Attached files

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EX-4.18 - EX-4.18 - PERCEPTRON INC/MIprcp-20160331xex4_18.htm
EX-31.1 - EX-31.1 - PERCEPTRON INC/MIprcp-20160331xex31_1.htm
EX-31.2 - EX-31.2 - PERCEPTRON INC/MIprcp-20160331xex31_2.htm
EX-32 - EX-32 - PERCEPTRON INC/MIprcp-20160331xex32.htm





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549



FORM 10-Q



Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2016.



Commission file number:  0-20206



PERCEPTRON, INC.

(Exact Name of Registrant as Specified in Its Charter)





 

Michigan

(State or Other Jurisdiction of

Incorporation or Organization)

38-2381442

(I.R.S. Employer

Identification No.)

47827 Halyard Drive, Plymouth, Michigan

(Address of Principal Executive Offices)

48170-2461

(Zip Code)



(734) 414-6100

(Registrant’s Telephone Number, Including Area Code)



Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)



Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



 

Yes 

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.  (Check one):



 

Large accelerated filer

Accelerated filer

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 



The number of shares outstanding of each of the issuer’s classes of common stock as of May 5, 2016, was:





 

 

Common Stock, $0.01 par value

 

9,345,246

Class

 

Number of shares



1


 





PERCEPTRON, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

For the Quarter Ended March 31, 2016







2


 

+





























 

 

 

 

 

 



 

 

 

 

 

 

PERCEPTRON, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



 

 

 

 

 



 

March 31,

 

June 30,

(In Thousands, Except Per Share Amount)

 

2016

 

2015



 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 



 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,130 

 

$

11,502 

Short-term investments

 

 

2,320 

 

 

4,134 

Receivables:

 

 

 

 

 

 

Billed receivables, net of allowance for doubtful accounts

 

 

28,201 

 

 

29,182 

of $246 and $214, respectively

 

 

 

 

 

 

Other receivables

 

 

941 

 

 

904 

Inventories, net of reserves of $1,499 and $1,436, respectively

 

 

13,123 

 

 

11,898 

Deferred income taxes

 

 

2,067 

 

 

2,067 

Other current assets

 

 

1,299 

 

 

1,732 

Total current assets

 

 

51,081 

 

 

61,419 



 

 

 

 

 

 

Property and Equipment

 

 

 

 

 

 

Building and land

 

 

7,736 

 

 

6,529 

Machinery and equipment

 

 

15,954 

 

 

15,078 

Furniture and fixtures

 

 

1,132 

 

 

1,123 



 

 

24,822 

 

 

22,730 

Less  -  Accumulated depreciation

 

 

(16,583)

 

 

(15,890)

Net property and equipment

 

 

8,239 

 

 

6,840 



 

 

 

 

 

 

Goodwill

 

 

7,662 

 

 

7,499 

Intangible Assets, Net

 

 

5,361 

 

 

6,685 

Long-Term Investments

 

 

771 

 

 

827 

Deferred Income Tax Asset

 

 

13,955 

 

 

11,668 



 

 

 

 

 

 

Total Assets

 

$

87,069 

 

$

94,938 



 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 



 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

Accounts payable

 

$

9,937 

 

$

7,723 

Accrued liabilities and expenses

 

 

3,968 

 

 

5,761 

Accrued compensation

 

 

1,897 

 

 

3,001 

Current portion of taxes payable

 

 

1,127 

 

 

1,450 

Deferred income taxes

 

 

295 

 

 

289 

Income taxes payable

 

 

180 

 

 

1,251 

Short-term notes payable

 

 

437 

 

 

 -

Restructuring reserve

 

 

1,448 

 

 

 -

Deferred revenue

 

 

8,974 

 

 

8,966 

Total current liabilities

 

 

28,263 

 

 

28,441 



 

 

 

 

 

 

Long-Term Taxes Payable

 

 

1,976 

 

 

3,056 

Deferred Income Taxes

 

 

1,316 

 

 

1,509 

Other Long-Term Liabilities

 

 

1,212 

 

 

1,140 



 

 

 

 

 

 

Total Liabilities

 

$

32,767 

 

$

34,146 



 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

Preferred stock, no par value, authorized 1,000 shares, issued none

 

 

 -

 

 

 -

Common stock, $0.01 par value, authorized 19,000 shares, issued

 

 

 

 

 

 

and outstanding 9,350 and 9,348, respectively

 

 

93 

 

 

93 

Accumulated other comprehensive loss

 

 

(2,807)

 

 

(2,371)

Additional paid-in capital

 

 

45,480 

 

 

45,015 

Retained earnings

 

 

11,536 

 

 

18,055 

Total shareholders' equity

 

 

54,302 

 

 

60,792 



 

 

 

 

 

 

Total Liabilities and Shareholders' Equity

 

$

87,069 

 

$

94,938 



 

 

 

 

 

 

The notes to the consolidated financial statements are an integral part of these statements.





3


 





















 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

PERCEPTRON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

March 31,

 

March 31,

(In Thousands, Except Per Share Amounts)

 

2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

18,082 

 

$

16,182 

 

$

50,361 

 

$

50,965 

Cost of Sales

 

 

12,880 

 

 

11,614 

 

 

35,638 

 

 

31,977 

Gross Profit

 

 

5,202 

 

 

4,568 

 

 

14,723 

 

 

18,988 



 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

4,702 

 

 

5,027 

 

 

15,358 

 

 

14,067 

Engineering, research and development

 

 

1,740 

 

 

1,948 

 

 

5,938 

 

 

5,648 

Severance, impairment and other charges

 

 

2,567 

 

 

 -

 

 

2,567 

 

 

 -

Total operating expenses

 

 

9,009 

 

 

6,975 

 

 

23,863 

 

 

19,715 



 

 

 

 

 

 

 

 

 

 

 

 

Operating Loss

 

 

(3,807)

 

 

(2,407)

 

 

(9,140)

 

 

(727)



 

 

 

 

 

 

 

 

 

 

 

 

Other Income and (Expenses)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

(46)

