Attached files
file | filename |
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EX-32 - EXHIBIT 32 - GERBER SCIENTIFIC INC | exhibit32.htm |
EX-31.2 - EXHIBIT 31.2 - GERBER SCIENTIFIC INC | exhibit31_2.htm |
EX-10.1 - EXHIBIT 10.1 - GERBER SCIENTIFIC INC | exhibit10_1.htm |
EX-31.1 - EXHIBIT 31.1 - GERBER SCIENTIFIC INC | exhibit31_1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
|
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FORM
10-Q
|
|||
þ QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
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For
the quarterly period ended January 31, 2010
OR
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from ___________ to ___________
Commission
File Number 1-5865
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Gerber
Scientific, Inc.
(Exact
name of registrant as specified in its charter)
|
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Connecticut
|
06-0640743
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(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
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83
Gerber Road West, South Windsor, Connecticut
(Address
of principal executive offices)
|
06074
(Zip
Code)
|
||
Registrant's
telephone number, including area code: (860)
644-1551
|
|||
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 þ No
|
|||
Indicate
by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files). Yes No
|
|||
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
Accelerated
filer þ
Non-accelerated
filer (Do not check if a smaller reporting
company) Smaller reporting
company
|
|||
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes
No þ
|
|||
25,157,590
shares of common stock of the registrant were outstanding as of February
28, 2010, exclusive of treasury shares.
|
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GERBER
SCIENTIFIC, INC.
Index
to Quarterly Report
on
Form 10-Q
Fiscal
Quarter Ended January 31, 2010
|
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PAGE
|
|||||
3-4 | |||||
5 | |||||
6 | |||||
7-18 | |||||
19-31 | |||||
31 | |||||
31 | |||||
32 | |||||
32 | |||||
33 | |||||
34 | |||||
35 |
Gerber
Scientific, Inc.
(Unaudited)
For
the Fiscal Quarters Ended January 31,
|
||||||||
In
thousands, except per share data
|
2010
|
2009
|
||||||
Revenue:
|
||||||||
Product
sales
|
$
|
94,794
|
$
|
88,752
|
||||
Service
sales
|
15,877
|
17,439
|
||||||
110,671
|
106,191
|
|||||||
Cost
of Sales:
|
||||||||
Cost
of products sold
|
67,618
|
63,674
|
||||||
Cost
of services sold
|
10,196
|
10,291
|
||||||
77,814
|
73,965
|
|||||||
Gross
profit
|
32,857
|
32,226
|
||||||
Selling,
general and administrative expenses
|
27,276
|
27,122
|
||||||
Research
and development
|
4,626
|
4,847
|
||||||
Restructuring
and other expenses
|
1,194
|
40
|
||||||
Operating
(loss) income
|
(239
|
)
|
217
|
|||||
Other
income (expense), net
|
(126
|
)
|
(2,470
|
)
|
||||
Interest
expense
|
(1,374
|
)
|
(654
|
)
|
||||
Loss
from continuing operations before income taxes
|
(1,739
|
)
|
(2,907
|
)
|
||||
Income
tax benefit
|
(981
|
)
|
(1,616
|
)
|
||||
Loss
from continuing operations, net of taxes
|
(758
|
)
|
(1,291
|
)
|
||||
Loss
from discontinued operations, net of taxes of $5 and $(25),
respectively
|
(51
|
)
|
(941
|
)
|
||||
Net
loss
|
$
|
(809
|
)
|
$
|
(2,232
|
)
|
||
Basic
loss per common share:
|
||||||||
Continuing
operations
|
$
|
(0.03
|
)
|
$
|
(0.05
|
)
|
||
Discontinued
operations
|
---
|
(0.04
|
)
|
|||||
Basic
loss per common share
|
$
|
(0.03
|
)
|
$
|
(0.09
|
)
|
||
Diluted
loss per common share:
|
||||||||
Continuing
operations
|
$
|
(0.03
|
)
|
$
|
(0.05
|
)
|
||
Discontinued
operations
|
---
|
(0.04
|
)
|
|||||
Diluted
loss per common share
|
$
|
(0.03
|
)
|
$
|
(0.09
|
)
|
||
Weighted
Average Common Shares Outstanding:
|
||||||||
Basic
|
25,195
|
24,131
|
||||||
Diluted
|
25,195
|
24,131
|
See
accompanying notes to condensed consolidated financial statements.
3
Gerber
Scientific, Inc.
Condensed
Consolidated Statements of Operations
(Unaudited)
For
the Nine Months Ended January 31,
|
||||||||
In
thousands, except per share data
|
2010
|
2009
|
||||||
Revenue:
|
||||||||
Product
sales
|
$
|
292,104
|
$
|
341,702
|
||||
Service
sales
|
49,315
|
55,207
|
||||||
341,419
|
396,909
|
|||||||
Cost
of Sales:
|
||||||||
Cost
of products sold
|
211,048
|
247,298
|
||||||
Cost
of services sold
|
30,267
|
35,636
|
||||||
241,315
|
282,934
|
|||||||
Gross
profit
|
100,104
|
113,975
|
||||||
Selling,
general and administrative expenses
|
78,987
|
88,996
|
||||||
Research
and development
|
13,586
|
16,778
|
||||||
Restructuring
and other expenses
|
1,450
|
884
|
||||||
Operating
income
|
6,081
|
7,317
|
||||||
Other
income (expense), net
|
(1,525
|
)
|
(3,007
|
)
|
||||
Interest
expense
|
(3,234
|
)
|
(1,941
|
)
|
||||
Income
from continuing operations before income taxes
|
1,322
|
2,369
|
||||||
Income
tax benefit
|
(996
|
)
|
(3,429
|
)
|
||||
Income
from continuing operations, net of taxes
|
2,318
|
5,798
|
||||||
Loss
from discontinued operations, net of taxes of ($886) and $5,
respectively
|
(2,154
|
)
|
(1,255
|
)
|
||||
Net
income
|
$
|
164
|
$
|
4,543
|
||||
Basic
earnings (loss) per common share:
|
||||||||
Continuing
operations
|
$
|
0.09
|
$
|
0.24
|
||||
Discontinued
operations
|
(0.08
|
)
|
(0.05
|
)
|
||||
Basic
earnings per common share
|
$
|
0.01
|
$
|
0.19
|
||||
Diluted
earnings (loss) per common share:
|
||||||||
Continuing
operations
|
$
|
0.09
|
$
|
0.24
|
||||
Discontinued
operations
|
(0.08
|
)
|
(0.05
|
)
|
||||
Diluted
earnings per common share
|
$
|
0.01
|
$
|
0.19
|
||||
Weighted
Average Common Shares Outstanding:
|
||||||||
Basic
|
24,904
|
23,953
|
||||||
Diluted
|
24,936
|
24,064
|
See
accompanying notes to condensed consolidated financial statements.
4
Gerber
Scientific, Inc.
(Unaudited)
January
31,
|
April
30,
|
|||||||
In
thousands
|
2010
|
2009
|
||||||
Assets:
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$
|
7,921
|
$
|
10,313
|
||||
Accounts
receivable, net
|
72,744
|
87,798
|
||||||
Inventories
|
66,883
|
72,108
|
||||||
Deferred
tax assets, net
|
9,702
|
9,022
|
||||||
Prepaid
expenses and other current assets
|
5,717
|
4,659
|
||||||
Total
Current Assets
|
162,967
|
183,900
|
||||||
Property,
plant and equipment, net
|
33,423
|
37,119
|
||||||
Goodwill
|
83,027
|
76,940
|
||||||
Deferred
tax assets, net
|
45,640
|
43,339
|
||||||
Other
assets
|
21,416
|
17,919
|
||||||
Total
Assets
|
$
|
346,473
|
$
|
359,217
|
||||
Liabilities
and Shareholders' Equity:
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable
|
$
|
38,566
|
$
|
37,494
|
||||
Accrued
compensation and benefits
|
12,717
|
15,735
|
||||||
Other
accrued liabilities
|
22,088
|
24,748
|
||||||
Deferred
revenue
|
12,329
|
13,084
|
||||||
Total
Current Liabilities
|
85,700
|
91,061
|
||||||
Long-term
debt
|
45,000
|
73,500
|
||||||
Accrued
pension benefit liability
|
30,366
|
29,629
|
||||||
Other
long-term liabilities
|
21,765
|
16,725
|
||||||
Commitments
and contingencies
|
||||||||
Shareholders'
Equity:
|
||||||||
Preferred
stock
|
---
|
---
|
||||||
Common
stock
|
257
|
252
|
||||||
Paid-in
capital
|
81,531
|
79,198
|
||||||
Retained
earnings
|
97,826
|
97,662
|
||||||
Treasury
stock
|
(11,035
|
)
|
(11,531
|
)
|
||||
Accumulated
other comprehensive loss
|
(4,937
|
)
|
(17,279
|
)
|
||||
Total
Shareholders' Equity
|
163,642
|
148,302
|
||||||
Total
Liabilities and Shareholders' Equity
|
$
|
346,473
|
$
|
359,217
|
See
accompanying notes to condensed consolidated financial
statements.
5
Gerber
Scientific, Inc.
(Unaudited)
For
the Nine Months Ended January 31,
|
||||||||
In
thousands
|
2010
|
2009
|
||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$
|
164
|
$
|
4,543
|
||||
Adjustments
to reconcile net income to cash provided by
operating activities:
|
||||||||
Depreciation
and amortization
|
7,250
|
7,547
|
||||||
Deferred
income taxes
|
(2,430
|
)
|
(5,173
|
)
|
||||
Stock-based
compensation
|
2,914
|
2,428
|
||||||
Loss
(gain) on sale of assets
|
2,328
|
(622
|
)
|
|||||
Other-than-temporary
impairment charge
|
---
|
2,290
|
||||||
Other
noncash items
|
1,525
|
977
|
||||||
Changes
in operating accounts, excluding effects of acquisitions:
|
||||||||
Accounts
receivable
|
13,785
|
27,929
|
||||||
Inventories
|
(233
|
)
|
(3,166
|
)
|
||||
Prepaid
expenses and other assets
|
(775
|
)
|
(114
|
)
|
||||
Accounts
payable and other accrued liabilities
|
(1,717
|
)
|
(21,577
|
)
|
||||
Accrued
compensation and benefits
|
(3,333
|
)
|
(8,744
|
)
|
||||
Net
cash provided by operating activities
|
19,478
|
6,318
|
||||||
Cash
flows from investing activities:
|
||||||||
Capital
expenditures
|
(3,231
|
)
|
(6,471
|
)
|
||||
Proceeds
from sale of net assets
|
13,116
|
2,590
|
||||||
Proceeds
from sale of available for sale investments
|
149
|
705
|
||||||
Purchases
of available for sale investments
|
(113
|
)
|
(432
|
)
|
||||
Business
acquisitions
|
(3,473
|
)
|
(34,273
|
)
|
||||
Investments
in intangible assets
|
(1,149
|
)
|
(678
|
)
|
||||
Net
cash provided by (used for) investing activities
|
5,299
|
(38,559
|
)
|
|||||
Cash
flows from financing activities:
|
||||||||
Debt
repayments
|
(88,676
|
)
|
(56,771
|
)
|
||||
Debt
proceeds
|
61,104
|
88,500
|
||||||
Debt
issuance costs
|
(494
|
)
|
---
|
|||||
Common
stock activity
|
(190
|
)
|
899
|
|||||
Net
cash (used for) provided by financing activities
|
(28,256
|
)
|
32,628
|
|||||
Effect
of exchange rate changes on cash
|
1,087
|
(3,339
|
)
|
|||||
Decrease
in cash and cash equivalents
|
(2,392
|
)
|
(2,952
|
)
|
||||
Cash
and cash equivalents at beginning of period
|
10,313
|
13,892
|
||||||
Cash
and cash equivalents at end of period
|
$
|
7,921
|
$
|
10,940
|
See
accompanying notes to condensed consolidated financial
statements.
6
Gerber
Scientific, Inc.
(Unaudited)
Note
1. Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements of Gerber
Scientific, Inc. and its subsidiaries (collectively, the "Company") have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial statements and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. The Condensed
Consolidated Balance Sheet as of April 30, 2009 has been derived from the
audited consolidated financial statements; however, these condensed consolidated
financial statements do not include all of the disclosures required by
accounting principles generally accepted in the United States of America for
complete financial statements. All significant intercompany
transactions have been eliminated in the condensed consolidated financial
statements. The condensed consolidated financial statements have been prepared,
in all material respects, in accordance with the accounting principles followed
in the preparation of the Company's annual financial statements for the fiscal
year ended April 30, 2009. The results of operations for the quarter
and nine months ended January 31, 2010 and cash flows for the nine months ended
January 31, 2010 are not necessarily indicative of the operating results and
cash flows for the full fiscal year or any other future period.
The
Company has evaluated subsequent events for disclosure that have occurred
through the issuance of the accompanying condensed consolidated financial
statements.
Management
believes that all adjustments, which include only normal recurring adjustments
necessary to fairly state the Company's consolidated financial position, results
of operations, cash flows and footnote disclosures for the periods reported,
have been included. The financial information included in this Quarterly
Report on Form 10-Q should be read in conjunction with the audited consolidated
financial statements and accompanying notes included in the Company's Annual
Report on Form 10-K for the fiscal year ended April 30, 2009, filed with the
Securities and Exchange Commission on July 7, 2009. Certain
reclassifications have been made to conform to the presentation for the quarter
and nine months ended January 31, 2010 that included the reclassification of
severance and other costs from Selling, general and administrative expenses to
Restructuring and other expenses on the accompanying Condensed Consolidated
Statements of Operations.
