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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 March 31, 2005.
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 May 9, 2005, was:
Common Stock, $0.01 par value 8,808,570
----------------------------- ----------------
Class Number of shares
PERCEPTRON, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2005
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 6. Exhibits 22
SIGNATURES 23
2
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, JUNE 30,
(In Thousands, Except Per Share Amount) 2005 2004
----------- --------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 20,872 $ 19,679
Receivables:
Billed receivables, net of allowance for doubtful accounts
of $612 and $625, respectively 18,706 19,631
Unbilled receivables 1,480 2,050
Other receivables 446 462
Inventories, net of reserves of $549 and $510, respectively 7,489 5,688
Deferred taxes and other current assets 2,241 1,831
----------- --------
Total current assets 51,234 49,341
PROPERTY AND EQUIPMENT
Building and land 6,013 6,013
Machinery and equipment 10,277 9,640
Furniture and fixtures 1,059 1,068
----------- --------
17,349 16,721
Less - Accumulated depreciation and amortization (9,732) (9,007)
----------- --------
Net property and equipment 7,617 7,714
DEFERRED TAX ASSETS 4,735 5,869
----------- --------
TOTAL ASSETS $ 63,586 $ 62,924
=========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,430 $ 1,444
Accrued liabilities and expenses 2,576 2,827
Accrued compensation 1,201 3,288
Income taxes payable 177 2,543
Deferred revenue 2,898 2,462
----------- --------
Total current liabilities 9,282 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 8,801 and 8,716, respectively 88 87
Accumulated other comprehensive income (loss) (197) (758)
Additional paid-in capital 42,708 42,502
Retained earnings 11,705 8,529
----------- --------
Total shareholders' equity 54,304 50,360
----------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 63,586 $ 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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
(In Thousands, Except Per Share Amounts) 2005 2004 2005 2004
-------- -------- -------- -------
NET SALES $ 12,879 $ 12,359 $ 39,935 $38,234
COST OF SALES 6,299 6,639 19,909 20,416
-------- -------- -------- -------
GROSS PROFIT 6,580 5,720 20,026 17,818
OPERATING EXPENSES
Selling, general and administrative 3,810 2,897 9,962 8,597
Engineering, research and development 1,681 1,660 5,301 4,762
Other expense - 166 - 166
-------- -------- -------- -------
Total operating expenses 5,491 4,723 15,263 13,525
-------- -------- -------- -------
OPERATING INCOME 1,089 997 4,763 4,293
OTHER INCOME AND (EXPENSES)
Interest income, net 138 53 356 193
Foreign currency (64) (18) 56 596
Other 24 13 12 151
-------- -------- -------- -------
Total other income (expenses) 98 48 424 940
-------- -------- -------- -------
INCOME BEFORE INCOME TAXES 1,187 1,045 5,187 5,233
INCOME TAX EXPENSE 443 537 2,011 2,168
-------- -------- -------- -------
NET INCOME $ 744 $ 508 $ 3,176 $ 3,065
======== ======== ======== =======
EARNINGS PER COMMON SHARE
Basic $ 0.08 $ 0.06 $ 0.36 $ 0.36
Diluted $ 0.08 $ 0.05 $ 0.34 $ 0.33
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 8,775 8,647 8,751 8,554
Dilutive effect of stock options 715 757 679 757
-------- -------- -------- -------
Diluted 9,490 9,404 9,430 9,311
======== ======== ======== =======
The notes to the consolidated financial statements are an integral part of these
statements.
