[Perceptron Letterhead]
February 28, 2005
Mr. Daniel Gordon
Branch Chief
United States Securities and Exchange Commission
Washington, D.C. 20549
RE: PERCEPTRON, INC.
FORM 10-K FOR THE YEAR ENDED JUNE 30, 2004
Dear Mr. Gordon:
Below are Perceptron's responses to your letter dated January 18, 2005.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
1. We noted that you included a brief Overview section as an introduction to
your MD&A. Consider enhancing your Overview section in future filings to
address current events, including the following:
- The most important themes or other significant matters with which
management is concerned primarily in evaluating the company's
current financial condition;
- Further insight into current material opportunities, challenges and
risks; and,
- A business analysis of the company's current approach to specific
challenges and opportunities that lie ahead.
Refer to SEC Release Nos. 33-8350, 34-48960, and FR-72.
ANSWER: In future filings, Perceptron will expand the overview section to
address current events of the business including the items listed above.
The Company modified the overview section in its quarterly report on Form
10-Q filed February 14, 2005 as shown below to address some of the items
listed above. The Company will continue to evaluate the overview
disclosure.
OVERVIEW
Perceptron, Inc. ("Perceptron" or the "Company") designs, develops,
manufactures and markets information-based measurement and inspection
solutions for process improvement. Perceptron's product offerings are
designed to improve quality, increase productivity and decrease costs in
manufacturing and product development. The solutions offered by the
Company are divided into three groups: 1) The Automated Systems Group made
up of AutoGauge(R), AutoFit(R), AutoScan(R), AutoSpect(R) and AutoGuide(R)
products; 2) The Technology Components Group made up of ScanWorks(TM),
Non-Contact Wheel Alignment and TriCam(R) sensors for the forest products
industry; and 3) The Value Added Services Group providing consulting,
training and non-warranty support services. The Company services multiple
markets, with the largest being the automotive industry. The Company's
primary operations are in North America, Europe and Asia.
The Company has a strong financial base, no debt and approximately $23.5
million of cash at December 31, 2004, to support its growth plans. The
Company's near-term focus for growth will remain on the successful
introduction of its two new Automated Systems products, AutoFit(R) and
AutoScan(R), which are designed to expand the Company's product offerings
in its worldwide automotive markets, and the continued development of
enhanced versions of its ScanWorks(TM) product line. In addition the
Company believes there are growth opportunities in Asia and Eastern Europe
related to the emerging automotive markets in those areas and the
expansion of the Company`s business with current customers in Japan. The
Company has plans to commit additional resources to support these efforts.
The foregoing statements are "forward-looking statements" within the
meaning of the Securities Exchange Act of 1934, as amended. See Item 2
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Safe Harbor Statement" for a discussion of a number of
uncertainties which could cause actual results to differ materially from
those set forth in the forward-looking statements.
The Company's revenues are principally derived from the sale of products
for use in the automotive industry. New vehicle tooling programs are the
most important selling opportunity for the Company's automotive related
sales. The number and timing of new vehicle tooling programs can be
influenced by the state of the economy. Therefore, from a macro
perspective the Company continues to assess the global economy and its
likely effect on the Company's automotive customers and markets served.
The Company is continuing its efforts to expand its opportunities outside
the automotive industry, principally through its Technology Components
Group and new product development efforts.
Results of Operations - Page 9
2. In future filings, where changes in financial statement line items are the
result of several factors; each significant factor should be separately
quantified and discussed. For example, you state that the decrease in
selling, general and administrative expenses "primarily reflected lower
bad debt, Michigan single business tax, and legal expenses that were
partially offset by salary and benefit increase and the impact of the
strong Euro." However, you do not quantify the impact of each of these
factors.
2
ANSWER: As disclosed in the quarterly report on Form 10-Q filed February
14, 2005, and in future filings, the Company will quantify to the extent
practicable the individually significant factors that explain line item
variances.
Critical Accounting Policies - Page 14
3. Please tell us why you do not believe revenue recognition to be one of the
company's critical accounting policies.
ANSWER: Revenue recognition is a significant accounting policy for the
Company. It was not classified as a critical accounting policy because
management does not believe that the determination of revenue involves
difficult, subjective or complex judgments or estimates by management.
However, management believes that revenue recognition policies are very
important for investors and others to understand when they review
financial performance for all registrants. As a result, management has
decided to add revenue recognition to its critical accounting policies in
its annual report on Form 10-K for fiscal year 2005.
