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 September 30, 2005.
Commission file number: 0-20206
PERCEPTRON, INC.
(Exact Name of Registrant as Specified in Its Charter)
Michigan 38-2381442
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
47827 Halyard Drive, Plymouth, Michigan 48170-2461
(Address of Principal Executive Offices) (Zip Code)
(734) 414-6100
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
------- -------
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
------- -------
The number of shares outstanding of each of the issuer's classes of common stock
as of November 7, 2005, was:
Common Stock, $0.01 par value 8,801,959
----------------------------- ----------------
Class Number of shares
PERCEPTRON, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2005
<Table>
<Caption>
PAGE
NUMBER
------
COVER 1
INDEX 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 5. Other Information 24
Item 6. Exhibits 24
SIGNATURES 25
</Table>
2
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
SEPTEMBER 30, JUNE 30,
(In Thousands, Except Per Share Amount) 2005 2005
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 20,794 $ 20,374
Receivables:
Billed receivables, net of allowance for doubtful accounts 18,350 19,413
of $399 and $391, respectively
Unbilled receivables 2,291 1,888
Other receivables 764 1,004
Inventories, net of reserves of $518 and $520, respectively 6,561 5,884
Deferred taxes 1,199 1,199
Other current assets 636 736
------------- -------------
Total current assets 50,595 50,498
PROPERTY AND EQUIPMENT
Building and land 6,013 6,013
Machinery and equipment 10,974 10,653
Furniture and fixtures 1,063 1,059
------------- -------------
18,050 17,725
Less - Accumulated depreciation and amortization (10,356) (10,038)
------------- -------------
Net property and equipment 7,694 7,687
DEFERRED TAX ASSET 5,469 5,205
------------- -------------
TOTAL ASSETS $ 63,758 $ 63,390
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,378 $ 1,854
Accrued liabilities and expenses 2,490 2,807
Accrued compensation 924 1,359
Income taxes payable 278 130
Deferred revenue 3,333 3,248
------------- -------------
Total current liabilities 9,403 9,398
SHAREHOLDERS' EQUITY
Preferred stock - no par value, authorized 1,000 shares, issued none -- --
Common stock, $0.01 par value, authorized 19,000 shares, issued
and outstanding 8,819 and 8,822, respectively 88 88
Accumulated other comprehensive (loss) (708) (677)
Additional paid-in capital 42,895 42,770
Retained earnings 12,080 11,811
------------- -------------
Total shareholders' equity 54,355 53,992
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 63,758 $ 63,390
============= =============
</Table>
The notes to the consolidated financial statements are an integral part of these
statements.
3
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30,
(In Thousands, Except Per Share Amounts) 2005 2004
-------- --------
NET SALES $ 12,760 $ 12,244
COST OF SALES 7,177 6,216
-------- --------
GROSS PROFIT 5,583 6,028
OPERATING EXPENSES
Selling, general and administrative 3,292 2,797
Engineering, research and development 1,872 1,703
-------- --------
Total operating expenses 5,164 4,500
-------- --------
OPERATING INCOME 419 1,528
OTHER INCOME AND (EXPENSES)
Interest income, net 147 91
Foreign currency 49 31
Other (1) 37
-------- --------
Total other income (expenses) 195 159
-------- --------
INCOME BEFORE INCOME TAXES 614 1,687
INCOME TAX EXPENSE 345 722
-------- --------
NET INCOME $ 269 $ 965
======== ========
EARNINGS PER COMMON SHARE
Basic $ 0.03 $ 0.11
Diluted $ 0.03 $ 0.10
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 8,830 8,727
Dilutive effect of stock options 446 667
-------- --------
Diluted 9,276 9,394
======== ========
</Table>
The notes to the consolidated financial statements are an integral part of these
statements.
4
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30,
(In Thousands) 2005 2004
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 269 $ 965
Adjustments to reconcile net income to net cash provided from
(used for) operating activities:
Depreciation and amortization 315 326
Stock compensation expense 185 --
Deferred income tax (credit) (264) 562
Stock option income tax benefit 22 43
Other 6 (50)
Changes in assets and liabilities, exclusive of changes shown
separately 302 417
-------- --------
Net cash provided from operating activities 835 2,263
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving credit borrowings 105 174
Revolving credit repayments (105) (174)
Proceeds from stock plans 51 79
Repurchase of company stock (132) --
-------- --------
Net cash (used for) provided from financing activities (81) 79
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (320) (422)
-------- --------
Net cash used for investing activities (320) (422)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (14) 178
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 420 2,098
CASH AND CASH EQUIVALENTS, JULY 1 20,374 19,679
-------- --------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30 $ 20,794 $ 21,777
======== ========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
Receivables, net $ 834 $ 3,885
Inventories (678) (533)
Accounts payable 523 371
Other current assets and liabilities (377) (3,306)
-------- --------
$ 302 $ 417
======== ========
</Table>
The notes to the consolidated financial statements are an integral part of these
statements.