4
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
(In Thousands) 2005 2004
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,176 $ 3,065
Adjustments to reconcile net income to net cash provided from
(used for) operating activities:
Depreciation and amortization 954 974
Stock option income tax benefit 122 359
Deferred income taxes 1,134 195
Other 85 15
Changes in assets and liabilities, exclusive of changes shown
separately (3,975) 5,448
-------- -------
Net cash provided from operating activities 1,496 10,056
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving credit borrowings 442 -
Revolving credit repayments (442) -
Proceeds from stock plans 364 831
Repurchase of company stock (279) -
-------- -------
Net cash provided from financing activities 85 831
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (954) (931)
-------- -------
Net cash used for investing activities (954) (931)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 566 489
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,193 10,445
CASH AND CASH EQUIVALENTS, JULY 1 19,679 11,101
-------- -------
CASH AND CASH EQUIVALENTS, MARCH 31 $ 20,872 $21,546
======== =======
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
Receivables, net $ 2,114 $10,263
Inventories (1,800) 239
Accounts payable 987 332
Other current assets and liabilities (5,276) (5,386)
-------- -------
$ (3,975) $ 5,448
======== =======
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 at March 31, 2005 and June 30, 2004 of $549,000 and $510,000,
respectively, is comprised of the following (in thousands):
MARCH 31, 2005 JUNE 30, 2004
-------------- -------------
Component Parts $3,473 $2,663
Work In Process 507 573
Finished Goods 3,509 2,452
------ ------
Total $7,489 $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 399,000 and 567,000 shares of common stock outstanding in
the three months ended March 31, 2005 and 2004, respectively, were not included
in the computation of diluted EPS because the effect would have been
anti-dilutive. Options to purchase 594,000 and 526,000 shares of common stock
outstanding in the nine months ended March 31, 2005 and 2004, 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 March 31, 2005, the Company had forward exchange contracts to sell 7.0
million Euros ($9.2 million equivalent) at weighted average settlement rates of
1.32 Euros to the United States Dollar. The contracts outstanding at March 31,
2005 mature through September 30, 2005. The objective of the hedge transactions
is to protect designated portions of the Company's net investment in its foreign
subsidiary against adverse changes in the Euro/U.S. Dollar exchange rate. The
Company assesses hedge effectiveness based on overall changes in fair value of
the forward contract. Since the critical risks of the forward contract and the
net investment coincide, there was no ineffectiveness. The accounting for the
hedges is consistent with translation adjustments where any gains and losses are
recorded to other comprehensive income. The Company recognized income of
$535,000 and a charge of $596,000 in other comprehensive income (loss) for the
unrealized change in value of the forward exchange contracts during the three
and nine months ended March 31, 2005, respectively. Offsetting these amounts
were corresponding changes in other comprehensive income (loss) for the
translation effect of the Company's foreign subsidiary. Because the forward
contracts were effective, there was no gain or loss recognized in earnings. The
Company's forward exchange contracts do not subject it to material risk due to
exchange rate movements because gains and losses on these contracts offset
losses and gains on the assets, liabilities, and transactions being hedged.
At March 31, 2004, the Company had approximately $11.0 million of forward
exchange contracts between the United States Dollar and the Euro with a weighted
average settlement price of 1.17 Euros to the United States Dollar. The Company
recognized income of $394,000 and a charge of $805,000 in other comprehensive
income (loss) for the unrealized change in value of forward exchange contracts
during the three and nine months ended March 31, 2004, respectively.
5. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in common shareholder's equity
during a period from transactions and events from non-owner sources, including
net income. Other items of comprehensive income include revenues, expenses,
gains and losses that are excluded from net income. Total comprehensive income
for the applicable periods is as follows (in thousands):
THREE MONTHS ENDED MARCH 31, 2005 2004
------ ------
Net Income $ 744 $ 508
Other Comprehensive Income:
Foreign Currency Translation Adjustments (1,048) (532)
Forward Contracts 535 394
------ ------
Total Comprehensive Income $ 231 $ 370
====== ======
NINE MONTHS ENDED MARCH 31, 2005 2004
------ ------
Net Income $3,176 $3,065
Other Comprehensive Income:
Foreign Currency Translation Adjustments 1,157 1,002
Forward Contracts (596) (805)
------ ------
Total Comprehensive Income $3,737 $3,262
====== ======
6. CREDIT FACILITIES
The Company had no debt outstanding at March 31, 2005.
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
7
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 (5.75% as of
March 31, 2005) 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
4.98% as of March 31, 2005) 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 $34.2
million as of March 31, 2005 and to have no advances outstanding for 30
consecutive days each calendar year. At March 31, 2005, the facility supported a
$264,000 letter of credit outstanding.
At March 31, 2005, the Company's German subsidiary (GmbH) had an unsecured
credit facility totaling 500,000 Euros (equivalent to approximately $646,000 at
March 31, 2005). The facility may be used to finance working capital needs and
equipment purchases or capital leases. Any borrowings for working capital needs
will bear interest at 9.0% on the first 100,000 Euros of borrowings and 2.0% for
borrowings over 100,000 Euros. The German credit facility is cancelable at any
time by either GmbH or the bank and any amounts then outstanding would become
immediately due and payable. At March 31, 2005, GmbH had no borrowings
outstanding. The facility supported outstanding letters of credit totaling
171,000 Euros (equivalent to approximately $221,000 at March 31, 2005).
