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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, 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 February 8, 2005, was:
Common Stock, $0.01 par value 8,766,531
----------------------------- ----------------
Class Number of shares
PERCEPTRON, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 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 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5 Other Information 23
Item 6. Exhibits 23
SIGNATURES 24
2
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
(In Thousands, Except Per Share Amount) 2004 2004
------------ ----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 23,509 $ 19,679
Receivables:
Billed receivables, net of allowance for doubtful accounts 17,832 19,631
of $731 and $625, respectively
Unbilled receivables 1,360 2,050
Other receivables 607 462
Inventories, net of reserves of $510 and $510, respectively 6,451 5,688
Deferred taxes and other current assets 1,774 1,831
---------- ----------
Total current assets 51,533 49,341
PROPERTY AND EQUIPMENT
Building and land 6,013 6,013
Machinery and equipment 10,446 9,640
Furniture and fixtures 1,071 1,068
---------- ----------
17,530 16,721
Less - Accumulated depreciation and amortization (9,696) (9,007)
---------- ----------
Net property and equipment 7,834 7,714
DEFERRED TAX ASSETS 4,795 5,869
---------- ----------
TOTAL ASSETS $ 64,162 $ 62,924
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,927 $ 1,444
Accrued liabilities and expenses 2,998 2,827
Accrued compensation 1,259 3,288
Income taxes payable 1,410 2,543
Deferred revenue 2,550 2,462
---------- ----------
Total current liabilities 10,144 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 8,759 and 8,716, respectively 88 87
Accumulated other comprehensive income (loss) 316 (758)
Additional paid-in capital 42,653 42,502
Retained earnings 10,961 8,529
---------- ----------
Total shareholders' equity 54,018 50,360
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 64,162 $ 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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
(In Thousands, Except Per Share Amounts) 2004 2003 2004 2003
---------- ---------- ---------- ----------
NET SALES $ 14,812 $ 13,607 $ 27,056 $ 25,875
COST OF SALES 7,394 7,120 13,610 13,777
---------- ---------- ---------- ----------
GROSS PROFIT 7,418 6,487 13,446 12,098
OPERATING EXPENSES
Selling, general and administrative 3,355 3,215 6,152 5,700
Engineering, research and development 1,917 1,665 3,620 3,102
---------- ---------- ---------- ----------
Total operating expenses 5,272 4,880 9,772 8,802
---------- ---------- ---------- ----------
OPERATING INCOME 2,146 1,607 3,674 3,296
OTHER INCOME AND (EXPENSES)
Interest income, net 127 89 218 140
Foreign currency 89 597 120 614
Other (49) 166 (12) 138
---------- ---------- ---------- ----------
Total other income (expenses) 167 852 326 892
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 2,313 2,459 4,000 4,188
INCOME TAX EXPENSE 846 929 1,568 1,631
---------- ---------- ---------- ----------
NET INCOME $ 1,467 $ 1,530 $ 2,432 $ 2,557
========== ========== ========== ==========
EARNINGS PER COMMON SHARE
Basic $ 0.17 $ 0.18 $ 0.28 $ 0.30
Diluted $ 0.16 $ 0.16 $ 0.26 $ 0.28
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 8,749 8,585 8,738 8,507
Dilutive effect of stock options 664 713 665 758
---------- ---------- ---------- ----------
Diluted 9,413 9,298 9,403 9,265
========== ========== ========== ==========
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) 2004 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,432 $ 2,557
Adjustments to reconcile net income to net cash provided from
(used for) operating activities:
Depreciation and amortization 665 681
Stock option income tax benefit 22 290
Deferred income taxes 1,074 439
Other 84 (137)
Changes in assets and liabilities, exclusive of changes shown
separately (935) 1,963
---------- ----------
Net cash provided from operating activities 3,342 5,793
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving credit borrowings 441 -
Revolving credit repayments (441) -
Proceeds from stock plans 167 576
Repurchase of company stock (38) -
---------- ----------
Net cash provided from financing activities 129 576
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (763) (582)
---------- ----------
Net cash used for investing activities (763) (582)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 1,122 541
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,830 6,328
CASH AND CASH EQUIVALENTS, JULY 1 19,679 11,101
---------- ----------
CASH AND CASH EQUIVALENTS, DECEMBER 31 $ 23,509 $ 17,429
========== ==========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
Receivables, net $ 3,322 $ 7,131
Inventories (763) 80
Accounts payable 483 426
Other current assets and liabilities (3,977) (5,674)
---------- ----------
$ (935) $ 1,963
========== ==========
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,
age and use of inventory that affect the value of the inventory. When the
related inventory is disposed of, the obsolescence reserve is reduced. A
detailed review of the inventory is performed yearly with quarterly updates for
known changes that have occurred since the annual review. Inventory, net of
reserves of $510,000 for both periods presented, is comprised of the following
(in thousands):
DECEMBER 31, 2004 JUNE 30, 2004
----------------- -------------
Component Parts $ 3,341 $ 2,663
Work In Process 519 573
Finished Goods 2,591 2,452
---------- ----------
Total $ 6,451 $ 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 624,000 and 580,000 shares of common stock outstanding in
the three months ended December 31, 2004 and 2003, respectively, were not
included in the computation of diluted EPS because the effect would have been
anti-dilutive. Options to purchase 623,000 and 580,000 shares of common stock
were outstanding in the six months ended December 31, 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.