5
PERCEPTRON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements should be read in conjunction
with the Company's 2005 Annual Report on Form 10-K. Certain reclassifications
may have been made to the prior year's financial statements to conform with the
fiscal year 2006 presentation. In the opinion of management, the unaudited
information furnished herein reflects all adjustments necessary, consisting of
normal recurring adjustments, for a fair presentation of the financial
statements for the periods presented. The results of operations for any interim
period are not necessarily indicative of the results of operations for a full
year.
2. INVENTORY
Inventory is stated at the lower of cost or market. The cost of inventory is
determined by the first-in, first-out ("FIFO") method. The Company provides a
reserve for obsolescence to recognize the effects of engineering change orders,
age and use of inventory that affect the value of the inventory. When the
related inventory is disposed of, the obsolescence reserve is reduced. A
detailed review of the inventory is performed yearly with quarterly updates for
known changes that have occurred since the annual review. Inventory, net of
reserves at September 30, 2005 and June 30, 2005 of $518,000 and $520,000,
respectively, is comprised of the following (in thousands):
<Table>
<Caption>
SEPTEMBER 30, JUNE 30,
2005 2005
------------- -------------
Component Parts $ 3,216 $ 2,799
Work In Process 490 407
Finished Goods 2,855 2,678
------------- -------------
Total $ 6,561 $ 5,884
============= =============
</Table>
3. EARNINGS PER SHARE
Basic earnings per share ("EPS") is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Other
obligations, such as stock options, are considered to be potentially dilutive
common shares. Diluted EPS assumes the issuance of potential dilutive common
shares outstanding during the period and adjusts for any changes in income and
the repurchase of common shares that would have occurred from the assumed
issuance, unless such effect is anti-dilutive. Effective with the adoption of
Statement of Financial Accounting Standards 123 (revised 2004), 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.
Options to purchase 832,000 and 621,000 shares of common stock outstanding in
the three months ended September 30, 2005 and 2004, respectively, were not
included in the computation of diluted EPS because the effect would have been
anti-dilutive.
4. FOREIGN EXCHANGE CONTRACTS
The Company may use, from time to time, a limited hedging program to minimize
the impact of foreign currency fluctuations. These transactions involve the use
of forward contracts, typically mature within one year and are designed to hedge
anticipated foreign currency transactions. The Company may use
6
forward exchange contracts to hedge the net assets of certain of its foreign
subsidiaries to offset the translation and economic exposures related to the
Company's investment in these subsidiaries.
At September 30, 2005, the Company had forward exchange contracts to sell 4.0
million Euros ($4.8 million equivalent) at weighted average settlement rates of
1.24 Euros to the United States Dollar. The contracts outstanding at September
30, 2005, mature through February 28, 2006. The objective of the hedge
transactions is to protect designated portions of the Company's net investment
in its foreign subsidiary against adverse changes in the Euro/U.S. Dollar
exchange rate. The Company assesses hedge effectiveness based on overall changes
in fair value of the forward contract. Since the critical risks of the forward
contract and the net investment coincide, there was no ineffectiveness. The
accounting for the hedges is consistent with translation adjustments where any
gains and losses are recorded to other comprehensive income. The Company
recognized income of approximately $40,000 in other comprehensive income (loss)
for the unrealized change in value of the forward exchange contracts during the
quarter ended September 30, 2005. 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.
At September 30, 2004, the Company had approximately $10.9 million of forward
exchange contracts between the United States Dollar and the Euro with a weighted
average settlement price of 1.21 Euros to the United States Dollar. The Company
recognized a charge of $143,000 in other comprehensive income (loss) for the
unrealized change in value of forward exchange contracts during the quarter
ended September 30, 2004.
5. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in common shareholder's equity
during a period from transactions and events from non-owner sources, including
net income. Other items of comprehensive income include revenues, expenses,
gains and losses that are excluded from net income. Total comprehensive income
for the applicable periods is as follows (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30, 2005 2004
-------- --------
Net Income $ 269 $ 965
Other Comprehensive Income (Loss):
Foreign currency translation adjustments (71) 341
Forward Contracts 40 (143)
-------- --------
Total Comprehensive Income $ 238 $ 1,163
======== ========
</Table>
6. CREDIT FACILITIES
The Company had no debt outstanding at September 30, 2005.
The Company has a $7.5 million secured Credit Agreement with Comerica Bank,
which expires on November 1, 2007. Proceeds under the Credit Agreement may be
used for working capital and capital expenditures. The security for the loan is
substantially all assets of the Company held in the United States. Borrowings
are designated as a Prime-based Advance or as a Eurodollar-based Advance.