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 NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
03/31/2005 03/31/2004 03/31/2005 03/31/2004
------------ ------------ ----------- -----------
NET INCOME
AS REPORTED $ 744 $ 508 $3,176 $3,065
EFFECT OF STOCK-BASED COMPENSATION
EXPENSE - NET OF TAX (125) (130) (397) (352)
------ ------ ------ ------
PRO FORMA $ 619 $ 378 $2,779 $2,713
====== ====== ====== ======
EARNINGS PER SHARE
BASIC - AS REPORTED $ 0.08 $ 0.06 $ 0.36 $ 0.36
BASIC - PRO FORMA $ 0.07 $ 0.04 $ 0.32 $ 0.32
DILUTED - AS REPORTED $ 0.08 $ 0.05 $ 0.34 $ 0.33
DILUTED - PRO FORMA $ 0.07 $ 0.04 $ 0.29 $ 0.29
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 NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
03/31/2005 03/31/2004 03/31/2005 03/31/2004
------------ ------------ ----------- -----------
WEIGHTED AVERAGE ESTIMATED FAIR VALUE
PER SHARE OF OPTIONS GRANTED
DURING THE PERIOD $ 2.30 $ 4.26 $ 2.12 $ 4.49
ASSUMPTIONS:
AMORTIZED DIVIDEND YIELD - - - -
COMMON STOCK PRICE VOLATILITY 28.87% 26.32% 28.40% 64.91%
RISK FREE RATE OF RETURN 3.50% 3.38% 3.38% 3.20%
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 March 31, 2005
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.
In March 2005, the SEC published Staff Accounting Bulletin (SAB) No. 107,
"Share-Based payment". This SAB provides guidance regarding the interaction
between SFAS No. 123R and certain SEC rules and regulations. SFAS 123R is
effective for the Company beginning July 1, 2005. The impact of adopting SFAS
No. 123R and SAB No. 107 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(R), 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's financial base remained strong, with no debt and approximately
$20.9 million of cash at March 31, 2005, to support its growth plans. The
Company's near-term focus for growth will remain on the market acceptance of
its two recently introduced 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(R) 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 MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
For the third quarter of fiscal 2005, the Company reported net income of
$744,000, or $0.08 per diluted share, compared to net income of $508,000, or
$0.05 per diluted share, for the third quarter of fiscal 2004. Specific line
item results are described below.
11
SALES - Net sales of $12.9 million for the third quarter of fiscal 2005 were up
$520,000, compared with the same period one year ago. The following tables set
forth comparison data for the Company's net sales by product groups and
geographic location.
SALES (BY GROUP) THIRD QUARTER THIRD QUARTER
(in millions) 2005 2004 INCREASE/(DECREASE)
- --------------------- ------------- ------------- -------------------
Automated Systems $ 8.8 68.2% $ 8.6 69.4% $ 0.2 2.3%
Technology Components 2.9 22.5% 2.4 19.3% .5 20.8%
Value Added Services 1.2 9.3% 1.4 11.3% (0.2) (14.3)%
----- ----- ----- ----- -----
Totals $12.9 100.0% $12.4 100.0% $ 0.5 4.0%
===== ===== ===== ===== =====
SALES (BY LOCATION) THIRD QUARTER THIRD QUARTER
(in millions) 2005 2004 INCREASE/(DECREASE)
- --------------------- ------------- ------------- -------------------
North America $ 7.5 58.1% $ 5.6 45.2% $ 1.9 33.9%
Europe 5.0 38.8% 6.4 51.6% (1.4) (21.9)%
Asia 0.4 3.1% 0.4 3.2% 0.0 0.0%
----- ----- ----- ----- -----
Totals $12.9 100.0% $12.4 100.0% $ 0.5 4.0%
===== ===== ===== ===== =====
Sales of the Company's Automated Systems products increased slightly due to
higher sales in North America that offset lower sales in Europe. The change
reflected the timing of customer delivery schedules and high sales to one
customer in Europe last year. The Technology Components sales increase reflected
higher ScanWorks(R) product line sales of approximately $1.6 million that were
up approximately $800,000 due to shipment of backlog developed during the second
quarter of fiscal 2005. The sales decrease in Europe was partially offset by the
benefit from the strong Euro that based on conversion rates in effect this
quarter, added approximately $290,000 more in sales than the comparable rates in
the third quarter of fiscal 2004 would have yielded.