6
At December 31, 2004, the Company had $8.0 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 1.28 Euros to
the United States Dollar. The contracts outstanding at December 31, 2004, mature
through June 30, 2005 and are intended to hedge the Company's investment in its
German subsidiary. The Company recognized a charge of approximately $988,000 and
$1.1 million in other comprehensive income (loss) for the unrealized change in
value of the forward exchange contracts during the three and six months ended
December 31, 2004, respectively. The Company's forward exchange contracts do not
subject it to material risk due to exchange rate movements because gains and
losses on these contracts offset losses and gains on the assets, liabilities,
and transactions being hedged.
At December 31, 2003, the Company had approximately $10.0 million of forward
exchange contracts between the United States Dollar and the Euro with a weighted
average settlement price of 1.16 Euros to the United States Dollar. The company
recognized a charge of $1.0 million and $1.2 million in other comprehensive
income (loss) for the unrealized change in value of forward exchange contracts
during the three and six months ended December 31, 2003, respectively.
5. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in common shareholder's equity
during a period from transactions and events from non-owner sources, including
net income. Other items of comprehensive income include revenues, expenses,
gains and losses that are excluded from net income. Total comprehensive income
for the applicable periods is as follows (in thousands):
THREE MONTHS ENDED DECEMBER 31, 2004 2003
----------- ----------
Net Income $ 1,467 $ 1,530
Other Comprehensive Income:
Foreign Currency Translation Adjustments 1,863 1,177
Forward Contracts (988) (985)
---------- ----------
Total Comprehensive Income $ 2,342 $ 1,722
========== ==========
SIX MONTHS ENDED DECEMBER 31, 2004 2003
----------- ----------
Net Income $ 2,432 $ 2,557
Other Comprehensive Income:
Foreign Currency Translation Adjustments 2,205 1,533
Forward Contracts (1,131) (1,198)
---------- ----------
Total Comprehensive Income $ 3,506 $ 2,892
========== ==========
6. CREDIT FACILITIES
The Company had no debt outstanding at December 31, 2004.
The Company has a $7.5 million secured Credit Agreement with Comerica Bank,
which expires on November 1, 2006. Proceeds under the Credit Agreement may be
used for working capital and capital expenditures. The security for the loan is
substantially all assets of the Company held in the United States. Borrowings
are designated as a Prime-based Advance or as a Eurodollar-based Advance.
Interest on Prime-based Advances is payable on the last day of each month and is
calculated daily at a rate that ranges from a 1/2% below to a 1/4% above the
bank's prime rate (5.25% as of December 31, 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 4.44% as of
7
December 31, 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
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 $33.9 million as of December
31, 2004 and to have no advances outstanding for 30 consecutive days each
calendar year. At December 31, 2004, the facility supported a $264,000 letter of
credit outstanding.
At December 31, 2004, the Company's German subsidiary (GmbH) had an unsecured
credit facility totaling 500,000 Euros (equivalent to approximately $682,000 at
December 31, 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 December 31, 2004, GmbH had no borrowings
outstanding. The facility supported outstanding letters of credit totaling
126,000 Euros (equivalent to approximately $172,000 at December 31, 2004).
7. STOCK-BASED COMPENSATION
The Company has stock plans, which are described more fully in Notes 10 and 11
in the Company's Annual Report on Form 10-K for fiscal year 2004. 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 SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
12/31/2004 12/31/2003 12/31/2004 12/31/2003
------------ ------------ ---------- -----------
NET INCOME
AS REPORTED $ 1,467 $ 1,530 $ 2,432 $ 2,557
EFFECT OF STOCK-BASED (136) (122) (272) (222)
COMPENSATION EXPENSE - NET OF TAX
--------- --------- --------- ---------
PRO FORMA $ 1,331 $ 1,408 $ 2,160 $ 2,335
========= ========= ========= =========
EARNINGS PER SHARE
BASIC - AS REPORTED $ 0.17 $ 0.18 $ 0.28 $ 0.30
BASIC - PRO FORMA $ 0.15 $ 0.16 $ 0.25 $ 0.27
DILUTED - AS REPORTED $ 0.16 $ 0.16 $ 0.26 $ 0.28
DILUTED - PRO FORMA $ 0.14 $ 0.15 $ 0.23 $ 0.25
8
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 SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
12/31/2004 12/31/2003 12/31/2004 12/31/2003
------------ ------------ ---------- ----------
WEIGHTED AVERAGE ESTIMATED FAIR VALUE PER
SHARE OF OPTIONS GRANTED DURING THE
PERIOD $ 2.12 $ 3.45 $ 2.12 $ 4.58
ASSUMPTIONS:
AMORTIZED DIVIDEND YIELD - - - -
COMMON STOCK PRICE VOLATILITY 28.39% 63.14% 28.39% 77.32%
RISK FREE RATE OF RETURN 3.38% 3.38% 3.38% 3.38%
EXPECTED OPTION TERM (IN YEARS) 5 5 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 Annual Report on Form 10-K for fiscal year 2004.