The
results of operations and cash flows for Yunique Solutions, Inc. (“Yunique”) are
included from the date of acquisition on November 25, 2009 through January 31,
2010 in the accompanying Condensed Consolidated Statements of Operations and
Condensed Consolidated Statements of Cash Flows. The accompanying
Condensed Consolidated Balance Sheet as of January 31, 2010 includes the
acquired assets and liabilities of Yunique. See Note 3.
The
results of operations and cash flows for two companies that were acquired during
the fiscal year ended April 30, 2009, Gamma Computer Tech Company, Ltd.
(“Gamma”) acquired in September 2008 and Virtek Vision International, Inc.
(“Virtek”) acquired in October 2008, are included in the accompanying Condensed
Consolidated Statements of Operations for the quarter and nine months ended
January 31, 2010 and 2009 and the Condensed Consolidated Statements of Cash
Flows for the nine months ended January 31, 2010 and 2009. For
comparative purposes, the Company believes that its consolidated results of
operations for the nine months ended January 31, 2009 would not have been
materially different had the fiscal 2009 acquisitions occurred on May 1,
2008.
The
Company completed the sale of 100 percent of the capital stock of its
wholly-owned subsidiary, FOBA Technology + Services GmbH (“FOBA”), on September
1, 2009. FOBA was acquired as part of the acquisition of
Virtek. The results of FOBA’s operations were previously reported
within the Apparel and Flexible Materials segment. The Company has
reported the results of operations and the gain on the sale of FOBA as
discontinued operations for the quarter and nine months ended January 31, 2010
and 2009 within the condensed consolidated financial statements. The
April 30, 2009 comparative Condensed Consolidated Balance Sheet and related
disclosures do not reflect net assets held for sale as the criteria for assets
held for sale were not met as of April 30, 2009. See Note
14.
The
Company completed the sale of substantially all of the assets and liabilities of
ND Graphics, a Canadian business unit of Gerber Scientific Products within the
Sign Making and Specialty Graphics segment, to a group of investors led by the
President of ND Graphics on September 30, 2009. The Company has
reported the results of operations and the loss on the sale of ND Graphics as
discontinued operations for the quarter and nine months ended January 31, 2010
and 2009 within the condensed consolidated financial statements. The
April 30, 2009 comparative Condensed Consolidated Balance Sheet and related
disclosures do not reflect net assets held for sale as the criteria for assets
held for sale were not met as of April 30, 2009. See Note
14.
7
The
Company closed the majority of its Spandex Poland operations during the quarter
ended October 31, 2009. The results of this business were previously
reported within the Sign Making and Specialty Graphics segment. The
Company has reported the results of operations of Spandex Poland as discontinued
operations for the quarter and nine months ended January 31, 2010 and 2009
within the condensed consolidated financial statements. See Note
14.
Note
2. Inventories
Inventories
were as follows:
January
31,
|
April
30,
|
|||||||
In
thousands
|
2010
|
2009
|
||||||
Raw
materials and purchased parts
|
$
|
55,657
|
$
|
58,779
|
||||
Work
in process
|
1,836
|
3,510
|
||||||
Finished
goods
|
9,390
|
9,819
|
||||||
Total
inventories
|
$
|
66,883
|
$
|
72,108
|
Note
3. Business Acquisition
On
November 25, 2009, the Company acquired for cash 100 percent of the stock of
Yunique, a software development company for the apparel and flexible materials
markets located in New York. The acquisition of this business is
expected to enhance the Apparel and Flexible Materials segment’s product
lifecycle management software product offerings. Under the terms of
the stock purchase agreement, the Company paid $2.0 million to the former owners
of Yunique and is liable for future contingent payments based upon Yunique’s
annual revenue for the three full fiscal years following the acquisition
date. The contingent payments could range from $3.3 million to $4.0
million and were estimated as approximately $3.8 million on an undiscounted
basis using probability-based forecasted revenue as of the acquisition
date. The contingent future payments were recorded at estimated fair
value and classified as Other long-term liabilities on the accompanying
Condensed Consolidated Balance Sheet. The Company funded the initial
payment for this acquisition with borrowings under its credit
facility. The operating results of this business are included in the
Company’s condensed consolidated financial statements from the date of the
acquisition as part of the Apparel and Flexible Materials segment.
The
assets and liabilities of Yunique were recorded at fair value under the purchase
method of accounting. The Company determined the fair value of
acquired intangible assets through the use of valuation models. The
acquired amortizable intangible assets included $1.8 million attributable to
customer relationships with an estimated useful life of ten years, $0.9 million
attributable to developed technology assets with an estimated useful life of
five years, and a trade name valued at $0.1 million with an estimated useful
life of ten years. The unallocated purchase price of $3.5 million was
recorded as goodwill, none of which is anticipated to be tax deductible. The
recorded goodwill is primarily attributable to expected synergies between the
Company and Yunique. The following table summarizes the assets
acquired and liabilities assumed:
In
thousands
|
November
25, 2009
|
|||
Assets
acquired:
|
||||
Accounts
receivable
|
$ | 208 | ||
Prepaid
and other assets
|
12 | |||
Goodwill
|
3,531 | |||
Other
assets
|
2,797 | |||
Total
assets acquired
|
$ | 6,548 | ||
Liabilities
assumed:
|
||||
Accounts
payable
|
34 | |||
Other
accrued liabilities
|
158 | |||
Deferred
revenue
|
149 | |||
Other
long-term liabilities
|
1,021 | |||
Total
liabilities assumed
|
$ | 1,362 | ||
Net
assets acquired
|
$ | 5,186 | ||
Consideration:
|
||||
Cash
payment
|
$ | 2,012 | ||
Estimated
fair value of contingent consideration
|
3,174 | |||
Total
consideration
|
$ | 5,186 |
8
For
comparative purposes, the Company believes that its results of operations for
the quarter and nine months ended January 31, 2009 would not have been
materially different had the acquisition occurred at May 1, 2008 and its results
of operations for the quarter and nine months ended January 31, 2010 would not
have been materially different had the acquisition occurred at May 1,
2009.
Note
4. Goodwill and Intangible Assets
The table
below presents the gross carrying amount and accumulated amortization of
acquired intangible assets other than goodwill included in Other assets on the
Company's Condensed Consolidated Balance Sheets:
January
31, 2010
|
April
30, 2009
|
|||||||||||||||
In
thousands
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
||||||||||||
Amortized
intangible assets:
|
||||||||||||||||
Patents
|
$
|
8,337
|
$
|
3,607
|
$
|
7,603
|
$
|
3,210
|
||||||||
Other
|
8,067
|
1,080
|
5,131
|
739
|
||||||||||||
Total
amortized intangible assets
|
$
|
16,404
|
$
|
4,687
|
$
|
12,734
|
$
|
3,949
|
Intangible
asset amortization expense was $0.4 million and $1.0 million, respectively, for
the quarter and nine months ended January 31, 2010. For the quarter
and nine months ended January 31, 2009, intangible asset amortization expense
was $0.4 million and $0.8 million, respectively. It is estimated that
such expense will be $1.4 million for the fiscal year ending April 30, 2010,
$1.5 million for the fiscal year ending April 30, 2011, $1.4 million for the
fiscal year ending April 30, 2012, $1.3 million for the fiscal year ending April
30, 2013 and $1.2 million annually for the fiscal years ending April 30, 2014
and 2015 based on the amortizable intangible assets as of January 31,
2010.
The
Company settled $1.5 million in contingent obligation commitments during the
nine months ended January 31, 2010 related to past acquisitions with the former
owners of Data Technology, Inc. and Gamma. In connection with the
sale of FOBA and ND Graphics, the Company recorded a charge of $2.6 million for
the write-off of goodwill as part of the Loss from discontinued operations in
the accompanying Condensed Consolidated Statements of
Operations. Balances and changes in the carrying amount of goodwill
for the nine months ended January 31, 2010 were as follows:
In
thousands
|
Sign
Making
and
Specialty
Graphics
|
Apparel
and
Flexible
Materials
|
Ophthalmic
Lens
Processing
|
Total
|
||||||||||||
Balance
as of April 30, 2009:
|
||||||||||||||||
Goodwill
|
$
|
118,690
|
$
|
34,207
|
$
|
38,696
|
$
|
191,593
|
||||||||
Accumulated
impairment losses
|
(92,953
|
)
|
---
|
(21,700
|
)
|
(114,653
|
)
|
|||||||||
Balance
as of April 30, 2009
|
25,737
|
34,207
|
16,996
|
76,940
|
||||||||||||
Business
acquisitions
|
1,086
|
3,897
|
---
|
4,983
|
||||||||||||
Business
dispositions
|
(972
|
)
|
(1,581
|
)
|
---
|
(2,553
|
)
|
|||||||||
Effects
of currency translation
|
1,615
|
2,042
|
--
|
3,657
|
||||||||||||
Balance
as of January 31, 2010
|
$
|
27,466
|
$
|
38,565
|
$
|
16,996
|
$
|
83,027
|
Note
5. Restructuring and Other Expenses
During
the quarter and nine months ended January 31, 2010, the Company terminated
certain employees that became redundant with the Yunique
acquisition. These terminations resulted in severance costs within
the Apparel and Flexible Materials segment of $0.4 million for both the quarter
and nine months ended January 31, 2010. As of January 31, 2010, $0.3
million in severance costs remained unpaid, which is expected to be paid in full
by January 31, 2011. The Company does not anticipate any future
additional costs associated with this action. Fees of $0.5 million
associated with the Yunique acquisition for both the quarter and nine months
ended January 31, 2010 are also included in Restructuring and other expenses in
the accompanying Condensed Consolidated Statements of Operations.
For the
quarter and nine months ended January 31, 2010, the Company eliminated certain
finance positions as a result of business process improvement initiatives and
the outsourcing of certain functions. These actions resulted in
severance costs of $0.3 million and $0.5 million for the quarter and nine months
ended January 31, 2010, respectively, recorded within the
9
Corporate
segment and not allocated to any reportable operating segment. As of
January 31, 2010, $0.3 million in severance costs remained unpaid, which is
expected to be paid in full by October 31, 2010.
During
the quarter and nine months ended January 31, 2009, the Company eliminated
several positions and reduced its global workforce as a result of general
economic conditions and incurred severance costs of $0.9 million and $1.7
million for the quarter and nine months ended January 31, 2009, respectively,
that were historically reported within Selling, general and administrative
expenses on the accompanying Condensed Consolidated Statements of
Operations. The Sign Making and Specialty Graphics segment incurred
$0.5 million and $0.7 million of severance for the quarter and nine months ended
January 31, 2009, respectively. The Apparel and Flexible Materials
segment incurred $0.3 million and $0.9 million for the quarter and nine months
ended January 31, 2009, respectively. The Ophthalmic Lens Processing
segment incurred $0.1 million for both the quarter and nine months ended January
31, 2009. Severance costs were paid in full as of January 31,
2010. Severance costs historically recorded as either Cost of
products sold or Cost of services sold were not reclassified to Restructuring
and other expenses on the accompanying Condensed Consolidated Statements of
Operations. The Company continues to evaluate its workforce based on
expected future business size.
During
the quarter and nine months ended January 31, 2009, management completed
facility rationalization plans for its Connecticut locations and determined that
it would reoccupy a previously vacated leased facility. This
determination resulted in the reversal of a previously established leased
facility restructuring reserve and resulted in a $0.9 million
benefit. This benefit was reflected in the Sign Making and Specialty
Graphics segment as the initial charge was recorded to this segment's
performance in the fiscal year ended April 30, 2004.
Note
6. Segment Reporting
The
Company's operations are classified into three reportable operating
segments: Sign Making and Specialty Graphics, Apparel and Flexible
Materials and Ophthalmic Lens Processing. The Sign Making and Specialty
Graphics reportable operating segment is comprised of the Gerber Scientific
Products and Spandex business units. The results of Yunique, Gamma
and Virtek are included within the Apparel and Flexible Materials segment from
the respective dates of acquisition. See Note 1.
The
following table presents revenue and operating (loss) income by reportable
segment:
For
the Fiscal Quarters
Ended
January 31,
|
For
the Nine Months
Ended
January 31,
|
|||||||||||||||
In
thousands
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Sign
Making and Specialty Graphics:
|
||||||||||||||||
Gerber
Scientific Products
|
$
|
9,341
|
$
|
11,938
|
$
|
33,603
|
$
|
45,457
|
||||||||
Spandex
|
50,267
|
45,430
|
159,094
|
177,122
|
||||||||||||
Sign
Making and Specialty Graphics
|
59,608
|
57,368
|
192,697
|
222,579
|
||||||||||||
Apparel
and Flexible Materials
|
40,095
|
36,437
|
112,249
|
130,768
|
||||||||||||
Ophthalmic
Lens Processing
|
10,968
|
12,386
|
36,473
|
43,562
|
||||||||||||
Consolidated
revenue
|
$
|
110,671
|
$
|
106,191
|
$
|
341,419
|
$
|
396,909
|
||||||||
Sign
Making and Specialty Graphics:
|
||||||||||||||||
Gerber
Scientific Products
|
$
|
(2,488
|
)
|
$
|
334
|
$
|
(4,950
|
)
|
$
|
(881
|
)
|
|||||
Spandex
|
2,730
|
704
|
9,255
|
6,832
|
||||||||||||
Sign
Making and Specialty Graphics
|
242
|
1,038
|
4,305
|
5,951
|
||||||||||||
Apparel
and Flexible Materials
|
4,140
|
2,778
|
11,597
|
11,373
|
||||||||||||
Ophthalmic
Lens Processing
|
(318
|
)
|
737
|
2,002
|
2,625
|
|||||||||||
Segment
operating income
|
4,064
|
4,553
|
17,904
|
19,949
|
||||||||||||
Corporate
operating expenses
|
(4,303
|
)
|
(4,336
|
)
|
(11,823
|
)
|
(12,632
|
)
|
||||||||
Consolidated
operating (loss) income
|
$
|
(239
|
)
|
$
|
217
|
$
|
6,081
|
$
|
7,317
|
10
Note
7. Comprehensive Income (Loss)
The
Company's total comprehensive income (loss) was as follows:
For
the Fiscal Quarters
Ended
January 31,
|
For
the Nine Months
Ended
January 31,
|
|||||||||||||||
In
thousands
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Net
(loss) income
|
$
|
(809
|
)
|
$
|
(2,232
|
)
|
$
|
164
|
$
|
4,543
|
||||||
Other
comprehensive (loss) income:
|
||||||||||||||||
Foreign
currency translation adjustments
|
(3,765
|
)
|
(3,677
|
)
|
11,346
|
(31,266
|
)
|
|||||||||
Defined
benefit pension plans activity, net of tax
|
96
|
205
|
288
|
614
|
||||||||||||
Unrealized
investment gain income, net of tax
|
79
|
1,283
|
450
|
474
|
||||||||||||
Net
gain (loss) on derivative instruments, net of tax
|
142
|
(561
|
)
|
258
|
(688
|
)
|
||||||||||
Total
comprehensive (loss) income
|
$
|
(4,257
|
)
|
$
|
(4,982
|
)
|
$
|
12,506
|
$
|
(26,323
|
)
|
Note
8. Earnings Per Share
Basic
earnings per common share are equal to net income divided by the weighted
average number of common shares outstanding during the
period. Diluted earnings per common share are equal to net income
divided by the weighted average number of common shares outstanding during the
period, including the effect of stock-based compensation, where such effect is
dilutive.