 

 

24 

 

 

(92)

 

 

178 

Foreign currency gain (loss)

 

 

158 

 

 

(62)

 

 

217 

 

 

(992)

Other income

 

 

12 

 

 

64 

 

 

157 

 

 

187 

Total other income (expense)

 

 

124 

 

 

26 

 

 

282 

 

 

(627)



 

 

 

 

 

 

 

 

 

 

 

 

Loss Before Income Taxes

 

 

(3,683)

 

 

(2,381)

 

 

(8,858)

 

 

(1,354)



 

 

 

 

 

 

 

 

 

 

 

 

Income Tax Benefit

 

 

818 

 

 

792 

 

 

2,339 

 

 

504 



 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$

(2,865)

 

$

(1,589)

 

$

(6,519)

 

$

(850)



 

 

 

 

 

 

 

 

 

 

 

 

Loss Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.31)

 

$

(0.17)

 

$

(0.70)

 

$

(0.09)

Diluted

 

 

(0.31)

 

 

(0.17)

 

 

(0.70)

 

 

(0.09)



 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

9,351 

 

 

9,290 

 

 

9,351 

 

 

9,220 

Dilutive effect of stock options

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Diluted

 

 

9,351 

 

 

9,290 

 

 

9,351 

 

 

9,220 



 

 

 

 

 

 

 

 

 

 

 

 

The notes to the consolidated financial statements are an integral part of these statements.







4


 









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

PERCEPTRON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

March 31,

 

March 31,

(In Thousands)

 

2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$

(2,865)

 

$

(1,589)

 

$

(6,519)

 

$

(850)

Other Comprehensive Loss:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

610 

 

 

(1,918)

 

 

(436)

 

 

(3,430)



 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Loss

 

$

(2,255)

 

$

(3,507)

 

$

(6,955)

 

$

(4,280)



 

 

 

 

 

 

 

 

 

 

 

 

The notes to the consolidated financial statements are an integral part of these statements.

 

 

 

 

 

 



5


 

































 

 

 

 

 

 



 

 

 

 

 

 

PERCEPTRON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(UNAUDITED)



 

Nine Months Ended



 

March 31,

(In Thousands)

 

2016

 

2015



 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net loss

 

$

(6,519)

 

$

(850)

Adjustments to reconcile net loss to net cash used for 

 

 

 

 

 

 

operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

1,516 

 

 

559 

Stock compensation expense

 

 

393 

 

 

378 

Asset impairment and related inventory write-down

 

 

813 

 

 

 -

Deferred income taxes

 

 

(2,532)

 

 

(1,950)

(Gain) loss on disposal of assets and other

 

 

(756)

 

 

951 

Allowance for doubtful accounts

 

 

32 

 

 

(20)

Changes in assets and liabilities

 

 

 

 

 

 

Receivables, net

 

 

1,042 

 

 

(1,827)

Inventories

 

 

(1,298)

 

 

(2,100)

Accounts payable

 

 

2,519 

 

 

657 

Other current assets and liabilities

 

 

(3,783)

 

 

1,057 

Net cash used for operating activities

 

 

(8,573)

 

 

(3,145)



 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Proceeds from (payments to) short-term credit borrowings, net

 

 

178 

 

 

(1,695)

Proceeds from stock plans

 

 

80 

 

 

928 

Net cash provided by (used for) financing activities

 

 

258 

 

 

(767)



 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Acquisition of businesses

 

 

 -

 

 

(4,205)

Purchases of short-term investments

 

 

(1,851)

 

 

(4,723)

Sales of short-term investments

 

 

3,492 

 

 

11,153 

Capital expenditures

 

 

(1,561)

 

 

(1,345)

Other long-term assets

 

 

(129)

 

 

(770)

Net cash (used for) provided by investing activities

 

 

(49)

 

 

110 



 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

 

(8)

 

 

(2,353)



 

 

 

 

 

 

Net Decrease in Cash and Cash Equivalents

 

 

(8,372)

 

 

(6,155)

Cash and Cash Equivalents, July 1

 

 

11,502 

 

 

23,070 

Cash and Cash Equivalents, March 31

 

$

3,130 

 

$

16,915 



 

 

 

 

 

 

Non-Cash Financing and Investing Activity:

 

 

 

 

 

 

Debt related to Purchase of Building

 

$

585 

 

$

 -

Deferred Purchase Price

 

$

 -

 

$

566 



 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

 

 

 

The notes to the consolidated financial statements are an integral part of these statements.







6


 

PERCEPTRON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



1.Basis of Presentation



The accompanying Consolidated Financial Statements should be read in conjunction with the Company’s 2015 Annual Report on Form 10-K.  The Consolidated Financial Statements include the operating results of the Company’s acquisitions of Next Metrology Software s.r.o., (“NMS”), which was consummated on January 29, 2015, and Coord3 S.r.l., (“Coord3”), which was consummated on February 27, 2015, from their acquisition dates.  See Note 3, “Acquisitions”, below.  In the opinion of management, the unaudited information furnished herein reflects all adjustments necessary for a fair presentation of the financial statements for the periods presented.  The results of operations for any interim period are not necessarily indicative of the results of operations for a full year.



2.New Accounting Pronouncements 



In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP.  The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services.  ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.  Further, in March 2016, the FASB issued the final guidance to clarify the principal versus agent guidance (i.e., whether an entity should report revenue gross or net).  Finally, in April 2016, the FASB issued the final guidance to clarify identifying performance obligation and the licensing implementation guidance.  These standards will be effective for annual periods beginning after December 15, 2017 (as amended in August 2015, by ASU 2015-14, Deferral of the Effective Date), and interim periods therein, using either of the following transition methods:  (i) a full retrospective approach reflecting the applications of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).  The Company is currently evaluating the impact of the adoption of ASU 2014-09 on the Company’s consolidated financial statements and have not yet determined the method by which we will adopt the standard in fiscal year 2019 (effective dates amended by ASU 2015-14).