Interest on Prime-based Advances is payable on the last day of each month and is
calculated daily at a rate that ranges from a 1/2% below to a 1/4% above the
bank's prime rate (6.75% as of September 30, 2005) dependent upon the Company's
ratio of funded debt to earnings before interest, taxes, depreciation and
7
amortization ("EBITDA"). Interest on Eurodollar-based Advances is calculated at
a specific margin above the Eurodollar Rate offered at the time and for the
period chosen (approximately 5.96% as of September 30, 2005) dependent upon the
Company's ratio of funded debt to EBITDA and is payable on the last day of the
applicable period. Quarterly, the Company pays a commitment fee on the daily
unused portion of the Credit Agreement based on a percentage dependent upon the
Company's ratio of funded debt to EBITDA. The Credit Agreement prohibits the
Company from paying dividends. In addition, the Credit Agreement requires the
Company to maintain a Tangible Net Worth, as defined in the Credit Agreement, of
not less than $34.4 million as of September 30, 2005 and to have no advances
outstanding for 30 consecutive days each calendar year.
At September 30, 2005, the Company's German subsidiary (GmbH) had an unsecured
credit facility totaling 500,000 Euros (equivalent to approximately $604,400 at
September 30, 2005). The facility may be used to finance working capital needs
and equipment purchases or capital leases. Any borrowings for working capital
needs will bear interest at 9.0% on the first 100,000 Euros of borrowings and
2.0% for borrowings over 100,000 Euros. The German credit facility is cancelable
at any time by either GmbH or the bank and any amounts then outstanding would
become immediately due and payable. At September 30, 2005, GmbH had no
borrowings outstanding. The facility supported outstanding letters of credit
totaling 139,000 Euros (equivalent to approximately $167,000 at September 30,
2005).
7. STOCK-BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment (SFAS 123R), effective July 1, 2005. SFAS 123R
requires the recognition of the fair value of stock-based compensation in the
Company's financial statements. Prior to July 1, 2005, the Company applied the
requirements of APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock-based plans.
Under APB 25, generally no compensation expense was recognized for the Company's
stock-based plans since the exercise price of granted employee stock options was
greater than or equal to the market value of the underlying common stock on the
date of grant.
The Company elected the modified prospective transition method for adopting SFAS
123R. Under this method, the provisions of SFAS 123R apply to all awards granted
or modified after the date of adoption. During the quarter ended September 30,
2005, the Company did not issue any new stock-based awards. As a result, the
Company has not yet evaluated which valuation model it will use to determine the
fair value of new grants under SFAS 123R. The provisions of SFAS 123R also apply
to awards granted prior to July 1, 2005 that did not vest before July 1, 2005
(transition awards). The compensation cost for the portion of the transition
awards that had not vested by July 1, 2005 is based on the grant-date fair value
of these transition awards as calculated for pro forma disclosures under the
provisions of SFAS 123. Compensation cost for these transition awards are
attributed to periods beginning July 1, 2005 and use the service method used
under SFAS 123, except that an estimate of expected forfeitures is used rather
than actual forfeitures.
The Company recognized non-cash stock-based compensation cost in the amount of
$185,000 in the first quarter of fiscal year 2006 and related tax benefits of
$35,000. This had the effect of decreasing income before taxes by $185,000 and
decreasing net income by $150,000 or $0.02 per diluted share. The $185,000
non-cash stock-based compensation expense was primarily related to transition
awards and to a smaller extent compensation expense related to the Company's
Employee Stock Purchase Plan. As of September 30, 2005, the total remaining
unrecognized compensation cost related to non-vested stock options amounted to
$1.3 million.
8
SFAS 123R requires the Company to present pro forma information for periods
prior to the adoption as if the Company had accounted for all employee
stock-based awards under the fair value method of that statement. For purposes
of pro forma disclosure, the estimated fair value of the stock-based awards at
the date of the grant is amortized to expense over the requisite service period,
which generally equals the vesting period. The following table illustrates the
effect on net income and earnings per share if the Company had applied the fair
value recognition provisions of SFAS 123R to stock-based employee compensation
for the quarter ended September 30, 2004 (in thousands except per share
amounts):
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30, 2004
------------------
NET INCOME
AS REPORTED $ 965
EFFECT OF STOCK-BASED COMPENSATION EXPENSE --
NET OF TAX (136)
-------
PRO FORMA $ 829
=======
EARNINGS PER SHARE
BASIC -- AS REPORTED $ 0.11
BASIC -- PRO FORMA $ 0.09
DILUTED -- AS REPORTED $ 0.10
DILUTED -- PRO FORMA $ 0.09
</Table>
The Company maintains 1992 and 1998 Stock Option Plans covering substantially
all company employees and certain other key persons and a Directors Stock Option
Plan covering all non-employee directors. During fiscal 2005, shareholders
approved a new 2004 Stock Incentive Plan that replaced the 1992 and Directors
Stock Option Plans as to future grants. Options previously granted under the
1992 and Directors Stock Option Plans will continue to be maintained until all
options are executed, cancelled or expire. The 2004, 1992 and Directors Plans
are administered by a committee of the Board of Directors. The 1998 Plan is
administered by the President of the Company.