In June
2008, the Financial Accounting Standards Board (“FASB”) issued new guidance
regarding the treatment of unvested share-based payment awards with rights to
receive non-forfeitable dividends that need to be considered participating
securities and must be included in the computation of basic earnings per common
share. This application must be applied retrospectively at the date
of adoption. The Company adopted this guidance, which is now a part
of Accounting Standards Codification (“ASC”) 260, Earnings per Share, on May 1,
2009, as unvested restricted stock grants include non-forfeitable dividend
rights. Approximately 1,402,013 shares and 503,359 shares of unvested restricted
stock were outstanding as of January 31, 2010 and January 31, 2009,
respectively. Reported basic and diluted earnings per common share
after adoption of the new guidance for both the quarter and nine months ended
January 31, 2009 were not impacted as a result of including these
shares.
The
following table sets forth the computation of basic and diluted earnings (loss)
per common share:
For
the Fiscal Quarters Ended January 31,
|
||||||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||||||
In
thousands, except per share amounts
|
Net
Loss
|
Average
Shares
|
Per
Share
|
Net
Loss
|
Average
Shares
|
Per
Share
|
||||||||||||||||||
Basic
loss per common share:
|
||||||||||||||||||||||||
Continuing
operations
|
$
|
(758
|
)
|
25,195
|
$
|
(0.03
|
)
|
$
|
(1,291
|
)
|
24,131
|
$
|
(0.05
|
)
|
||||||||||
Discontinued
operations
|
$
|
(51
|
)
|
25,195
|
---
|
(941
|
)
|
24,131
|
(0.04
|
)
|
||||||||||||||
Basic
loss per common share
|
$
|
(809
|
)
|
25,195
|
$
|
(0.03
|
)
|
$
|
(2,232
|
)
|
24,131
|
$
|
(0.09
|
)
|
||||||||||
Diluted loss per common
share:
|
||||||||||||||||||||||||
Continuing
operations
|
$
|
(758
|
)
|
25,195
|
$
|
(0.03
|
)
|
$
|
(1,291
|
)
|
24,131
|
$
|
(0.05
|
)
|
||||||||||
Effect
of dilutive options and awards
|
---
|
---
|
---
|
---
|
---
|
---
|
||||||||||||||||||
Continuing
operations
|
$
|
(758
|
)
|
25,195
|
$
|
(0.03
|
)
|
$
|
(1,291
|
)
|
24,131
|
$
|
(0.05
|
)
|
||||||||||
Discontinued
operations
|
$
|
(51
|
)
|
25,195
|
---
|
(941
|
)
|
24,131
|
(0.04
|
)
|
||||||||||||||
Diluted
loss per common share
|
$
|
(809
|
)
|
25,195
|
$
|
(0.03
|
)
|
$
|
(2,232
|
)
|
24,131
|
$
|
(0.09
|
)
|
11
For
the Nine Months Ended January 31,
|
||||||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||||||
In
thousands, except per share amounts
|
Net
Income
|
Average
Shares
|
Per
Share
|
Net
Income
|
Average
Shares
|
Per
Share
|
||||||||||||||||||
Basic
earnings (loss) per common share:
|
||||||||||||||||||||||||
Continuing
operations
|
$
|
2,318
|
24,904
|
$
|
0.09
|
$
|
5,798
|
23,953
|
$
|
0.24
|
||||||||||||||
Discontinued
operations
|
$
|
(2,154
|
)
|
24,904
|
$
|
(0.08
|
)
|
(1,255
|
)
|
23,953
|
(0.05
|
)
|
||||||||||||
Basic
earnings per common share
|
$
|
164
|
24,904
|
$
|
0.01
|
$
|
4,543
|
23,953
|
$
|
0.19
|
||||||||||||||
Diluted earnings (loss) per common
share:
|
||||||||||||||||||||||||
Continuing
operations
|
$
|
2,318
|
24,904
|
$
|
0.09
|
$
|
5,798
|
23,953
|
$
|
0.24
|
||||||||||||||
Effect
of dilutive options and awards
|
---
|
32
|
---
|
---
|
111
|
---
|
||||||||||||||||||
Continuing
operations
|
$
|
2,318
|
24,936
|
$
|
0.09
|
$
|
5,798
|
24,064
|
$
|
0.24
|
||||||||||||||
Discontinued
operations
|
$
|
(2,154
|
)
|
24,936
|
$
|
(0.08
|
)
|
(1,255
|
)
|
24,064
|
(0.05
|
)
|
||||||||||||
Diluted
earnings per common share
|
$
|
164
|
24,936
|
$
|
0.01
|
$
|
4,543
|
24,064
|
$
|
0.19
|
Note
9. Guarantees
The
Company extends financial and product performance guarantees to third
parties. There have been no material changes to guarantees outstanding
during the quarter or nine months ended January 31, 2010.
Changes
in the carrying amounts of product warranty liabilities were as
follows:
For
the Nine Months Ended January 31,
|
||||||||
In
thousands
|
2010
|
2009
|
||||||
Beginning
balance
|
$
|
2,815
|
$
|
2,327
|
||||
Warranties
issued in the current period
|
4,342
|
3,738
|
||||||
Reductions
for costs incurred
|
(4,128
|
)
|
(3,984
|
)
|
||||
Impact
of business acquisitions
|
---
|
668
|
||||||
Impact
of business dispositions
|
(574
|
)
|
---
|
|||||
Ending
balance
|
$
|
2,455
|
$
|
2,749
|
Note
10. Employee Benefit Plans
Components
of net periodic benefit cost were as follows:
For
the Fiscal Quarters
Ended
January 31,
|
For
the Nine Months
Ended
January 31,
|
|||||||||||||||
In
thousands
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Service
cost
|
$
|
---
|
$
|
597
|
$
|
---
|
$
|
1,791
|
||||||||
Interest
cost
|
1,698
|
1,770
|
5,096
|
5,310
|
||||||||||||
Expected
return on plan assets
|
(1,316
|
)
|
(1,709
|
)
|
(3,948
|
)
|
(5,129
|
)
|
||||||||
Amortization
of:
|
||||||||||||||||
Prior
service cost
|
---
|
73
|
---
|
219
|
||||||||||||
Actuarial
loss
|
153
|
253
|
459
|
759
|
||||||||||||
Net
periodic benefit cost
|
$
|
535
|
$
|
984
|
$
|
1,607
|
$
|
2,950
|
Cash
contributions of $0.1 million and $0.4 million were made to the Company’s
nonqualified defined benefit pension plan for the fiscal quarter and nine months
ended January 31, 2010, respectively. The Company expects to contribute
$0.6 million to its nonqualified pension plan in the fiscal year ending April
30, 2010 to fund benefit payments. No contributions are anticipated
for the Company’s qualified defined benefit pension plan in the fiscal year
ending April 30, 2010.
12
Note
11. Derivative Instruments
The
Company has used derivative instruments, including interest rate swaps, during
the quarter and nine months ended January 31, 2010 and
2009. Derivative instruments are viewed as risk management tools and
are not used for trading or speculative purposes.
The
Company holds debt that is indexed at variable market interest rates and
operates internationally. Therefore, the Company is exposed to
fluctuations in interest rates and foreign exchange rates in the normal course
of business. These fluctuations can increase the costs of financing,
investing and operating the business. By nature, all financial
instruments involve market and credit risks. The Company enters into
derivative and other financial instruments with major investment grade financial
institutions and has procedures to monitor the credit risk of those
counterparties. The Company limits its counterparty exposure and
concentration of risk by diversifying counterparties. While there can
be no assurances, the Company does not anticipate any non-performance by any of
these counterparties.
All
derivative instruments are recorded on the balance sheet at fair
value. Derivatives used to hedge forecasted cash flows associated
with foreign currency commitments or forecasted interest payments may be
accounted for as cash flow hedges, as deemed appropriate. Gains and
losses on derivatives designated as cash flow hedges are recorded in other
comprehensive income and reclassified to earnings in a manner that matches the
timing of the earnings impact of the hedged transactions. The
ineffective portion of all hedges, if any, is recognized currently in
earnings. As of January 31, 2010 and April 30, 2009, there were no
outstanding foreign currency forward contracts.
Interest Rate Swaps – The
Company is subject to market risk exposure from changes to interest rates due to
the variable nature of the credit facility market interest rates. The
Company manages these exposures by periodically assessing the market
environments and swapping variable interest payments for fixed interest payments
at an acceptable level for a portion of its debt. These derivative
instruments are accounted for as cash flow hedges. The fair value of
the interest rate swap is classified as an other asset or other liability at
fair value on the Condensed Consolidated Balance Sheets. To the
extent these derivatives are effective in offsetting the variability of the
hedged cash flows, and otherwise meet the hedge accounting criteria, changes in
the derivatives' fair value are not included in current earnings but are
included in Accumulated other comprehensive loss in Shareholders' Equity in the
Condensed Consolidated Balance Sheets. These changes in fair value
will subsequently be reclassified in current earnings as a component of Interest
expense when the interest payments are incurred. If a previously
designated hedging transaction ceases to be effective as a hedge, any
ineffectiveness measured in the hedging relationship would be recorded in
earnings in the period that it occurs. Cash flows associated with the
interest rate swaps are recorded within Cash flows from operating activities in
the Condensed Consolidated Statements of Cash Flows.
The
Company maintained two interest rate swap arrangements effective during the
quarter and nine months ended January 31, 2010, hedging its variable LIBOR-based
interest payments on $20.0 million and $25.0 million, respectively, of its debt,
which qualified for hedge accounting as cash flow hedges. The
interest rate swap agreement on $20.0 million of debt matures in May 2010 and
the interest rate swap agreement on $25.0 million of debt matures in November
2010.
The
following table summarizes the fair value of these derivative instruments as of
January 31, 2010 and April 30, 2009:
In
thousands
|
Balance
Sheet Location
|
January
31,
2010
|
April
30,
2009
|
||||||
Derivatives
designated as hedging instruments:
|
|||||||||
Interest
rate swap arrangements
|
Other
accrued liabilities
|
$ | 770 | $ | 1,181 |
During
the quarter and nine months ended January 31, 2010, there was no material impact
to the fair value of the Company’s derivative liabilities due to the Company’s
or its counterparties’ credit risk.
13
The
following table summarizes the pre-tax impact on Accumulated other comprehensive
loss in Shareholders' Equity in the Condensed Consolidated Balance Sheets from
interest rate swap arrangements that qualified as cash flow hedges for the
quarter and nine months ended January 31, 2010:
In
thousands
|
For
the Fiscal Quarter
Ended January
31, 2010
|
For
the Nine Months
Ended
January 31, 2010
|
||||||
Loss
recognized in Accumulated Other Comprehensive Loss before tax
effect
|
$ | 71 | $ | 404 | ||||
Loss
reclassified from Accumulated Other Comprehensive Loss to Interest Expense
(effective portion)
|
$ | 297 | $ | 815 |
Assuming
current market conditions continue, an $0.8 million loss is expected to be
reclassified as Interest expense from Accumulated other comprehensive loss in
the Condensed Consolidated Statements of Operations to reflect the fixed
interest payments obtained from interest rate swap arrangements within the next
12 months.
Note
12. Fair Value Measurements
In
September 2006, the FASB issued fair value guidance for the accounting of both
financial assets and liabilities and nonrecurring nonfinancial assets and
liabilities. The guidance, which is now a part of ASC 820, Fair Value Measurements and
Disclosures (“ASC 820”), was adopted by the Company on May 1, 2008 for
its financial assets and liabilities and on May 1, 2009 for its nonrecurring
nonfinancial assets and liabilities. ASC 820 defines fair value,
establishes a framework for measuring fair value and expands related disclosure
requirements. Nonrecurring nonfinancial assets and liabilities for
the Company include those measured at fair value in goodwill impairment testing,
asset retirement obligations initially measured at fair value and those
nonrecurring nonfinancial assets and liabilities initially measured at fair
value in a business combination.
ASC 820
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly business transaction in the principal
market for the asset or liability.