The Company is a party to a suit filed by Industries GDS, Inc., Bois Granval GDS
Inc., and Centre de Preparation GDS, Inc. (collectively, "GDS") on or about
November 21, 2002 in the Superior Court of the Judicial District of Quebec,
Canada against the Company, Carbotech, Inc. ("Carbotech"), and U.S. Natural
Resources, Inc. ("USNR"), among others. The suit alleges that the Company
breached its contractual and warranty obligations as a manufacturer in
connection with the sale and installation of three systems for trimming and
edging wood products. The suit also alleges that Carbotech breached its
contractual obligations in connection with the sale of equipment and the
installation of two trimmer lines, of which the Company's systems were a part,
and that USNR, which acquired substantially all of the assets of the Forest
Products business unit from the Company, was liable for GDS' damages. USNR has
sought indemnification from the Company under the terms of existing contracts
between the Company and USNR. GDS seeks compensatory damages against the
Company, Carbotech and USNR of approximately $5.5 million using a December 31,
2004 exchange rate. Carbotech has filed for bankruptcy protection in Canada. The
Company intends to vigorously defend GDS' claims.
The Company has been informed that a customer has received allegations of
possible patent infringement involving the Company's TriCam sensor. The customer
is currently engaged in litigation relating to such matter. This customer has
notified the Company that it expects the Company to indemnify it for expenses
and damages, if any, incurred in this matter. Management believes, however, that
the TriCam sensor was independently developed without utilizing any previously
patented process or technology and intends to vigorously assist its customer in
defending the Company's position. Because of the uncertainty surrounding the
nature of any possible infringement and the validity of any such claim or any
possible customer claim for indemnity, it is not possible to estimate the
ultimate effect, if any, of this matter on the Company's financial position.
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
9. NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs -
an amendment of ARB No. 43, Chapter 4". This Statement amends the guidance in
ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that "
.. . . under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." This Statement requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This Statement will be adopted
by the Company effective July 1, 2005 and is not expected to have a material
impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - an amendment of APB Opinion No. 29". This Statement amends Opinion 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. This Statement will be effective for
non-monetary asset exchanges occurring July 1, 2005 or thereafter.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment". This
Statement is a revision of FASB Statement No. 123, Accounting for Stock-Based
Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and its related implementation guidance. This Statement
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. This Statement
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. This Statement is
effective for the Company beginning July 1, 2005. The impact of adopting this
Statement on the Company's consolidated statement of operations has not yet been
evaluated.
10
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.
The Company has a strong financial base, no debt and approximately $23.5 million
of cash at December 31, 2004, to support its growth plans. The Company's
near-term focus for growth will remain on the successful introduction of its two
new Automated Systems products, AutoFit(R) and AutoScan(R), which are designed
to expand the Company's product offerings in its worldwide automotive markets,
and the continued development of enhanced versions of its ScanWorks(TM) product
line. In addition the Company believes there are growth opportunities in Asia
and Eastern Europe related to the emerging automotive markets in those areas and
the expansion of the Company`s business with current customers in Japan. The
Company has plans to commit additional resources to support these efforts. 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's revenues are principally derived from the sale of products for use
in the automotive industry. New vehicle tooling programs are the most important
selling opportunity for the Company's automotive related sales. The number and
timing of new vehicle tooling programs can be influenced by the state of the
economy. Therefore, from a macro perspective the Company continues to assess the
global economy and its likely effect on the Company's automotive customers and
markets served. The Company is continuing its efforts to expand its
opportunities outside the automotive industry, principally through its
Technology Components Group and new product development efforts.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2004 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2003
For the second quarter of fiscal 2005, the Company reported net income of $1.5
million, or $0.16 per diluted share, compared to net income of $1.5 million or
$0.16 per diluted share, for the second quarter of fiscal 2004. Specific line
item results are described below.
11
SALES - Net sales of $14.8 million for the second quarter of fiscal 2005 were up
$1.2 million, compared with the same period one year ago. The following tables
set forth comparison data for the Company's net sales by product groups and
geographic location.
SALES (BY GROUP) SECOND QUARTER SECOND QUARTER
(in millions) 2005 2004 INCREASE/(DECREASE)
- --------------------- ------------------ ------------------ ---------------------
Automated Systems $ 11.1 75% $ 8.9 65% $ 2.2 24.7%
Technology Components 2.2 15% 3.3 25% (1.1) (33.3)%
Value Added Services 1.5 10% 1.4 10% 0.1 7.1%
--------- --- --------- --- ---------
Totals $ 14.8 100% $ 13.6 100% $ 1.2 8.8%
========= === ========= === =========
SALES (BY LOCATION) SECOND QUARTER SECOND QUARTER
(in millions) 2005 2004 INCREASE/(DECREASE)
- ------------------- ------------------- ------------------- --------------------
North America $ 9.2 62% $ 9.1 56% $ 0.1 1.1%
Europe 5.3 36% 4.2 41% 1.1 26.2%
Asia 0.3 2% 0.3 3% 0.0 0.0%
---------- --- ---------- --- ----------
Totals $ 14.8 100% $ 13.6 100% $ 1.2 8.8%
========== === ========== === ==========
Sales of the Company's Automated Systems products increased primarily due to the
early delivery of a large AutoGauge(R) order to support a revised customer
delivery schedule and a higher than normal number of project completions that
resulted in customer buy-offs and associated final invoicing and sales
recognition. Technology Components sales were down primarily due to the timing
of customer delivery requirements for the ScanWorks(TM) product line.