Awards under the 2004 Stock Incentive 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 will be determined by
the Management Development Committee, unless specified in the 2004 Stock
Incentive Plan. Options outstanding under the 1992 and 1998 Stock Option Plans
generally become exercisable at 25% per year beginning one year after the date
of grant and expire ten years after the date of grant. Options outstanding under
the Directors Stock Option Plan are either an initial option or an annual
option. Prior to December 7, 2004, initial options of 15,000 shares were granted
as of the date the non-employee director was first elected to the Board of
Directors and became exercisable in full on the first anniversary of the date of
grant. Prior to December 7, 2004, annual options of 3,000 shares were granted as
of the date of the respective annual meeting to each non-employee director
serving at least six months prior to the annual meeting and become exercisable
in three annual increments of 33 1/3% after the date of grant. Options under the
Directors Stock Option Plan expire ten years from the date of grant. Option
prices for options granted under these plans must not be less than fair market
value of the Company's stock on the date of grant.
Activity under these Plans is shown in the following table:
9
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30, 2005
--------------------
Weighted Aggregate
Average Intrinsic(1)
Exercise Value (in
Shares subject to option Shares Price millions)
--------- -------- ------------
Outstanding at beginning of period 2,204,007 $ 7.56
New grants (based on fair value of
common stock at dates of grant) - -
Exercised (13,364) $ 1.90
Expired (1,000) $ 16.12
Forfeited (55,622) $ 7.28
Outstanding at end of period 2,134,021 $ 7.60 $ 4.48
Exercisable at end of period 1,521,909 $ 8.56 $ 3.60
</Table>
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30, 2004
--------------------
Weighted Aggregate
Average Intrinsic(1)
Exercise Value (in
Shares subject to option Shares Price millions)
--------- -------- ------------
Outstanding at beginning of period 2,182,882 $ 8.06
New grants (based on fair value of
common stock at dates of grant) 500 $ 6.55
Exercised (24,812) $ 1.62
Expired - -
Forfeited (2,174) $ 3.13
Outstanding at end of period 2,156,396 $ 8.14 $ 5.39
Exercisable at end of period 1,339,553 $ 10.81 $ 2.92
</Table>
(1) The intrinsic value of a stock option is the amount by which the current
market value of the underlying stock exceeds the exercise price of the option.
The total intrinsic value of stock options exercised during the three months
ended September 30, 2005 and 2004 was $63,395 and $44,027, respectively.
The total fair value of shares vested during the three months ended September
30, 2005 and 2004 was $176,000 and $287,000, respectively.
Activity regarding nonvested shares is shown in the following table:
<Table>
<Caption>
Weighted Average
Grant Date
Nonvested Shares Shares Fair Value
- ---------------- -------- ----------------
Nonvested at July 1, 2005 768,133 $ 6.85
Granted -- --
Vested (103,675) $ 8.13
Cancelled (52,346) $ 6.75
--------
Nonvested at September 30, 2005 612,112 $ 6.89
========
</Table>
10
The Company did not grant any stock options during the quarter ended September
30, 2005. The estimated fair value as of the date options were granted during
the quarter ended September 30, 2004 using the Black Scholes option-pricing
model, was as follows:
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30, 2004
------------------
Weighted average estimated fair value per share of options granted
during the period $ 1.93
Assumptions:
Amortized dividend yield --
Common stock price volatility 24.77%
Risk free rate of return 3.78%
Expected option term (in years) 5
</Table>
The following table summarizes information about stock options at September 30,
2005:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range of Exercise Prices Shares Contractual Life Price Shares Price
--------- ---------------- -------- --------- --------
$ 1.01 to $ 1.53 637,443 6.00 $ 1.39 523,622 $ 1.41
1.72 to 6.50 707,281 6.11 $ 4.65 512,266 $ 4.53
6.55 to 23.50 643,601 5.13 $ 12.52 340,325 $ 17.58
25.79 to 33.96 145,696 1.69 $ 27.33 145,696 $ 27.33
--------- ---------
$ 1.01 to $33.96 2,134,021 5.48 $ 7.60 1,521,909 $ 8.56
========= =========
</Table>
At September 30, 2005, options covering 819,475 shares were available for future
grants under the 2004 and 1998 Plans.
8. COMMITMENTS AND CONTINGENCIES
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 suit filed by Industries GDS, Inc., Bois Granval GDS
Inc., and Centre de Preparation GDS, Inc. (collectively, "GDS") on or about
November 21, 2002 in the Superior Court of the Judicial District of Quebec,
Canada against the Company, Carbotech, Inc. ("Carbotech"), and U.S. Natural
Resources, Inc. ("USNR"), among others. The suit alleges that the Company
breached its contractual and warranty obligations as a manufacturer in
connection with the sale and installation of three systems for trimming and
edging wood products. The suit also alleges that Carbotech breached its
contractual obligations in connection with the sale of equipment and the
installation of two trimmer lines, of which the Company's systems were a part,
and that USNR, which acquired substantially all of the assets of the Forest
Products business unit from the Company, was liable for GDS' damages. USNR has
sought indemnification from the Company under the terms of existing contracts
between the Company and USNR. GDS seeks compensatory damages against the
Company, Carbotech and USNR of approximately $5.7 million using a September 30,
2005 exchange rate. Carbotech has filed for bankruptcy protection in Canada. The
Company intends to vigorously defend GDS' claims.