BOOKINGS - The Company had new order bookings during the quarter of $16.2
million compared with new order bookings of $16.9 million in the quarter ended
December 31, 2004 and $15.0 million for the quarter ended March 31, 2004. 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) THIRD QUARTER THIRD QUARTER
(in millions) 2005 2004 INCREASE/ (DECREASE)
- --------------------- ------------- ------------- -------------------
Automated Systems $11.0 67.9% $12.1 80.7% $(1.1) (9.1)%
Technology Components 4.1 25.3% 1.8 12.0% 2.3 127.8%
Value Added Services 1.1 6.8% 1.1 7.3% 0.0 0.0%
----- ----- ----- ----- -----
TOTALS $16.2 100.0% $15.0 100.0% $ 1.2 8.0%
===== ===== ===== ===== =====
BOOKINGS (BY LOCATION) THIRD QUARTER THIRD QUARTER
(in millions) 2005 2004 INCREASE/ (DECREASE)
- --------------------- ------------- ------------- -------------------
North America $ 8.8 53.7% $ 7.2 48.0% $ 1.6 22.2%
Europe 7.0 43.2% 7.3 48.7% (0.3) (4.1)%
Asia 0.4 3.1% 0.5 3.3% (0.1) (20.0)%
----- ----- ----- ----- -----
TOTALS $16.2 100.0% $15.0 100.0% $ 1.2 8.0%
===== ===== ===== ===== =====
12
New orders for Automated Systems products were good this quarter, but below the
high level achieved last year when Europe received a large order from one
customer. Technology Components bookings were significantly higher than the
third quarter of fiscal 2004 because of the high rate of new orders for
Non-Contact Wheel Alignment sensors of $2.5 million, up $1.7 million compared to
one year ago. Sales for this product are dependent on the number of wheel
alignment systems that our customers have scheduled for delivery to automotive
assembly plants. New orders of $600,000 for TriCam(R) sensors for the forest
products industry were up approximately $600,000 compared to one year ago when
there were no orders.
BACKLOG - The Company's backlog was $18.9 million as of March 31, 2005 compared
with $15.6 million as of December 31, 2004 and $19.3 million as of March 31,
2004. The following tables set forth comparison data for the Company's backlog
by product groups and geographic location.
BACKLOG (BY GROUP) THIRD QUARTER THIRD QUARTER
(in millions) 2005 2004 INCREASE/ (DECREASE)
- --------------------- ------------- ------------- -------------------
Automated Systems $13.9 73.5% $15.3 79.3% $(1.4) (9.2)%
Technology Components 3.0 15.9% 2.3 11.9% 0.7 30.4%
Value Added Services 2.0 10.6% 1.7 8.8% 0.3 17.6%
----- ----- ----- ----- -----
TOTALS $18.9 100.0% $19.3 100.0% $(0.4) (2.1)%
===== ===== ===== ===== =====
BACKLOG (BY LOCATION) THIRD QUARTER THIRD QUARTER
(in millions) 2005 2004 INCREASE/ (DECREASE)
- --------------------- ------------- ------------- -------------------
North America $11.6 61.4% $10.4 54.4% $ 1.2 11.5%
Europe 7.0 37.0% 7.9 40.9% (0.9) (11.4)%
Asia 0.3 1.6% 1.0 4.7% (0.7) (70.0)%
----- ----- ----- ----- -----
TOTALS $18.9 100.0% $19.3 100.0% $(0.4) (2.1)%
===== ===== ===== ===== =====
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 $6.6 million, or 51.1% of sales, in the third
quarter of fiscal year 2005, as compared to $5.7 million, or 46.3% of sales, in
the third quarter of fiscal year 2004. The margin improvement was primarily due
to a favorable mix of product line sales. The strong Euro also had a positive
impact of approximately $200,000, or 1.6% of sales. Installation and
manufacturing costs were comparable in both fiscal quarters. However,
installation costs are generally higher than past years because customers are
buying a greater number of flexible compared to fixed AutoGauge(R) systems, and
flexible systems require more time to install. As a result, the Company does not
expect to achieve gross profit margins at this level in future periods. The
foregoing statement is a "forward-looking statement" 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
statement.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES - SG&A expenses were $3.8
million in the quarter ended March 31, 2005 compared to $2.9 million in the
third quarter a year ago. The increase of $900,000 was primarily due to a net
increase in the provision for doubtful accounts of approximately $470,000. Bad
debt expense this quarter reflected the expected loss related to a customer
bankruptcy compared to a net credit in the third quarter of fiscal 2004 when the
final loss related to a customer
13
bankruptcy was less than expected. The balance of the increase was due to salary
and benefit increases of approximately $250,000 and a net increase of
approximately $200,000 in the accrual for Michigan single business tax.
