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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, 2004.
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 8, 2004, was:
Common Stock, $0.01 par value 8,747,225
- ----------------------------- ---------
Class Number of shares
PERCEPTRON, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
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 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 5. Other Information 17
Item 6. Exhibits 17
SIGNATURES 18
2
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
(In Thousands, Except Per Share Amount) 2004 2004
-------- --------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 21,777 $ 19,679
Receivables:
Billed receivables, net of allowance for doubtful accounts 16,287 19,631
of $554 and $625, respectively
Unbilled receivables 1,538 2,050
Other receivables 666 462
Inventories, net of reserves of $510 and $510, respectively 6,222 5,688
Deferred taxes and other current assets 1,832 1,831
-------- --------
Total current assets 48,322 49,341
PROPERTY AND EQUIPMENT
Building and land 6,013 6,013
Machinery and equipment 9,957 9,640
Furniture and fixtures 1,068 1,068
-------- --------
17,038 16,721
Less - Accumulated depreciation and amortization (9,249) (9,007)
-------- --------
Net property and equipment 7,789 7,714
DEFERRED TAX ASSET 5,308 5,869
-------- --------
TOTAL ASSETS $ 61,419 $ 62,924
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,814 $ 1,444
Accrued liabilities and expenses 2,617 2,827
Accrued compensation 1,127 3,288
Income taxes payable 1,423 2,543
Deferred revenue 2,792 2,462
-------- --------
Total current liabilities 9,773 12,564
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 8,747 and 8,716, respectively 87 87
Accumulated other comprehensive loss (559) (758)
Additional paid-in capital 42,624 42,502
Retained earnings 9,494 8,529
-------- --------
Total shareholders' equity 51,646 50,360
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 61,419 $ 62,924
======== ========
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
SEPTEMBER 30,
(In Thousands, Except Per Share Amounts) 2004 2003
-------- --------
NET SALES $ 12,244 $ 12,268
COST OF SALES 6,216 6,657
-------- --------
GROSS PROFIT 6,028 5,611
OPERATING EXPENSES
Selling, general and administrative 2,797 2,485
Engineering, research and development 1,703 1,437
-------- --------
Total operating expenses 4,500 3,922
-------- --------
OPERATING INCOME 1,528 1,689
OTHER INCOME AND (EXPENSES)
Interest income, net 91 51
Foreign currency and other 68 (11)
-------- --------
Total other income (expenses) 159 40
-------- --------
INCOME BEFORE INCOME TAXES 1,687 1,729
INCOME TAX EXPENSE 722 702
-------- --------
NET INCOME $ 965 $ 1,027
======== ========
EARNINGS PER COMMON SHARE
Basic $ 0.11 $ 0.12
Diluted $ 0.10 $ 0.11
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 8,727 8,430
Dilutive effect of stock options 667 804
-------- --------
Diluted 9,394 9,234
======== ========
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) 2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations $ 965 $ 1,027
Adjustments to reconcile income from continuing operations
to net cash provided from (used for) operating activities:
Depreciation and amortization 326 345
Stock option income tax benefit 43 209
Deferred income taxes 562 (9)
Other (50) (98)
Changes in assets and liabilities, exclusive of changes shown
separately 417 2,063
-------- --------
Net cash provided from (used for) operating activities 2,263 3,537
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving credit borrowings 174 -
Revolving credit repayments (174) -
Proceeds from stock plans 79 440
-------- --------
Net cash provided from financing activities 79 440
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (422) (212)
-------- --------
Net cash used for investing activities (422) (212)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 178 73
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,098 3,838
CASH AND CASH EQUIVALENTS, JULY 1 19,679 11,101
-------- --------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30 $ 21,777 $ 14,939
======== ========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
Receivables, net $ 3,885 $ 5,425
Inventories (533) (192)
Accounts payable 371 8
Other current assets and liabilities (3,306) (3,178)
-------- --------
$ 417 $ 2,063
======== ========
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 2004 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 2005 presentation. In the opinion of management, the unaudited
information furnished herein reflects all adjustments necessary, consisting of
normal recurring adjustments, for a fair presentation of the financial
statements for the periods presented. The results of operations for any interim
period are not necessarily indicative of the results of operations for a full
year.