ASC 820
establishes a hierarchy of inputs used to measure fair value as Level 1, 2 and
3, as described in the following table, which provides assets and liabilities
reported at fair value and measured on a recurring basis as of January 31,
2010:
In
thousands
|
Total
|
Quoted
prices
in
active
markets
(Level
1)
|
Significant
other
observable
inputs
(Level
2)
|
Significant
unobservable
inputs
(Level
3)
|
||||||||||||
Available
for sale investments
|
$
|
3,708
|
$
|
3,708
|
$
|
---
|
$
|
---
|
||||||||
Interest
rate swap agreements
|
(770
|
)
|
---
|
(770
|
)
|
---
|
||||||||||
Estimated
fair value of contingent consideration
|
(3,174
|
)
|
---
|
---
|
(3,174
|
)
|
||||||||||
Total
|
$
|
(236
|
)
|
$
|
3,708
|
$
|
(770
|
)
|
$
|
(3,174
|
)
|
The fair
values of the available for sale investments were based on quoted market prices
unadjusted from financial exchanges (Level 1), except for preferred shares in an
international private company, for which the fair value was based upon Level 3
evidence and determined to be insignificant. The interest rate swap
agreements were valued using observable current market information as of the
reporting date such as the prevailing LIBOR-based currency spot and forward
rates (Level 2).
In
connection with the acquisition of Yunique (see Note 3), a liability was
recognized for the Company’s estimate of the fair value of the contingent
consideration on the acquisition date based on probability-based forecasted
revenue. Any change in the fair value of the contingent consideration
subsequent to the acquisition date will be recognized in the statement of
operations. This fair value measurement is based on significant
inputs not observed in the market and thus represents a Level 3
measurement. Level 3 instruments are valued based on unobservable
inputs that are supported by little or no market activity and reflect the
Company’s own assumptions in measuring fair value. A change in the
estimated probabilities of revenue achievement could have a material effect on
the statement of operations and balance sheets in the period of
change.
14
The above
fair values were computed based on quoted market prices or an estimate of the
amount to be received or paid to terminate or settle the agreement, as
applicable. The fair values of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate the carrying amounts due to
their short-term nature. All of the Company's outstanding debt
accrued interest at variable interest rates. As the underlying
interest rates are believed to represent market rates, the carrying amounts are
considered to approximate fair value.
Note
13. Income Taxes
For the
quarter ended January 31, 2010, the Company recognized tax benefits from the
utilization of certain foreign net operating losses which had previously been
reserved and from international rate differences. For the quarter
ended October 31, 2009, the Company recognized tax benefits from a favorable
settlement of a foreign tax audit, as well as from international tax rate
differences.
For the
quarter ended January 31, 2009, the Company recognized tax benefits from
adjustments to tax contingency reserves as well as from international tax rate
differences. During the quarter ended October 31, 2008, the Company
finalized the merger of its two French subsidiaries in order to avoid redundant
administrative costs and solidify the capital structure of the
entities. Based on the projected future income of the merged entity,
a valuation reserve against French loss carryforwards of approximately $3.4
million was reversed.
Note
14. Discontinued Operations and Asset Sales
On
September 1, 2009, the Company sold 100 percent of the capital stock of FOBA for
a net sales price of approximately $8.8 million, net of transaction
fees. FOBA was acquired in October 2008 as part of the acquisition of
Virtek. Sales proceeds of approximately $0.9 million will remain in
escrow for a two-year period for possible application to specified
contingencies. A gain on sale of $1.7 million was included on the
Condensed Consolidated Statement of Operations within Loss from discontinued
operations for the nine months ended January 31, 2010.
On
September 30, 2009, the Company sold substantially all of the assets and
liabilities of ND Graphics for a net sales price of approximately $5.3 million,
net of transaction fees. A loss on sale of $3.1 million was included
on the Condensed Consolidated Statement of Operations within Loss from
discontinued operations for the nine months ended January 31,
2010. ND Graphics will continue to serve as the Company’s Canadian
distributor for its Sign Making and Specialty Graphics segment. The Company
expects some continuing cash flows, primarily from sales of equipment and
aftermarket supplies to ND Graphics, although these cash flows are not expected
to be significant enough to preclude discontinued operations
accounting.
The
operations of ND Graphics and FOBA were not considered a core strategic focus
for the Company. See Note 1. Net proceeds from the
transactions were used to reduce the Company’s outstanding debt.
The
Company allocated a portion of its interest expense to discontinued operations,
as the proceeds from the sales were required to reduce the Company’s outstanding
obligations under its credit facility. The Company allocated
approximately $0.3 million of interest expense to discontinued operations for
the nine months ended January 31, 2010. The Company allocated
approximately $0.2 million and $0.4 million of interest expense to discontinued
operations for the quarter and nine months ended January 31, 2009,
respectively.
The
following table provides revenue and pretax (loss) income from the FOBA
discontinued operations:
For
the Fiscal Quarters Ended
January
31,
|
For
the Nine Months Ended
January
31,
|
|||||||||||||||
In
thousands
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Revenue
from discontinued operations
|
$
|
---
|
$
|
6,572
|
$
|
5,973
|
$
|
7,122
|
||||||||
Pretax
(loss) income from discontinued operations
|
$
|
(181
|
)
|
$
|
(318
|
)
|
$
|
618
|
$
|
(131
|
)
|
15
The
following table provides a summary of the assets and liabilities of FOBA as of
September 1, 2009 that were sold:
In
thousands
|
September
1, 2009
|
|||
Assets:
|
||||
Accounts
receivable, net
|
$ | 3,069 | ||
Inventories
|
3,848 | |||
Prepaid
and other assets
|
66 | |||
Total current
assets
|
6,983 | |||
Property,
plant and equipment, net
|
1,336 | |||
Total
assets
|
$ | 8,319 | ||
Liabilities:
|
||||
Accounts
payable
|
$ | 1,142 | ||
Accrued
compensation and benefits
|
488 | |||
Other
accrued liabilities
|
1,577 | |||
Other
liabilities
|
229 | |||
Total
liabilities
|
$ | 3,436 | ||
Net
assets
|
$ | 4,883 |
The
following table provides revenue and pretax income (loss) from the ND Graphics
discontinued operations:
For
the Fiscal Quarters Ended
January
31,
|
For
the Nine Months Ended
January
31,
|
|||||||||||||||
In
thousands
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Revenue
from discontinued operations
|
$
|
---
|
$
|
6,574
|
$
|
13,901
|
$
|
25,272
|
||||||||
Pretax
income (loss) from discontinued operations
|
$
|
21
|
$
|
(73
|
)
|
$
|
(3,392
|
)
|
$
|
33
|
The
following table provides a summary of the assets and liabilities of ND Graphics
as of September 30, 2009 that were sold:
In
thousands
|
September
30, 2009
|
|||
Assets:
|
||||
Accounts
receivable, net
|
$ | 4,413 | ||
Inventories
|
4,579 | |||
Prepaid
and other assets
|
174 | |||
Total current
assets
|
9,166 | |||
Property,
plant and equipment, net
|
720 | |||
Other
long-term assets
|
60 | |||
Total
assets
|
$ | 9,946 | ||
Liabilities:
|
||||
Accounts
payable
|
$ | 1,332 | ||
Accrued
compensation and benefits
|
130 | |||
Other
accrued liabilities
|
146 | |||
Total
liabilities
|
$ | 1,608 | ||
Net
assets
|
$ | 8,338 |
The
Company closed the majority of its Spandex Poland operations during the quarter
ended October 31, 2009. The results of this business were previously
reported within the Sign Making and Specialty Graphics segment. The
Company has reported the results of operations of Spandex Poland as discontinued
operations for the quarter and nine months ended January 31, 2010 and 2009,
respectively, within the condensed consolidated financial
statements. The Company expects some continuing cash flow from the
Spandex Poland operation, primarily related to service contracts on prior
equipment sales. These cash flows are not expected to be significant enough to
preclude discontinued operations accounting.
16
The
following table provides revenue and pretax income (loss) from the Spandex
Poland discontinued operations:
For
the Fiscal Quarters Ended
January
31,
|
For
the Nine Months Ended
January31,
|
|||||||||||||||
In
thousands
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Revenue
from discontinued operations
|
$
|
---
|
$
|
760
|
$
|
1,234
|
$
|
3,410
|
||||||||
Pretax
income (loss) from discontinued operations
|
$
|
114
|
$
|
(575
|
)
|
$
|
(266
|
)
|
$
|
(1,152
|
)
|
In August
2008, the Company sold the Ophthalmic Lens Processing segment’s Australian
facility for a sales price of $1.0 million. The Company realized a
gain of $0.6 million related to this transaction, which was reflected as a
benefit within Selling, general and administrative expenses on the accompanying
Condensed Consolidated Statements of Operations for the nine months ended
January 31, 2009.
Note
15. Recently Issued Accounting Pronouncements
In
October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, Multiple-Deliverable Revenue
Arrangements (“ASU 2009-13.”) ASU 2009-13 amends the
accounting and reporting guidance for arrangements including multiple
revenue-generating activities. ASU 2009-13 amends the criteria for separating
deliverables and measuring and allocating arrangement consideration to one or
more units of accounting. The amendment also establishes a selling price
hierarchy for determining the selling price of a deliverable. Significantly
enhanced disclosures will also be required to provide information about the
Company’s multiple-deliverable revenue arrangements, including information about
the nature and terms, significant deliverables, and its performance within
arrangements. ASU 2009-13 also requires information to be provided about
significant judgments made, changes to those judgments and how the application
of the relative selling-price method affects the timing or amount of revenue
recognition.
In
October 2009, the FASB issued ASU 2009-14, Certain Revenue Arrangements That
Include Software Elements (“ASU 2009-14.”) ASU 2009-14 changes
the accounting model for revenue arrangements that include both tangible
products and software elements that are “essential to the functionality,” and
removes these products from current software revenue guidance. The new guidance
will include factors to help companies determine what software elements are
considered “essential to the functionality.” ASU 2009-14 subjects
software-enabled products to other revenue guidance and disclosure requirements,
such as guidance relating to revenue arrangements with
multiple-deliverables.
Both ASU
2009-13 and ASU 2009-14 are effective prospectively for revenue arrangements
entered into or materially modified beginning May 1, 2011 for the Company,
although early application is permitted. The Company is currently evaluating the
potential impacts of ASU 2009-13 and ASU 2009-14 on its revenue recognition
accounting practices.
In
December 2008, the FASB issued guidance, included within FASB ASC 715, Compensation-Retirement
Benefits, on an employer’s disclosures about plan assets of a defined
benefit pension on investment policies and strategies, major categories of plan
assets, inputs and valuation techniques used to measure the fair value of plan
assets and significant concentrations of risk within plan assets. This guidance
will be effective for the fourth quarter of the fiscal year ending April 30,
2010. Upon initial application, the provisions of this guidance are
not required for earlier periods that are presented for comparative
purposes. The Company will comply with the disclosure requirements of
this guidance for its fiscal year ending April 30, 2010.
Note
16. Debt Amendment
In
November 2009, the Company amended the credit agreement for its revolving credit
facility with several banks and other financial institutions and lenders
specified in the agreement and RBS Citizens, N.A., in its capacity as
administrative agent for the lenders. The amendment modified certain
financial covenants as described below, amended the definitions of EBIT and
EBITDA, and reduced the maximum borrowing capacity to $75.0 million from $100.0
million.
The ratio
of Total Funded Debt to Consolidated EBITDA financial covenant was modified as
follows:
Twelve
Month Period Ended
|
Previous
Covenant
|
Amended
Covenant
|
January
31, 2010
|
Maximum
3.25:1
|
Maximum
3.00:1
|
April
30, 2010
|
Maximum
3.25:1
|
Maximum
3.00:1
|
July
31, 2010 and thereafter
|
Maximum
3.00:1
|
Maximum
3.00:1
|
The ratio
of Consolidated EBIT to Consolidated Interest Expense financial covenant was
modified as follows:
17
Twelve
Month Period Ended
|
Previous
Covenant
|
Amended
Covenant
|
January
31, 2010
|
Minimum
2.25:1
|
Minimum
1.50:1
|
April
30, 2010
|
Minimum
2.75:1
|
Minimum
2.25:1
|
July
31, 2010
|
Minimum
3.00:1
|
Minimum
2.50:1
|
October
31, 2010 and thereafter
|
Minimum
3.00:1
|
Minimum
3.00:1
|
The
amendment also modified the Asset Coverage Covenant to phase out the $20.0
million allowance for consolidated net fixed assets over periods ending October
31, 2010 and thereafter. Additionally, the measurement of compliance
with this covenant will change from being tested monthly to being tested
quarterly after October 31, 2010.
The
amendment modified the definitions of EBIT and EBITDA, for purposes of the
foregoing financial covenants, providing the Company with enhanced operating
flexibility under the credit agreement. These modifications allow the
add-back of certain non-recurring charges and pro-forma historical adjustments
to the calculations of EBIT and EBITDA.
The
Company incurred fees and related costs in connection with this amendment of
$0.5 million, which will be amortized over the remaining term of the
agreement. As a result of this amendment, the Company also incurred
$0.3 million of interest expense associated with the write-off of a portion of
previously capitalized deferred financing fees.
18
Unless
indicated, or unless the context otherwise requires, references in this report
to “Gerber” mean Gerber Scientific, Inc. and its consolidated
subsidiaries.