ScanWorks(TM) sales of $0.2 million were down approximately $500,000 compared to
the second quarter of fiscal 2004. The sales increase in Europe reflected a
higher level of new orders scheduled for delivery during the quarter of $640,000
and the benefit from the strong Euro, that based on conversion rates in effect
this quarter, added approximately $460,000 more in sales than the comparable
rates in the second quarter of fiscal 2004 would have yielded.
BOOKINGS - The Company had new order bookings during the quarter of $16.9
million compared with new order bookings of $6.7 million in the first quarter of
fiscal 2005 and $12.4 million for the quarter ended December 31, 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) SECOND QUARTER SECOND QUARTER
(in millions) 2005 2004 INCREASE/ (DECREASE)
- --------------------- ----------------------- ----------------------- -----------------------
Automated Systems $ 13.6 80% $ 6.8 55% $ 6.8 100.0 %
Technology Components 1.8 11% 3.3 27% (1.5) (45.5)%
Value Added Services 1.5 9% 2.3 18% (0.8) (34.8)%
--------- --- --------- --- ---------
TOTALS $ 16.9 100% $ 12.4 100% $ 4.5 36.3 %
========= === ========= === =========
BOOKINGS (BY LOCATION) SECOND QUARTER SECOND QUARTER
(in millions) 2005 2004 INCREASE/ (DECREASE)
- ---------------------- -------------------- ------------------- -----------------------
North America $ 12.1 72% $ 7.3 60% $ 4.8 65.8%
Europe 4.8 28% 4.4 37% 0.4 9.1%
Asia 0.0 0% 0.7 3% (0.7) (100.0)%
---------- --- ---------- --- ----------
TOTALS $ 16.9 100% $ 12.4 100% $ 4.5 36.3%
========== === ========== === ==========
12
The Company indicated in its Form 10-Q filed for the first quarter of fiscal
2005 that it expected new orders to be significantly higher than the low level
of new orders reported in the first quarter of $6.7 million. The timing of new
orders, particularly for Automated Systems products, can cause a large swing
between quarters as was the case between the first and second quarters of fiscal
2005. The reduction in new orders for Technology Components and Value Added
Services was also primarily a function of timing. The Company believes that
interest in the ScanWorks(TM) product line and Value Added Services remains
high, and correspondingly expects orders to increase. New orders in Asia were
less than $50,000 this quarter, but the Company believes that customer interest
for many of the Company's product lines has been growing. As a result the
Company believes there is growth potential for new orders in this region and
intends to commit additional resources to the Asian market. The foregoing
statements are "forward-looking statements" within the meaning of the Securities
Exchange Act of 1934, as amended. See Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Safe Harbor
Statement" for a discussion of a number of uncertainties which could cause
actual results to differ materially from those set forth in the forward-looking
statements.
BACKLOG - The Company's backlog was $15.6 million as of December 31, 2004
compared with $13.5 million as of September 30, 2004 and $16.6 million as of
December 31, 2003. The following tables set forth comparison data for the
Company's backlog by product groups and geographic location.
BACKLOG (BY GROUP) SECOND QUARTER SECOND QUARTER
(in millions) 2005 2004 INCREASE/ (DECREASE)
- -------------------- -------------- --------------- ---------------------
Automated Systems $12.2 78% $10.9 66% $ 1.3 11.9 %
Technology Components 1.9 12% 3.0 18% (1.1) (36.7)%
Value Added Services 1.5 10% 2.7 16% (1.2) (44.4)%
----- --- ----- --- -----
TOTALS $15.6 100% $16.6 100% $(1.0) (6.0)%
===== === ===== === =====
BACKLOG (BY LOCATION) SECOND QUARTER SECOND QUARTER INCREASE/
(in millions) 2005 2004 (DECREASE)
- -------------------- --------------- --------------- --------------------
North America $ 10.2 55% $ 8.8 53% $ 1.4 15.9 %
Europe 5.1 41% 6.9 42% (1.8) (26.1)%
Asia 0.3 4% 0.9 5% (0.6) (66.7)%
------ --- ----- --- -----
TOTALS $ 15.6 100% $16.6 100% $(1.0) (6.0)%
====== === ===== === =====
The Company expects to be able to fill substantially all of the orders in
backlog during the next twelve months. The level of backlog during any
particular period is not necessarily indicative of the future operating
performance of the Company. Most of the backlog is subject to cancellation by
the customer.