2. INVENTORY
Inventory is stated at the lower of cost or market. The cost of inventory is
determined by the first-in, first-out ("FIFO") method. The Company provides a
reserve for obsolescence to recognize the effects of engineering change orders
and other matters that affect the value of the inventory. When the related
inventory is disposed of, the obsolescence reserve is reduced. Inventory, net of
reserves of $510,000 for both periods presented, is comprised of the following
(in thousands):
SEPTEMBER 30, JUNE 30,
2004 2004
---- ----
Component Parts $3,447 $2,663
Work In Process 503 573
Finished Goods 2,272 2,452
------ ------
Total $6,222 $5,688
====== ======
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 621,000 and 579,000 shares of common stock outstanding in
the three months ended September 30, 2004 and 2003, 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.
At September 30, 2004, the Company had $10.9 million of forward exchange
contracts between the United States Dollar and the Euro. The hedges are
accounted for as cash flow hedges and have a weighted average settlement price
of 1.21 Euros to the United States Dollar. The contracts outstanding at
September 30, 2004, mature through March 31, 2005 and are intended to hedge the
Company's investment in its German subsidiary. The Company recognized a charge
of $143,000 in other comprehensive income (loss) for the
6
unrealized change in value of these forward exchange contracts during the
quarter ended September 30, 2004. The Company's forward exchange contracts do
not subject it to material risk due to exchange rate movements because gains and
losses on these contracts offset losses and gains on the assets, liabilities,
and transactions being hedged.
At September 30, 2003, the Company had $8.0 million of forward exchange
contracts between the United States Dollar and the Euro with a weighted average
settlement price of 1.11 Euros to the United States Dollar. 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.
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, 2004 2003
------- -------
Net Income $ 965 $ 1,027
Other Comprehensive Income (Loss):
Foreign currency translation adjustments 341 356
Forward Contracts (143) (213)
------- -------
Total Comprehensive Income $ 1,163 $ 1,170
======= =======
6. CREDIT FACILITIES
The Company had no debt outstanding at September 30, 2004.
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 assets of the Company held in the United States.
Borrowings are designated as a Prime-based Advance or as a Eurodollar-based
Advance. Interest on Prime-based Advances is payable on the last day of each
month and is calculated daily at a rate that ranges from a 1/2% below to a
1/4% above the bank's prime rate (4.75% as of September 30, 2004) 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 3.89% as of September 30, 2004)
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 that have been outstanding for less than
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 located in the
United States 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 $33.1 million as of September 30, 2004.
The borrowing base at September 30, 2004 was $7.5 million.
7
At September 30, 2004, the Company's German subsidiary (GmbH) had an unsecured
credit facility totaling 500,000 Euros (equivalent to approximately $617,000 at
September 30, 2004). 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, 2004, GmbH had no
borrowings outstanding. The facility supported outstanding letters of credit
totaling 126,000 Euros (equivalent to approximately $155,000 at September 30,
2004).
7. STOCK BASED COMPENSATION
The Company has stock plans, which are described more fully in Notes 10 and 11
in the Company's 2004 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 ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ---------------
Net income:
As reported $ 965 $ 1,027
Pro forma $ 829 $ 927
Earnings per share:
Basic - as reported $ 0.11 $ 0.12
Basic - pro forma $ 0.09 $ 0.11
Diluted - as reported $ 0.10 $ 0.11
Diluted - pro forma $ 0.09 $ 0.10
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 ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ------------------
Weighted average estimated fair value per
share of options granted during the period $ 1.93 $ 4.59
Assumptions:
Amortized dividend yield - -
Common stock price volatility 24.77% 89.87%
Risk free rate of return 3.78% 3.13%
Expected option term (in years) 5 5
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 2004 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
8
Judicial District of Quebec, Canada against the Company, Carbotech, Inc.