11
The Company has been informed that certain of its customers have received
allegations of possible patent infringement involving processes and methods used
in the Company's products. Certain of these customers, including one customer
who was a party to a patent infringement suit relating to this matter, have
settled such claims. Management believes that the processes used in the
Company's products were independently developed without utilizing any previously
patented process or technology. Because of the uncertainty surrounding the
nature of any possible infringement and the validity of any such claim or any
possible customer claim for indemnity relating to claims against the Company's
customers, it is not possible to estimate the ultimate effect, if any, of this
matter on the Company's financial statements.
The Company may, from time to time, be subject to other claims and suits in the
ordinary course of its business. To estimate whether a loss contingency should
be accrued by a charge to income, the Company evaluates, among other factors,
the degree of probability of an unfavorable outcome and the ability to make a
reasonable estimate of the amount of the loss. Since the outcome of litigation
is subject to significant uncertainty, changes in these factors could materially
impact the Company's financial position or results of operations.
9. NEW ACCOUNTING PRONOUNCEMENTS
Effective July 1, 2005, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 151, "Inventory Costs -- an amendment of ARB No. 43,
Chapter 4". This Statement amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). The
adoption of this Statement did not have a material impact on the Company's
financial statements.
Effective July 1, 2005, the Company adopted SFAS 123R, Share-Based Payment".
This Statement is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. This Statement supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. Effective July 1, 2005, the Company also adopted the Securities and
Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 107, "Share-Based
Payment". This SAB provides guidance regarding the interaction between SFAS No.
123R and certain SEC rules and regulations. Under SFAS 123R and SAB 107, the
Company recorded in the first quarter of fiscal 2006 $185,000 of non-cash
stock-based compensation expense related to the amortization of the fair value
of previously granted stock options that had not vested as of June 30, 2005 and,
to a smaller extent, the amortization of the fair value of the Company's
Employee Stock Purchase Plan. The non-cash stock-based compensation expense had
the effect of reducing net income $150,000 during the quarter or $0.02 per
diluted share. See Note 7 for further information regarding the Company's stock
plans.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Perceptron, Inc. ("Perceptron" or the "Company") designs, develops, manufactures
and markets information-based measurement and inspection solutions for process
improvement. Perceptron's product offerings are designed to improve quality,
increase productivity and decrease costs in manufacturing and product
development. The solutions offered by the Company are divided into three groups:
1) The Automated Systems Group made up of AutoGauge(R), AutoFit(R), AutoScan(R),
AutoSpect(R) and AutoGuide(R) products; 2) The Technology Components Group made
up of ScanWorks(R), Non-Contact Wheel Alignment and TriCam(R) sensors for the
forest products industry; and 3) The Value Added Services Group providing
consulting, training and non-warranty support services. The Company services
multiple markets, with the largest being the automotive industry. The Company's
primary operations are in North America, Europe and Asia.
The Company's financial base remained strong, with no debt and approximately
$20.8 million of cash at September 30, 2005, available to support its growth
plans. The Company's near-term focus for growth has been on the successful
introduction of its two newly released Automated Systems products, AutoFit(R)
and AutoScan(R), which are designed to expand the Company's product offerings in
its worldwide automotive markets, and the continued development of enhanced
versions of its ScanWorks(R) product line. The Company is demonstrating the
capabilities of AutoFit(R) and AutoScan(R) to its customers and continues to
believe that both of these products have the potential to yield significant
revenue. The Company believes that the latest version of its ScanWorks(R)
product line offers features and a level of precision that are superior to
similar competitor products and will enable the Company to sustain world wide
growth in the ScanWorks(R) product line. The Company has initiated its plans to
achieve sales growth in largely untapped geographic areas including 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. Toward this
end, the Company has established an office in Singapore, relocated an employee
from its Plymouth headquarters to become the managing director for this region,
and hired two application engineers to support new business opportunities in the
region. The Company has hired an account manager to establish relationships with
automotive manufacturers in Italy, and hired two application engineers to
provide better support throughout Europe. The Company believes that the long
term revenue growth potential in these geographic regions will provide a
significant return on the investment in personnel.
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 a number of economic
factors. 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 continues to view the automotive industry's focus on
introducing new vehicles more frequently to satisfy their customers' changing
requirements, as well as their continuing focus on improved quality, as positive
indicators for new business. The Company is continuing its efforts to increase
revenue outside the automotive industry, principally through its Technology
Components Group and new product development efforts.
Effective July 1, 2005, the Company was required to adopt a new accounting
pronouncement, SFAS 123R that required the Company to record non-cash
stock-based compensation expense for its stock compensation plans. Previously,
the Company generally did not record non-cash stock-based compensation as an
expense following the requirements of Accounting Principles Board Opinion 25.