CAUTIONARY
NOTE CONCERNING FACTORS THAT MAY INFLUENCE FUTURE RESULTS
This
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains statements which, to the extent they are not statements of
historical or present fact, constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements are
intended to provide management's current expectations or plans for the future
operating and financial performance of Gerber, based on assumptions currently
believed to be reasonable. Forward-looking statements can be
identified by the use of words such as "believe," "expect," "intend," "foresee,"
"may," "plan," "anticipate" and other words of similar meaning in connection
with a discussion of future operating or financial performance. These
forward-looking statements include, among others, statements relating
to:
·
|
expected
financial condition, future earnings, levels of growth, or other measures
of financial performance, or the future size of market segments or
geographic markets;
|
·
|
economic
conditions;
|
·
|
planned
cost reductions;
|
·
|
future
cash flows and uses of cash and debt reduction
strategies;
|
·
|
prospective
product developments and business growth opportunities, as well as
competitor product developments;
|
·
|
demand
for Gerber's products and services;
|
·
|
methods
of and costs associated with potential geographic
expansion;
|
·
|
regulatory
and market developments and the impact of such developments on future
operating results;
|
·
|
potential
impacts from credit market risk;
|
·
|
future
effective income tax rates;
|
·
|
the
outcome of contingencies;
|
·
|
the
availability and cost of raw materials;
and
|
·
|
pension
plan assumptions and future
contributions.
|
All
forward-looking statements involve risks and uncertainties that may cause actual
results to differ materially from those expressed or implied in the
forward-looking statements. Some of these risks and uncertainties are
set forth in Item 1A, "Risk Factors" of Gerber’s Annual Report on Form 10-K for
the fiscal year ended April 30, 2009 and in subsequent filings with the
Securities and Exchange Commission. Gerber cannot assure that its
results of operations, financial condition or cash flows will not be adversely
affected by one or more of these factors. Gerber does not undertake
to update any forward-looking statement made in this report or that may from
time to time be made by or on behalf of Gerber.
OVERVIEW
Gerber
develops, manufactures, distributes and services integrated automation equipment
and software, as well as related aftermarket supplies, for sign making and
specialty graphics, apparel and flexible materials and the ophthalmic lens
processing industries through its global operations.
In the
third quarter of fiscal 2010, the economic challenges from the first half of the
year continued in many of Gerber’s end-markets. Revenue increased
$4.5 million, or 4.2 percent, for the third quarter of fiscal 2010 as compared
with the prior year third quarter. The Apparel and Flexible Materials
and Sign Making and Specialty Graphics segments reported higher revenue for the
third quarter of fiscal 2010 as compared with the prior year, though this
improvement was primarily attributable to favorable foreign currency translation
as compared with the prior year. The Apparel and Flexible Materials
segment revenue improvement also reflected growth in Asia, particularly within
apparel markets. The Ophthalmic Lens Processing segment reported
lower revenue as compared with the prior year as consumer demand for eyeglasses
remained depressed and continued industry consolidation of large eyeglass
manufacturing customers negatively impacted sales. While
Gerber management is encouraged by the improved market conditions within the
Apparel and Flexible Materials segment during the third quarter of fiscal 2010,
the overall global economic uncertainties continued to persist and negatively
impacted operating performance for the quarter and nine months ended January 31,
2010.
19
Gerber
reported essentially break-even operating performance in the third quarters of
both fiscal 2010 and fiscal 2009. Restructuring and other expenses
adversely impacted fiscal 2010 results by $1.2 million. These costs
included severance expenses as a result of initial business process improvement
initiatives within Gerber’s finance organization and also severance expenses
associated with the discontinuation of internal research and development efforts
as a result of the acquisition of Yunique Solutions, Inc, or “Yunique,” and
related acquisition fees. Yunique is a software development company
serving apparel and flexible materials industries with annual unaudited
historical revenue of approximately $1.5 million. This acquisition is
expected to enhance Gerber’s existing product lifecycle management and product
data management software offerings. Management continually reviews
its operating segments and selected markets in terms of their potential
long-term returns and may consider other potential business acquisitions or
divestitures, some of which could be material.
During
the first nine months of fiscal 2010, Gerber focused its efforts on cash
generation and working capital management to reduce its overall
debt. Lower working capital levels, coupled with asset sales proceeds
from the fiscal 2010 second quarter dispositions, generated sufficient funds to
reduce debt by $28.5 million from April 30, 2009. Gerber was in
compliance with its debt covenants as of January 31, 2010.
Although
global economic uncertainty continues, Gerber believes that the strength of its
product portfolio, diversified business model and streamlined organizational
structure should allow Gerber to resume growth quickly when its markets begin to
recover. The majority of cost savings that were realized during both
the second half of fiscal 2009 and the first nine months of fiscal 2010 are
expected to be sustainable when sales volumes improve. Such cost
savings measures included a global workforce reduction of approximately 15
percent and lower pension plan expenses as a result of Gerber’s freeze of the
United States defined benefit pension plan benefits as of April 30,
2009. Temporary cost savings measures benefited the third quarter of
fiscal 2010 and included a 10 percent salary reduction in the United States and
a freeze of employer matching contributions to the United States 401(k)
retirement plan. These temporary costs savings measures are not
expected to continue throughout fiscal 2011. Gerber is actively
reviewing other structural cost reduction initiatives that would permanently
reduce costs. Such initiatives may result in charges for severance
and other restructuring costs that, if consummated, would negatively impact
results. Gerber expects severance and other charges of approximately
$1.5 million to $2.5 million for its fourth quarter of fiscal 2010 as a result
of ongoing efforts to reduce Gerber’s cost structure. The extent and
timing of these expected charges may vary from initial estimates are plans are
finalized. For the remainder of fiscal 2010, Gerber will continue to
manage its business with a heightened focus on cash generation and improved
operating performance.
RESULTS
OF OPERATIONS
Historical
operating results for FOBA, ND Graphics and Spandex Poland, the net loss on the
sale of ND Graphics of $3.1 million and net gain on the sale of FOBA of $1.7
million were presented as discontinued operations within the condensed
consolidated statements of operations for the quarter and nine months ended
January 31, 2010 and 2009.
Revenue
For
the Fiscal Quarters Ended
January
31,
|
For
the Nine Months Ended
January
31,
|
|||||||||||||||||||||||
In
thousands
|
2010
|
2009
|
Percent
Change
|
2010
|
2009
|
Percent
Change
|
||||||||||||||||||
Equipment
and software
|
$
|
30,523
|
$
|
30,501
|
0.1
|
%
|
$
|
86,252
|
$
|
115,484
|
(25.3
|
%)
|
||||||||||||
Aftermarket
supplies
|
64,271
|
58,251
|
10.3
|
%
|
205,852
|
226,218
|
(9.0
|
%)
|
||||||||||||||||
Service
|
15,877
|
17,439
|
(9.0
|
%)
|
49,315
|
55,207
|
(10.7
|
%)
|
||||||||||||||||
Total
revenue
|
$
|
110,671
|
$
|
106,191
|
4.2
|
%
|
$
|
341,419
|
$
|
396,909
|
(14.0
|
%)
|
Gerber
generates a substantial portion of its revenue from sales to non-U.S.
markets. Gerber therefore analyzes its results of operations on a
constant currency basis, excluding the impact of foreign currency
translation. The impact of foreign currency translation on the
operating performance quantified within this Management's Discussion and
Analysis of Financial Condition and Results of Operations was estimated by
comparing translated amounts at the current period average foreign exchange
rates with historical period average foreign exchange rates.
The
increase in revenue of $4.5 million for the quarter ended January 31, 2010
reflected the impact of favorable foreign currency translation of approximately
$8.5 million as compared with the quarter ended January 31,
2009. This impact resulted primarily from the weakening of the United
States dollar against several other currencies in which Gerber transacts
business as compared with the respective prior year period. The
decrease in revenue of $55.5 million for the
20
nine
months ended January 31, 2010 included the negative impact of foreign currency
translation of approximately $0.7 million as compared with the nine months ended
January 31, 2009, primarily as a result of the strengthening of the United
States dollar against several other currencies in which Gerber transacts
business.
For the
quarter ended January 31, 2010, improved sales volume within the Apparel and
Flexible Materials segment, driven by improved volume from its Asian apparel
markets, and favorable foreign currency translation contributed to the overall
revenue growth as compared with the prior year respective
period. Lower sales volume from the Sign Making and Specialty
Graphics and Ophthalmic Lens Processing segments, primarily within the United
States, offset the increase. For the nine months ended January 31,
2010, decreased volume across all business segments resulted in lower revenue as
compared with the prior year respective period.
For the
quarter and nine months ended January 31, 2010, lower sales volumes negatively
impacted revenue by approximately $4.1 million and $62.1 million,
respectively. For the nine months ended January 31, 2010, pricing
benefits of approximately $1.0 million favorably impacted revenue as compared
with the prior year period. Gerber believes the lower sales volumes
are reflective of weak global economic conditions that continued to hamper
demand and restricted availability of credit, making it difficult for certain
customers to obtain financing for potential equipment
purchases. Given the macroeconomic impacts on the global capital
equipments market, Gerber believes that the lower revenue reflected customer
hesitation in making capital equipment purchases and did not result in a loss of
market share. Aftermarket supplies revenue primarily
benefited from foreign currency translation and overall demand improved
slightly. The service revenue decline was primarily attributable to
weak global economic conditions. Aftermarket supplies and service
revenue provide a steady annuity of repeat business after the initial equipment
sale. Incremental revenue from mid-fiscal 2009 acquisitions of Virtek
Vision International, Inc., or “Virtek,” and Gamma Computer Tech Company, Ltd.,
or “Gamma,” benefited revenue for the nine months ended January 31, 2010 by
approximately $6.4 million.
As a
capital equipment provider, Gerber analyzes key new product revenue as a measure
of development efforts. Key new product revenue was $3.9 million for
the quarter ended January 31, 2010 and $12.7 million for the nine months ended
January 31, 2010 and included sales of the Sign Making and Specialty Graphics
segment’s Solara™ ion
UV inkjet printers and related aftermarket supplies, and the Z7 GERBERcutter equipment
marketed by the Apparel and Flexible Materials segment. Key new
product revenue declined $1.6 million, or 29.4 percent, from the third quarter
of fiscal 2009, and $15.1 million, or 54.2 percent, from the nine months ended
January 31, 2009. Weak global economic conditions typically impact
product launches and Gerber believes its key new product revenue for the third
quarter and first nine months of fiscal 2010 was depressed as a result of the
weak global economy and adverse credit market conditions that reduced credit
availability for potential customers. During the third quarter of
fiscal 2010, the Ophthalmic Lens Processing segment announced the planned launch
of its new, eco-friendly E2G Blocking System for the wholesale
market. The system consists of the E2G blocker, new surface blocks, a
deblocker, and a proprietary environmentally safe medium called
Onyx-Bond™. Onyx-Bond is the first environmentally-safe blocking
material available for digital (free-form) lens processing.
Orders
for the quarter ended January 31, 2010 improved from the prior year same period
primarily as a result of improvement in Rest of World markets and Europe,
although the increase in orders from Europe reflected favorable foreign currency
translation. For the nine months ended January 31, 2010, orders
decreased in North America and Europe primarily as a result of adverse economic
conditions and improved for the Rest of World region. In the Rest of
World region, Asia continues to be the world’s largest apparel-producing area
and the Apparel and Flexible Materials segment’s fastest growing
market. Although Asian markets such as China have been negatively
affected by economic factors and the impact of the global recession, Gerber’s
revenue from China increased to $6.3 million for the quarter ended January 31,
2010 from $4.5 million for the quarter ended January 31, 2009 and increased to
$17.9 million for the nine months ended January 31, 2010 from $15.6 million for
the same prior year period. Management believes that these increases
may signal that this area is beginning to recover and Gerber continues to
believe these markets offer significant growth opportunities.
21
The
following table provides the backlog as of January 31, 2010 and April 30,
2009. The overall increase in backlog was attributable to the Apparel
and Flexible Materials segment, indicating some improvements in market
conditions for that segment. The decline in backlog for the Sign
Making and Specialty Graphics and Ophthalmic Lens Processing segments reflected
lower equipment demand.
In
thousands
|
January
31,
2010
|
April
30,
2009
|
||||||
Backlog:
|
||||||||
Sign
Making and Specialty Graphics
|
$
|
825
|
$
|
1,636
|
||||
Apparel
and Flexible Materials
|
24,526
|
21,800
|
||||||
Ophthalmic
Lens Processing
|
662
|
1,200
|
||||||
$
|
26,013
|
$
|
24,636
|
Gross Profit /
Margin
For
the Fiscal Quarters Ended
January
31,
|
For
the Nine Months Ended
January
31,
|
|
|||||||||||||||
In
thousands
|
2010
|
2009
|
Percent
Change
|
2010
|
2009
|
Percent
Change
|
|||||||||||
Gross
profit
|
$
|
32,857
|
$
|
32,226
|
2.0
|
%
|
$
|
100,104
|
$
|
113,975
|
(12.2
|
%)
|
|||||
Gross
profit margin
|
29.7
|
%
|
30.3
|
%
|
29.3
|
%
|
28.7
|
%
|
Gross
profit was $0.6 million higher for the quarter ended January 31, 2010 as
compared with the respective prior year period. The increase in the
third quarter of fiscal 2010 reflected favorable foreign currency translation of
approximately $2.9 million and the effect of severance expenses of $0.4 million
in the prior year comparable period and was primarily offset by the impact of
lower revenue volumes. To address the lower revenue volumes, Gerber
implemented several cost savings measures in fiscal 2009 that continued to
benefit gross profit. Despite favorable foreign currency translation
and cost savings, continued depressed revenue volumes in the third quarter of
fiscal 2010 resulted in unfavorable absorption of fixed manufacturing
costs. Unfavorable absorption of fixed manufacturing costs on the
lower revenue base and a business mix favoring lower margin products contributed
to the 0.6 percentage point decrease in gross profit margin for the quarter
ended January 31, 2010.