("Carbotech"), and U.S. Natural Resources, Inc. ("USNR"), among others. The suit
alleges that the Company breached its contractual and warranty obligations as a
manufacturer in connection with the sale and installation of three systems for
trimming and edging wood products. The suit also alleges that Carbotech breached
its contractual obligations in connection with the sale of equipment and the
installation of two trimmer lines, of which the Company's systems were a part,
and that USNR, which acquired substantially all of the assets of the Forest
Products business unit from the Company, was liable for GDS' damages. USNR has
sought indemnification from the Company under the terms of existing contracts
between the Company and USNR. GDS seeks compensatory damages against the
Company, Carbotech and USNR of approximately $5.3 million using a September 30,
2004 exchange rate. Carbotech has filed for bankruptcy protection in Canada. The
Company intends to vigorously defend GDS' claims.
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
OVERVIEW
Perceptron, Inc. ("Perceptron" or the "Company") designs, develops, manufactures
and markets information-based measurement and inspection solutions for process
improvement. Perceptron's product offerings are designed to improve quality,
increase productivity and decrease costs in manufacturing and product
development. The solutions offered by the Company are divided into three groups:
1) The Automated Systems Group made up of AutoGauge(R), AutoFit(R), AutoScan(R),
AutoSpect(R) and AutoGuide(R) products; 2) The Technology Components Group made
up of ScanWorks(TM), Non-Contact Wheel Alignment and TriCam(R) sensors for the
forest products industry; and 3) The Value Added Services Group providing
consulting, training and non-warranty support services. The Company services
multiple markets, with the largest being the automotive industry. The Company's
primary operations are in North America, Europe and Asia.
RESULTS OF OPERATIONS
For the first quarter of fiscal 2005, the Company reported net income of
$965,000, or $0.10 per diluted share, compared to net income of $1.0 million or
$0.11 per diluted share, for the first quarter of fiscal 2004. Specific line
item results are described below.
SALES - Net sales of $12.2 million for the first quarter of fiscal 2005 were
comparable to net sales of $12.3 million for the same period one year ago. The
following tables set forth comparison data for the Company's net sales by
product groups and geographic location.
SALES (BY GROUP) FIRST QUARTER FIRST QUARTER INCREASE/
(in millions) 2005 2004 (DECREASE)
----------------- --------------- --------------------
Automated Systems $ 7.9 65% $ 9.2 75% $(1.3) (14.1%)
Technology Components 2.9 24% 2.2 18% 0.7 31.8%
Value Added Services 1.4 11% .9 7% 0.5 55.6%
------ --- ----- --- ----- ----
Totals $ 12.2 100% $12.3 100% $(0.1) (0.8%)
====== === ===== === ===== =====
SALES (BY LOCATION) FIRST QUARTER FIRST QUARTER INCREASE/
(in millions) 2005 2004 (DECREASE)
----------------- --------------- --------------------
North America $ 7.7 63% $ 6.9 56% $ 0.8 11.6%
Europe 4.0 33% 5.0 41% (1.0) (20.0%)
Asia .5 4% .4 3% 0.1 25.0%
------ --- ----- --- ----- ----
Totals $ 12.2 100% $12.3 100% $(0.1) (0.8%)
====== === ===== === ===== ====
Sales of the Company's Automated Systems products decreased primarily due to the
timing of new orders and available business related to fewer new vehicle tooling
programs primarily in Europe. Technology Components sales improved primarily due
to ScanWorks(TM) product line sales of $1.0 million that were up approximately
$500,000 compared to the first quarter of fiscal 2004. This increase principally
reflected higher sales in North America by value added resellers selected by the
Company because of their established customer bases for the use of ScanWorks(TM)
technology. The sales increase in North America resulted from higher sales of
the ScanWorks(TM) product line. The sales decrease in Europe was primarily due
to lower AutoGauge(R) product line sales resulting from fewer new vehicle
tooling programs that was partially offset by the strong Euro, that based on
conversion rates in effect this quarter, added approximately $240,000 more in
sales than the comparable rates in the first quarter of fiscal 2004 would have
yielded.
10
BOOKINGS - The Company had new order bookings during the quarter of $6.7 million
compared with new order bookings of $14.9 million in the fourth quarter of
fiscal 2004 and $12.0 million for the quarter ended September 30, 2003. The
amount of new order bookings during any particular period is not necessarily
indicative of the future operating performance of the Company. The following
tables set forth comparison data for the Company's bookings by product groups
and geographic location.
