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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, 2003.
Commission file number: 0-20206
PERCEPTRON, INC.
(Exact Name of Registrant as Specified in Its Charter)
Michigan 38-2381442
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
47827 Halyard Drive, Plymouth, Michigan 48170-2461
(Address of Principal Executive Offices) (Zip Code)
(734) 414-6100
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------------- --------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
-------------- --------------
The number of shares outstanding of each of the issuer's classes of common stock
as of February 9, 2004, was:
Common Stock, $0.01 par value 8,632,032
----------------------------- --------------------------
Class Number of shares
PERCEPTRON, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2003
PAGE
NUMBER
------
COVER 1
INDEX 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES
19
2
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) 2003 2002 2003 2002
-------- -------- -------- --------
NET SALES $ 13,607 $ 12,751 $ 25,875 $ 23,528
COST OF SALES 7,120 5,941 13,777 12,022
-------- -------- -------- --------
GROSS PROFIT 6,487 6,810 12,098 11,506
-------- -------- -------- --------
OPERATING EXPENSES
Selling, general and administrative 3,215 3,289 5,700 5,842
Engineering, research and
development 1,665 1,575 3,102 3,034
-------- -------- -------- --------
Total operating expenses 4,880 4,864 8,802 8,876
-------- -------- -------- --------
OPERATING INCOME
1,607 1,946 3,296 2,630
-------- -------- -------- --------
OTHER INCOME AND (DEDUCTIONS)
Interest expense - (32) - (151)
Interest income 89 16 140 83
Foreign currency and other 763 56 752 (69)
-------- -------- -------- --------
Total other income (deductions) 852 40 892 (137)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES
2,459 1,986 4,188 2,493
INCOME TAX EXPENSE 929 851 1,631 1,071
-------- -------- -------- --------
NET INCOME $ 1,530 $ 1,135 $ 2,557 $ 1,422
======== ======== ======== ========
EARNING PER COMMON SHARE
Basic $ 0.18 $ 0.14 $ 0.30 $ 0.17
Diluted $ 0.16 $ 0.14 $ 0.28 $ 0.17
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic 8,585 8,253 8,507 8,248
Dilutive effect of stock options 713 86 758 28
-------- -------- -------- --------
Diluted 9,298 8,339 9,265 8,276
======== ======== ======== ========
The notes to the consolidated financial statements are an integral part of these
statements.
3
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
(In Thousands, Except Per Share Amount) 2003 2003
------------ ---------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 17,429 $ 11,101
Receivables:
Billed receivables, net of allowance for doubtful accounts 17,652 22,955
of $547 and $674, respectively
Unbilled receivables 1,471 1,170
Other receivables 465 1,474
Inventories, net of reserves of $567 and $569, respectively 6,729 6,809
Deferred taxes and other current assets 1,654 1,365
------------ --------
Total current assets 45,400 44,874
------------ --------
PROPERTY AND EQUIPMENT
Building and land 6,004 6,004
Machinery and equipment 9,974 9,682
Furniture and fixtures 1,068 1,063
------------ --------
17,046 16,749
Less - Accumulated depreciation and amortization (8,846) (8,459)
------------ --------
Net property and equipment 8,200 8,290
------------ --------
DEFERRED TAX ASSET 5,811 6,250
------------ --------
TOTAL ASSETS $ 59,411 $ 59,414
============ ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,180 $ 1,754
Accrued liabilities and expenses 3,335 5,051
Deferred revenue 1,380 1,098
Income taxes payable 2,004 2,859
Accrued compensation 1,809 3,707
------------ --------
Total current liabilities 10,708 14,469
------------ --------
SHAREHOLDERS' EQUITY
Preferred stock - no par value, authorized 1,000 shares, issued none - -
Common stock, $0.01 par value, authorized 19,000 shares, issued
and outstanding 8,615 and 8,342, respectively 86 83
Accumulated other comprehensive loss (626) (961)
Additional paid-in capital 42,144 41,281
Retained earnings 7,099 4,542
------------ --------
Total shareholders' equity 48,703 44,945
------------ --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 59,411 $ 59,414
============ ========
The notes to the consolidated financial statements are an integral part of these
statements.
4
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
(In Thousands) 2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,557 $ 1,422
Adjustments to reconcile net income to net cash provided from
(used for) operating activities:
Depreciation and amortization 681 639
Stock option income tax benefit 290
Deferred income taxes 439 842
Other (137) (1)
Changes in assets and liabilities, exclusive of changes shown
separately 1,963 836
-------- --------
Net cash provided from operating activities 5,793 3,738
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving credit borrowings - 10,841
Revolving credit repayments - (15,202)
Proceeds from stock plans 576 71
-------- --------
Net cash provided from (used for) financing activities 576 (4,290)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (582) (532)
-------- --------
Net cash used for investing activities (582) (532)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 541 331
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,328 (753)
CASH AND CASH EQUIVALENTS, JULY 1 11,101 8,143
-------- --------
CASH AND CASH EQUIVALENTS, DECEMBER 31 $ 17,429 $ 7,390
======== ========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
Receivables, net $ 7,131 $ 1,630
Inventories 80 (529)
Accounts payable 426 (746)
Other current assets and liabilities (5,674) 481
-------- --------
$ 1,963 $ 836
======== ========
The notes to the consolidated financial statements are an integral part of these
statements.