For the
nine months ended January 31, 2010, gross profit was $13.9 million lower as a
result of lower revenue volume and the resulting unfavorable absorption of fixed
manufacturing costs, and was partially offset by cost savings
measures. For the nine months ended January 31, 2009, severance
expenses of $0.7 million reduced gross profit. Cost savings measures
included a reduced workforce and temporary salary reductions that were in effect
for nine months of fiscal 2010. For the first nine months of fiscal
2009, the workforce reductions were initiated in August 2008 and temporary
salary reductions had not yet been implemented. Gerber’s gross profit
margin improved 0.6 percentage points for the nine months ended January 31, 2010
as compared with the respective prior year period. This increase
reflected the positive benefits from overall cost savings associated with the
prior year workforce reductions, the contribution from the recently acquired
Virtek business for a nine month period as compared with only four months of
contribution in the fiscal 2009 comparable period, and increased licensing
revenue. Gerber anticipates that revenue volumes will improve for the
fourth quarter of fiscal 2010. If revenue volumes continue to be
depressed, however, unfavorable absorption of fixed manufacturing costs could
continue to result in lower gross profit.
Selling,
General and Administrative Expenses
For
the Fiscal Quarters Ended
January
31,
|
For
the Nine Months Ended
January
31,
|
|
|||||||||||||||
In
thousands
|
2010
|
2009
|
Percent
Change
|
2010
|
2009
|
Percent
Change
|
|||||||||||
Selling,
general and administrative expenses
|
$
|
27,276
|
$
|
27,122
|
0.6
|
%
|
$
|
78,987
|
$
|
88,996
|
(11.2
|
%)
|
|||||
Percentage
of revenue
|
24.6
|
%
|
25.5
|
%
|
23.1
|
%
|
22.4
|
%
|
Selling,
general and administrative, or "SG&A," expenses increased $0.2 million for
the quarter ended January 31, 2010 as compared with the quarter ended January
31, 2009. Unfavorable foreign currency translation of approximately
$1.7 million was primarily offset by cost savings measures that included a ten
percent United States workforce salary reduction, lower pension expense of $0.4
million and lower self-insurance costs of $0.4 million.
22
SG&A
expenses declined $10.0 million for the nine months ended January 31, 2010 as
compared with the nine months ended January 31, 2009. The effect of
cost savings initiatives that included workforce reductions, initiated in August
2008 and December 2008, and a ten percent United States workforce salary
reduction, initiated in February 2009, drove the decline in
costs. Also attributing to the decline, pension costs were lower by
$1.3 million, self-insurance costs were lower by $0.4 million and the impact of
foreign currency translation lowered expenses by approximately $0.3 million for
the nine months ended January 31, 2010 as compared with the nine months ended
January 31, 2009. Partially offsetting this improvement, SG&A for
the nine months ended January 31, 2009 benefited from a $0.6 million gain on the
sale of property within the Ophthalmic Lens Processing segment.
Lower
pension expenses should benefit financial results for the remainder of fiscal
2010, as the lower costs were driven by plan design changes effected on April
30, 2009 that froze future benefits under Gerber’s United States defined benefit
pension plans.
Research
and Development
For
the Fiscal Quarters Ended
January
31,
|
For
the Nine Months Ended
January
31,
|
|
||||||||||||||||||||||
In
thousands
|
2010
|
2009
|
Percent
Change
|
2010
|
2009
|
Percent
Change
|
||||||||||||||||||
Research
and development
|
$
|
4,626
|
$
|
4,847
|
(4.6
|
%)
|
$
|
13,586
|
$
|
16,778
|
(19.0
|
%)
|
||||||||||||
Percentage
of revenue
|
4.2
|
%
|
4.6
|
%
|
4.0
|
%
|
4.2
|
%
|
Research
and development, or “R&D,” expenses decreased for both the third quarter and
first nine months of fiscal 2010 as compared with the same respective periods of
the prior year. For the nine months ended January 31, 2010, the
reduction was primarily a result of cost savings initiatives implemented in
fiscal 2009 that included workforce reductions and a focus on limiting R&D
expenses primarily to sustaining projects until the economy begins to
recover. Lower incremental development costs related to the Solara ion, which was
launched in fiscal 2009, also contributed to the decrease on a year-to-date
basis as compared with the prior year.
Restructuring
and Other Expenses
For
the Fiscal Quarters Ended
January
31,
|
For
the Nine Months Ended
January
31,
|
|||||||||||||||
In
thousands
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Restructuring
and other expenses
|
$
|
1,194
|
$
|
40
|
$
|
1,450
|
$
|
884
|
Restructuring
and other expenses consist of severance costs, acquisition costs and facility
restructuring charges.
During
the quarter and nine months ended January 31, 2010, Gerber terminated certain
employees that became redundant with the Yunique acquisition. These
terminations resulted in severance costs within the Apparel and Flexible
Materials segment of $0.4 million for both the quarter and nine months ended
January 31, 2010. Gerber does not anticipate any future additional
restructuring costs associated with this action. Fees of $0.5 million
associated with the Yunique acquisition for both the quarter and nine months
ended January 31, 2010 are also included in Restructuring and other
expenses.
For the
quarter and nine months ended January 31, 2010, Gerber eliminated certain
finance positions as a result of business process improvement initiatives with
actions that included the outsourcing of certain functions. These
actions resulted in severance costs of $0.3 million and $0.5 million for the
quarter and nine months ended January 31, 2010, respectively, recorded within
the Corporate segment and not allocated to any reportable operating
segment.
During
the quarter and nine months ended January 31, 2009, Gerber eliminated several
positions and reduced its global workforce as a result of general economic
conditions and, as a result, incurred severance costs of $0.9 million and $1.7
million for the quarter and nine months ended January 31, 2009,
respectively. The Sign Making and Specialty Graphics segment incurred
$0.5 million and $0.7 million of severance for the quarter and nine months ended
January 31, 2009, respectively. The Apparel and Flexible Materials
segment incurred $0.3 million and $0.9 million for the quarter and nine months
ended January 31, 2009, respectively. The Ophthalmic Lens Processing
segment incurred $0.1 million for both the quarter and nine months ended January
31, 2009. Severance costs were paid in full as of January 31,
2010. Gerber continues to evaluate its workforce based on expected
future business size.
23
During
the quarter and nine months ended January 31, 2009, management completed
facility rationalization plans for its Connecticut locations and determined that
it would reoccupy a previously vacated leased facility. This
determination resulted in the reversal of a previously established leased
facility restructuring reserve and resulted in a $0.9 million
benefit. This benefit was reflected in the Sign Making and Specialty
Graphics segment, as the initial charge was recorded to this segment's
performance in fiscal 2004.
Other Income
(Expense), net
For
the Fiscal Quarters Ended
January
31,
|
For
the Nine Months Ended
January
31,
|
|||||||||||||||
In
thousands
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Other
income (expense), net
|
$
|
(126
|
)
|
$
|
(2,470
|
)
|
$
|
(1,525
|
)
|
$
|
(3,007
|
)
|
Other
income (expense), net primarily includes interest income, bank fees and foreign
currency transaction gains and losses. During the fiscal quarter and
nine months ended January 31, 2009, Gerber realized a $2.3 million non-cash
charge related to an other-than-temporary impairment of an available for sale
investment. During the nine months ended January 31, 2010, foreign
currency transaction losses were $0.3 million as compared with a gain of $0.2
million for the nine months ended January 31, 2010. Bank fees
increased $0.3 million as compared with the prior year period.
Interest
Expense
For
the Fiscal Quarters Ended
January
31,
|
For
the Nine Months Ended
January
31,
|
|||||||||||||||||||||||
In
thousands
|
2010
|
2009
|
Percent
Change
|
2010
|
2009
|
Percent
Change
|
||||||||||||||||||
Interest
expense
|
$
|
1,374
|
$
|
654
|
110.1
|
%
|
$
|
3,234
|
$
|
1,941
|
66.6
|
%
|
||||||||||||
Weighted-average
credit facility interest rate
|
8.1
|
%
|
4.6
|
%
|
7.3
|
%
|
5.1
|
%
|
Interest
expense increased $0.7 million and $1.3 million for the quarter and nine months
ended January 31, 2010, respectively, as compared with the same prior year
periods. Included in these higher costs were $0.4 million of expense
for the write-off of deferred financing fees associated with both Gerber’s
amendment to its credit facility in November 2009 and the early repayment of
$6.0 million principal amount of outstanding Variable Rate Demand Industrial
Development Bonds. Interest rates per the credit facility were not
changed as a result of the November 2009 amendment.
The
remaining increase in interest expense was primarily attributable to higher
weighted-average interest rates based upon a credit facility amendment effected
during March 2009 as well as higher amortization expense of deferred financing
costs associated with the March 2009 and November 2009
amendments. Partially offsetting the higher interest rates, average
borrowings have decreased for the first nine months of fiscal 2010 as Gerber
reduced its outstanding debt by $28.5 million from April 30, 2009 with proceeds
from the asset dispositions described elsewhere in this report and working
capital improvements.
Gerber
allocated interest expense to discontinued operations, as proceeds from the
sales of FOBA and ND Graphics were required to reduce the outstanding credit
facility obligation. Gerber allocated $0.3 million of interest
expense to discontinued operations for the nine months ended January 31, 2010,
$0.2 million for the quarter ended January 31, 2009, and $0.4 million for the
nine months ended January 31, 2009.
Income
Tax Benefit
For
the Fiscal Quarters Ended
January
31,
|
For
the Nine Months Ended
January
31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Effective
tax rate
|
(56.4
|
%)
|
(55.6
|
%)
|
(75.3
|
%)
|
(144.7
|
%)
|
For the
quarter ended January 31, 2010, Gerber’s effective tax rate differed from the
expected statutory rate of 35 percent primarily due to benefits recorded from
the utilization of certain foreign net operating losses which had previously
been reserved, as well as from international rate differences and changes in
earnings mix. The same factors
24
contributed
to the differential from the statutory rate for the nine months ended January
31, 2010. In addition, the rate for the nine-month period also
benefited from the favorable settlement of a foreign tax audit.
During
the third quarter of fiscal 2009, Gerber’s effective tax rate differed from the
statutory rate primarily as a result of adjustments to tax contingency
reserves. During the second quarter of fiscal 2009, Gerber finalized
the merger of its two French subsidiaries in order to avoid redundant
administrative costs and solidify the capital structure of the
entities. As a result, it is more likely than not that the tax
benefits from French loss carryforwards will be realized and Gerber reversed
approximately $3.4 million of a valuation reserve against these loss
carryforwards. Gerber’s effective tax rate would have been 0.6
percent for the nine months ended January 31, 2009, excluding the non-recurring
tax benefit from the merger of the French subsidiaries. The primary
reasons for the 0.6 percent effective tax rate being below the statutory rate
were adjustments to contingency reserves and the effects of international rate
differences.
As of
January 31, 2010, Gerber has net deferred tax assets of approximately $41.5
million, of which approximately $33.5 million relates to the United
States. In each tax jurisdiction, deferred tax assets are assessed
for realizability based on all evidence available, including historical
earnings, projected earnings and tax planning strategies. Given
recent losses within the United States, Gerber is closely monitoring the
realizability of the U.S. deferred tax assets. As of January 31,
2010, Gerber expects that the recorded net deferred tax assets are fully
recoverable. If future reassessment of the realizabilty results in
management determining that it is more likely than not that these assets would
not be realized, a valuation reserve would be recorded.
Discontinued
Operations
On
September 1, 2009, Gerber sold FOBA to ALLTEC Angewandte Laserlicht Technologie
GmbH, the laser business unit of Videojet Technologies Inc, for a net sales
price of approximately $8.8 million. FOBA, acquired in October 2008
as part of the acquisition of Virtek, was sold as it was not considered a core
strategic focus for Gerber.
Gerber
sold substantially all of the assets and liabilities of ND Graphics, a Canadian
business unit of Gerber Scientific Products within the Sign Making and Specialty
Graphics segment, to a group of investors led by the President of ND Graphics on
September 30, 2009 for a net sales price of approximately $5.3
million.
Gerber
also closed the majority of its Spandex Poland operations during the quarter
ended October 31, 2009. The results of this business were previously
reported within the Sign Making and Specialty Graphics segment.
SEGMENT
REVIEW
Gerber is
a leading worldwide provider of equipment, software and related services in the
sign making and specialty graphics, apparel and flexible materials and
ophthalmic lens processing industries. Gerber conducts business through
three principal operating segments. These operating segments and the
principal businesses within those segments are as follows:
Operating
Segment
|
Principal
Business
|
Sign
Making and Specialty Graphics
|
Gerber
Scientific Products ("GSP") and Spandex
|
Apparel
and Flexible Materials
|
Gerber
Technology
|
Ophthalmic
Lens Processing
|
Gerber
Coburn
|
Sign Making and
Specialty Graphics
For
the Fiscal Quarters Ended January 31,
|
||||||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||||||
In
thousands
|
GSP
|
Spandex
|
Total
|
GSP
|
Spandex
|
Total
|
||||||||||||||||||
Revenue
|
$
|
9,341
|
$
|
50,267
|
$
|
59,608
|
$
|
11,938
|
$
|
45,430
|
$
|
57,368
|
||||||||||||
Operating
(loss) income
|
$
|
(2,488
|
)
|
$
|
2,730
|
$
|
242
|
$
|
334
|
$
|
704
|
$
|
1,038
|
For
the Nine Months Ended January 31,
|
||||||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||||||
In
thousands
|
GSP
|
Spandex
|
Total
|
GSP
|
Spandex
|
Total
|
||||||||||||||||||
Revenue
|
$
|
33,603
|
$
|
159,094
|
$
|
192,697
|
$
|
45,457
|
$
|
177,122
|
$
|
222,579
|
||||||||||||
Operating
(loss) income
|
$
|
(4,950
|
)
|
$
|
9,255
|
$
|
4,305
|
$
|
(881
|
)
|
$
|
6,832
|
$
|
5,951
|
25
Segment
revenue increased $2.2 million, or 3.9 percent, for the third quarter of fiscal
2010 and decreased $29.9 million, or 13.4 percent, for the first nine months of
fiscal 2010 as compared with the same respective periods in the prior
year. Foreign currency translation favorably impacted Spandex’s revenue by
approximately $6.1 million for the quarter ended January 31, 2010 and negatively
impacted revenue by approximately $1.1 million for the nine months ended January
31, 2010 as compared with the respective prior year periods. The
persistent macroeconomic factors impacting the sign making markets are believed
to have caused lower aftermarket and equipment demand during the third quarter
of fiscal 2010, significantly offsetting the benefits of favorable foreign
currency translation. Lower than anticipated revenue from the Solara ion for the quarter
and nine months ended January 31, 2010 was driven by the overall economic
conditions that have continued to create customer hesitation in committing to
capital purchases, as well as the continued lack of credit availability to
finance purchases. Gerber believes sales of the Solara ion have also slowed
due to warranty-related field issues, which are believed to have been identified
and continue to be worked on through Gerber’s current product improvement
program. Additionally, actions by several of Gerber’s distributors to
reduce inventory of demonstration equipment in preparation for the upcoming
release of the new Solara
ion Z high
resolution system are believed to have affected demand. Fiscal 2009
equipment revenue benefited from revenue generated by the initial launch of the
Solara ion in that
fiscal year. Aftermarket revenue declines are believed to be consistent
with the sign making and specialty graphics current market conditions for the
markets served by Gerber and therefore not indicative of a loss of market
share.