BOOKINGS (BY GROUP) FIRST QUARTER FIRST QUARTER INCREASE/
(in millions) 2005 2004 (DECREASE)
-------------- ---------------- -------------------
Automated Systems $3.6 54% $ 9.2 77% $(5.6) (60.9%)
Technology Components 2.6 39% 1.9 16% 0.7 36.8%
Value Added Services .5 7% .9 7% (0.4) (44.4%)
---- --- ----- --- ----- -----
TOTALS $6.7 100% $12.0 100% $(5.3) (44.2%)
==== === ===== === ===== =====
BOOKINGS (BY LOCATION) FIRST QUARTER FIRST QUARTER INCREASE/
(in millions) 2005 2004 (DECREASE)
-------------- ---------------- -------------------
North America $3.7 55% $ 7.2 60% $(3.5) (48.6%)
Europe 2.5 37% 4.4 37% (1.9) (43.2%)
Asia .5 8% .4 3% 0.1 25.0%
---- --- ----- --- ----- -----
TOTALS $6.7 100% $12.0 100% $(5.3) (44.2%)
==== === ===== === ===== =====
Orders for Automated Systems products decreased primarily due to the timing of
customer decisions to place new orders. Many of the orders expected during the
first quarter were received in October. The Company booked or received
commitments for approximately $6 million of new orders during October, most of
which were Automated Systems orders. Orders for Technology Components increased
reflecting the growth of business by value added resellers for the ScanWorks(TM)
product line. Orders for Value Added Services decreased primarily due to the
timing of customer purchase order releases.
BACKLOG - The Company's backlog was $13.5 million as of September 30, 2004
compared with $19.1 million as of June 30, 2004 and $17.9 million as of
September 30, 2003. The following tables set forth comparison data for the
Company's backlog by product groups and geographic location.
BACKLOG (BY GROUP) FIRST QUARTER FIRST QUARTER INCREASE/
(in millions) 2005 2004 (DECREASE)
-------------- --------------- -----------------
Automated Systems $ 9.1 67% $14.9 83% $(5.8) (38.9%)
Technology Components 2.3 17% 2.1 12% 0.2 9.5%
Value Added Services 2.1 16% 0.9 5% 1.2 133.3%
----- --- ----- --- ----- -----
TOTALS $13.5 100% $17.9 100% $(4.4) (24.6%)
===== === ===== === ===== =====
BACKLOG (BY LOCATION) FIRST QUARTER FIRST QUARTER INCREASE/
(in millions) 2005 2004 (DECREASE)
-------------- --------------- -----------------
North America $ 7.4 55% $10.6 59% $(3.2) (30.2%)
Europe 5.5 41% 6.7 38% (1.2) (17.9%)
Asia 0.6 4% 0.6 3% 0.0 0.0%
----- --- ------ --- ----- -----
TOTALS $13.5 100% $ 17.9 100% $(4.4) (24.6%)
===== === ====== === ===== =====
The Company expects to be able to fill substantially all of the orders in
backlog during the following twelve months. The level of backlog during any
particular period is not necessarily indicative of the future operating
performance of the Company.
11
GROSS PROFIT - Gross profit was $6.0 million, or 49.2% of sales, in the first
quarter of fiscal year 2005, as compared to $5.6 million, or 45.7% of sales, in
the first quarter of fiscal year 2004. The gross profit percentage improvement
was primarily due to lower installation and manufacturing costs that had the
effect of improving margins by approximately 2%. The benefit from the strong
Euro that increased margins by approximately $150,000, or 1.2%, and favorable
product mix accounted for the balance of the gross margin percentage
improvement.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES - SG&A expenses were $2.8
million in the quarter ended September 30, 2004 compared to $2.5 million in the
first quarter a year ago. The increase was principally due to salary and benefit
increases, higher legal expenses and the impact of the strong Euro on SG&A
expenses in the Company's European subsidiary. Legal expenses in fiscal 2004
were lower due to accrual adjustments related to the settlement of various
litigation matters.