GROSS PROFIT - Gross profit was $7.4 million, or 50.1% of sales, in the second
quarter of fiscal year 2005, as compared to $6.5 million, or 47.7% of sales, in
the second quarter of fiscal year 2004. The margin improvement primarily
reflected the benefit from higher than normal revenue in North America of
approximately $370,000, or 2.5% of sales, related to customer buy-offs on
completed system installations and the strong Euro that had a net positive
impact of approximately $300,000, or 2.0% of sales. Higher installation and
manufacturing costs compared with the second quarter of fiscal 2004 of
approximately $530,000, or 3.6% of sales, partially offset the improvement. The
balance of the gross margin percentage change was due to product mix.
13
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES - SG&A expenses were $3.4
million in the quarter ended December 31, 2004 compared to $3.2 million in the
second quarter a year ago. The increase of $140,000 was primarily due to salary
and benefit increases of $100,000, higher provision for doubtful accounts of
approximately $140,000 and the impact of the strong Euro on SG&A expenses in the
Company's European subsidiary of approximately $90,000. Partially offsetting the
increases were lower legal expenses in fiscal 2005 of $220,000 related to the
settlement of various litigation matters.
ENGINEERING, RESEARCH AND DEVELOPMENT (R&D) EXPENSES - Engineering and R&D
expenses were $1.9 million in the quarter ended December 31, 2004 compared to
$1.7 million in the second quarter a year ago. The increase of $252,000 was
principally due to spending on contract engineering services and engineering
materials to support new product development.
INTEREST INCOME, NET - Net interest income was $127,000 in the second quarter of
fiscal 2005 compared with net interest income of $89,000 in the second quarter
of fiscal 2004. The increase was primarily due to higher cash balances available
for investment in short term securities at higher interest rates compared to one
year ago.
FOREIGN CURRENCY - There was a net foreign currency transaction gain of $89,000
this quarter primarily due to the strengthening Euro compared with a foreign
currency gain of $597,000 last year. Last year's results included a large,
realized foreign exchange gain of approximately $400,000 on Euros that had been
held in a bank account in Europe by the Company.
OTHER - Other expense this quarter was $49,000 primarily due to the loss on a
Euro foreign exchange contract compared to other income last year of $166,000
that included the receipt of funds related to the settlement of all legal
disputes with LMI Technologies, Inc. offset by certain costs incurred to secure
the settlement and the reversal of certain costs that were not required to be
paid in the final settlement of an arbitration award.
INCOME TAXES - The effective tax rates of 36.6% and 37.8% for the second 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 - The Company continues to expect revenues and bookings for the fiscal
year as a whole to remain comparable to those achieved in fiscal year 2004. The
Company also expects operating results for the second half of fiscal 2005 to
remain positive. 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. Longer term there are several factors that may positively influence
sales growth including the automotive industry's focus on introducing fresh new
vehicles more frequently to satisfy its customer's changing requirements, our
customers continuing focus on improving the fit and finish of their vehicles,
and the Company's new products AutoFit(R) and AutoScan(R), that are designed to
not only support our customers goals to improve fit that is measured in terms of
the vehicle's gap and flush but also to reduce the time and cost to introduce
new vehicles. 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.
14
SIX MONTHS ENDED DECEMBER 31, 2004 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 2003
The Company reported net income of $2.4 million, or $0.26 per diluted share, for
the first half of fiscal 2005, compared with net income of $2.6 million, or
$0.28 per diluted share for the six months ended December 31, 2003.
SALES - Net sales in the first six months of fiscal 2005 were $27.1 million,
compared to $25.9 million for the six months ended December 31, 2003. The
following tables set forth comparison data for the Company's net sales by
product groups and geographic location.
SALES (BY GROUP) SIX MONTHS SIX MONTHS
(in millions) ENDED 12/31/04 ENDED 12/31/03 INCREASE/ (DECREASE)
- --------------------- -------------- -------------- --------------------
Automated Systems $19.0 70% $18.2 70% $0.8 4.4 %
Technology Components 5.2 19% 5.4 21% (0.2) (3.7)%
Value Added Services 2.9 11% 2.3 9% 0.6 26.1 %
----- --- ----- --- ----
Totals $27.1 100% $25.9 100% $1.2 4.6 %
===== === ===== === ====
SALES (BY LOCATION) SIX MONTHS SIX MONTHS
(in millions) ENDED 12/31/04 ENDED 12/31/03 INCREASE/ (DECREASE)
- ------------------ -------------- -------------- --------------------
North America $17.1 63% $16.0 62% $1.1 6.9%
Europe 9.2 34% 9.2 35% 0.0 0.0%
Asia 0.8 3% 0.7 3% 0.1 14.3%
----- --- ----- --- ----
Totals $27.1 100% $25.9 100% $1.2 4.6%
===== === ===== === ====
Sales by product line and geographic region for both six month periods generally
reflected the timing of orders scheduled for delivery. The sales increase in
North America was primarily due to higher sales of AutoGauge(TM) systems within
the Automated Systems products group. Sales in Europe did benefit from the
strong Euro that based on conversion rates in effect for fiscal year 2005 added
approximately $730,000 more in sales than the comparable rates for the same
period of fiscal 2004 would have yielded.