5
PERCEPTRON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements should be read in conjunction
with the Company's 2003 Annual Report on Form 10-K. Certain reclassifications
may have been made to the prior year's financial statements to conform with the
fiscal year 2004 presentation. In the opinion of management, the unaudited
information furnished herein reflects all adjustments necessary, including
normal recurring adjustments, for a fair presentation of the financial
statements for the periods presented. The results of operations for any interim
period are not necessarily indicative of the results of operations for a full
year.
2. INVENTORY
Inventory is stated at the lower of cost or market. The cost of inventory is
determined by the first-in, first-out ("FIFO") method. The Company provides a
reserve for obsolescence to recognize the effects of engineering change orders
and other matters that affect the value of the inventory. When the related
inventory is disposed of, the obsolescence reserve is released. During the six
months ended December 31, 2003, the Company disposed of $103,000 of inventory
that had been reserved for at June 30, 2003 and accrued approximately an
additional $101,000 for anticipated obsolete inventory. Inventory, net of
reserves at December 31, 2003 and June 30, 2003 of $567,000 and $569,000,
respectively, is comprised of the following (in thousands):
DECEMBER 31, JUNE 30,
2003 2003
------------ --------
Component Parts $ 3,642 $ 3,525
Work In Process 507 516
Finished Goods 2,580 2,768
------------ --------
Total $ 6,729 $ 6,809
============ ========
3. EARNINGS PER SHARE
Basic earnings per share ("EPS") is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Other
obligations, such as stock options, are considered to be potentially dilutive
common shares. Diluted EPS assumes the issuance of potentially 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 580,000 and 1,104,000 shares of common stock outstanding in
the three months ended December 31, 2003 and 2002, respectively, were not
included in the computation of diluted EPS because the effect would have been
anti-dilutive. Options to purchase 580,000 and 1,563,000 shares of common stock
were outstanding in the six months ended December 31, 2003 and 2002,
respectively, and were not included in the computation of diluted EPS because
the effect would have been anti-dilutive.
6
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 that typically mature within one year and are designed to
hedge anticipated foreign currency transactions. The Company may use forward
exchange contracts to hedge the net assets of certain of its foreign
subsidiaries to offset the translation and economic exposures related to the
Company's investment in these subsidiaries. Changes in the fair value of these
contracts are included in other comprehensive income until they are recognized
in earnings at the time the forecasted transaction occurs.
At December 31, 2003, the Company had forward exchange contracts between the
United States Dollar and the Euro in the notional amount of approximately $10.0
million. The forward exchange contracts are accounted for as cash flow hedges
and have a weighted average settlement price of 1.16 Euros to the United States
Dollar. The contracts outstanding at December 31, 2003, mature through December
8, 2004 and are intended to hedge the Company's investment in its German
subsidiary. The Company's forward exchange contracts do not subject it to
material risk due to exchange rate movements because gains and losses on these
contracts offset losses and gains on the assets, liabilities, and transactions
being hedged. The Company did not engage in any hedging activities during the
first half of fiscal year 2003.
5. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in common shareholder's equity
during a period from transactions and events from non-owner sources, including
net income. Other items of comprehensive income include revenues, expenses,
gains and losses that are excluded from net income. Total comprehensive income
for the applicable periods is as follows (in thousands):
THREE MONTHS ENDED DECEMBER 31, 2003 2002
--------- ----------
Net Income $ 1,530 $ 1,135
Other Comprehensive Income:
Foreign Currency Translation Adjustments 1,177 756
Forward Contracts (985) -
--------- ----------
Total Comprehensive Income $ 1,722 $ 1,891
========= ==========
SIX MONTHS ENDED DECEMBER 31, 2003 2002
--------- ----------
Net Income $ 2,557 $ 1,422
Other Comprehensive Income:
Foreign Currency Translation Adjustments 1,533 757
Forward Contracts (1,198) -
--------- ----------
Total Comprehensive Income $ 2,892 $ 2,179
========= =========
6. CREDIT FACILITIES
The Company has a $7.5 million collateral-based Credit Agreement with Comerica
Bank, which expires on November 1, 2005. Proceeds under the Credit Agreement may
be used for working capital and capital expenditures. The collateral for the
loan is substantially all U.S. assets of the Company. Borrowings are designated
as a Prime-based Advance or as a Eurodollar-based Advance. Interest on
Prime-based
7
Advances is payable on the last day of each month and is calculated daily at a
rate that ranges from a 1/2% below to a 1/4% above the bank's prime rate (4.00%
as of January 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
3.0% as of January 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 aggregate principal amount outstanding at any one time
cannot exceed the lesser of $7.5 million or the borrowing base which is
comprised of 80% of eligible accounts receivable billed in the United States,
aged up to 180 days, plus the lesser of 25% of raw material located in the
United States or $2.0 million, plus the lesser of 50% of finished goods
inventory or $750,000 plus $4.2 million representing 60% of the appraised value
of the Company's real property located in Plymouth, Michigan. The Credit
Agreement prohibits the Company from paying dividends. In addition, the Credit
Agreement requires the Company to maintain a Tangible Net Worth, as defined in
the Credit Agreement, of not less than $31.9 million as of December 31, 2003.