ENGINEERING, RESEARCH AND DEVELOPMENT (R&D) EXPENSES - Engineering and R&D
expenses were $1.7 million in the quarter ended September 30, 2004 compared to
$1.4 million in the first quarter a year ago. The increase was principally due
to salary and benefit increases and increased spending on new product
development and enhancement primarily for Technology Components products.
INTEREST INCOME, NET - Net interest income was $91,000 in the first quarter of
fiscal 2005 compared with net interest income of $51,000 in the first quarter of
fiscal 2004. The increase was primarily due to higher cash balances available
for investment in short term securities this quarter.
FOREIGN CURRENCY AND OTHER - Foreign currency and other income were $68,000 in
the first quarter of fiscal year 2005 compared to a loss of $11,000 in the first
quarter of fiscal 2004. This year's results included $37,000 of miscellaneous
income while last year's results reflected a miscellaneous loss of $28,000. Net
foreign currency income related to gains and losses on the Euro, Yen and Real
was $36,000 this year compared to $17,000 last year.
INCOME TAXES - The effective tax rates of 42.8% and 40.6% for the first quarter
of fiscal 2005 and 2004, respectively, 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 - Since the rate of new orders to start the second quarter of fiscal
2005 has been strong, and the expectation for new orders for the balance of the
second quarter and third quarter of fiscal 2005 remains very good, the Company
expects sales and bookings for fiscal year 2005 to be comparable to those
achieved during fiscal year 2004. The Company's sales forecast is based on a
thorough assessment of the probable size, system content, and timing of each of
the programs being considered by its customers. These factors are difficult to
quantify accurately because over time the Company's customers weigh changes in
the economy and the probable effect of these changes on their business, and
adjust the number and timing of their new vehicle programs to reflect the
changing business conditions. The Company continues to view the automotive
industry's focus on introducing new vehicles more frequently to satisfy their
customers' changing requirements, as well as their continuing focus on improved
quality, as positive indicators for new business. The 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
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $21.8 million at September 30,
2004, compared to $19.7 million at June 30, 2004. The cash increase of $2.1
million for the quarter ended September 30, 2004 resulted primarily from $2.3
million of cash generated from operations. The Company also used $422,000 of
cash for capital expenditures and received $79,000 of cash from the purchase of
common stock under its stock plans. Depreciation and amortization was $326,000
during the quarter ended September 30, 2004.
The $2.3 million in cash provided from operations was primarily generated from
net income of $965,000 million and the add back of non-cash items such as
depreciation and deferred income taxes that totaled $881,000. Cash provided from
operations also increased due to the change in net working capital of $417,000.
Net working capital is defined as changes in assets and liabilities, exclusive
of changes shown separately on the Consolidated Statements of Cash Flow. The net
working capital decrease resulted primarily from reductions of accounts
receivables of $3.9 million and increases in accounts payable of $371,000 that
were offset by a $3.3 million reduction in other current assets and liabilities
and an increase in inventory of $533,000. The $3.9 million reduction in
receivables primarily related to increased cash collections due to higher sales
achieved in the fourth quarter of fiscal 2004. The $3.3 million use of cash for
other current assets and accrued liabilities primarily represents payments of
approximately $2.3 million made under the Company's 2004 team member profit
sharing plan. Inventory increased due to purchases of items required to fill
anticipated orders.
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. There was
no inventory disposed of during the first quarter of fiscal 2005. The Company
determines its allowance for doubtful accounts by considering a number of
factors, including the length of time trade accounts receivable are past due,
the Company's previous loss history, the customer's current ability to pay its
obligation to the Company, and the condition of the general economy and the
industry as a whole. The Company writes-off accounts receivable when they become
uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts. During the first quarter of
fiscal 2005, the Company wrote off $2,000 of receivables. To date, the Company
has not experienced any significant losses related to the collection of accounts
receivable.
The Company has no debt outstanding at September 30, 2004. 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 assets of the Company held in the United States. Borrowings are designated
as a Prime-based Advance or as a Eurodollar-based Advance. Interest on
Prime-based Advances is payable on the last day of each month and is calculated
daily at a rate that ranges from a 1/2% below to a 1/4% above the bank's prime
rate (4.75% as of September 30, 2004) 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 3.89% as of September 30, 2004) 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
that have been outstanding for less than 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 located in the United States or $750,000, plus $4.2
million representing 60% of the appraised value of the Company's real property
located in
13
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 $33.1
million as of September 30, 2004. The borrowing base at September 30, 2004 was
$7.5 million.