13
Under SFAS 123R, the Company recorded in the first quarter of fiscal 2006
$185,000 of non-cash stock-based compensation expense related to the
amortization of the fair value of previously granted stock options that had not
vested as of June 30, 2005 and, to a smaller extent, the amortization of the
fair value of the Company's Employee Stock Purchase Plan. The non-cash
stock-based compensation expense had the effect of reducing net income $150,000
during the quarter or $0.02 per diluted share. Based upon outstanding stock
option grants at September 30, 2005, the Company expects quarterly non-cash
stock-based compensation expense for fiscal 2006 to be at comparable levels.
Additional stock-based awards granted under these plans during fiscal 2006 would
increase the amount of non-cash stock-based compensation expense.
The foregoing statements in this "Overview" section 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.
RESULTS OF OPERATIONS
For the first quarter of fiscal 2006, the Company reported net income of
$269,000, or $0.03 per diluted share, compared to net income of $965,000 or
$0.10 per diluted share, for the first quarter of fiscal 2005. Specific line
item results are described below.
SALES -- Net sales were $12.8 million for the first quarter of fiscal 2006
compared to net sales of $12.2 million for the same period one year ago. The
following tables set forth comparison data for the Company's net sales by
product groups and geographic location.
<Table>
<Caption>
FIRST FIRST
SALES (BY GROUP) QUARTER QUARTER
(in millions) 2006 2005 INCREASE/(DECREASE)
- ---------------- ------------------ ------------------ -------------------
Automated Systems $ 9.1 71.1% $ 7.9 64.7% $ 1.2 15.2%
Technology Components 2.8 21.9% 2.9 23.8% (0.1) (3.4)%
Value Added Services 0.9 7.0% 1.4 11.5% (0.5) (35.7)%
------ ------ ------ ------ ------
TOTALS $ 12.8 100.0% $ 12.2 100.0% $ 0.6 4.9%
====== ====== ====== ====== ======
</Table>
<Table>
<Caption>
FIRST FIRST
SALES (BY LOCATION) QUARTER QUARTER
(in millions) 2006 2005 INCREASE/(DECREASE)
- ---------------- ------------------ ------------------ -------------------
North America $ 6.4 50.0% $ 7.7 63.1% $ (1.3) (16.9)%
Europe 5.9 46.1% 4.0 32.8% 1.9 47.5%
Asia 0.5 3.9% 0.5 4.1% 0.0 0.0%
------ ------ ------ ------ ------
TOTALS $ 12.8 100.0% $ 12.2 100.0% $ 0.6 4.9%
====== ====== ====== ====== ======
</Table>
Sales of the Company's Automated Systems products increased primarily due to the
available business and timing of new orders related to new vehicle tooling
programs. Within the Technology Components Group, the sales decrease reflected
lower production of one product during the fiscal 2006 quarter that was
primarily caused by a supplier issue. The incremental change in both North
America and Europe was primarily due to the number and timing of new vehicle
programs and the Company's Automated Systems' sales associated with those
programs. In addition, the decrease in Technology Components sales also
contributed to the decrease in North American sales. The relationship of the
U. S. dollar to the
14
Euro was comparable for both periods and had no impact on sales reported
in Europe this quarter compared to one year ago. Sales in Asia were
approximately $500,000 for both periods.
BOOKINGS -- The Company had new order bookings during the quarter of $15.0
million compared with new order bookings of $14.1 million in the fourth quarter
of fiscal 2005 and $6.7 million for the quarter ended September 30, 2004. The
amount of new order bookings during any particular period is not necessarily
indicative of the future operating performance of the Company. The following
tables set forth comparison data for the Company's bookings by product groups
and geographic location.
<Table>
<Caption>
FIRST FIRST
BOOKINGS (BY GROUP) QUARTER QUARTER
(in millions) 2006 2005 INCREASE/(DECREASE)
- ---------------- ------------------ ------------------ -------------------
Automated Systems $ 11.5 76.7% $ 3.6 53.7% $ 7.9 219.4%
Technology Components 2.6 17.3% 2.6 38.8% 0.0 0.0%
Value Added Services 0.9 6.0% 0.5 7.5% 0.4 80.0%
------ ------ ------ ------ ------
TOTALS $ 15.0 100.0% $ 6.7 100.0% $ 8.3 123.9%
====== ====== ====== ====== ======
</Table>
<Table>
<Caption>
FIRST FIRST
BOOKINGS (BY LOCATION) QUARTER QUARTER
(in millions) 2006 2005 INCREASE/(DECREASE)
- ---------------- ------------------ ------------------ -------------------
North America $ 10.1 67.3% $ 3.7 55.2% $ 6.4 173.0%
Europe 4.5 30.0% 2.5 37.3% 2.0 80.0%
Asia 0.4 2.7% 0.5 7.5% (0.1) (20.0)%
------ ------ ------ ------ ------
TOTALS $ 15.0 100.0% $ 6.7 100.0% $ 8.3 123.9%
====== ====== ====== ====== ======
</Table>
The level of new orders and mix of business among many customers this quarter
reflected strong demand for the Company's products and services within the
Automated Systems Group, and the outlook for new orders, particularly in the
second quarter of fiscal 2006, remains good. The foregoing statement is a
"forward looking statement" within the meaning of the Securities 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 low level of new orders
in the first quarter of fiscal 2005 for Automated Systems products was due to
the timing of customer decisions to place orders. This was particularly true in
North America where many of the orders expected during the first quarter of
fiscal 2005 were received in October 2004. Subsequently, new orders of $16.9
million for the second quarter of fiscal 2005 were much higher than normal.