In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11), which changes the measurement of inventory at the lower of cost and net realizable value.  Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.  There were also amendments to the guidance to more clearly articulate the requirements for the measurement and disclosure of inventory.  ASU 2015-11 is effective for the Company beginning July 1, 2017 and is not expected to have a significant impact on the Company’s consolidated financial statements or disclosures.



In September 2015, the FASB issued Accounting Standards Update No. 2015-16, Business Combinations – Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16), which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.  The amendments in this update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.  ASU 2015-16 is effective for the Company beginning July 1, 2016 and is not expected to have a significant impact on the Company’s consolidated financial statements or disclosures.



In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes (ASU 2015-17), which requires all deferred tax assets and liabilities, included related valuation allowances, be classified as non-current on the Company’s consolidated balance sheets.  ASU 2015-17 is effective for the Company beginning July 1, 2017 and is not expected to have a significant impact on the Company’s consolidated financial statements or disclosures.



In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments.  ASC 2016-01 is effective for the Company beginning July 1, 2018 and is not expected to have a significant impact on the Company’s consolidated financial statements or disclosures.



In February 2016, the FASB issued Accounting Standards Update No. 2016-02 Leases (ASU 2016-2), which establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.  ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted.  A modified retrospective transition approach is required for lessees with capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.   The Company is currently evaluating the impact of the adoption of ASU 2016-02 on the Company’s consolidated financial statements.



7


 

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows.  ASU 2016-09 is effective for fiscal years and interim periods beginning after December 15, 2016, with early adoption permitted.  The Company is currently evaluating the impact of the adoption of ASU 2016-09 on the Company’s consolidated financial statements.



3.Acquisitions



The Consolidated Financial Statements include the operating results of the Company’s acquisitions of NMS, which was consummated on January 29, 2015, and Coord3, which was consummated on February 27, 2015, from their acquisition dates.  The following pro forma information for the three and nine months ended March 31, 2015 is based on the assumption that the acquisitions of NMS and Coord3 occurred on July 1, 2014 (in thousands, except per share amounts):

























 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

3/31/2015

 

3/31/2015

Revenue

 

$

18,289 

 

 

$

60,618 

 

Net Loss

 

$

(1,658)

 

 

$

(883)

 



 

 

 

 

 

 

 

 

Loss per Common Share

 

 

 

 

 

 

 

 

Basic

 

$

(0.18)

 

 

$

(0.10)

 

Diluted

 

$

(0.18)

 

 

$

(0.10)

 



 

 

 

 

 

 

 

 





4.Goodwill



Goodwill represents the excess purchase price over the fair value of the net amounts assigned to assets acquired and liabilities assumed in connection with the Company’s acquisitions.  Under FASB Accounting Standards Codification, or ASC Topic 805 “Business Combinations”, the Company is required to test goodwill for impairment annually or more frequently, whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit with goodwill below its carrying amount.  Application of the goodwill impairment test requires judgment, including assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit.



The qualitative events or circumstances that could affect the fair value of a reporting unit could include economic conditions; industry and market considerations, including competition; increases in raw materials, labor, or other costs; overall financial performance such as negative or declining cash flows; relevant entity-specific events such as changes in management, key personnel, strategy, or customers; sale or disposition of a significant portion of a reporting unit; and regulatory or political developments.  If based upon these qualitative factors, it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, then the first and second steps of the goodwill impairment tests described below are not necessary. 



If the qualitative review indicates it is more likely than not that the fair value of the reporting unit is less than its carrying amount, a two-step quantitative impairment test is performed to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized, if any.  Step 1 is to identify potential impairment by comparing fair value of a reporting unit with its carrying value, including goodwill.  If the fair value is lower than the carrying value, this is an indication of goodwill impairment and Step 2 must be performed.  Under Step 2, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill.  This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the business, estimation of the useful life over which cash flows will occur, and determination of the Company’s weighted average cost of capital.  The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, foreign currency fluctuations and other factors.  Changes in these estimates and assumptions could materially affect the determination of fair value and could result in goodwill impairment for a reporting unit, negatively impacting the Company’s results of operations for the period and financial position.



The valuation of assets and assumed liabilities, including goodwill, resulting from the acquisition of Coord3 and NMS is reflective of the reporting unit values based on the long-term financial forecast for the business.  It is possible that the Company may not realize its forecasts.  Given the value assigned to goodwill during the purchase price allocation, the Company will closely monitor the performance of the business versus the long-term forecast to determine if any impairments arise.  Goodwill is recorded in the local currency of the acquired entities and foreign currency effects will continue to impact the balance of goodwill in future periods.  Goodwill related to the acquisition of Coord3 and NMS as of June 30, 2015 was $7,499,000 and as of March 31, 2016 was $7,662,000.  The change of $163,000 was due to the change in foreign currency rates from June 30, 2015 to March 31, 2016.



8


 

5.Intangibles



The Company has acquired intangible assets in addition to goodwill in connection with the acquisition of Coord3 and NMS.  These assets are susceptible to shortened estimated useful lives and changes in fair value due to changes in their use, market or economic changes, or other events or circumstances. The Company evaluates the potential impairment of these intangible assets whenever events or circumstances indicate their carrying value may not be recoverable.  Factors that could trigger an impairment review include historical or projected results that are less than the assumptions used in the original valuation of an intangible asset, a change in the Company’s business strategy or its use of an intangible asset, or negative economic or industry trends.



If an event or circumstance indicates that the carrying value of an intangible asset may not be recoverable, the Company assesses the recoverability of the asset by comparing the carrying value of the asset to the sum of the undiscounted future cash flows that the asset is expected to generate over its remaining economic life. If the carrying value exceeds the sum of the undiscounted future cash flows, the Company compares the fair value of the intangible asset to the carrying value and records an impairment loss for the difference.  The Company generally estimates the fair value of its intangible assets using the income approach based upon a discounted cash flow model. The income approach requires the use of many assumptions and estimates including future revenues and expenses, discount factors, income tax rates, the identification of groups of assets with highly independent cash flows and assets’ economic lives. Volatility in the global economy makes these assumptions and estimates more judgmental. Actual future operating results and the remaining economic lives of our other intangible assets could differ from those used in assessing the recoverability of these assets and could result in an impairment of other intangible assets in future periods. 