At September 30, 2004, the Company's German subsidiary (GmbH) had an unsecured
credit facility totaling 500,000 Euros (equivalent to approximately $617,000 at
September 30, 2004). 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, 2004, GmbH had no
borrowings outstanding. The facility supported outstanding letters of credit
totaling 126,000 Euros (equivalent to approximately $155,000 at September 30,
2004).
The Company also had a favorable cash effect of $178,000 in the first quarter of
fiscal 2005 related to the impact of exchange rate changes, principally due to
the strong Euro, on Company cash held in Euros.
On August 9, 2004, the Company's Board of Directors approved a stock repurchase
program authorizing the Company to repurchase up to $2.0 million of the
Company's common stock. The Company may buy shares of its common stock on the
open market or in privately negotiated transactions from time to time, based on
market prices. There were no repurchases of the Company's common stock during
the quarter ended September 30, 2004. The program may be discontinued at any
time.
See Note 8 to the Consolidated Financial Statements, "Commitments and
Contingencies", contained in this Quarterly Report on Form 10-Q, Item 3, "Legal
Proceedings" and Note 8 to the Consolidated Financial Statements,
"Contingencies", of the Company's Annual Report on Form 10-K for fiscal year
2004, for a discussion of certain contingencies relating to the Company's
liquidity, financial position and results of operations. See also, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies - Litigation and Other Contingencies"
of the Company's Annual Report on Form 10-K for fiscal year 2004.
The Company expects to spend approximately $1.2 million during fiscal year 2005
for capital equipment, although there is no binding commitment to do so.
Based upon the Company's current business plan, the Company believes that
available cash on hand and existing credit facilities will be sufficient to fund
its currently anticipated fiscal 2005 cash flow requirements and its cash flow
requirements for at least the next few years, except to the extent that the
Company implements new business opportunities, which would be financed as
discussed below. The Company does not believe that inflation has significantly
impacted historical operations and does not expect any significant near-term
inflationary impact. The foregoing statements are "forward-looking statements"
within the meaning of the Securities Exchange Act of 1934, as amended. See Item
2 "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Safe Harbor Statement" for a discussion of a number of
uncertainties which could cause actual results to differ materially from those
set forth in the forward looking statements.
The Company continues to evaluate business development opportunities, including
potential acquisitions that fit its strategic plans. There can be no assurance
that the Company will identify any opportunities that fit its strategic plans or
will be able to execute any such opportunities on terms acceptable to the
Company. The Company intends to finance any such opportunities from available
cash on hand, existing credit facilities, issuance of additional shares of its
stock or additional sources of financing, as circumstances warrant.
14
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 2004. There have been no material changes in the accounting policies
followed by the Company during the first quarter of fiscal year 2005.
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 United States The Company may from time to time have interest
rate risk in connection with its investment of its cash.
FOREIGN CURRENCY RISK
The Company has foreign currency exchange risk in its international operations
arising from the time period between sales commitment and delivery for contracts
in non-United States currencies. For sales commitments entered into in the
non-United States currencies, the currency rate risk exposure is predominantly
less than one year with the majority in the 120 to 150 day range. At September
30, 2004, the Company's percentage of sales commitments in non-United States
currencies was approximately 45.0% or $6.1 million, compared to 40.2% or $7.2
million at September 30, 2003.
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, 2004, the Company had $10.9 million of forward exchange
contracts between the United States Dollar and the Euro. The hedges are
accounted for as cash flow hedges and have a weighted average settlement price
of 1.21 Euros to the United States Dollar. The contracts outstanding at
September 30, 2004, mature through March 31, 2005 and are intended to hedge the
Company's investment in its German subsidiary. The Company recognized a charge
of $143,000 in other comprehensive income (loss) for the unrealized change in
value of forward exchange contracts during the quarter ended September 30, 2004.