Market Risk Information
Foreign Currency Risk - Page 15
4. Please revise future filings to provide the potential loss in future
earnings of market risk sensitive instruments resulting from one or more
selected hypothetical changes in foreign currency exchange rates over a
selected period of time. You should select hypothetical changes in market
rates or prices that are expected to reflect reasonably possible near-term
changes in those rates and prices. Reference is made to Item 305 of
Regulation S-K. For examples, see Appendix to Item 305 of Regulation S-K -
Tabular disclosures.
ANSWER: In future filings, the Company will provide the potential loss in
future earnings that would result from the translation of foreign
denominated revenues and costs into U.S. dollars for a selected
hypothetical change or changes in foreign currency exchange rates or
prices.
Note 1. Summary of Significant Accounting Policies
Revenue Recognition - Page 22
5. We noted you sell your products to original equipment manufacturers,
value-added resellers, system integrators, and directly to end users. Tell
us and expand your revenue recognition policy to explain whether any of
your product sales include price protection agreements or any obligations
to buy back inventory from original equipment manufacturers or value-added
resellers. If you have price protection agreements or are required to
potentially buy back
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inventory, tell us how you recognize revenue and cite the specific
accounting literature that you have relied upon.
ANSWER: The Company does not have any price protection agreements nor does
it have any obligation to buy back inventory from original equipment
manufacturers or value-added resellers.
In future filings, the Company will expand it revenue recognition policy
to state that it does not have price protection agreements or requirements
to buy back inventory.
6. We also noted that you sell multiple element arrangements to your
customers. Please tell us, and investors in future filings, if each
delivered item has value to the customer on a stand-alone basis and
whether the delivered items include general rights of return. In addition,
please tell us the nature of your sales agreements and whether any
delivered items are contingent upon the delivery of any undelivered
additional items and the company's related revenue recognition policy.
ANSWER: The Company's multiple element arrangements usually take the form
of a purchase of equipment, future labor support such as during the launch
period of the customer, and/or training. Each element has value on a
stand-alone basis and is recorded as revenue when delivered. The delivered
items do not include general rights of return. Delivered items are not
contingent upon the delivery of any undelivered items. Customers that
purchase equipment can choose to install the purchased equipment
themselves, hire an independent contractor or hire the Company to perform
the services. Customers can choose to train new employees on the function
and use of the equipment themselves or they can hire the Company to
conduct a training class for a group of their employees. As a result, each
item could and is purchased as a stand-alone item without the other
elements.
In future filings, the Company will expand its revenue recognition policy
to explain the nature of its multiple element arrangements.
7. Please also tell us and expand your revenue recognition policies related
to product returns, including the company's policy and related accounting.
ANSWER: The Company's revenues from shipment of equipment reflect the sale
of systems that have been jointly defined with the customer. The Company
integrates proprietary components and configures systems to meet each
customer's requirements. Because the systems are configured to meet
specific customer requirements, the Company has virtually no history of
returns because the Company's systems are critical to meeting the
customer's process control goals. Accordingly, SFAS 48 is not applicable.
If a customer were to ask to return a product and the Company agreed, the
Company would generate a credit memo to cancel the outstanding receivable
and reverse the revenue and would record a debit to inventory and a credit
to cost of goods sold for the value of the inventory returned.
In future filings, the Company will expand its revenue recognition policy
to explain the nature and accounting of product returns.
4
8. We noted your discussion regarding software products that you license to
customers pursuant to license agreements in the business section. However,
we did not note any discussion of such agreements in the footnotes to the
financial statements. Please tell us, and investors in future filings, the
nature of these agreements and the related accounting. Please also cite
the related accounting guidance on which you based your accounting.
ANSWER: Perceptron's products are designed to measure and/or inspect and
provide information to the customer for process control and improvement.
Perceptron's products include hardware (camera, lens, etc) for scanning an
image and imbedded software (extraction software algorithms) to convey the
results of the scan to the customer. The hardware and software operate as
one product. Perceptron does not market its software algorithms as a
separate item distinct from the scanning product. While the algorithm
software is important to the functionality of the product, it is
incidental to the product taken as a whole. The customer perceives that it
is buying one product or scanning system not separate hardware and
software. As an example, in an assembly line situation, the cost of the
product to the customer is dependent upon how many measurement points the
customer wants to capture. Each point would require a separate scanner or
measurement collector. Therefore for one application the customer may
purchase a five sensor system and for another application a 20 sensor
system. The cost of the system is generally based on the number of sensors
required.