During the third quarter of 2016, the Company determined that one of its product lines was not viable in the market.  As a result of this determination, the unamortized software development costs associated with this product line of $694,000 was written off and included in ‘Severance, Impairment and Other Charges’ on the Consolidated Statement of Operations (see Note 11 for further discussion).



The detail of the remaining intangible assets is shown below (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

March 31,

 

 

 

 

March 31,

 

 

June 30,

 

 

 

 

June 30,



 

 

2016

 

 

 

 

2016

 

 

2015

 

 

 

 

2015



 

 

Gross

 

 

 

 

Net

 

 

Gross

 

 

 

 

Net



 

 

Carrying

 

Accumulated

 

 

Carrying

 

 

Carrying

 

Accumulated

 

 

Carrying



 

 

Amount

 

Amortization

 

 

Amount

 

 

Amount

 

Amortization

 

 

Amount

Customer/Distributor Relationships

 

$

3,234 

 

(701)

 

$

2,533 

 

$

3,172 

 

(211)

 

$

2,961 

Trade Name

 

 

2,512 

 

(272)

 

 

2,240 

 

 

2,463 

 

(82)

 

 

2,381 

Software

 

 

677 

 

(166)

 

 

511 

 

 

1,249 

 

(12)

 

 

1,237 

Other

 

 

122 

 

(45)

 

 

77 

 

 

120 

 

(14)

 

 

106 

Total

 

$

6,545 

 

(1,184)

 

$

5,361 

 

$

7,004 

 

(319)

 

$

6,685 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization expense for the three month periods ended March 31, 2016 and 2015 was $280,000 and $5,000,  respectively.  Amortization expense for the nine month periods ended March 31, 2016 and 2015 was $865,000 and $5,000,  respectively.



The estimated amortization of the remaining intangible assets by year is as follows (in thousands):

























 

 



 

 

Years Ending June 30,

Amount

2016 (excluding the nine months ended March 31, 2016)

 

269 

2017

 

1,077 

2018

 

1,099 

2019

 

1,063 

2020

 

682 

after 2020

 

1,171 



$

5,361 



 

 







6.Revenue Recognition



The Company recognizes revenue related to products and services upon shipment when title and risk of loss have passed to the customer or upon completion of the service, there is persuasive evidence of an arrangement, the sales price is fixed or determinable, collection of the related receivable is reasonably assured and customer acceptance criteria, if any, have been successfully demonstrated.



The Company also has multiple element arrangements in its Measurement Solutions product line that may include elements such as, equipment, installation, labor support and/or training.  Each element has value on a stand-alone basis and the delivered elements do not include general rights of return.  Accordingly, each element is considered a separate unit of accounting.  When available, the Company allocates arrangement consideration to each element in a multiple element arrangement based upon vendor specific objective evidence (“VSOE”) of fair value of the respective elements. When VSOE cannot be established, the Company attempts to establish the selling price of

9


 

each element based on relevant third-party evidence.  The Company’s products contain a significant level of proprietary technology, customization or differentiation such that comparable pricing of products with similar functionality cannot be obtained; in these cases, the Company uses its best estimate of selling price (“BESP”).  The Company determines the BESP for a product or service by considering multiple factors including, but not limited to, pricing practices, internal costs, geographies and gross margin.



For multiple element arrangements, the Company defers from revenue recognition the greater of the relative fair value of any undelivered elements of the contract or the portion of the sales price of the contract that is not payable until the undelivered elements are completed.  As part of this evaluation, the Company limits the amount of revenue recognized for delivered elements to the amount that is not contingent on the future delivery of products or services, including a consideration of payment terms that delay payment until those future deliveries are completed. 



Some multiple element arrangements contain installment payment terms with a final payment (“final buy-off”) due upon the Company’s completion of all elements in the arrangement or when the customer’s final acceptance is received.  The Company recognizes revenue for each completed element of a contract when it is both earned and realizable.  A provision for final customer acceptance generally does not preclude revenue recognition for the delivered equipment element because the Company rigorously tests equipment prior to shipment to ensure it will function in the customer’s environment.  The final acceptance amount is assigned to specific element(s) identified in the contract, or if not specified in the contract, to the last element or elements to be delivered that represent an amount at least equal to the final payment amount.



The Company’s Measurement Solutions products are designed and configured to meet each customer’s specific requirements.  Timing for the delivery of each element in the arrangement is primarily determined by the customer’s requirements and the number of elements ordered.  Delivery of all of the multiple elements in an order will typically occur over a three to 15 month period after the order is received. The Company does not have price protection agreements or requirements to buy back inventory.  The Company’s history demonstrates that sales returns have been insignificant.



7.Financial Instruments



For a discussion on the Company’s fair value measurement policies for Financial Instruments, refer to Note 1 to the Consolidated Financial Statements, “Summary of Significant Accounting Policies – Financial Instruments”, of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015.



The Company has not changed its valuation techniques in measuring the fair value of any financial assets and liabilities during the period.



The following table presents the Company’s investments at March 31, 2016 and June 30, 2015 that are measured and recorded at fair value on a recurring basis consistent with the fair value hierarchy provisions of ASC 820, “Fair Value Measurements and Disclosures” (in thousands).  The fair value of the Company’s investments approximates their cost basis.



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Description

March 31, 2016

 

Level 1

 

Level 2

 

Level 3

Mutual funds

$

79 

 

$

79 

 

$

 -

 

$

 -

Fixed deposits and certificates of deposit

 

2,241 

 

 

 -

 

 

2,241 

 

 

 -

Total

$

2,320 

 

$

79 

 

$

2,241 

 

$

 -



 

 

 

 

 

 

 

 

 

 

 

Description

June 30, 2015

 

Level 1

 

Level 2

 

Level 3

Mutual funds

$

34 

 

$

34 

 

$

 -

 

$

 -

Fixed deposits and certificates of deposit

 

4,100 

 

 

 -

 

 

4,100 

 

 

 -

Total

$

4,134 

 

$

34 

 

$

4,100 

 

$

 -



 

 

 

 

 

 

 

 

 

 

 

Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates.



