs of this magnitude are very rare. Though
the Company does not expect a repeat of any single order of this magnitude in
fiscal 2004, the overall number of tooling programs remains consistent with
previous years. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $14.9 million at September 30,
2003, compared to $11.1 million at June 30, 2003. The $3.8 million increase in
cash was primarily generated from operations as net income of $1.0 million and a
reduction in receivables of $5.4 million more than offset the $3.2 million use
of cash for other current assets and accrued liabilities.
During the first quarter of fiscal 2004, stock option exercises generated cash
proceeds of $440,000 and a tax benefit of $209,000. Capital expenditures were
$212,000.
During the first quarter of fiscal 2004, the Company disposed of $103,000 of
inventory that had been reserved for at June 30, 2003. 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 inventory is
deemed to have no further use or value, the Company disposes of the inventory
and the reserve for obsolescence is reduced. During the first quarter of fiscal
2004, the Company wrote off $94,000 of receivables that had been provided for in
its allowance for doubtful accounts at June 30, 2003. 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. To date, the Company has not
experienced any significant losses related to the collection of accounts
receivable.
11
The Company has a $7.5 million collateral-based Credit Agreement with Comerica
Bank, which expires on November 1, 2005. Proceeds under the Credit Agreement may
be used for working capital and capital expenditures. 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 (4.00% as of November 1, 2003) 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 3.0% as of November 1, 2003) 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 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 $2.0 million, 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 $31.2 million as of September 30, 2003.
The borrowing base at September 30, 2003 was $7.5 million with no borrowings
outstanding.
At September 30, 2003, the Company's German subsidiary (GmbH) had an unsecured
credit facility totaling 500,000 Euros. 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 September 30,
2003, GmbH had no borrowings outstanding. The facility supported outstanding
letters of credit totaling 258,000 Euros.
See 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 2003, 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 damage award against the wholly-owned subsidiary of the
Company has not been paid and is included in the Company's accrued liabilities
and expenses as of September 30, 2003.
The Company believes that available cash on hand and existing credit facilities
will be sufficient to fund its currently anticipated fiscal 2004 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.
12
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 2003. There have been no material changes in the accounting policies
followed by the Company during the first quarter of fiscal year 2004.
MARKET RISK INFORMATION
Perceptron'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 U.S. The Company may from time to time have interest rate risk
in connection with its borrowings.
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 September 30, 2003, the
Company's percentage of sales commitments in non-U.S. currencies was
approximately 40.2% or $7.2 million.
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. These forward contracts, which typically mature within one
year, are designed to hedge anticipated foreign currency transactions. 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. 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 September 30, 2003, the Company had forward exchange contracts between the
United States Dollar and the Euro in the notional amount of $8.0 million. The
forward exchange contracts are accounted for as cash flow hedges and have a
weighted average settlement price of 1.11 Euros to the United States Dollar. The
contracts outstanding at September 30, 2003 mature through June 30, 2004 and are
intended to hedge the Company's investment in its German subsidiary. The Company
recognized a charge of $213,000 in other comprehensive income (loss) for the
unrealized change in value of these forward exchange contracts during the
quarter ended September 30, 2003. During the first quarter ended September 30,
2002, the Company did not engage in any hedging activities.
INTEREST RATE RISK
The Company is subject to interest rate risk in connection with any borrowings
under its variable and fixed rate revolving lines of credit. The Company's
exposure to interest rate risk would arise 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 Financial Statements, "Credit Facilities",
for a description of the Company's available credit facilities.
13
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 2004 and future revenue, order booking levels and
earnings levels and the ability of the Company to fund its currently anticipated
fiscal 2004 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, 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 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.
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 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, as of September
30, 2003, 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,
14
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
On October 15, 2003, the Company entered into a Settlement Agreement
("Agreement") with LMI Technologies, Inc. ("LMI"), Diffracto Limited, Sensor
Adaptive Machines, Inc., Leonard Metcalfe, Neil Hummel and others that resolved
all pending litigation matters between the parties. The Agreement settled the
May 10, 2002 action the Company commenced against LMI et al. in the Ontario
Superior Court of Justice-Commercial List, the February 21, 2003 suit filed by
the Company against LMI in the United States District Court for the Eastern
District of Michigan and the May 30, 2003 suit filed by LMI against the Company
in the United States District Court for the Eastern District of Michigan that
are discussed more fully in the Company's Form 10-K for the year ended June 30,
2003 under Item 3, Legal Proceedings. As part of the settlement, LMI agreed to
pay the Company a cash settlement and the parties agreed to cross license
certain intellectual property, including intellectual property that was the
subject of the disputes.
See Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Critical Accounting Policies -- Litigation and Other
Contingencies" for a discussion of the Company's accounting policies regarding
legal proceedings and other contingencies.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
4.6 First Amendment to Credit Agreement, dated October
24, 2002, between Perceptron, Inc. and Comerica dated
May 20, 2003.
4.7 Second Amendment to Credit Agreement, dated October
24, 2002, between Perceptron, Inc. and Comerica
dated November 10, 2003.
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Chief Financial Officer
(B) Reports on Form 8-K
On August 12, 2003, the Company furnished a Form 8-K under Item 12 -
"Results of Operation and Financial Condition" concerning the Company's
press release announcing its financial results for the fourth quarter
and year ended June 30, 2003.
15
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: November 13, 2003 By: /S/ Alfred A. Pease
---------------------------------------
Alfred A. Pease
President and Chief Executive Officer
Date: November 13, 2003 By: /S/ John J. Garber
---------------------------------------
John J. Garber
Vice President and Chief Financial
Officer (Principal Financial Officer)
Date: November 13, 2003 By: /S/ Sylvia M. Smith
---------------------------------------
Sylvia M. Smith
Controller and Chief Accounting Officer
(Principal Accounting Officer)
16
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ---------- -----------
4.6 First Amendment to Credit Agreement, dated October
24, 2002, between Perceptron, Inc. and Comerica
dated May 20, 2003.
4.7 Second Amendment to Credit Agreement dated October
24, 2002, between Perceptron, Inc. and Comerica
dated November 10, 2003.
31.1 Section 302 Certification of Chief Executive
Officer
31.2 Section 302 Certification of Chief Financial
Officer
32.1 Section 906 Certification of Chief Executive
Officer
32.2 Section 906 Certification of Chief Financial
Officer
17