Perceptron has patents on many of the processes contained in the products
it sells. Perceptron sells its products directly and thru value added
resellers to customers for the customers' own use and not for the
customers to resell to another. The licensing language is to convey the
proprietary nature of Perceptron's product. The licensing is not the
typical software licensing that is used by software companies where
updates and maintenance are included. Accordingly, SOP 97-2 is not
applicable to Perceptron's licensing situation.
When Perceptron sells a product, revenue is recorded and the costs of the
hardware components are recorded to cost of goods sold. There is no cost
recorded for the imbedded software algorithms.
In future filings, the Company will disclose the nature and accounting of
its licensing agreements.
Foreign Currency - Page 22
9. In future filings please disclose the aggregate transaction gain or loss
included in determining net income for the period in the financial
statements or footnotes to the financial statements. See paragraph 30 of
SFAS 52.
ANSWER: In future filings, the Company will disclose on its financial
statement as a separate line item the aggregate foreign currency
transaction gain or loss included in determining net income for the
periods presented. In the Company's quarterly report on
5
Form 10-Q dated February 14, 2005, the Company added a separate line item
entitled foreign currency to its income statement.
Inventories - Page 23
10. We noted that the company provides a reserve for obsolescence. Please
provide us, and investors in future filings, with more information with
regards to management's policy for reviewing inventory for obsolescence.
Specifically, please provide more details of the "other matters" and
discuss the frequency with which management reviews the reserve.
ANSWER: On an annual basis, the Company performs a detailed review of
inventory. This review encompasses running usage reports and reviewing any
inventory that has no activity during a two year period. A further review
of the inventory with no activity is performed to determine if the
inventory has value for warranty or service related requirements. Any
inventory that has no activity and has no value for warranty or service
requirements is designated obsolete. If obsolete inventory can not be sold
to another party, it is thrown out. Each quarter, the Company compares
engineering change orders to the inventory listing to identify inventory
obsolescence that has occurred since the annual review.
In future filings, the Company will expand its footnote on inventories to
provide more information regarding the Company's policy for reviewing
inventory for obsolescence. The Company modified the inventory footnote
disclosure in its quarterly report on Form 10-Q filed February 14, 2005 as
shown below:
Inventory is stated at the lower of cost or market. The cost of inventory
is determined by the first-in, first-out ("FIFO") method. The Company
provides a reserve for obsolescence to recognize the effects of
engineering change orders, age and use of inventory that affect the value
of the inventory. When the related inventory is disposed of, the
obsolescence reserve is reduced. A detailed review of the inventory is
performed yearly with quarterly updates for known changes that have
occurred since the annual review. Inventory, net of reserves of $510,000
for both periods presented, is comprised of the following (in thousands):
DECEMBER 31, 2004 JUNE 30, 2004
----------------- -------------
Component Parts $ 3,341 $ 2,663
Work In Process 519 573
Finished Goods 2,591 2,452
------------ ------------
Total $ 6,451 $ 5,688
============ ============
Warranty - Page 24
11. Please revise future filings to provide the disclosures required by
paragraph 14 of FIN 45. Alternatively, tell us why you believe such
disclosures are not required.
6
ANSWER: The Company has not provided the disclosures required by paragraph
14 of FIN 45 in the past due to the immaterial amount of the Company's
warranty expense. For the fiscal years ended 2002, 2003 and 2004, the
Company's warranty expense was $92,000, $318,000 and $253,000
respectively.
Stock-Based Employee Compensation - Page 24
12. In future filings please present the table illustrating the pro forma
effect on net income and earnings per share in accordance with paragraph
2.e.c of SFAS 148.
ANSWER: The Company will modify its footnote disclosure for future filings
to illustrate the pro forma effect on net income and earnings per share in
accordance with paragraph 2.e.c of SFAS 148. The Company modified its
stock-based compensation footnote disclosure in its quarterly report on
Form 10-Q filed February 14, 2005 as shown below:
The Company has stock plans, which are described more fully in Notes 10
and 11 in the Company's Annual Report on Form 10-K for fiscal year 2004.