Technology Components Group new orders were the same for both quarters. Value
Added Services bookings increased $400,000 for the fiscal 2006 quarter compared
to the fiscal 2005 quarter. The increase did not reflect a trend, but rather
related to the timing of customers' orders.
BACKLOG - The Company's backlog was $20.2 million as of September 30, 2005
compared with $18.0 million as of June 30, 2005 and $13.5 million as of
September 30, 2004. The following tables set forth comparison data for the
Company's backlog by product groups and geographic location.
15
<Table>
<Caption>
FIRST FIRST
BACKLOG (BY GROUP) QUARTER QUARTER
(in millions) 2006 2005 INCREASE/(DECREASE)
- ---------------- ------------------ ------------------ -------------------
Automated Systems $ 16.7 82.7% $ 9.1 94.1% $ 7.6 83.5%
Technology Components 2.4 11.9% 2.3 4.4% 0.1 4.3%
Value Added Services 1.1 5.4% 2.1 1.5% (1.0) (47.6)%
------ ------ ------ ------ ------
TOTALS $ 20.2 100.0% $ 13.5 100.0% $ 6.7 49.6%
====== ====== ====== ====== ======
</Table>
<Table>
<Caption>
FIRST FIRST
BACKLOG (BY LOCATION) QUARTER QUARTER
(in millions) 2006 2005 INCREASE/(DECREASE)
- ---------------- ------------------ ------------------ -------------------
North America $ 12.6 61.4% $ 7.4 54.8% $ 5.2 70.3%
Europe 7.3 37.0% 5.5 40.7% 1.8 32.7%
Asia 0.3 1.6% 0.6 4.5% (0.3) (50.0)%
------ ------ ------ ------ ------
TOTALS $ 20.2 100.0% $ 13.5 100.0% $ 6.7 49.6%
====== ====== ====== ====== ======
</Table>
The Company expects to be able to fill substantially all of the orders in
backlog at September 30, 2005 during the following twelve months. The level of
backlog during any particular period is not necessarily indicative of the future
operating performance of the Company.
GROSS PROFIT -- Gross profit was $5.6 million, or 43.8% of sales, in the first
quarter of fiscal year 2006, as compared to $6.0 million, or 49.2% of sales, in
the first quarter of fiscal year 2005. The quarter-to-quarter margin variability
was due to a number of comparable factors including the amount of revenue
recognized on various contracts in accordance with the Company's revenue
recognition policy, the mix of Automated Systems sold this quarter that had
higher material and installation labor content and the new investments the
Company made in personnel in the Value Added Services Group to stimulate growth
in that area. The Euro exchange rate this quarter was comparable to the first
quarter of fiscal 2005 and as a result had no effect on the gross profit
percentage.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES -- SG&A expenses were $3.3
million in the quarter ended September 30, 2005 compared to $2.8 million in the
first quarter a year ago. SG&A expenses were higher primarily due to an increase
in salary and benefits of $155,000 and consulting services of $92,000 that were
related mainly to the Company's plans for sales growth, a net decrease in the
allowance for doubtful accounts of $79,000 due to a charge of $8,000 in the
first quarter of fiscal 2006 compared to a $71,000 credit that was applied to
the allowance account in the first quarter of fiscal 2005, non-cash stock-based
compensation expense of $67,000 and costs to implement compliance with Sarbanes
Oxley 404 controls of $59,000.
ENGINEERING, RESEARCH AND DEVELOPMENT (R&D) EXPENSES -- Engineering and R&D
expenses were $1.9 million in the quarter ended September 30, 2005 compared to
$1.7 million in the first quarter a year ago. The increase was principally due
to higher expenses related to engineering materials for new product development
and non-cash stock-based compensation expense of $63,000.
INTEREST INCOME, NET -- Net interest income was $147,000 in the first quarter of
fiscal 2006 compared with net interest income of $91,000 in the first quarter of
fiscal 2005. The increase was primarily due to higher interest rates than one
year ago on cash balances available for investment in short term securities this
quarter.
16
FOREIGN CURRENCY AND OTHER -- Net foreign currency income related to gains and
losses on foreign exchange was $49,000 this year compared to $31,000 last year.
Other income was a miscellaneous loss of $1,000 this year compared to $37,000 of
miscellaneous income last year.