ENGINEERING, RESEARCH AND DEVELOPMENT (R&D) EXPENSES - Engineering and R&D
expenses of $1.7 million in the quarter ended March 31, 2005 were comparable to
the third quarter a year ago. There were no significant spending variances
within the expense account detail.
OTHER EXPENSE - Other expense during fiscal year 2004 reflected a $166,000 loss
on the disposition of a fixed asset.
INTEREST INCOME, NET - Net interest income was $138,000 in the third quarter of
fiscal 2005 compared with net interest income of $53,000 in the third 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 loss of $64,000
this quarter primarily due to a decline in the Euro during the quarter compared
with a foreign currency transaction loss of $18,000 last year when the Euro
declined during the quarter but to a lesser degree.
OTHER - Other income this quarter was $24,000 primarily due to the gain on a
Euro foreign exchange contract compared to other income last year of $13,000.
INCOME TAXES - The effective tax rates of 37.3% and 51.4% for the third 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 expects sales for all of fiscal 2005 to be comparable to
those achieved in fiscal 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. Longer term there has been no change in 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 and our customers continuing focus on improving
the fit and finish of their vehicles. The Company's new products AutoFit(R) and
AutoScan(R) are designed to not only support our customers goals to improve fit
that is measured in terms of the vehicle's gap and flushness 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.
NINE MONTHS ENDED MARCH 31, 2005 COMPARED TO NINE MONTHS ENDED MARCH 31, 2004
The Company reported net income of $3.2 million, or $0.34 per diluted share, for
the first nine months of fiscal 2005, compared with net income of $3.1 million,
or $0.33 per diluted share for the nine months ended March 31, 2004.
14
SALES - Net sales in the first nine months of fiscal 2005 were $39.9 million,
compared to $38.2 million for the nine months ended March 31, 2004. The
following tables set forth comparison data for the Company's net sales by
product groups and geographic location.
SALES (BY GROUP) NINE MONTHS NINE MONTHS INCREASE/
(in millions) ENDED 3/31/05 ENDED 3/31/04 (DECREASE)
- --------------------- --------------- ---------------- --------------
Automated Systems $ 27.8 69.7% $ 26.7 69.9% $ 1.1 4.1%
Technology Components 8.1 20.3% 7.9 20.7% 0.2 2.5%
Value Added Services 4.0 10.0% 3.6 9.4% 0.4 11.1%
------ ----- ------ ----- ------
Totals $ 39.9 100.0% 38.2 100.0% $ 1.7 4.5%
====== ===== ====== ===== ======
SALES (BY LOCATION) NINE MONTHS NINE MONTHS INCREASE/
(in millions) ENDED 3/31/05 ENDED 3/31/04 (DECREASE)
- ------------------- --------------- --------------- --------------
North America $24.4 61.1% $21.5 56.3% $ 2.9 13.5%
Europe 14.2 35.6% 15.6 40.8% (1.4) (9.0)%
Asia 1.3 3.3% 1.1 2.9% 0.2 18.2%
----- ----- ----- ----- -----
Totals $39.9 100.0% $38.2 100.0% $ 1.7 4.5%
===== ===== ===== ===== =====
Sales by group for both nine 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(R) systems within the Automated Systems
products group. The sales decrease in Europe primarily reflected lower sales of
AutoGauge(R) systems that were partially offset by the strong Euro that based on
conversion rates in effect for fiscal year 2005 added approximately $1.0 million
more in sales than the comparable rates for the same period of fiscal 2004 would
have yielded.
BOOKINGS - New order bookings for the nine months ended March 31, 2005 were
$39.7 million compared to $39.4 million for the same period one year ago.