8.Inventory



Inventory is stated at the lower of cost or market.  The cost of inventory is determined by the first-in, first-out (“FIFO”) method.  The Company provides a reserve for obsolescence to recognize inventory impairment for the effects of engineering change orders, age and use of inventory that affect the value of the inventory.  The reserve for obsolescence creates a new cost basis for the impaired inventory.  When inventory that has previously been impaired is sold or disposed of, the related obsolescence reserve is reduced resulting in the reduced cost basis being reflected in cost of goods sold.  A detailed review of the inventory is performed annually with quarterly updates for known changes that have occurred since the annual review.  Inventory, net of reserves of $1,499,000 and $1,436,000 at March 31, 2016 and June 30, 2015, respectively, is comprised of the following (in thousands):







 

 

 

 

 



 

 

 

 

 

10


 



March 31,

 

June 30,

Inventory

2016

 

2015

Component parts

$

5,371 

 

$

4,694 

Work in process

 

3,204 

 

 

1,989 

Finished goods

 

4,548 

 

 

5,215 

Total

$

13,123 

 

$

11,898 



 

 

 

 

 





9.Short-Term and Long-Term Investments



The Company accounts for its investments in accordance with ASC 320 “Investments – Debt and Equity Securities”.   Investments with a maturity greater than three months and up to one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term if the Company reasonably expects the investment to be realized in cash or sold or consumed during the normal operating cycle of the business. Investments available for sale are recorded at fair market value using the specific identification method. Investments expected to be held to maturity or until market conditions improve are measured at amortized cost in the statement of financial position if it is the Company’s intent and ability to hold those securities long-term. At each balance sheet date, the Company evaluates its investments for possible other-than-temporary impairment, which involves significant judgment. In making this judgment, management reviews factors such as the length of time and extent to which fair value has been below the cost basis, the anticipated recovery period, the financial condition of the issuer, the credit rating of the instrument and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for recovery of the cost basis. Any unrealized gains and losses on securities are reported as other comprehensive income as a separate component of shareholders’ equity until realized or until a decline in fair value is determined to be other than temporary. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in the income statement. If market, industry, and/or investee conditions deteriorate, future impairments may be incurred.



At March 31, 2016, the Company had $2.3 million of short-term investments that primarily represented investments in time deposits.  Included in short-term investments is restricted cash that serves as collateral for bank guarantees that provide financial assurance that the Company will fulfill certain customer obligations in China.  The cash is restricted as to withdrawal or use while the related bank guarantees are outstanding.  Interest is earned on the restricted cash and recorded as interest income. At March 31, 2016 and June 30, 2015, restricted cash in short-term investments was $92,000 and $238,000, respectively.



At March 31, 2016, the Company held a long-term investment in preferred stock that is not registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The preferred stock investment is currently recorded at $725,000 after consideration of impairment charges recorded in fiscal years 2008 and 2009.  The Company estimated that the fair market value of this investment at March 31, 2016 exceeded $725,000 based on an internal valuation model which included the use of a discounted cash flow model. The fair market analysis considered the following key inputs, (i) the underlying structure of the security; (ii) the present value of the future principal, discounted at rates considered to reflect current market conditions; and (iii) the time horizon that the market value of the security could return to its cost and be sold. Under ASC 820 “Fair Value Measurements” such valuation assumptions are defined as Level 3 inputs. 



The Company also held a long-term time deposit for $46,000 as of March 31, 2016.  This time deposit serves as collateral for a bank guarantee that provides financial assurance that the Company will fulfill certain customer obligations in China.  The cash is restricted as to withdrawal or use while the related bank guarantee is outstanding.  Interest is earned on the restricted cash and recorded as interest income.





10.Credit Facilities      



The Company had approximately $437,000 and no short-term notes payable outstanding at March 31, 2016 and June 30, 2015, respectively.  In addition, the Company had approximately $407,000 and no long-term debt outstanding included in ‘Other Long-Term Liabilities’ at March 31, 2016 and June 30, 2015, respectively. 



On October 30, 2015, the Company entered into an Eighth Amendment to the Company’s Amended and Restated Credit Agreement with Comerica Bank (“Credit Agreement”).  The Eighth Amendment changed the Credit Agreement to an on-demand line of credit from a committed line of credit that previously required the Company to pay a commitment fee of .15% per annum.  The maximum permitted borrowings increased from $6.0 million to $10.0 million.  The borrowing base was amended to add an amount equal to the lesser of 50% of eligible inventory or $4.0 million to the previous formula of the lesser of $6.0 million or 80% of eligible receivables. At March 31, 2016, the Company’s maximum borrowing under this facility was approximately $3.3 million.  Proceeds under the Credit Agreement may be used for working capital and capital expenditures.  Security for the Credit Agreement is substantially all assets of the Company held in the United States.  Borrowings are designated as a Libor-based Advance or as a Prime-based Advance if the Libor-based Advance is not available.  Interest on Libor-based Advances is calculated at 2.35% above the Libor Rate offered at the time for the period chosen, and is payable on the last day of the applicable period.  The Company is required to maintain a Tangible Net Worth of at least $29.0 million, down from the $31.0 million requirement in effect prior to October 30, 2015.  The Company was not in compliance with the Tangible Net Worth financial covenant at March 31, 2016, however a waiver was obtained from Comerica Bank on May 6, 2016.  The Company is also required to have no advances outstanding under the Credit Agreement for 30 days (which need not be consecutive) during each calendar year.  At March 31, 2016, the Company did not have any borrowings outstanding under the Credit Agreement, however early in the fourth quarter of fiscal 2016, the Company borrowed $1.5 million under the Credit Agreement. 