The borrowing base at December 31, 2003 was $7.5 million with no borrowings
outstanding.
At December 31, 2003, the Company's German subsidiary (GmbH) had an unsecured
credit facility totaling 500,000 Euros. The facility may be used to finance
working capital needs and equipment purchases or capital leases. Any borrowings
for working capital needs will bear interest at 9.0% on the first 100,000 Euros
of borrowings and 2.0% for borrowings over 100,000 Euros. The German credit
facility is cancelable at any time by either GmbH or the bank and any amounts
then outstanding would become immediately due and payable. At December 31, 2003,
GmbH had no borrowings outstanding. The facility supported outstanding letters
of credit totaling 289,000 Euros.
7. STOCK BASED COMPENSATION
The Company has stock option plans, which are described more fully in Note 13 in
the Company's 2003 Annual Report. The Company applies APB Opinion No. 25 ("APB
25"), "Accounting for Stock Issued to Employees," and related interpretations in
accounting for these plans. Accordingly, compensation cost for stock options has
been recognized under the provisions of APB 25. No stock-based compensation cost
is reflected in net income, as all options granted under these plans had an
exercise price greater than or equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the pro forma
effect on net income and earnings per share for the periods indicated if the
Company had applied the fair value recognition provisions of FASB Statement 123,
"Accounting for Stock-Based Compensation," to its stock option plans as
indicated below (in thousands except per share amounts):
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2003 DECEMBER 31, 2002
--------------------------------------------------------------------------------
Net Income
As Reported $ 1,530 $ 1,135 $ 2,557 $ 1,422
Pro Forma $ 1,408 $ 1,046 $ 2,335 $ 1,244
Earnings Per Share -- Diluted
As Reported $ 0.16 $ 0.14 $ 0.28 $ 0.17
Pro Forma $ 0.15 $ 0.13 $ 0.25 $ 0.15
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
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2003 DECEMBER 31, 2002
------------------------------------------------------------------------------
Weighted Average Estimated Fair
Value Per Share Of Options Granted $ 3.45 $ 1.24 $ 4.58 $ 1.02
During The Period
Assumptions:
Amortized Dividend Yield - - - -
Common Stock Price Volatility 63.14% 64.80% 77.32% 93.66%
Risk Free Rate Of Return 3.38% 3.00% 3.38% 3.00%
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 2003 Annual Report on Form 10-K.
As previously disclosed in the Company's Form 10-Q for the quarter ended
September 30, 2003, on October 15, 2003, the Company entered into a Settlement
Agreement ("Agreement") with LMI Technologies, Inc. ("LMI"), Diffracto Limited,
Sensor Adaptive Machines, Inc., Leonard Metcalfe, Neil Hummel and others that
resolved all pending litigation matters between the parties. The Agreement
settled the May 10, 2002 action the Company commenced against LMI et al. in the
Ontario Superior Court of Justice-Commercial List, the February 21, 2003 suit
filed by the Company against LMI in the United States District Court for the
Eastern District of Michigan and the May 30, 2003 suit filed by LMI against the
Company in the United States District Court for the Eastern District of Michigan
that are discussed more fully in the Company's Form 10-K for the year ended June
30, 2003 under Item 3, Legal Proceedings. As part of the settlement, LMI agreed
to pay the Company a cash settlement and the parties agreed to cross license
certain intellectual property, including intellectual property that was the
subject of the disputes.
On December 24, 2003, the Company entered into a Compromise and Settlement
Agreement with Speroni S.p.A. that resolved the arbitration award that is
discussed more fully in the Company's Form 10-K for the year ended June 30, 2003
under Item 3, Legal Proceedings. As a result of the settlement, on December 24,
2003, the Company paid Speroni S.p.A. approximately $2.3 million.