BOOKINGS - New order bookings for the six months ended December 31, 2004 were
$23.6 million compared to $24.4 million for the same period one year ago.
BOOKINGS (BY GROUP) SIX MONTHS SIX MONTHS
(in millions) ENDED 12/31/04 ENDED 12/31/03 INCREASE/ (DECREASE)
- --------------------- -------------- -------------- ---------------------
Automated Systems $16.0 68% $16.0 65% $ 0.0 0.0 %
Technology Components 4.4 19% 5.3 22% (0.9) (17.0)%
Value Added Services 3.2 13% 3.1 13% 0.1 3.2 %
----- --- ----- --- -----
TOTALS $23.6 100% $24.4 100% $(0.8) (3.3)%
===== === ===== === =====
BOOKINGS (BY LOCATION) SIX MONTHS SIX MONTHS
(in millions) ENDED 12/31/04 ENDED 12/31/03 INCREASE/ (DECREASE)
- ---------------------- -------------- -------------- --------------------
North America $15.8 67% $14.6 60% $ 1.2 8.2 %
Europe 7.3 31% 8.8 36% (1.5) (17.0)%
Asia 0.5 2% 1.0 4% (0.5) (50.0)%
----- --- ----- --- -----
TOTALS $23.6 100% $24.4 100% $(0.8) (3.3)%
===== === ===== ==== =====
15
The decrease in orders of the Technology Components Group was due to lower
orders of the WheelWorks(TM) product line of $2.2 million compared to $3.0
million last year when the level of new orders was higher than normal. The
reduction in new orders in Europe reflected fewer new vehicle tooling programs
that represent the primary opportunity to sell AutoGauge(TM) systems. New orders
in Asia for the six months ended December 31, 2004 were $500,000 less than the
prior year six-month period. The Company believes that customer interest in Asia
for many of the Company's product lines has been growing. As a result the
Company believes there is growth potential for new orders in this region and
intends to commit additional resources to the Asian market. The foregoing
statements are "forward-looking statements" within the meaning of the Securities
Exchange Act of 1934, as amended. See Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Safe Harbor
Statement" for a discussion of a number of uncertainties which could cause
actual results to differ materially from those set forth in the forward-looking
statements.
GROSS PROFIT - Gross profit was $13.4 million, or 49.7% of sales, in the first
half of fiscal year 2005, as compared to $12.1 million, or 46.8% of sales, in
the first half of fiscal year 2004. The margin improvement primarily reflected
the benefit from higher than normal revenue in North America of approximately
$500,000, or 1.8% of sales, related to customer buy-offs on completed system
installations with nominal associated costs and the strong Euro that had a net
impact of approximately $480,000, or 1.8% of sales. The balance of the gross
margin percentage change was primarily due to product mix.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSEs - SG&A expenses were $6.2
million for the six months ended December 31, 2004 compared to $5.7 million in
the six-month period a year ago. The increase of $452,000 was primarily due to
salary and benefit increases of approximately $200,000, higher provision for
doubtful accounts of approximately $150,000, and the impact of the strong Euro
on SG&A expenses in the Company's European subsidiary of approximately $150,000
that were partially offset by lower legal expenses of approximately $120,000.
ENGINEERING, RESEARCH AND DEVELOPMENT (R&D) EXPENSES - Engineering and R&D
expenses were $3.6 million for the six months ended December 31, 2004 compared
to $3.1 million for the six-month period a year ago. The increase of $518,000
was due principally to increased spending of approximately $350,000 for contract
engineering services and engineering materials to support new product
development and salary and benefit increases of approximately $150,000.
INTEREST INCOME, NET - Net interest income was $218,000 in the first half of
fiscal 2005 compared with net interest income of $140,000 in the first half of
fiscal 2004. The increase was due to higher cash balances available for
investment in short term securities at higher interest rates compared to one
year ago.
FOREIGN CURRENCY - There was a net foreign currency gain of $120,000 in the
first half of fiscal 2005 primarily due to the strengthening Euro compared with
a net foreign currency gain of $614,000 last year when the Company realized a
foreign exchange gain of approximately $400,000 on Euros that had been held in a
bank account in Europe by the Company.
OTHER - Other expense in the first half of fiscal 2005 was $12,000 primarily due
to the loss on a Euro foreign exchange contract this quarter compared to other
income last year of $138,000 that reflected the receipt of funds related to the
settlement of all legal disputes with LMI Technologies, Inc. offset by certain
costs incurred to secure the settlement as well as the reversal of certain costs
previously expensed that were not required to be paid in the final settlement of
the arbitration award.
16
INCOME TAXES - The effective tax rates of 39.2% and 38.9% for the first six
months 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $23.5 million at December 31, 2004,
compared to $19.7 million at June 30, 2004. The cash increase of $3.8 million
for the six months ended Decemer 31, 2004 resulted primarily from $3.3 million
of cash generated from operations. The Company also used $763,000 of cash for
capital expenditures and $38,000 for the repurchase of company stock and
received $167,000 of cash from the purchase of common stock under its employee
stock plans. Depreciation and amortization was $665,000 during the six months
ended December 31, 2004.