The Company applies APB Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees," and related interpretations in accounting for these
plans. Accordingly, compensation cost for stock options has been
recognized under the provisions of APB 25. No stock-based compensation
cost is reflected in net income, as all options granted under these plans
had an exercise price greater than or equal to the market value of the
underlying common stock on the date of grant. The following table
illustrates the pro forma effect on net income and earnings per share for
the periods indicated if the Company had applied the fair value
recognition provisions of FASB Statement 123, "Accounting for Stock-Based
Compensation," to its stock option plans as indicated below (in thousands
except per share amounts):
THREE THREE
MONTHS MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
12/31/2004 12/31/2003 12/31/2004 12/31/2003
---------- ---------- ---------- ----------
NET INCOME
AS REPORTED $ 1,467 $ 1,530 $ 2,432 $ 2,557
EFFECT OF STOCK-BASED
COMPENSATION EXPENSE - NET OF TAX (136) (122) (272) (222)
-------- ------- ------- --------
PRO FORMA $ 1,331 $ 1,408 $ 2,160 $ 2,335
======== ======= ======= ========
EARNINGS PER SHARE
BASIC - AS REPORTED $ 0.17 $ 0.18 $ 0.28 $ 0.30
BASIC - PRO FORMA $ 0.15 $ 0.16 $ 0.25 $ 0.27
DILUTED - AS REPORTED $ 0.16 $ 0.16 $ 0.26 $ 0.28
DILUTED - PRO FORMA $ 0.14 $ 0.15 $ 0.23 $ 0.25
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The estimated fair value as of the date options were granted during the
periods presented, using the Black-Scholes option-pricing model, was as
follows:
THREE THREE
MONTHS MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
12/31/2004 12/31/2003 12/31/2004 12/31/2003
---------- ---------- ---------- ----------
WEIGHTED AVERAGE ESTIMATED FAIR VALUE
PER SHARE OF OPTIONS GRANTED DURING THE
PERIOD $ 2.12 $ 3.45 $ 2.12 $ 4.58
ASSUMPTIONS:
AMORTIZED DIVIDEND YIELD - - - -
COMMON STOCK PRICE VOLATILITY 28.39% 63.14% 28.39% 77.32%
RISK FREE RATE OF RETURN 3.38% 3.38% 3.38% 3.38%
EXPECTED OPTION TERM (IN YEARS) 5 5 5 5
Note 6. Commitments and Other - Page 26
13. We noted your discussion of the contingent royalty payments on sales using
the Sonic technology through October 2004. We also noted that you prepaid
certain of these royalty payments. Please tell us the status of the
activity as of June 30, 2004. Is there a prepaid asset included in your
balance sheet or a liability as of June 30, 2004? What is the company's
remaining commitment under this agreement?
ANSWER: As of June 30, 2004, the Company did not have a prepaid asset nor
a liability recorded on its books related to the Sonic technology. As part
of the 1998 purchase price of the Sonic technology, the Company assumed
certain liabilities incurred by Sonic prior to the sale date. The 1998
assumed liabilities were considered part of the purchase price for the
assets purchased and thus were not recorded as a prepaid royalty. However,
for the purpose of calculating future contingent royalties, the amount of
the assumed liabilities was designated as a prepayment of royalties that
had to be exceeded prior to the Company incurring any royalty obligation.
The calculation of the contingent royalty related to sales of product
using the Sonic technology through June 30, 2004 did not exceed the
assumed liabilities amount and as a result there was no liability to
record. As of October 1, 2004, the time period for calculating contingent
royalties expired and the Company has no further obligation with regards
to this matter.
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14. We noted the company's use of foreign currency cash flow hedges.
Supplementally, and in future filings tell us the amount of the gain/loss
recognized in earnings during the reporting period as well as a
description of the transactions that will result in the reclassification
into earnings of gains/losses that are reported in other comprehensive
income. See paragraph 44 and 45 of SFAS 133 as amended.
ANSWER: The Company's cash flow hedges disclosed in the annual report on
Form 10-K for fiscal year 2004 were hedges of the net investment in the
Company's German subsidiary. The translation of the German subsidiary
financial statement is in accordance with SFAS 52 with the functional
currency being the local currency of the foreign country. As a result,
translation adjustments are recorded to other comprehensive income and
there is no gain/loss recognized in earnings. The effect of the hedges are
recorded to other comprehensive income and offset the related translation
effect of converting the German subsidiary's financial statements into
United States dollars. The Company is not aware of any transaction for
this type of hedge that would result in the reclassification into earnings
of gains/losses that are reported in other comprehensive income.