The Company may, from time to time, be subject to other claims and suits in the
ordinary course of its business. To estimate whether a loss contingency should
be accrued by a charge to income, the Company evaluates, among other factors,
the degree of probability of an unfavorable outcome and the ability to make a
reasonable estimate of the amount of the loss. Since the outcome of litigation
is subject to significant uncertainty, changes in these factors could materially
impact the Company's financial position or results of operations.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 2002
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); 2) The Technology Components Group made up of
ScanWorks(TM), WheelWorks(R) (Non-Contact Wheel Alignment) and sensors for the
forest products industry; and 3) The Value Added Services Group providing
consulting, training and non-warranty support services.
The Company's current principal products are based upon proprietary
three-dimensional image processing, AutoSolve(TM) feature extraction software
algorithms and TriCam(R) three-dimensional object imaging technology. TriCam(R)
technology uses structured laser light and triangulation techniques to obtain
accurate three-dimensional measurements. TriCam(R) systems are used to measure
formed parts for reduction of process variation, to provide robot guidance for
automated assembly tasks and to improve the speed and lower the cost of wheel
alignment in final assembly operations.
The Company reported net income of $1.5 million, or $0.18 per share, for the
second quarter of fiscal 2004, compared to net income of $1.1 million, or $0.14
per share, in the quarter ended December 31, 2002.
Sales -- Net sales of $13.6 million for the second quarter of fiscal 2004 were
up $856,000, compared with the same period one year ago. Sales of the Company's
Automated Systems Group were $8.9 million compared to $9.8 million last year.
Sales of the Technology Components Group were $3.3 million compared to $1.8
million last year. Value Added Services sales were $1.4 million compared to $1.2
million last year. Sales by geographic region were as follows: North America
sales were approximately $9.1 million this year compared to $7.1 million last
year, European sales were approximately $4.2 million this year compared to $5.2
million last year, and Asian sales were approximately $300,000 this year
compared to $500,000 last year. The sales increase in North America primarily
reflected an increase in Technology Components Group sales of $1.1 million
compared to last year. The sales decrease in Europe resulted from lower
AutoGauge(R) sales that were partially offset by the strong Euro that based on
conversion rates in effect this quarter added approximately $640,000 more in
sales than the comparable rates in the second quarter of fiscal 2003 would have
yielded. The sales change in both North America and Europe was primarily a
function of the timing of customer orders.
Bookings & Backlog -- The Company had new order bookings during the quarter of
$12.4 million compared with new order bookings of $12.0 million in the first
quarter of fiscal 2004 and $17.0 million for the second quarter of fiscal 2003.
New orders for the Automated Systems Group were $6.8 million compared to $14.2
million last year. The high level of orders last year was principally due to a
single unusually large tooling program by a European customer that encompassed a
number of plants around Europe and resulted in higher bookings for AutoGauge(R)
systems. Orders for the Technology Components Group were $3.3 million compared
to $1.8 million last year principally due to increased bookings of the Company's
ScanWorks(TM) products. Orders for the Value Added Services Group
10
increased $1.3 million to $2.3 million for fiscal 2004 compared to $1.0 million
last year. The Company's backlog was $16.6 million as of December 31, 2003
compared with $17.9 million as of September 30, 2003 and $20.5 million as of
December 31, 2002. The Company expects to be able to fill substantially all of
the orders in backlog during the following twelve months. The amount of new
order bookings and the level of backlog during any particular period are not
necessarily indicative of the future operating performance of the Company.
Gross Profit -- Gross profit was $6.5 million, or 47.7% of sales, in the second
quarter of fiscal year 2004, as compared to $6.8 million, or 53.4% of sales, in
the second quarter of fiscal year 2003. The relatively high gross profit margin
last year was primarily due to the recognition of deferred revenues in Europe
related to customer buy-off on completed system installations with nominal
associated costs. Approximately one percent of the gross margin difference
reflected higher sales of low margin forest product sensors. The pricing of
these forest product sensors was agreed to as a condition in the purchase
agreement related to the sale of the Company's forest product business unit in
March of 2002. Also impacting the margin in the current period was higher
manufacturing and installation costs associated with the initial implementations
related to new products. The current period margin reductions were partially
offset by the incremental benefit from the strengthening Euro that had the
effect of increasing gross margins in Europe.
Selling, General and Administrative (SG&A) Expenses -- SG&A expenses of $3.2
million in the quarter ended December 31, 2003 were $74,000 lower than the
second quarter of fiscal 2002. The decrease primarily reflected lower accruals
in fiscal 2004 for the Company's allowance for doubtful accounts and employee
profit sharing plan that were partially offset by salary and benefit increases
and higher legal expense.
Engineering, Research and Development (R&D) Expenses -- Engineering and R&D
expenses of $1.7 million in the quarter ended December 31, 2003 were $90,000
higher than the second quarter of fiscal 2003 due principally to salary and
benefit increases.