BOOKINGS (BY GROUP) NINE MONTHS NINE MONTHS INCREASE/
(in millions) ENDED 3/31/05 ENDED 3/31/04 (DECREASE)
- --------------------- --------------- --------------- ---------------
Automated Systems $26.8 67.7% $28.1 71.3% $(1.3) (4.6)%
Technology Components 8.4 21.2% 7.1 18.0% 1.3 18.3%
Value Added Services 4.5 11.1% 4.2 10.7% 0.3 7.1%
----- ----- ----- ----- -----
TOTALS $39.7 100.0% $39.4 100.0% $ 0.3 0.8%
===== ===== ===== ===== =====
BOOKINGS (BY LOCATION) NINE MONTHS NINE MONTHS INCREASE/
(in millions) ENDED 3/31/05 ENDED 3/31/04 (DECREASE)
- ---------------------- --------------- --------------- ----------------
North America $24.5 61.7% $21.8 55.3% $ 2.7 12.4%
Europe 14.2 35.8% 16.1 40.9% (1.9) (11.8)%
Asia 1.0 2.5% 1.5 3.8% (0.5) (33.3)%
----- ----- ----- ----- -----
TOTALS $39.7 100.0% $39.4 100.0% $ 0.3 0.8%
===== ===== ===== ===== =====
The decrease in orders of the Automated Systems Group was the result of the
timing of new orders received. The increase in orders of the Technology
Components Group was primarily due to high orders of the WheelWorks(R) product
line of $2.5 million in the third quarter of fiscal 2005 that resulted in
year-to-date orders of $4.6 million compared to $3.8 million for the nine months
ended March 31, 2004. North American orders increased in fiscal 2005 for all
product groups. Automated Systems were up $1.2
15
million, Technology Components were up $700,000 and Value Added Services were up
$800,000. The new order decrease in Europe of $1.9 million was primarily due to
lower orders for AutoGauge(R) systems of $7.9 million in fiscal 2005 compared to
$10.4 million in fiscal 2004. The reduction in new orders in Europe reflected
fewer new vehicle tooling programs that represent the primary opportunity to
sell AutoGauge(R) systems. New orders in Asia remained $500,000 below the level
achieved in fiscal 2004. The Company continues to believe that there is
significant growth potential in Asia and has plans to commit additional
resources to the Asian market. The foregoing statement is a "forward-looking
statement" 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 statement.
GROSS PROFIT - Gross profit was $20.0 million, or 50.1% of sales, for the nine
months ended March 31, 2005, as compared to $17.8 million, or 46.6% of sales,
for the nine months ended March 31, 2004. The gross margin percentage
improvement primarily reflected the benefit from the strong Euro that had a net
impact of approximately $680,000, or 1.7% of sales, and higher than normal
revenue in North America of approximately $562,000, or 1.4% of sales, related to
customer buy-offs on completed system installations. The balance of the gross
margin percentage change was primarily due to product mix. Installation and
manufacturing costs were comparable in both fiscal periods.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES - SG&A expenses were $10.0
million for the nine months ended March 31, 2005 compared to $8.6 million in the
nine-month period a year ago. The increase of $1.4 million was primarily due to
a net increase in the provision for doubtful accounts of approximately $580,000.
Bad debt expense this year reflected the expected loss related to a customer
bankruptcy compared to a net credit in the first nine months of fiscal 2004 when
the final loss related to a customer bankruptcy was less than expected. The
balance of the increase was due to salary and benefit increases of approximately
$400,000, a net increase of approximately $230,000 in the accrual for Michigan
single business tax and the impact of the strong Euro on SG&A expense in the
Company's European subsidiary of approximately $200,000.
ENGINEERING, RESEARCH AND DEVELOPMENT (R&D) EXPENSES - Engineering and R&D
expenses were $5.3 million for the nine months ended March 31, 2005 compared to
$4.8 million for the nine-month period a year ago. The increase of $539,000 was
due principally to increased spending of approximately $440,000 for contract
engineering services and engineering materials to support new product
development and salary and benefit increases of approximately $100,000.
OTHER EXPENSE - Other expense during fiscal year 2004 reflected a $166,000 loss
on the disposition of a fixed asset.
INTEREST INCOME, NET - Net interest income was $356,000 in the first nine months
of fiscal 2005 compared with net interest income of $193,000 in the first nine
months 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 $56,000 in the first
nine months of fiscal 2005 compared with a net foreign currency gain of $596,000
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 income in the first nine months of fiscal 2005 was $12,000
compared to other income last year of $151,000 that reflected the receipt of
funds related to the settlement of all legal disputes with
16
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 an arbitration award.
INCOME TAXES - The effective tax rates of 38.8% and 41.4% for the first nine
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 $20.9 million at March 31, 2005,
compared to $19.7 million at June 30, 2004. The cash increase of $1.2 million
for the nine months ended March 31, 2005 resulted primarily from $1.5 million of
cash generated from operations. The Company also used $954,000 of cash for
capital expenditures and $279,000 for the repurchase of company stock and
received $364,000 of cash from the purchase of common stock under its employee
stock plans. Depreciation and amortization was $954,000 during the nine months
ended March 31, 2005.