The $3.3 million in cash provided from operations was primarily generated from
net income of $2.4 million and the add back of non-cash items such as
depreciation and deferred income taxes that totaled $1.8 million. Cash provided
from operations also reflected a decrease due to the change in net working
capital of $935,000. 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 increase resulted primarily
from reductions of other current assets and liabilities of $4.0 million and
increases in inventories of $763,000 that were partially offset by a reduction
in accounts receivables of $3.3 million and increases in accounts payable of
$483,000. The $4.0 million use of cash for other current assets and accrued
liabilities primarily represents payments of $2.3 million made under the
Company's 2004 team member profit sharing plan and tax payments of $1.1 million.
The $3.3 million reduction in receivables primarily related to increased cash
collections due to higher sales achieved in the fourth quarter of fiscal 2004
that were collected during the first six months of fiscal 2005. 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, age and use of inventory that affect the value of the
inventory. A detailed review of the inventory is performed yearly with quarterly
updates for known changes that have occurred since the annual review. When
inventory is deemed to have no further use or value, the Company disposes of the
inventory and the reserve for obsolescence is reduced. There was no inventory
disposed of during the first six months 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 half of fiscal
2005, the Company wrote off $8,000 of receivables and received a payment of
$79,000 for a previously written-off receivable. Also during the first half of
fiscal 2005, the Company increased its provision for bad debts by $35,000. On
February 2, 2005, Tower Automotive Inc., a customer of the Company, filed for
bankruptcy. On that date, Tower Automotive owed the Company approximately
$500,000. At December 31, 2004, the Company had already reserved for a portion
of the amount outstanding. It is expected that a further reserve will be
recorded during the third quarter of fiscal 2005 as the Company receives
additional information related to the bankruptcy proceeding. To date, except as
indicated above, the Company has not experienced any significant losses related
to the collection of accounts receivable.
17
The Company has no debt outstanding at December 31, 2004. The Company has a $7.5
million secured Credit Agreement with Comerica Bank, which expires on November
1, 2006. Proceeds under the Credit Agreement may be used for working capital and
capital expenditures. The security for the loan is substantially all assets of
the Company held in the United States. Borrowings are designated as a
Prime-based Advance or as a Eurodollar-based Advance. Interest on Prime-based
Advances is payable on the last day of each month and is calculated daily at a
rate that ranges from a 1/2% below to a 1/4% above the bank's prime rate (5.25%
as of December 31, 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
4.44% as of December 31, 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 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 $33.9
million as of December 31, 2004 and to have $0 advances outstanding for 30
consecutive days each calendar year. At December 31, 2004 the facility supported
a $264,000 letter of credit outstanding.
At December 31, 2004, the Company's German subsidiary (GmbH) had an unsecured
credit facility totaling 500,000 Euros (equivalent to approximately $682,000 at
December 31, 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 December 31, 2004, GmbH had no borrowings
outstanding. The facility supported outstanding letters of credit totaling
126,000 Euros (equivalent to approximately $172,000 at December 31, 2004).
The Company also had a favorable cash effect of $1.1 million in the first half
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. During the first half of fiscal 2005, the Company repurchased
5,400 shares of the Company's common stock for approximately $38,000. 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 and 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 $1.5 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 development opportunities, which would be
financed as discussed
18
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.
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 half 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 December
31, 2004, the Company's percentage of sales commitments in non-United States
currencies was approximately 41.2% or $6.4 million, compared to 46.9% or $7.8
million at December 31, 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 December 31, 2004, the Company had $8.0 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 1.28 Euros to
the United States Dollar. The contracts outstanding at December 31, 2004, mature
through June 30, 2005 and are intended to hedge the Company's investment in its
German subsidiary. The Company recognized a charge of approximately $988,000 and
$1.1 million in other
19
comprehensive income (loss) for the unrealized change in value of forward
exchange contracts during the three and six months ended December 31, 2004,
respectively. The Company's forward exchange contracts do not subject it to
material risk due to exchange rate movements because gains and losses on these
contracts offset losses and gains on the assets, liabilities, and transactions
being hedged.
At December 31 2003, the Company had $10.0 million of forward exchange contracts
between the United States Dollar and the Euro with a weighted average settlement
price of 1.16 Euros to the United States Dollar. The Company recognized a charge
of $1.0 million and $1.2 million in other comprehensive income (loss) for the
unrealized change in value of forward exchange contracts during the three and
six months ended December 31, 2003, respectively.
INTEREST RATE RISK
The Company invests its cash and cash equivalents in high quality, short-term
investments with primarily a term of three months or less. Given the short
maturities and investment grade quality of the Company's investment holdings at
December 31, 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.
NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new accounting pronouncements, see Note 9 to the
Consolidated Financial Statements, "New Accounting Pronouncements".