Recent
cost savings actions allowed this segment to maintain profitability, driven by
the Spandex business unit. GSP’s operating loss reflected unfavorable
absorption of fixed manufacturing costs on a lower revenue base and also
included incremental warranty costs associated with the Solara ion. Gerber
believes its continued focus on controllable expenses, improved volumes and
lower warranty expenses will improve future profitability of this segment when
the economy stabilizes. GSP’s operating income (loss) for the quarter
and nine months ended January 31, 2009 included a $0.9 million non-cash benefit
attributable to management’s decision to utilize a leased facility that was
previously vacated.
The GSP
reporting unit’s goodwill asset has a book value of approximately $7.0
million. Gerber reviews the value of goodwill for impairment annually
during its fourth quarter or when events or changes in business circumstances
indicate that the carrying amount of the assets may not be fully
recoverable. As of January 31, 2010, Gerber did not have a triggering
event to conduct an early goodwill impairment test for the GSP reporting
unit. The identification and measurement of goodwill impairment
involves an estimation of the fair value of reporting units, using assumptions
that could affect whether an impairment charge is recognized and the amount
thereof. Significant assumptions include inputs into discounted cash
flow analysis that are used for measuring fair value such as future sales, new
product launches and expense levels. If either the operating results
of GSP continue to deteriorate or there is a significant decline in projected
results, a goodwill impairment charge may be required. The extent of
the potential goodwill impairment charge will be based upon the facts,
circumstances and estimates in place at the time of the goodwill impairment
analysis.
Apparel and
Flexible Materials
For
the Fiscal Quarters Ended
January
31,
|
For
the Nine Months Ended
January
31,
|
|||||||||||||||
In
thousands
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Revenue
|
$
|
40,095
|
$
|
36,437
|
$
|
112,249
|
$
|
130,768
|
||||||||
Segment
operating income
|
$
|
4,140
|
$
|
2,778
|
$
|
11,597
|
$
|
11,373
|
Segment
revenue for the quarter ended January 31, 2010 increased $3.7 million, or 10.0
percent, which included favorable foreign currency translation of approximately
$1.9 million, as compared with the prior year. The increase in
revenue for the third quarter of fiscal 2010 was driven by improvement within
apparel markets in Asia. Gerber management believes that the
improvement in revenue may indicate that key Asian markets are beginning to
recover. Segment revenue for the nine months ended January 31, 2010
decreased $18.5 million, or 14.2 percent as compared with the prior year, which
was partially offset by favorable foreign currency translation of approximately
$0.3 million. Segment revenue for the nine months ended January 31,
2010 was negatively impacted by global economic factors that included continued
depressed demand in apparel markets, which are believed to have resulted in
lower capital equipment and software sales as compared with the same period of
the prior year. The lower revenue appears to be indicative of
widespread market conditions, and not of a loss of market
share. Partially offsetting the negative economic impacts, the
acquisitions of Virtek and Gamma completed late in the second quarter of fiscal
2009 provided incremental revenue of $6.4 million for the nine months ended
January 31, 2010. Key new product revenue of $2.3 million and $6.3
million for the quarter and nine months ended January 31, 2010, respectively,
were primarily comprised of sales of the Z7 GERBERcutter equipment and
FLM software.
26
Segment
revenue in China of $5.9 million and $17.0 million for the quarter and nine
months ended January 31, 2010 represented an increase of $1.7 million and $1.9
million as compared with the quarter and nine months ended January 31, 2009,
respectively. Based on improved order and quote activity within Asian
markets, Gerber believes that these markets are positioned for a modest recovery
in the fourth quarter of fiscal 2010 from the corresponding fiscal 2009
period.
The
acquisition of Yunique in November 2009 is expected to enhance this segment’s
existing product lifecycle management and product data management software
offerings and increase operating income beginning with the fourth quarter of
fiscal 2010.
Segment
operating profit improved $1.4 million for the quarter ended January 31, 2010
and $0.2 million for the nine months ended January 31, 2010 as compared with the
respective prior year periods. The improved profitability in the
third quarter of fiscal 2010 as compared with the prior year was attributable to
higher gross profit from increased revenue volume and the impact of cost control
measures. As this segment begins to recover, profitability levels are
expected to improve as a result of improved revenue volumes and the fiscal 2009
cost reduction actions.
Ophthalmic Lens
Processing
For
the Fiscal Quarters Ended
January
31,
|
For
the Nine Months Ended
January
31,
|
|||||||||||||||
In
thousands
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Revenue
|
$
|
10,968
|
$
|
12,386
|
$
|
36,473
|
$
|
43,562
|
||||||||
Segment
operating (loss) income
|
$
|
(318
|
)
|
$
|
737
|
$
|
2,002
|
$
|
2,625
|
Segment
revenue decreased $1.4 million, or 11.4 percent, and $7.1 million, or 16.3
percent, for the quarter and nine months ended January 31, 2010, respectively,
as compared with the same prior year periods. Gerber believes the decrease
is attributable to the weak global economic conditions, resulting in lower
equipment and aftermarket demand, particularly in the United
States. Increased patent license revenue partially offset the overall
decline for the nine months ended January 31, 2010. Patent license
revenue is not a predictable, recurring revenue source. Favorable
foreign currency translation impacted revenue by approximately $0.5 million and
$0.1 million for the quarter and nine months ended January 31, 2010,
respectively, as compared with the same periods of the prior
year. Market studies indicate that purchases of eyeglasses continue
to be depressed, which adversely impacts demand for ophthalmic aftermarket
supplies and lens production and finishing capital equipment.
The
Ophthalmic Lens Processing segment reported an operating loss of $0.3 million
for the fiscal quarter ended January 31, 2010, primarily attributable to
incremental bad debt expense due to the effects of the persistent slow economy
on its customers, as well as higher warranty expenses during the third quarter
of fiscal 2010. Operating income for the nine months ended January
31, 2010 was adversely impacted by lower revenue volumes, the effect of which
was partially mitigated by increased license revenue. Operating
income for the nine months ended January 31, 2009 included a $0.6 million gain
from the sale of an Australian facility. Until its markets recover,
this segment intends to remain focused on prudent cost control measures and new
product development. This segment is preparing for a key new product
launch in the fourth quarter of fiscal 2010 of a new, eco-friendly E2G Blocking
System for the wholesale market. The system consists of the E2G
blocker, new surface blocks, a deblocker, and a proprietary environmentally safe
medium called Onyx-Bond™.
Corporate
Expenses
For
the Fiscal Quarters Ended
January
31,
|
For
the Nine Months Ended
January
31,
|
|||||||||||||||
In
thousands
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Operating
expenses
|
$
|
4,303
|
$
|
4,336
|
$
|
11,823
|
$
|
12,632
|
Corporate
operating expenses were essentially flat for the quarter and decreased $0.8
million for the first nine months ended January 31, 2010 compared with the
respective prior year periods. For the quarter ended January 31,
2010, lower pension expense of $0.4 million and lower self-insurance costs of
$0.4 million were offset by Yunique acquisition fees of $0.5 million and other
incremental consulting costs, as compared with the quarter ended January 31,
2009. For the nine months ended January 31, 2010, the lower costs
reflected savings from fiscal 2009 workforce reductions and other cost savings
measures, as well as $1.3 million of lower pension plan expenses as compared
with prior year period. The lower pension costs should continue
throughout fiscal 2010 as a result of the pension plan freeze as of April 30,
2009. These lower costs were partially offset by incremental
acquisition expenses related to the Yunique acquisition of $0.5 million and
finance-related severance costs of $0.5 million that were recorded as Corporate
expenses.
27
FINANCIAL
CONDITION
LIQUIDITY
AND CAPITAL RESOURCES
Gerber's
primary sources of liquidity are internally generated cash flows from operations
and available borrowings under the company's senior secured revolving credit
facility. These sources of liquidity are subject to all of the risks
of Gerber's business and could be adversely affected by, among other factors, a
decrease in demand for Gerber's products, charges that may be required because
of changes in market conditions or other costs of doing business, delayed
product introductions or adverse changes to availability of
funds. Adverse conditions in the credit and financial markets have
reduced liquidity and credit availability and increased volatility in prices of
securities across most markets. Gerber performed an assessment of
this difficult financial environment and challenging global credit market
situation and its potential impacts as of April 30, 2009. Gerber's
sales declined significantly in fiscal 2009 and for the nine months ended
January 31, 2010. As a result, Gerber has taken measures to control
costs in order to offset the impact of further revenue declines on its results
of operations and cash flows from operations. Gerber has not
experienced changes in credit availability from its lenders under the terms of
its existing credit facility agreement and does not currently anticipate such
changes. After assessing the consequences of this difficult financial
environment, and although the duration and extent of future market turmoil
cannot be predicted, Gerber does not currently expect that the credit market
conditions will have a significant negative impact on its liquidity, financial
position or operations in the remainder of fiscal 2010 as compared with fiscal
2009.
As of
January 31, 2010, cash balances were $7.9 million and $12.4 million was
available for borrowing under the revolving credit facility, based on facility
financial covenants. Gerber believes that cash on hand, cash flows
from operations and borrowings expected to be available under the revolving
credit facility will enable Gerber to meet its ongoing cash requirements for at
least the next 12 months. After this, Gerber may require additional
capital for investment in its business. The amount and timing of any
additional investment will depend on the anticipated demand for Gerber's
products, the availability of funds and other factors. During the
quarter ended July 31, 2009, Gerber filed a shelf registration statement for
$35.0 million of debt securities, common stock, preferred stock, depositary
shares, warrants, rights and units that Gerber may offer and sell during the
three-year effective period of the shelf registration. The shelf
registration was not used as of January 31, 2010. The actual amount
and timing of Gerber's future capital requirements may differ materially from
the company's estimates depending on the demand for its products and new market
developments and opportunities. If the company's plans or assumptions
change or prove to be inaccurate, the foregoing sources of funds may prove to be
insufficient. In addition, if Gerber successfully completes any
acquisitions of other businesses or if it seeks to accelerate the expansion of
its business, it may be required to seek additional
capital. Additional sources of such capital may include equity and
debt financing. If Gerber believes it can obtain additional financing
on acceptable terms, it may seek such financing at any time, to the extent that
market conditions and other factors permit it to do so. Any inability
of Gerber to generate the sufficient funds that it may require or to obtain such
funds under reasonable terms could limit its ability to increase revenue or
operate profitably. The continuation of impaired equity and credit
markets and restrictions under Gerber's revolving credit facility could
adversely impact Gerber's ability to raise any required funds.
The
following table provides information about Gerber's capitalization as of the
dates indicated:
In
thousands, except ratio amounts
|
January
31,
2010
|
April
30,
2009
|
||||||
Cash
and cash equivalents
|
$
|
7,921
|
$
|
10,313
|
||||
Working
capital
|
$
|
77,267
|
$
|
92,839
|
||||
Total
debt
|
$
|
45,000
|
$
|
73,500
|
||||
Net
debt (total debt less cash and cash equivalents)
|
$
|
37,079
|
$
|
63,187
|
||||
Shareholders'
equity
|
$
|
163,642
|
$
|
148,302
|
||||
Total
capital (net debt plus shareholders' equity)
|
$
|
200,721
|
$
|
211,489
|
||||
Current
ratio
|
1.90:1
|
2.02:1
|
||||||
Net
debt-to-total capital ratio
|
18.5
|
%
|
29.9
|
%
|
28
Cash
Flows
The
following table provides information about Gerber’s cash flows for the periods
indicated:
For
the Nine Months Ended January 31,
|
||||||||
In
thousands
|
2010
|
2009
|
||||||
Cash
flows provided by operating activities
|
$
|
19,478
|
$
|
6,318
|
||||
Cash
flows provided by (used for) investing activities
|
$
|
5,299
|
$
|
(38,559
|
)
|
|||
Cash
flows (used for) provided by financing activities
|
$
|
(28,256
|
)
|
$
|
32,628
|
Gerber
generated $19.5 million in cash from operating activities during its first nine
months of fiscal 2010 primarily from accounts receivable
collections. Gerber generated $6.3 million of cash from operating
activities for the nine months ended January 31, 2009 primarily from operating
earnings. Fiscal 2009 accounts receivable collections were offset by
increased payments to vendors, additional investments in inventory and payments
of fiscal 2008 incentive compensation.