The $1.5 million in cash provided from operations was primarily generated from
net income of $3.2 million and the add back of non-cash items such as
depreciation and deferred income taxes that totaled $2.3 million. Cash provided
from operations also reflected a use of cash related to changes in net working
capital of $4.0 million. 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 uses of cash for other current assets and liabilities of $5.3 million and
inventories of $1.8 million that were partially offset by a reduction in
accounts receivables of $2.1 million and increases in accounts payable of
$987,000. The $5.3 million use of cash for other current assets and accrued
liabilities primarily represents payments of $2.5 million made under the
Company's 2004 team member profit sharing plan and tax payments of $1.9 million.
The $2.1 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 nine 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 nine months ended March 31, 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 nine months ended
March 31, 2005, the Company wrote off $474,000 of receivables and received a
payment of $79,000 for recovery of a previously written-off receivable. Also
during the nine months ended March 31, 2005, the Company increased its provision
for bad debts by $382,000. A customer bankruptcy was the reason for the large
write-off and provision for bad debts. To date, except as indicated above, the
Company has not experienced any significant losses related to the collection of
accounts receivable.
17
The Company had no debt outstanding at March 31, 2005. 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 (5.75%
as of March 31, 2005) 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
4.98% as of March 31, 2005) 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 $34.2
million as of March 31, 2005 and to have no advances outstanding for 30
consecutive days each calendar year. At March 31, 2005, the facility supported a
$264,000 letter of credit outstanding.
At March 31, 2005, the Company's German subsidiary (GmbH) had an unsecured
credit facility totaling 500,000 Euros (equivalent to approximately $646,000 at
March 31, 2005). The facility may be used to finance working capital needs and
equipment purchases or capital leases. Any borrowings for working capital needs
will bear interest at 9.0% on the first 100,000 Euros of borrowings and 2.0% for
borrowings over 100,000 Euros. The German credit facility is cancelable at any
time by either GmbH or the bank and any amounts then outstanding would become
immediately due and payable. At March 31, 2005, GmbH had no borrowings
outstanding. The facility supported outstanding letters of credit totaling
171,000 Euros (equivalent to approximately $221,000 at March 31, 2005).
The Company also had a favorable cash effect of $566,000 in the nine months
ended March 31, 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 nine months ended March 31, 2005, the Company
repurchased 39,000 shares of the Company's common stock for approximately
$279,000. 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
18
requirements and its cash flow requirements for at least the next few years,
except to the extent that the Company implements new business development
opportunities, which would be financed as discussed below. The Company does not
believe that inflation has significantly impacted historical operations and does
not expect any significant near-term inflationary impact. The foregoing
statements are "forward-looking statements" within the meaning of the Securities
Exchange Act of 1934, as amended. See Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Safe Harbor
Statement" for a discussion of a number of uncertainties which could cause
actual results to differ materially from those set forth in the forward-looking
statements.
The Company 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 nine months ended March 31, 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 March 31,
2005, the Company's percentage of sales commitments in non-United States
currencies was approximately 44.4% or $8.4 million, compared to 45.5% or $8.8
million at March 31, 2004.
The Company may use, from time to time, a limited hedging program to minimize
the impact of foreign currency fluctuations. These transactions involve the use
of forward contracts, typically mature within one year and are designed to hedge
anticipated foreign currency transactions. The Company may use forward exchange
contracts to hedge the net assets of certain of its foreign subsidiaries to
offset the translation and economic exposures related to the Company's
investment in these subsidiaries
At March 31, 2005, the Company had forward exchange contracts to sell 7.0
million Euros ($9.2 million equivalent) at weighted average settlement rates of
1.32 Euros to the United States Dollar. The contracts outstanding at March 31,
2005, mature through September 30, 2005. The objective of the hedge transactions
is to protect designated portions of the Company's net investment in its foreign
subsidiary against adverse changes in the Euro/U.S. Dollar exchange rate. The
Company assesses hedge effectiveness based on overall changes in fair value of
the forward contract. Since the critical risks of the
19
forward contract and the net investment coincide, there was no ineffectiveness.