11


 



At March 31, 2016, the Company's German subsidiary (“GmbH”) had an unsecured credit facility totaling 350,000 Euros (equivalent to approximately $390,000).  The facility allows 100,000 Euros to be used to finance working capital needs and equipment purchases or capital leases.  The facility allows up to 250,000 Euros to be used for providing bank guarantees.  The interest rate on any borrowings for working capital needs is 3.99%.  Any outstanding bank guarantees bear a 2.0% interest rate.  The GmbH credit facility is cancelable at any time by either GmbH or the bank and any amounts then outstanding would become immediately due and payable.  At March 31, 2016 and June 30, 2015, GmbH had no borrowings or bank guarantees outstanding.



During the second quarter of fiscal 2016, Coord3 entered into a secured credit facility totaling 200,000 Euros (equivalent to approximately $225,000).  This credit facility is collateralized by certain account receivable balances and has an annual effective interest rate of 1.91357%.  The Coord3 credit facility is cancelable at any time by either Coord3 or the bank and any amounts then outstanding would become immediately due and payable.  At March 31, 2016 there was an outstanding balance of 191,000 Euros (equivalent to approximately $216,000).



During the third quarter of fiscal 2016, Coord3 exercised an option to purchase the current manufacturing facility.  The total remaining principal payments of 555,000 Euros (equivalent to approximately $628,000)  payable over the following 39 months at a 7.0% annual interest rate are recorded in ‘Short-term notes payable’ and ‘Other Long-Term Liabilities’ on the Consolidated Balance Sheet at March 31, 2016.



11.Severance, Impairment and Other Charges



During the third quarter of fiscal 2016, the Company announced a financial improvement plan that resulted in a reduction in global headcount of approximately 10%.  This plan was implemented to re-align the Company’s fixed cost with its near-to mid-term expectations for the Company’s business.  As a result of this restructuring plan, the Company expects to incur pre-tax cash and non-cash charges of approximately $3.0 million.  The charges recorded as Severance, Impairment and Other Charges for the three and nine months ended March 31, 2016 related to this restructuring plan are as follows:





 

 



 

 



Three and Nine Months Ended



March 31, 2016

Severance and related costs

$

1,754 

Impairment

 

694 

Inventory Write-off

 

119 

Total

$

2,567 



 

 

Severance expense for the three and nine months ended March 31, 2016 was associated with a reduction in force at our U.S. ($1,200,000), Germany ($524,000) and China ($30,000) locations.  The Company also recorded an impairment charge of previously capitalized software and wrote-off inventory in the amount of $813,000 related to a product line that was discontinued in the third quarter of fiscal 2016.   



The following table reconciles the activity for the nine months ended March 31, 2016 for the Restructuring Reserve:





 

 



 

 



Restructuring Reserve

Balance at July 1, 2015

$

 -

Accruals - Severance related

 

1,754 

Payments

 

(306)

Balance at March 31, 2016

$

1,448 



 

 

The accrued balance at March 31, 2016 mainly includes payments to be made related to our U.S., Germany and China reduction in force and is expected to be paid within the next 11 months.



12.Current and Long-Term Taxes Payable



The Company acquired current and long-term taxes payable as part of the purchase of Coord3.  The tax liabilities represent income and payroll related taxes that are payable in accordance with government authorized installment payment plans.  These installment plans require varying monthly payments through January 2021.



13.Other Long-Term Liabilities



Other long-term liabilities at March 31, 2016 and June 30, 2015 include long-term contractual and statutory severance liabilities for the Company’s employees located in Italy that represent amounts which will be payable to employees upon termination of employment. At June 30, 2015, the Company also had a long-term liability of 300,000 Euros representing a deferred purchase price payable 18 months following the closing of the Coord3 acquisition to the extent not used to cover indemnification obligations.  At March 31, 2016, this liability is recorded in current accrued liabilities.  See Note 10 for description of long-term debt included in ‘Other Long-Term Liabilities’ at March 31, 2016.







12


 

14.Stock-Based Compensation



The Company maintains a 2004 Stock Incentive Plan (“2004 Plan”) covering substantially all company employees, non-employee directors and certain other key persons.  Options previously granted under a 1998 Global Team Member Stock Option Plan (“1998 Plan”) will continue to be maintained until all options are exercised, cancelled or expire.  No further grants are permitted to be made under the terms of the 1998 Plan.  The 2004 Plan is administered by a committee of the Board of Directors: the Management Development, Compensation and Stock Option Committee.  The 1998 Plan is administered by the President of the Company.



Awards under the 2004 Plan may be in the form of stock options, stock appreciation rights, restricted stock or restricted stock units, performance share awards, director stock purchase rights and deferred stock units; or any combination thereof.  The terms of the awards are determined by the Management Development, Compensation and Stock Option Committee, except as otherwise specified in the 2004 Plan. 



Stock Options



Options outstanding under the 2004 Plan generally become exercisable at 25% or 33.3% per year beginning one year after the date of grant and expire ten years after the date of grant.  All options outstanding under the 1998 Plan are vested and expire ten years from the date of grant.  Option prices from options granted under these plans must not be less than fair market value of the Company’s stock on the date of grant.  The Company uses the Black-Scholes model for determining stock option valuations.  The Black-Scholes model requires subjective assumptions, including future stock price volatility and expected time to exercise, which affect the calculated values.  The expected term of option exercises is derived from historical data regarding employee exercises and post-vesting employment termination behavior.  The risk-free rate of return is based on published U.S. Treasury rates in effect for the corresponding expected term.  The expected volatility is based on historical volatility of the Company’s stock price.  These factors could change in the future, which would affect the stock-based compensation expense in future periods. 



The Company recognized operating expense for non-cash stock-based compensation costs related to stock options in the amount of $12,000 and $275,000 in the three and nine months ended March 31, 2016, respectively.  The Company recognized operating expense for non-cash stock-based compensation costs related to stock options in the amount of $77,000 and $236,000 in the three and nine months ended March 31, 2015, respectively. As of March 31, 2016, the total remaining unrecognized compensation cost related to non-vested stock options amounted to approximately $695,000.  The Company expects to recognize this cost over a weighted average vesting period of 2.24 years.