Gerber
generated $5.3 million of cash from investing activities primarily related to
the sale of FOBA and ND Graphics during the first nine months of fiscal
2010. Offsetting these proceeds, Gerber used cash for investing
activities in the first nine months of fiscal 2010 on capital expenditures of
$3.2 million and business acquisitions of $3.5 million. The business
acquisition payments included Gerber’s initial payment for the purchase of
Yunique in November 2009 of $2.0 million and payments to the former owners of
Data Technology and Gamma in accordance with the terms of the purchase
agreements for those acquisitions. Fiscal 2010 capital expenditures
are expected to be approximately $5.0 million. Gerber used $38.6
million of cash for investing activities primarily for the Virtek and Gamma
business acquisitions during the nine months ended January 31,
2009. Gerber also invested $6.5 million in capital expenditures for
the nine months ended January 31, 2009. Partially offsetting these
cash outflows, Gerber collected $2.6 million related to the sale of a Corporate
land parcel, the sale of a facility in the Ophthalmic Lens Processing segment in
fiscal 2009 and proceeds from a note receivable for certain non-operating assets
sold within the Ophthalmic Lens Processing segment in fiscal 2008.
Borrowings
under Gerber’s credit facility and proceeds of stock option exercises are the
primary sources of cash flows from financing activities, and repayments of debt
constitute the primary use. Gerber used $28.3 million in cash for
financing activities, primarily to reduce its outstanding debt, which included
early repayment of the $6.0 million principal amount of outstanding Variable
Rate Demand Industrial Development Bonds during the quarter ended January 31,
2010. These repayments were funded with working capital improvements
and proceeds from the sale of FOBA and ND Graphics. Borrowings
increased $31.7 million during the nine months ended January 31, 2009, primarily
to fund the Virtek and Gamma acquisitions and related transaction
costs. Gerber realized $0.9 million in cash from stock option
exercises during the first nine months of fiscal 2009.
Financial
Condition
As of
January 31, 2010, the United States dollar weakened against the euro, the pound
sterling and the Canadian and Australian dollars, resulting in higher translated
euro, pound sterling, Canadian and Australian dollar-denominated assets and
liabilities as compared with April 30, 2009. The most significant portion
of Gerber’s international assets and liabilities are denominated in the
euro. Gerber’s Condensed Consolidated Balance Sheets as of April 30,
2009 included assets and liabilities related to the disposed FOBA and ND
Graphics business units.
Net
accounts receivable decreased to $72.7 million as of January 31, 2010 from $87.8
million as of April 30, 2009. The decrease, which was partially offset by
foreign currency translation, was primarily attributable to strong collection of
accounts receivable related to fiscal 2009 fourth quarter shipments, the sale of
FOBA and ND Graphics, and an increase in the allowance for doubtful
accounts. Days sales outstanding in ending accounts receivable were 59
days as of January 31, 2010 as compared with 66 days as of April 30,
2009.
Inventories
decreased to $66.9 million as of January 31, 2010 from $72.1 million as of April
30, 2009. The reduction primarily reflected the sale of FOBA and ND
Graphics and was partially offset by foreign currency translation and
investments in inventories for anticipated new product
launches. Inventory turnover increased to 4.8 times annually as of
January 31, 2010 from 4.6 times annually as of April 30, 2009.
Prepaid
expenses and other current assets increased to $5.7 million as of January 31,
2010 from $4.7 million as of April 30, 2009, primarily related to payments for
insurance policies at the beginning of the fiscal year that are amortized over
the fiscal year.
29
Property,
plant and equipment decreased to $33.4 million from $37.1 million primarily as a
result of depreciation expense recorded in the nine months ended January 31,
2010 and the sale of FOBA and ND Graphics, which was partially offset by capital
expenditures and the impact of foreign currency translation.
Goodwill
increased to $83.0 million as of January 31, 2010 from $76.9 million as of April
30, 2009, primarily due to the Yunique acquisition, payments made to former
owners of acquired companies and the impact of foreign currency translation, and
was partially offset by the write-off of goodwill associated with the
dispositions of FOBA and ND Graphics.
Accounts
payable and other accrued liabilities decreased to $73.4 million as of January
31, 2010 from $78.0 million as of April 30, 2009, primarily as a result of the
reduction of certain liabilities related to the FOBA and ND Graphics
dispositions and also to the timing of payments to Gerber’s vendors and
employees, and was partially offset by the impacts of foreign currency
translation. Days purchases outstanding in accounts payable increased to
45 days as of January 31, 2010 from 39 days as of April 30, 2009.
Long-term
Debt
In
November 2009, Gerber amended the credit agreement to its revolving credit
facility with several banks and other financial institutions and lenders
specified in the agreement and RBS Citizens, N.A., in its capacity as
administrative agent for the lenders. The amendment modified certain
financial covenants as described below, amended the definitions of EBIT and
EBITDA and reduced the maximum borrowing capacity to $75.0 million from $100.0
million. The credit agreement is Gerber’s primary source of debt and
matures on January 31, 2012. In addition to the $75.0 million
borrowing capacity, Gerber may elect, subject to compliance with specified
conditions, to solicit the lenders under the credit agreement to increase by up
to $50 million the total principal amount of borrowings available under the
credit facility.
The ratio
of Total Funded Debt to Consolidated EBITDA financial covenant was modified as
follows:
Twelve
Month Period Ended
|
Previous
Covenant
|
Amended
Covenant
|
January
31, 2010
|
Maximum
3.25:1
|
Maximum
3.00:1
|
April
30, 2010
|
Maximum
3.25:1
|
Maximum
3.00:1
|
July
31, 2010 and thereafter
|
Maximum
3.00:1
|
Maximum
3.00:1
|
The ratio
of Consolidated EBIT to Consolidated Interest Expense financial covenant was
modified as follows:
Twelve
Month Period Ended
|
Previous
Covenant
|
Amended
Covenant
|
January
31, 2010
|
Minimum
2.25:1
|
Minimum
1.50:1
|
April
30, 2010
|
Minimum
2.75:1
|
Minimum
2.25:1
|
July
31, 2010
|
Minimum
3.00:1
|
Minimum
2.50:1
|
October
31, 2010 and thereafter
|
Minimum
3.00:1
|
Minimum
3.00:1
|
The
amendment also modified the Asset Coverage Covenant to phase out the historical
$20.0 million allowance for consolidated net fixed assets over periods ending
October 31, 2010 and thereafter. Additionally, the measurement of
compliance with this covenant will change from being tested monthly to being
tested quarterly after October 31, 2010.
The
amendment modified the definition of EBIT and EBITDA for purposes of the
foregoing financial covenants, providing Gerber with enhanced operating
flexibility under the credit agreement. These modifications provide
for additional adjustments to the calculations of EBIT and EBITDA to allow the
add-back of certain non-recurring charges and pro-forma historical
adjustments.
Interest
rates per the credit facility were not changed as a result of the November 2009
amendment. The amendment fees and related costs were $0.5
million.
Gerber's
future compliance with the financial covenants under the credit agreement
depends primarily on its success in generating sufficient operating cash flows,
which could be adversely affected by various economic, financial and industrial
factors. Noncompliance with the covenants would constitute an event
of default under the credit facility, potentially allowing the lenders to
accelerate repayment of any outstanding borrowings to the extent permitted under
the credit agreement and applicable law. In the event of failure by
Gerber to continue to be in compliance with any covenants, Gerber would seek to
negotiate amendments to the applicable covenants or obtain compliance waivers
from
30
its
lenders. Gerber was in compliance with its financial covenants as of
January 31, 2010. Compliance with the amended financial covenants is
presented in the following table:
Covenant
|
Requirement
|
Actual
as of January 31, 2010
|
Total
Funded Debt to Consolidated EBITDA
|
Maximum
3.00:1
|
2.36:1
|
Consolidated
EBIT to Consolidated Interest Expense
|
Minimum
1.50:1
|
2.66:1
|
Asset
Coverage Ratio
|
At
least 1.0:1
|
1.52:1
|
Gerber
repaid its $6.0 million principal amount of outstanding Variable Rate Demand
Industrial Development Bonds during the quarter ended January 31, 2010 using
credit facility borrowings.
OBLIGATIONS,
COMMITMENTS, AND CONTINGENCIES
Gerber
entered into an agreement with the former owners of Yunique requiring contingent
payments based on revenue targets for fiscal 2011, fiscal 2012 and fiscal 2013,
which are anticipated to total approximately $3.8 million for the three year
period. There were no other material changes to Gerber’s cash
obligations or commercial commitments from those disclosed in the Annual Report
on Form 10-K for the fiscal year ended April 30, 2009.
CRITICAL
ACCOUNTING ESTIMATES
The
preparation of financial statements requires management to make estimates and
assumptions that affect amounts reported. Actual results could differ from
management's estimates. Gerber described the critical accounting estimates
that require management's most difficult, subjective, or complex judgments in
Gerber’s Annual Report on Form 10-K for the fiscal year ended April 30, 2009.
There were no significant changes to Gerber’s critical accounting estimates
during the nine months ended January 31, 2010 from those previously disclosed in
Gerber’s Annual Report on Form 10-K.
No
material changes have occurred in the quantitative and qualitative market risk
disclosures for Gerber during the first nine months of fiscal 2010 from those
disclosed under Item 7A. "Quantitative and Qualitative Disclosures about Market
Risk," presented in Gerber’s Annual Report on Form 10-K for the fiscal year
ended April 30, 2009.
Evaluation
of Disclosure Controls and Procedures
Gerber’s
management, including its Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of Gerber’s disclosure controls and
procedures as of January 31, 2010. Based upon that evaluation, Gerber’s
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures were effective as of January 31,
2010.
Changes
in Internal Control over Financial Reporting
There
were no changes in Gerber’s internal control over financial reporting that
occurred during the fiscal quarter ended January 31, 2010 that have materially
affected, or that are reasonably likely to materially affect, Gerber’s internal
control over financial reporting.
31
Gerber's
business, financial condition, operating results and cash flows can be impacted
by a number of factors, any one of which could cause its actual results to vary
materially from recent results or from anticipated future results. No material
changes have occurred in Gerber’s risk factors during the third quarter of
fiscal 2010 from those disclosed under Item 1A. "Risk Factors," presented in
Gerber’s Annual Report on Form 10-K for the fiscal year ended April 30,
2009.
For a
discussion identifying risk factors and other important factors that could cause
actual results to differ materially from those anticipated, readers are referred
to Gerber’s filings with the Securities and Exchange Commission, including but
not limited to, the information included in Gerber’s Annual Report on Form 10-K
for the fiscal year ended April 30, 2009 under the headings "Business," "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Cautionary Note Concerning Factors that May Influence
Future Results" and within this Quarterly Report on Form 10-Q.
The
following table provides information about Gerber’s purchases of its common
stock during the quarter ended January 31, 2010:
Period
|
(a)
Total
Number
of
Shares
(or
Units)
Purchased
|
(b)
Average
Price
Paid
per
Share
(or
Unit)
|
(c)
Total
Number of
Shares
(or Units)
Purchased
as Part
of
Publicly
Announced
Plans
or
Programs
|
(d)
Maximum
Number
(or
Approximate
Dollar
Value)
of
Shares (or Units)
that
May Yet Be
Purchased
Under the
Plans
or Program
|
||||||
November
1, 2009 – November 30, 2009
|
---
|
---
|
Not
applicable
|
Not
applicable
|
||||||
December
1, 2009 – December 31, 2009 (1)
|
14,129
|
$
|
5.04
|
Not
applicable
|
Not
applicable
|
|||||
January
1, 2010 – January 31, 2010 (1)
|
2,072
|
4.94
|
Not
applicable
|
Not
applicable
|
||||||
16,201
|
$
|
5.02
|
Not
applicable
|
Not
applicable
|
(1)
Represents shares withheld by, or delivered to, Gerber pursuant to
provisions in agreements with recipients of restricted stock granted under
Gerber’s stock incentive plan allowing Gerber to withhold, or the recipient to
deliver to Gerber, the number of shares having the fair value equal to tax
withholding due.
32
Gerber
herewith files the following exhibits:
Exhibit
Number
|
Description
|
||
10.1
|
Third
Amendment to Credit Agreement, dated as of November 19, 2009, among Gerber
Scientific, Inc., certain subsidiaries of Gerber Scientific, Inc., JP
Morgan Chase Bank N.A., HSBC Bank USA, National Association, Merrill Lynch
Capital Corporation, Bank of America, N.A., Sovereign Bank, and RBS
Citizens N.A. as lender and agent. Filed
herewith.
|
||
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
under the Securities Exchange Act of 1934, filed
herewith.
|
||
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
under the Securities Exchange Act of 1934, filed
herewith.
|
||
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(b) or 15d-14(b) under the Securities Exchange Act of 1934 and to 18
U.S.C. 1350, filed herewith.
|
33
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.
GERBER
SCIENTIFIC, INC.
|
||
March
8, 2010
|
By:
|
/s/ Michael R.
Elia
|
Michael R.
Elia
Executive
Vice President, Chief Financial Officer and Chief Accounting
Officer
(Principal
Financial and Accounting
Officer)
|
34
GERBER
SCIENTIFIC, INC.
Exhibit
Number
|
Description
|
||
Third
Amendment to Credit Agreement, dated as of November 19, 2009, among Gerber
Scientific, Inc., certain subsidiaries of Gerber Scientific, Inc., JP
Morgan Chase Bank N.A., HSBC Bank USA, National Association, Merrill Lynch
Capital Corporation, Bank of America, N.A., Sovereign Bank, and RBS
Citizens N.A. as lender and agent. Filed
herewith.
|
|||
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
under the Securities Exchange Act of 1934, filed
herewith.
|
|||
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
under the Securities Exchange Act of 1934, filed
herewith.
|
|||
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(b) or 15d-14(b) under the Securities Exchange Act of 1934 and to 18
U.S.C. 1350, filed herewith.
|
35