The accounting for the hedges is consistent with translation adjustments where
any gains and losses are recorded to other comprehensive income. The Company
recognized income of $535,000 and a charge of $596,000 in other comprehensive
income (loss) for the unrealized change in value of the forward exchange
contracts during the three and nine months ended March 31, 2005, respectively.
Offsetting these amounts were corresponding changes in other comprehensive
income (loss) for the translation effect of the Company's foreign subsidiary.
Because the forward contracts were effective, there was no gain or loss
recognized in earnings. The Company's forward exchange contracts do not subject
it to material risk due to exchange rate movements because gains and losses on
these contracts offset losses and gains on the assets, liabilities, and
transactions being hedged.
At March 31, 2004, the Company had approximately $11.0 million of forward
exchange contracts between the United States Dollar and the Euro with a weighted
average settlement price of 1.17 Euros to the United States Dollar. The Company
recognized income of $394,000 and a charge of $805,000 in other comprehensive
income (loss) for the unrealized change in value of forward exchange contracts
during the three and nine months ended March 31, 2004, respectively.
The Company's potential loss in earnings that would have resulted from a
hypothetical 10% adverse change in quoted foreign currency exchange rates
related to the translation of foreign denominated revenues and expenses into
U.S. dollars for the nine months ended March 31, 2005 and 2004, would have been
approximately $105,000 and $151,000, respectively.
INTEREST RATE RISK
The Company invests its cash and cash equivalents in high quality, short-term
investments with primarily a term of three months or less. Given the short
maturities and investment grade quality of the Company's investment holdings at
March 31, 2005, 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
20
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 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 March 31,
2005, the
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Company's disclosure controls and procedures were effective in causing the
material information required to be disclosed by the Company in the reports that
it files or submits under the Securities Exchange Act of 1934 to be recorded,
processed, summarized and reported, to the extent applicable, within the time
periods required for the Company to meet the Securities and Exchange
Commission's ("SEC") filing deadlines for these reports specified in the SEC's
rules and forms. There have been no significant changes in the Company's
internal controls over financial reporting during the quarter ended March 31,
2005 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
(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
- --------------------- --------- ----------- ---------------- --------------------
January 1 - 31, 2005 - - - -
February 1 - 28, 2005 32,850 $ 7.11 32,850 $ 1,728,408
March 1 - 31, 2005 750 $ 7.44 750 $ 1,722,631
------ --------- ------ --------------
Total 33,600 $ 7.12 33,600 $ 1,722,831
====== ========= ====== ==============
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.
On March 1, 2005, four members of the Company's Board of Directors became
entitled to receive a total of 3,940 shares of Common Stock at $7.61 per share
pursuant to the Directors Stock Purchase Rights Option under the 2004 Stock
Incentive Plan which was approved by shareholders in December 2004. The 2004
Stock Incentive Plan permits non-employee directors to purchase shares of
Common Stock through the 2004 Stock Incentive Plan in exchange for all or a
portion of the cash fees payable to them for serving as directors of the
Company. The transactions by the Company with the four directors did not
involve a public offering and are exempt under Section 4(2) of the Securities
Exchange Act of 1933 and Rules 505 and 506 promulgated thereunder.
ITEM 6. EXHIBITS
31.1 Certification by the Chief Executive Officer of the Company
pursuant to Rule 13a - 14(a) and Rule 15d - 14(a).
31.2 Certification by the Chief Financial Officer of the Company
pursuant to Rule 13a - 14(a) and Rule 15d - 14(a).
32.1 Certification of the Chief Executive Officer of the Company
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer of the Company
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERCEPTRON, INC.
(Registrant)
Date: May 13, 2005 By: /s/ Alfred A. Pease
------------------------------------------
Alfred A. Pease
Chairman of the Board, President and Chief
Executive Officer
Date: May 13, 2005 By: /s/ John J. Garber
------------------------------------------
John J. Garber
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: May 13, 2005 By: /s/ Sylvia M. Smith
------------------------------------------
Sylvia M. Smith
Controller and Chief Accounting Officer
(Principal Accounting Officer)
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EXHIBIT INDEX
EX NO. DESCRIPTION
- ------ -----------
31.1 Certification by the Chief Executive Officer of the Company pursuant
to Rule 13a - 14(a) and Rule 15d - 14(a).
31.2 Certification by the Chief Financial Officer of the Company pursuant
to Rule 13a - 14(a) and Rule 15d - 14(a).
32.1 Certification of the Chief Executive Officer of the Company pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer of the Company pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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