During the three months ended March 31, 2016 and 2015, the Company granted 100,000 and 8,000 stock options, respectively.  The estimated fair value as of the date options were granted during the periods presented, using the Black-Scholes option-pricing model, is shown in the table below. 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Three Months Ended

 

Nine Months Ended

 

Nine Months Ended



3/31/2016

 

3/31/2015

 

3/31/2016

 

3/31/2015

Weighted average estimated fair value per

 

 

 

 

 

 

 

 

 

 

 

share of options granted during the period

$

2.54 

 

$

3.06 

 

$

2.97 

 

$

4.04 

Assumptions:

 

 

 

 

 

 

 

 

 

 

 

Dividend yield

 

 -

 

 

1.20% 

 

 

 -

 

 

1.20% 

Common stock price volatility

 

45.43% 

 

 

46.85% 

 

 

45.43% 

 

 

46.85% 

Risk free rate of return

 

1.40% 

 

 

0.98% 

 

 

1.40% 

 

 

1.62% 

Expected option term (in years)

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

The Company received approximately $11,000 and $57,000 in cash from option exercises under all share-based payment arrangements for the three and nine months ended March 31, 2016, respectively.  The Company received approximately $696,000 and $849,000 in cash from option exercises under all share-based payment arrangements for the three and nine months ended March 31, 2015, respectively. 



Restricted Stock and Restricted Stock Units



The Company’s restricted stock and restricted stock units under the 2004 Plan have been awarded by three methods as follows:  (1) awards that are earned based on an individual’s achievement of performance goals during the initial fiscal year with either a subsequent one year service vesting period or with a one-third vesting requirement on the first,  second and third anniversary of the issuance, provided the individual’s employment has not terminated prior to the vesting date and are freely transferable after vesting; (2) awards that are earned based on the Company achieving certain revenue and operating income results with a subsequent one-third vesting requirement on the first,  second and third anniversary of the issuance provided the individual’s employment has not terminated prior to the vesting date and are freely transferable after vesting; and (3) awards to non-management members of the Board of Directors with a subsequent one-third vesting requirement on the first,  second and third anniversary of the issuance provided the service of the non-management member of the Board of Directors has not terminated prior to the vesting date and are freely transferable after vesting. 



The grant date fair value associated with the restricted stock is calculated in accordance with ASC 718 “Compensation – Stock Compensation”.  Compensation expense related to restricted stock and restricted stock unit awards is based on the closing price of the

13


 

Company’s Common Stock on the grant date authorized by the Company’s Board of Directors, multiplied by the number of restricted stock and restricted stock unit awards expected to be issued and vested and is amortized over the combined performance and service periods.  The non-cash stock-based compensation expense recorded for restricted stock and restricted stock unit awards for the three months and nine months ended March 31, 2016 was $9,000 and $118,000, respectively.    The non-cash stock-based compensation expense recorded for restricted stock and restricted stock unit awards for the three months and nine months ended March 31, 2015 was $56,000 and $142,000, respectively. As of March 31, 2016, the total remaining unrecognized compensation cost related to restricted stock and restricted stock unit awards is approximately $269,000.



A summary of the status of restricted stock and restricted stock unit awards issued at March 31, 2016 is presented in the table below.



















 

 

 

 

 



 

 

 

 

 



Non-vested

 

Weighted Average



Restricted

 

Grant Date



Shares/Units

 

Fair Value

Non-vested at June 30, 2015

 

61,014 

 

$

10.76 

Granted

 

25,000 

 

 

6.41 

Vested

 

(33,007)

 

 

11.69 

Forfeited or expired

 

(11,866)

 

 

9.20 

Non-vested at March 31, 2016

 

41,141 

 

$

7.82 



 

 

 

 

 





15.Earnings Per Share



Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of common shares outstanding during the period.  Other obligations, such as stock options, are considered to be potentially dilutive common shares.  Diluted EPS assumes the issuance of potential dilutive common shares outstanding during the period and adjusts for any changes in income and the repurchase of common shares that would have occurred from the assumed issuance, unless such effect is anti-dilutive.  The calculation of diluted shares also takes into effect the average unrecognized non-cash stock-based compensation expense and additional adjustments for tax benefits related to non-cash stock-based compensation expense.



Furthermore, the Company excludes all options to purchase common stock from the computation of diluted EPS in periods of net losses because the effect is anti-dilutive.  Options to purchase 709,791 and 355,860 shares of common stock outstanding in the three months ended March 31, 2016 and 2015, respectively, were not included in the computation of diluted EPS because the effect would have been anti-dilutive.  Options to purchase 600,608 and 310,648 shares of common stock outstanding in the nine months ended March 31, 2016 and 2015, respectively, were not included in the computation of diluted EPS, because the effect would have been anti-dilutive.



16.Commitments and Contingencies



The Company may, from time to time, be subject to litigation and other claims in the ordinary course of its business.  The Company accrues for estimated losses arising from such litigation or claims if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. To estimate whether a loss contingency should be accrued by a charge to income, the Company evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss. Since the outcome of litigation and claims is subject to significant uncertainty, changes in the factors used in the Company’s evaluation could materially impact the Company’s financial position or results of operations.



Management is currently unaware of any significant pending litigation affecting the Company other than the matters set forth below. 



The Company is a party to a civil suit filed by 3CEMS, a Cayman Islands and People’s Republic of China corporation, in the U.S. District Court for the Eastern District of Michigan and served on the Company on or about January 7, 2015.  The suit alleges that the Company breached its contractual obligations by failing to pay for component parts to be used to manufacture optical video scopes for the Company’s discontinued Commercial Products Business Unit.  3CEMS alleged that it purchased the component parts in advance of the receipt of orders from the Company based upon instructions they claimed to have received from the Company.  The suit alleged damages of not less than $4.0 million.  The Company intends to vigorously defend against 3CEMS’ claims.  Because of the inherent uncertainty of litigation and claims such as the 3CEMS Matter, the Company is unable to reasonably estimate a possible loss or range of loss relating to the 3CEMS Matter.