Company Statement
The Company acknowledges that
- - the Company is responsible for the adequacy and accuracy of the disclosure
in its filings;
- - staff comments or changes to disclosure in response to staff comments in
the filings reviewed by the staff do not foreclose the Commission from
taking any action with respect to the filing; and
- - the Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
Sincerely,
/s/ John J. Garber
- ------------------------------------------
John J. Garber
Vice President and Chief Financial Officer
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[Perceptron Letterhead]
April 18, 2005
Mr. Daniel Gordon
Branch Chief
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: PERCEPTRON, INC.
FORM 10-K FOR THE YEAR ENDED JUNE 30, 2004
Dear Mr. Gordon:
Below is Perceptron's response to your letter dated March 18, 2005.
Note 6. Commitments and Other, Page 26
1. We note your response to our prior comment 14 and understand that your
intention is to hedge the net investment in the company's German
subsidiary. However, it is still unclear to us the nature of the cash flow
hedges. Please identify the hedged transactions and how the transactions
are typically settled. Include in your discussion how you conclude that
these hedges are highly effective and qualify for hedge accounting. Tell
us the amount of the gain/loss recognized in earnings during the reporting
period as well as a description of the transactions that will result in
the reclassification into earnings of gains/losses that are reported in
other comprehensive income. See paragraphs 44 and 45 of SFAS 133, as
amended.
ANSWER: The Company has entered into several forward contracts to sell
Euros at an exchange rate between the functional currency of the hedged
net investment (Euros) and the Company's functional currency (U.S.
Dollar). Settlement of the forward contract is handled by either the
Company exchanging the Euros for U.S. Dollars or by a single net
difference payment either to the Company or from the Company depending
upon the effect of the change in the foreign exchange rate of the
particular contract. The Company assesses hedge effectiveness based on
overall changes in fair value of the forward contract on an after tax
basis. Since the critical risks of the forward contract and the net
investment coincide, there is no ineffectiveness. The unrealized and
realized change in the value of the forward exchange contracts that are
effective are recorded to other comprehensive income and are offset by the
corresponding translation effect of the Company's net investment. The
forward contracts qualify for hedge accounting as they meet the two
criteria established in Statement 133 paragraph 42 for this type of
transaction. Namely, the U.S. Company has the foreign currency exposure
and is a party to the hedging instrument and the hedge transaction is
denominated in a currency (Euro) other than the hedging unit's functional
currency (U.S. Dollar). Because the hedges have been effective, there has
been no gain/loss recognized in earnings during the reporting periods. The
Company would be required to reclassify into earnings gains and losses
that were previously reported in other comprehensive income if the
underlying hedged investment was sold prior to the expiration of the
forward contracts. It was noted that the Company's previous use of the
reference to accounting for these hedges as cash flow hedges was adding
confusion to the disclosure that there may be two types of hedges; namely,
hedges of the net investment in a foreign subsidiary and cash flow hedges.
All of the hedges disclosed were to hedge the net investment in the
Company's foreign subsidiary and there were no other type of hedges
requiring disclosure.
In future filings, Perceptron will modify its footnote to clarify the
accounting method used similar to the example below:
At June 30, 2004, the Company had forward exchange contracts to sell
6,980,000 Euros ($8.4 million equivalent) at weighted average settlement
rates of 1.2065 Euro to each U.S. Dollar. The contracts outstanding at
June 30, 2004, mature through December 8, 2004. The objective of the hedge
transactions is to protect designated portions of the Company's net
investment in its foreign subsidiary against adverse changes in the
Euro/U.S. Dollar exchange rate. The Company assesses hedge effectiveness
based on overall changes in fair value of the forward contract. Since the
critical risks of the forward contract and the net investment coincide,
there was no ineffectiveness. The accounting for the hedges was consistent
with translation adjustments where any gains and losses are recorded to
other comprehensive income. The Company recognized a charge of $642,000 in
other comprehensive income (loss) for the unrealized and realized change
in value of the forward exchange contracts during the fiscal year ended
June 30, 2004. Offsetting this amount was an increase in other
comprehensive income (loss) for the translation effect of the Company's
foreign subsidiary. Because the forward contracts were effective, there
was no gain or loss recognized in earnings. The Company's forward exchange
contracts do not subject it to material risk due to exchange rate
movements because gains and losses on these contracts offset losses and
gains on the assets, liabilities, and transactions being hedged.
Sincerely,
/s/ John J. Garber
------------------------------------------
John J. Garber
Vice President and Chief Financial Officer