Interest Income/Expense, net -- Net interest income was $89,000 in the second
quarter of fiscal 2004 compared with net interest expense of $16,000 in the
second quarter of fiscal 2003. There was no debt during the second quarter of
fiscal 2004 and excess cash was invested in short term securities. Interest
expense during the second quarter of fiscal 2003 was on an average outstanding
debt of approximately $2.9 million.
Foreign Currency and Other- There was an unusually large net foreign currency
gain of $597,000 during the second quarter of fiscal 2004 primarily due to the
strengthening Euro compared with a foreign currency gain of $64,000 last year.
Other income of $166,000 for the second quarter of fiscal 2004 compared to other
expense last year of $8,000 reflected the receipt of funds related to the
settlement of all legal disputes with LMI Technologies, Inc., which were
partially 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 the arbitration award with Speroni S.p.A., see Part II "Other
Information", Item 1 "Legal Proceedings".
Income Taxes -- Income tax expense for the three-month periods ended December
31, 2003 and 2002 reflected 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 strong sales for fiscal year 2004, in
the range of $48.0 million to $52.0 million, depending in part upon the relative
strength of the U. S. Dollar against the Euro. As previously reported, the
Company expects to remain profitable for the second half of fiscal 2004,
11
although not at the same high level achieved last year when results benefited
from an unusually large tooling program with a single European customer that
encompassed a number of plants around Europe. Programs of this magnitude are
rare. Though the Company does not expect a repeat of any single order of this
magnitude in fiscal 2004, the overall number of tooling programs remains
consistent with previous years. In the longer term the automotive industry's
current focus on introducing new vehicles more frequently to satisfy their
customers' changing requirements is a positive indicator for the Company's
future rate of new orders. The foregoing statements are "forward-looking
statements" within the meaning of the Securities Exchange Act of 1934, as
amended. See Item 2 "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Safe Harbor Statement" for a discussion of a number
of uncertainties which could cause actual results to differ materially from
those set forth in the forward-looking statements.
SIX MONTHS ENDED DECEMBER 31, 2003, COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 2002
Overview - The Company reported net income of $2.6 million, or $0.30 per share,
for the first half of fiscal 2004, compared with net income of $1.4 million, or
$0.17 per share for the six months ended December 31, 2002.
Sales -- Sales in the first six months of fiscal 2004 were $25.9 million,
compared to $23.5 million for the six months ended December 31, 2002. Sales of
the Company's Automated Systems Group were $18.2 million compared to $16.6
million last year. Technology Components Group sales were $5.4 million compared
to $4.3 million last year. Value Added Services Group sales were $2.3 million
compared to $2.6 million last year. Sales by geographic region were as follows:
North America sales were approximately $16.0 million this year compared to $13.9
million last year, European sales were approximately $9.2 million this year
compared to $8.4 million last year, and Asian sales were approximately $700,000
this year compared to $1.2 million last year. The sales increase in North
America was spread over the Company's product lines. The sales increase in
Europe resulted from the strong Euro that based on conversion rates in effect
for fiscal year 2004 added approximately $1.3 million more in sales than the
comparable rates for the same period of fiscal 2003 would have yielded.
Excluding the effect of the Euro, sales in Europe were down $500,000 in the
first half of fiscal year 2004 primarily in AutoGauge(R) sales related to the
timing of customer orders. The sales decrease in Asia was also due to the timing
of customer orders.
Bookings & Backlog -- New order bookings for the six months ended December 31,
2003 were $24.4 million compared to $28.8 million for the same period one year
ago. New orders for the Automated Systems Group were $16.0 million compared to
$23.2 million last year. The high level of orders last year was principally due
to bookings for $22.6 million of AutoGauge(R) systems of which $12.6 million was
placed by European Automotive manufacturers. Orders for the Technology
Components Group were $5.3 million up $1.5 million compared to last year
primarily due to higher demand for WheelWorks(R) products in all geographic
regions. Orders for the Value Added Services Group were $3.1 million compared to
$1.8 million last year. Backlog at December 31, 2003 was $16.6 million compared
to $20.5 million at December 31, 2002. The Company expects to be able to fill
substantially all of the orders in backlog during the following twelve months.
The amount of new order bookings and the level of backlog during any particular
period are not necessarily indicative of the future operating performance of the
Company.
Gross Profit -- Gross profit was $12.1 million, or 46.8% of sales, in the first
half of fiscal year 2004, as compared to $11.5 million, or 48.9% of sales, in
the first half of fiscal year 2003. The higher gross profit margin last year was
primarily due to the recognition of deferred revenues in Europe related to
customer
12
buy-offs on completed system installations with nominal associated costs. The
lower margin in fiscal 2004 also reflected the need to use a higher level of
outside contractor labor to install certain AutoGauge(R) systems in North
America, as well as higher manufacturing and installation costs associated with
the initial implementations related to new products. These margin reductions
were partially offset by the incremental benefit from the strengthening Euro
that yielded higher gross margins in Europe.