As part of routine evaluation procedures, the Company identified a potential concern regarding the employment status and withholding for several individuals in one of the Company’s foreign jurisdictions.  During the third quarter of fiscal 2015, the Company estimated a range of the potential financial liability related to this matter of 486,000 Euros to 1 million Euros.  The Company was not able to reasonably estimate the amount within this range that it would ultimately be required to pay for this matter.  As a result, the Company recorded a reserve of 486,000 Euros (equivalent to approximately $547,000) representing the minimum amount the Company estimated would be paid.  The Company has paid a net amount of approximately 454,000 Euros leaving a balance in the reserve of approximately 32,000 Euros.  The Company expects final resolution of this matter in the next few months. The Company does not expect that the resolution of this matter will have a detrimental effect on the conduct of the Company’s business in this foreign jurisdiction.

14


 



17.Subsequent Events



The Company performs review procedures for subsequent events and determines any necessary disclosures that arise from such evaluation, up to the date of issuance of our annual and interim reports.

15


 



ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS



SAFE HARBOR STATEMENT 



Certain statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations may be “forward-looking statements” within the meaning of the Securities Exchange Act of 1934, including the Company’s expectation as to its fiscal year 2016, and future results, cost savings from its financial improvement plan, operating data, new order bookings, revenue, expenses, income and backlog levels, the timing of revenue and income from new products which we have recently released or have not yet released, the timing of the introduction of new products and expansion into new industry sectors and geographies, as well as our ability to fund our fiscal year 2016 and future cash flow requirements.  Whenever possible, we have identified these forward-looking statements by words such as “target,” “will,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “prospects,” “outlook” or similar expressions.  We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of our forward-looking statements.  While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which speak only as of the date made.  Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different.  Factors that might cause such a difference include, without limitation, disruptions to our operations due to the financial improvement plan and related headcount reductions and position eliminations, risks associated with effectively controlling operating expenses, including failure to achieve anticipated cost savings from the financial improvement plan and other cost reduction initiatives or to reduce costs to the level originally anticipated to avoid disruptions to our operations, risks associated with changes in our sales strategy and structure, including the impact of such changes on booking and revenue levels and customer purchase decisions, the risk that actual charges from the financial improvement plan differ from the assumptions used in estimating the charges, and the risks and uncertainties discussed from time to time in our periodic reports filed with the Securities and Exchange Commission, including those listed in “Item 1A – Risk Factors” of our Annual Report on Form 10-K for fiscal 2015.  Except as required by applicable law, we do not undertake, and expressly disclaim, any obligation to publicly update or alter our statements whether as a result of new information, events or circumstances occurring after the date of this report or otherwise. 



OVERVIEW



Perceptron, Inc. (“Perceptron”, “Company”, or “we”) develops, produces and sells a comprehensive range of automated industrial metrology products and solutions to manufacturing organizations for dimensional gauging, dimensional inspection and 3D scanning.  The Company’s primary operations are in North America, Europe and Asia.  The Company has one operating segment, because all of our products rely on our core laser technology.  However, products are divided into three lines:

·

In-Line and Near-Line Measurement Solutions - engineered metrology systems for industrial automated process control and assembly using fixed and robot mounted laser scanners. The Company also provides Value Added Services including training, field service, calibration, launch support services, consulting services, maintenance agreements and repairs, related to In-Line and Near-Line Measurement Solutions. 

·

Off-Line Measurement Solutions - tailored metrology products for industrial gauging and dimensional inspection using standalone robot mounted laser scanners and Coordinate Measuring Machines (“CMM”), which may include training, calibration, maintenance agreements and repairs.

·

3D Scanning Products - laser scanner products that target the digitizing, reverse engineering, inspection and original equipment manufacturers wheel alignment markets.



The largest end-use market we serve is the automotive industry.    New automotive vehicle tooling programs represent the most important selling opportunity for the Company’s In-Line and Near-Line Measurement Solutions products.  The number and timing of new vehicle tooling programs varies based on the plans of the individual automotive manufacturers.  The existing installed base of In-Line and Near-Line Measurement Solutions products also provides a continuous revenue stream in the form of system additions, upgrades and modifications as well as Value Added Services such as customer training and support. 



The Company’s Off-Line and 3D Scanning products, including our newly acquired CMM products, are used by and targeted to a wide variety of industrial customers, with the automotive industry representing the largest market for industrial metrology products.  The Company acquired Coord3 and NMS in the third quarter of fiscal 2015.  We have developed a number of new products in the past year for the 3D Scanning and CMM markets.  Our marketing and sales efforts remain in the early stages and the acceptance and adoption rate in the market will be better understood over the next several quarters.



RESULTS OF OPERATIONS



Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015



Overview – The Company reported a net loss of $2.9 million, or ($0.31) per diluted share, for the third quarter of fiscal 2016 compared with a net loss of $1.6 million, or ($0.17) per diluted share, for the third quarter of fiscal 2015.   

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Our quarterly results vary from quarter to quarter and are dependent upon delivery and installation schedules determined by our customers.  These schedules are subject to change by the customer and are not controlled by the Company.  



Bookings – Bookings represent new orders received from our customers.  We expect the level of new orders to fluctuate from quarter to quarter and do not believe new order bookings during any particular period are indicative of the future operating performance of the Company. 



Bookings by geographic location were: 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Bookings (by location)

Third Quarter

Third Quarter

 

 

 

 

 

(in millions)

2016

2015

Increase/(Decrease)

Americas

 

$

6.1 

 

38.6% 

 

 

$

7.6 

 

49.4% 

 

 

$

(1.5)

(19.7)%

 

Europe

 

 

8.0 

 

50.6% 

 

 

 

4.7 

 

30.5% 

 

 

 

3.3  70.2% 

 

Asia

 

 

1.7 

 

10.8% 

 

 

 

3.1 

 

20.1%