The Company's forward exchange contracts do not subject it to material risk due
to exchange rate movements because gains and losses on these contracts offset
losses and gains on the assets, liabilities, and transactions being hedged.
At September 30, 2003, the Company had $8.0 million of forward exchange
contracts between the United States Dollar and the Euro with a weighted average
settlement price of 1.11 Euros to the United States Dollar. The Company
recognized a charge of $213,000 in other comprehensive income (loss) for the
unrealized change in value of forward exchange contracts during the quarter
ended September 30, 2003.
INTEREST RATE RISK
The Company invests its cash and cash equivalents in high quality, short-term
investments with primarily a term of three months or less. Given the short
maturities and investment grade quality of the Company's investment holdings at
September 30, 2004, a 100 basis point rise in interest rates would not be
expected to have a material adverse impact on the fair value of the Company's
cash and cash equivalents. As a result, the Company does not currently hedge
these interest rate exposures.
15
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 2005 and future revenue, order bookings, costs and
earnings levels and the ability of the Company to fund its currently anticipated
fiscal 2005 cash flow requirements and cash flow requirements for the next few
years. 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,
continued pricing pressures from the Company's customers, the timing of orders
and shipments which can cause the Company to experience significant fluctuations
in its quarterly and annual revenue, order bookings, backlog and operating
results, timely receipt of required supplies and components which could result
in delays in anticipated shipments, general product demand and market acceptance
risks, the ability of the Company to successfully compete with alternative and
similar technologies, the timing, number and continuation of the Automotive
industry's retooling programs, including the risk that the Company's customers
postpone new tooling programs as a result of economic conditions or otherwise,
the ability of the Company to 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.
Because a significant portion of the Company's revenues are denominated in
foreign currencies, and are translated for financial reporting purposes into
U.S. Dollars, the level of the Company's reported net sales, operating profits
and net income are affected by changes in currency exchange rates, principally
between U.S. Dollars and Euros. Currency exchange rates are subject to
significant fluctuations, due to a number of factors beyond the control of the
Company, including general economic conditions in the United States and other
countries. Because the Company's expectations regarding future revenues, order
bookings, backlog and operating results are based upon assumptions as to the
levels of such currency exchange rates, actual results could differ materially
from the Company's expectations.
16
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, 2004, the Company's disclosure controls and procedures were effective in
causing the material information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange Act of 1934 to be
recorded, processed, summarized and reported, to the extent applicable, within
the time periods required for the Company to meet the Securities and Exchange
Commission's ("SEC") filing deadlines for these reports specified in the SEC's
rules and forms. There have been no significant changes in the Company's
internal controls over financial reporting during the quarter ended September
30, 2004 identified in connection with the Company's evaluation that has
materially affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 9, 2004, the Company's Board of Directors approved a stock repurchase
program authorizing the Company to repurchase up to $2.0 million of the
Company's common stock. There were no repurchases of the Company's common stock
during the quarter ended September 30, 2004. The Company may buy shares of its
common stock on the open market or in privately negotiated transactions from
time to time, based on market prices. The program may be discontinued at any
time.
ITEM 5. OTHER INFORMATION
The Company's Management Development, Compensation and Stock Option Committee
approved the 2005 Team Member Profit Sharing Plan on September 14, 2004. A
written description of the 2005 Team Member Profit Sharing Plan has been filed
as Exhibit 10.37 to this Form 10-Q and is incorporated herein by reference.
Generally, all team members of the Company, including all executive officers,
employed on or before December 31, 2004 participate in the plan.
ITEM 6. EXHIBITS
(A) Exhibits
10.37 Written Description of 2005 Team Member Profit Sharing
Plan.
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
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 11, 2004 By: /S/ Alfred A. Pease
-----------------------------------
Alfred A. Pease
President and Chief Executive Officer
Date: November 11, 2004 By: /S/ John J. Garber
-----------------------------------
John J. Garber
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: November 11, 2004 By: /S/ Sylvia M. Smith
-----------------------------------
Sylvia M. Smith
Controller and Chief Accounting Officer
(Principal Accounting Officer)
18
EXHIBIT INDEX
Exhibits
- --------
10.37 Written Description of 2005 Team Member Profit Sharing Plan.
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