Selling, General and Administrative (SG&A) Expenses -- SG&A expenses decreased
$142,000 to $5.7 million in the six months ended December 31, 2003, compared
with last year. The decrease primarily reflected lower accruals for the
Company's allowance for doubtful accounts and employee profit sharing plan that
were partially offset by salary and benefit increases.
Engineering, Research and Development (R&D) Expenses -- Engineering and R&D
expenses of $3.1 million in the six months ended December 31, 2003 were $68,000
higher the first half of fiscal 2003 due principally to salary and benefit
increases.
Interest Income/Expense, net -- Net interest income was $140,000 in the first
half of fiscal 2004 compared with net interest expense of $68,000 in the first
half of fiscal 2003. There was no debt during the first half of fiscal 2004 and
excess cash was invested in short term securities. Interest expense during the
first half of 2003 was on an average debt of approximately $5.7 million.
Foreign Currency and Other- There was a net foreign currency gain of $614,000 in
the first half of fiscal 2004 primarily due to the strengthening Euro compared
with a foreign currency loss of $89,000 last year. Other income in the first
half of fiscal 2004 of $138,000 compared to other income last year of $20,000
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
with Speroni S.p.A., see Part II "Other Information", Item 1 "Legal
Proceedings".
Income Taxes -- Income tax expense for the six-month periods ended December 31,
2003 and 2002 reflected 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 grew to $17.4 million at December 31,
2003, compared to $11.1 million at June 30, 2003. The $6.3 million increase in
cash was primarily generated from operations. Net income of $2.6 million,
non-cash add backs of $1.3 million and a reduction in receivables of $7.1
million more than offset uses of cash of $5.7 million for other current assets
and accrued liabilities, $426,000 for accounts payable and $80,000 for
inventories. The $7.1 million reduction in receivables primarily relates to
increased cash collections due to the higher sales levels achieved in the second
half of fiscal 2003. The $5.7 million use of cash for other current assets and
accrued liabilities, primarily represents payments of approximately $2.3 million
as settlement of the Speroni S.p.A. arbitration (discussed more fully in Part II
"Other Information", Item 1 "Legal Proceedings" below), payments of $1.9 million
for accrued 401K and profit sharing related to fiscal 2003 results and
approximately $900,000 related to accrued tax liabilities.
Also during the six-month period, the Company received cash from stock option
exercises of $576,000, had capital expenditures of $582,000 and had a favorable
cash effect of $541,000 related to the impact of exchange rate changes,
principally due to the strong Euro, on Company cash held in Euros.
13
During the six-month period, the Company's reserve for inventory obsolescence
decreased $2,000 to $567,000 reflecting additional accruals for anticipated
obsolescence of approximately $101,000 and disposals of $103,000 of inventory
that had been reserved for at June 30, 2003. The Company provides a reserve for
obsolescence to recognize the effects of engineering change orders and other
matters that affect the value of the inventory. When inventory is deemed to have
no further use or value, the Company disposes of the inventory and the reserve
for obsolescence is reduced. During the six months ended December 31, 2003, the
Company's reserve for doubtful accounts decreased $128,000 to $547,000
reflecting charge-offs of $128,000. The Company determines its allowance for
doubtful accounts by considering a number of factors, including the length of
time trade accounts receivable are past due, the Company's previous loss
history, the customer's current ability to pay its obligation to the Company,
and the condition of the general economy and the industry as a whole. The
Company writes-off accounts receivable when they become uncollectible, and
payments subsequently received on such receivables are credited to the allowance
for doubtful accounts. To date, the Company has not experienced any significant
losses related to the collection of accounts receivable.
The Company has a $7.5 million collateral-based Credit Agreement with Comerica
Bank, which expires on November 1, 2005. Proceeds under the Credit Agreement may
be used for working capital and capital expenditures. The collateral for the
loan is substantially all U.S. assets of the Company. Borrowings are designated
as a Prime-based Advance or as a Eurodollar-based Advance. Interest on
Prime-based Advances is payable on the last day of each month and is calculated
daily at a rate that ranges from a 1/2% below to a 1/4% above the bank's prime
rate (4.00% as of January 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 3.0% as of January 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 aggregate principal amount outstanding at any one
time cannot exceed the lesser of $7.5 million or the borrowing base which is
comprised of 80% of eligible accounts receivable billed in the United States,
aged up to 180 days, plus the lesser of 25% of raw material located in the
United States or $2.0 million, plus the lesser of 50% of finished goods
inventory or $750,000 plus $4.2 million representing 60% of the appraised value
of the Company's real property located in Plymouth, Michigan. The Credit
Agreement prohibits the Company from paying dividends. In addition, the Credit
Agreement requires the Company to maintain a Tangible Net Worth, as defined in
the Credit Agreement, of not less than $31.9 million as of December 31, 2003.