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, the introduction of, and customer interest in, new products,
customer interest in Asia for the Company's existing products, 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 expand into new markets in Eastern Europe and
Asia, 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
20
industry, which has from time to time been subject to cyclical downturns due to
the level of demand for, or supply of, the products produced by companies in
this industry. The ability of the Company to expand into new geographic markets
is subject to a number of uncertainties, including the timing of customer
acceptance of the Company's products and technologies, the impact of changes in
local economic conditions, the ability of the Company to attract the appropriate
personnel to effectively represent, install and service the Company's products
in the market and uncertainties inherent in doing business in foreign markets,
especially those that are less well developed than the Company's traditional
markets, such as the impact of fluctuations in foreign currency exchange rates,
foreign government controls, policies and laws affecting foreign trade and
investment, differences in the level of protection available for the Company's
intellectual property and differences in language and local business and social
customs. The 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.
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 December 31,
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 December 31,
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.
21
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) TOTAL NUMBER (d) MAXIMUM NUMBER
OF SHARES (OR APPROXIMATE
(a) TOTAL PURCHASED AS DOLLAR VALUE) OF
NUMBER OF (b) AVERAGE PART OF PUBLICLY SHARES THAT MAY YET
SHARES PRICE PAID ANNOUNCED BE PURCHASED UNDER
PERIOD PURCHASED PER SHARE PROGRAM THE PROGRAM
- --------------------- --------- ---------- ---------------- -------------------
November 1 - 30, 2004 2,000 $6.95 2,000 $1,986,100
December 1 - 31, 2004 3,400 $7.08 5,400 $1,962,029
----- ----- ----- ----------
Total 5,400 $7.03 5,400 $1,962,029
===== ===== ===== ==========
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. The program may be discontinued at any time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on December 6, 2004 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 6,343,588 912,282 --
Kenneth R. Dabrowski 6,478,230 777,640 --
Philip J. DeCocco 6,376,598 879,272 --
W. Richard Marz 6,594,640 661,230 --
Robert S. Oswald 6,573,240 682,630 --
Alfred A. Pease 6,527,886 727,984 --
James A. Ratigan 5,553,193 1,702,677 --
Terryll R. Smith 6,449,172 806,698 --
2. The Shareholders approved the Company's 2004 Stock Incentive Plan. As to
this proposal, 2,328,260 shares voted "for", 1,932,071 shares voted "against",
29,049 shares "abstained" and 2,966,490 shares were "broker non-votes".
3. The Shareholders approved the Company's Amended and Restated Employee Stock
Purchase Plan which increased the shares of Common Stock available under the
plan by 100,000 shares from 150,000 to 250,000. As to this proposal, 4,074,268
voted "for", 187,148 shares voted "against", 27,964 shares "abstained" and
2,966,490 shares were "broker non-votes".
22
ITEM 5. OTHER INFORMATION
On November 16, 2004, the Company announced the appointment of Peter J. Chatel
as Senior Vice President for New Market Development, effective November 22,
2004. A letter agreement between Mr. Chatel and the Company which outlines
certain terms and conditions of Mr. Chatel's employment has been filed as
Exhibit 10.43 to this Form 10-Q and is incorporated herein by reference.
ITEM 6. EXHIBITS
10.38 Perceptron, Inc. 2004 Stock Incentive Plan is incorporated by
reference to Exhibit 10.1 of the Company's Report on Form 8-K
filed December 10, 2004.
10.39 Perceptron, Inc. Employee Stock Purchase Plan, as amended and
restated as of October 22, 2004, is incorporated by reference
to Exhibit 10.2 of the Company's Report on Form 8-K filed
December 10, 2004.
10.40 Fourth Amendment dated as of December 29, 2004 to Credit
Agreement dated October 24, 2002 is incorporated by reference
to Exhibit 10.1 of the Company's Report on Form 8-K filed
January 5, 2005.
10.41 Form of Incentive Stock Option Agreement Terms for Officers
under the Perceptron, Inc. 2004 Stock Incentive Plan is
incorporated by reference to Exhibit 10.2 of the Company's
Report on Form 8-K filed January 5, 2005.
10.42 Form of Nonqualified Stock Option Agreement Terms for Officers
under the Perceptron, Inc. 2004 Stock Incentive Plan is
incorporated by reference to Exhibit 10.3 of the Company's
Report on Form 8-K filed January 5, 2005.
10.43 Letter Agreement, dated October 13, 2004, between the Company
and Peter J. Chatel.
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
23
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, 2005 By: /s/ Alfred A. Pease
----------------------------------------
Alfred A. Pease
Chairman of the Board, President
and Chief Executive Officer
Date: February 11, 2005 By: /s/ John J. Garber
----------------------------------------
John J. Garber
Vice President and Chief
Financial Officer
(Principal Financial Officer)
Date: February 11, 2005 By: /s/ Sylvia M. Smith
----------------------------------------
Sylvia M. Smith
Controller and Chief Accounting Officer
(Principal Accounting Officer)
24
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------
10.43 Letter Agreement, dated October 13, 2004, between the Company and
Peter J. Chatel.
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