The borrowing base at December 31, 2003 was $7.5 million with no borrowings
outstanding.
At December 31, 2003, the Company's German subsidiary (GmbH) had an unsecured
credit facility totaling 500,000 Euros. The facility may be used to finance
working capital needs and equipment purchases or capital leases. Any borrowings
for working capital needs will bear interest at 9.0% on the first 100,000 Euros
of borrowings and 2.0% for borrowings over 100,000 Euros. The German credit
facility is cancelable at any time by either GmbH or the bank and any amounts
then outstanding would become immediately due and payable. At December 31, 2003,
GmbH had no borrowings outstanding. The facility supported outstanding letters
of credit totaling 289,000 Euros.
See Item 3, "Legal Proceedings" and Note 9 to the Consolidated Financial
Statements, "Contingencies", of the Company's Annual Report on Form 10-K for
fiscal year 2003, for a discussion of certain contingencies relating to the
Company's liquidity, financial position and results of operations.
14
Based upon the Company's current business plan, the Company believes that
available cash on hand, existing credit facilities and expected cash generated
from operations will be sufficient to fund its currently anticipated cash flow
requirements through Fiscal 2005. 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.
CRITICAL ACCOUNTING POLICIES
A summary of critical accounting policies is presented in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Critical Accounting Policies" of the Company's Annual Report on Form 10-K for
fiscal year 2003. There have been no material changes in the accounting policies
followed by the Company during the first half of fiscal year 2004.
MARKET RISK INFORMATION
Perceptron's primary market risk is related to foreign exchange rates. The
foreign exchange risk is derived from the operations of its international
subsidiaries, which are primarily located in Germany and for which products are
produced in the U.S. The Company may from time to time have interest rate risk
in connection with its borrowings.
FOREIGN CURRENCY RISK
The Company has foreign currency exchange risk in its international operations
arising from the time period between sales commitment and delivery for contracts
in non-U.S. currencies. For sales commitments entered into in non-U.S.
currencies, the currency rate risk exposure is predominantly less than one year
with the majority in the 120 to 150 day range. At December 31, 2003, the
Company's percentage of sales commitments in non-U.S. currencies was
approximately 46.9% or $7.8 million compared to 70% or $14.3 million at December
31, 2002. Sales commitments at December 31, 2002 included a single unusually
large tooling program by a European customer that encompassed a number of plants
around Europe.
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, 2003, the Company had forward exchange contracts between the
United States Dollar and the Euro in the notional amount of approximately $10.0
million. The forward exchange contracts are accounted for as cash flow hedges
and have a weighted average settlement price of 1.16 Euros to the United States
Dollar. The contracts outstanding at December 31, 2003, mature through December
8, 2004 and are intended to hedge the Company's investment in its German
subsidiary. During the six
15
months ended December 31, 2003, the Company recognized a charge of approximately
$1.2 million in other comprehensive income (loss) for the unrealized change in
value of the forward exchange contracts. Offsetting this amount was an increase
in other comprehensive income (loss) for the translation effect of the Company's
German subsidiary. The Company's forward exchange contracts do not subject it to
material risk due to exchange rate movements because gains and losses on these
contracts offset losses and gains on the assets, liabilities, and transactions
being hedged. The Company did not engage in any hedging activities during the
first half of fiscal year 2003.
INTEREST RATE RISK
The Company is subject to interest rate risk in connection with any borrowings
under its variable and fixed rate revolving lines of credit. The Company's
exposure to interest rate risk would arise primarily from changes in the prime
rate and changes in Eurodollar rates in the London interbank market. The Company
would not expect its operating results or cash flows to be affected to any
significant degree by a hypothetical 10 percent change in market interest rates.
See Note 6 of Notes to Consolidated Financial Statements, "Credit Facilities",
for a description of the Company's available credit facilities.
SAFE HARBOR STATEMENT
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations may be "forward-looking statements" within
the meaning of the Securities Exchange Act of 1934, including the Company's
expectation as to fiscal 2004 and future revenue, order booking levels and
earnings levels, the continued strength of the Euro and the ability of the
Company to fund its currently anticipated fiscal 2004 and long term cash flow
requirements. The Company assumes no obligation for updating any such
forward-looking statements to reflect actual results, changes in assumptions or
changes in other factors affecting such forward-looking statements. Actual
results could differ materially from those in the forward-looking statements due
to a number of uncertainties, including, but not limited to, the dependence of
the Company's revenue on a number of sizable orders from a small number of
customers, the timing of orders and shipments which can cause the Company to
experience significant fluctuations in its quarterly and annual revenue and
operating results, timely receipt of required supplies and components which
could result in delays in anticipated shipments, general product demand and
market acceptance risks, the ability of the Company to successfully compete with
alternative and similar technologies, the timing and continuation of the
Automotive industry's retooling programs, the ability of the Company to resolve
technical issues inherent in the development of new products and technologies,
the ability of the Company to identify and satisfy market needs, general product
development and commercialization difficulties, the ability of the Company to
attract and retain key personnel, especially technical personnel, the quality
and cost of competitive products already in existence or developed in the
future, the level of interest existing and potential new customers may have in
new products and technologies generally, rapid or unexpected technological
changes, and the effect of economic conditions, particularly economic conditions
in the domestic and worldwide Automotive industry, which has from time to time
been subject to cyclical downturns due to the level of demand for, or supply of,
the products produced by companies in this industry. The Company's expectations
regarding future bookings and revenues are projections developed by the Company
based upon information from a number of sources, including, but not limited to,
customer data and discussions. These projections are subject to change based
upon a wide variety of factors, a number of which are discussed above. Certain
of these new orders have been delayed in the past and could be delayed in the
future. Because the Company's products are typically integrated into larger
systems or lines, the timing of new orders is dependent on the timing of
completion of the overall system or line. In addition, because the Company's
products have shorter lead times than other components and are required later in
16
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, operating profits and net income 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,
2003, the Company's disclosure controls and procedures were effective in causing
the material information required to be disclosed by the Company in the reports
that it files or submits under the Securities Exchange Act of 1934 to be
recorded, processed, summarized and reported, to the extent applicable, 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 changes in the Company's internal controls
over financial reporting during the quarter ended December 31, 2003 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 1. LEGAL PROCEEDINGS
The following disclosures update and should be read in conjunction with Item 3,
"Legal Proceedings" of the Company's Form 10-K for the year ended June 30, 2003.
As previously disclosed in the Company's Form 10-Q for the quarter ended
September 30, 2003, on October 15, 2003, the Company entered into a Settlement
Agreement ("Agreement") with LMI Technologies, Inc. ("LMI"), Diffracto Limited,
Sensor Adaptive Machines, Inc., Leonard Metcalfe, Neil Hummel and others that
resolved all pending litigation matters between the parties. The Agreement
settled the May 10, 2002 action the Company commenced against LMI et al. in the
Ontario Superior Court of Justice-Commercial List, the February 21, 2003 suit
filed by the Company against LMI in the United States District Court for the
Eastern District of Michigan and the May 30, 2003 suit filed by LMI against the
Company in the United States District Court for the Eastern District of Michigan
that are discussed more fully in the Company's Form 10-K for the year ended June
30, 2003 under Item 3, Legal Proceedings. As part of the settlement, LMI agreed
to pay the Company a cash settlement and the parties
17
agreed to cross license certain intellectual property, including intellectual
property that was the subject of the disputes.
On December 24, 2003, the Company entered into a Compromise and Settlement
Agreement with Speroni S.p.A. that resolved the arbitration award that is
discussed more fully in the Company's Form 10-K for the year ended June 30, 2003
under Item 3, Legal Proceedings. As a result of the settlement, on December 24,
2003, the Company paid Speroni S.p.A. approximately $2.3 million.
See Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Critical Accounting Policies -- Litigation and Other
Contingencies" for a discussion of the Company's accounting policies regarding
legal proceedings and other contingencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on December 8, 2003 at which
the following action was taken:
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 7,567,328 239,142 -
Kenneth R. Dabrowski 7,651,524 154,946 -
Philip J. DeCocco 7,567,828 238,642 -
W. Richard Marz 7,567,828 238,642 -
Robert S. Oswald 7,651,524 154,946 -
Alfred A. Pease 7,651,148 155,322 -
James A. Ratigan 7,651,524 154,946 -
Terryll R. Smith 7,651,524 154,946 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
10.39 Summary of 2004 Team Member Profit Sharing Plan.
31.1 Section 302 Certification of Chief Executive
Officer
31.2 Section 302 Certification of Chief Financial
Officer
32.1 Section 906 Certification of Chief Executive
Officer
32.2 Section 906 Certification of Chief Financial
Officer
(B) Reports on Form 8-K
On November 6, 2003, the Company furnished a Form 8-K under
Item 12 -- "Results of Operations and Financial Condition"
concerning the Company's press release announcing its
financial results for the first quarter ended September 30,
2003.
18
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 13, 2004 By: /S/ Alfred A. Pease
------------------------------------------
Alfred A. Pease
President and Chief Executive Officer
Date: February 13, 2004 By: /S/ John J. Garber
------------------------------------------
John J. Garber
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: February 13, 2004 By: /S/ Sylvia M. Smith
------------------------------------------
Sylvia M. Smith
Controller and Chief Accounting Officer
(Principal Accounting Officer)
19
EXHIBIT INDEX
DESCRIPTION
No.
10.39 Summary of 2004 Team Member Profit Sharing Plan.
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Chief Financial Officer