INCOME TAXES -- The effective tax rates of 56.2% and 42.8% for the first quarter
of fiscal 2006 and 2005, respectively, primarily reflected the effect of the mix
of operating profit and loss among the Company's various operating entities and
their countries' respective tax rates. Tax rates are higher in Europe than in
the United States. On a comparison basis, the first quarter of fiscal 2006 had
increased income in Europe and lower income in the United States than the fiscal
2005 quarter. In addition, the Company is not able to record a tax benefit for
non-cash stock-based compensation expense related to incentive stock options and
the Company's Employee Stock Purchase Plan, which had the effect of increasing
the effective tax rate in fiscal 2006 by 4.7%.
OUTLOOK -- Based on the backlog as of September 30, 2005, anticipated vehicle
tooling programs being considered by customers in geographic regions currently
served and the forecasted timing of these programs, the Company expects the
business environment and correspondingly sales for its core product lines in
fiscal year 2006 to be similar to that experienced in fiscal year 2005. Since
the backlog and rate of new orders at the start of the second quarter of fiscal
2006 were strong, and the expectation for new orders for the balance of the
second quarter is good, the Company expects sales for the second quarter of
fiscal 2006 to be comparable to the second quarter of fiscal 2005. The holidays
could cause some deliveries scheduled for the second quarter to be moved to the
third quarter of fiscal 2006. New orders and the resulting sales for the first
half of fiscal 2006 represent orders for the Company's core product lines and
existing market territories. The Company continues to expect revenues for fiscal
2006 to be approximately 10% higher than those of fiscal 2005.
As previously announced, the Company is making important new investments in
fiscal 2006, largely in personnel, for recently introduced products, new product
development and potential geographic growth opportunities in the United States,
Europe, Eastern Europe and Asia, particularly where it has not aggressively
pursued business and where it sees potential for sales growth. Some of the
planned personnel additions have been completed, and their training is in
process. The Company expects selling expenses and to a lesser degree research
and development expenses to be higher than those of fiscal 2005. The Company
also expects to generate revenue from these investments beginning with the
second half of fiscal 2006, and net income growth from these investments
beginning in fiscal 2007. As a result of these investments and the adoption of
SFAS 123R, the Company expects net income levels for fiscal 2006 to be lower
than fiscal 2005.
The Company's new order bookings and sales forecast is based on a thorough
assessment of the probable size, system content, and timing of each of the
programs being considered by its customers. These factors are difficult to
quantify accurately because over time the Company's customers weigh changes in
the economy and the probable effect of these changes on their business, and
adjust the number and timing of their new vehicle programs to reflect changing
business conditions. The Company continues to view the automotive industry's
focus on introducing new vehicles more frequently to satisfy their customers'
changing requirements, as well as their continuing focus on improved quality, as
positive indicators for new business.
The foregoing statements in this "Outlook" section 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.
17
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $20.8 million at September 30,
2005, compared to $20.4 million at June 30, 2005. The cash increase of $420,000
for the quarter ended September 30, 2005 resulted primarily from $835,000 of
cash generated from operations. The Company also used $320,000 of cash for
capital expenditures and $132,000 for the repurchase of Company stock and
received $51,000 of cash from the purchase of common stock under its stock
plans.
The $835,000 in cash provided from operations was primarily generated from
changes in net working capital of $302,000, cash provided from net income of
$269,000 and the add back of non-cash items, such as depreciation of $315,000,
non-cash stock based compensation expense of $185,000 and realized stock-based
compensation tax benefits of $22,000, which were offset by the change in
deferred income taxes of $264,000. Net working capital is defined as changes in
assets and liabilities, exclusive of changes shown separately on the
Consolidated Statements of Cash Flow. The net working capital decrease resulted
primarily from reductions of receivables of $834,000 and increases in accounts
payable of $523,000 that were offset by an increase in inventory of $678,000 and
reduction in other current assets and liabilities of $377,000. The $834,000
reduction in receivables primarily related to cash collections during the
quarter exceeding new sales in the quarter. Inventory increased $678,000 due to
purchases of items required to fill anticipated orders.
The Company provides a reserve for obsolescence to recognize the effects of
engineering change orders, age and use of inventory that affect the value of the
inventory. A detailed review of the inventory is performed yearly with quarterly
updates for known changes that have occurred since the annual review. When
inventory is deemed to have no further use or value, the Company disposes of the
inventory and the reserve for obsolescence is reduced. During the first quarter
of fiscal 2006, the Company disposed of $2,000 of inventory that had previously
been reserved for at June 30, 2005.
The Company determines its allowance for doubtful accounts by considering a
number of factors, including the length of time trade accounts receivable are
past due, the Company's previous loss history, the customer's current ability to
pay its obligation to the Company, and the condition of the general economy and
the industry as a whole. The Company writes-off accounts receivable when they
become uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts. The Company did not have any
write-offs of receivables during the first quarter of fiscal 2006. To date, the
Company has not experienced any significant losses related to the collection of
accounts receivable except for a customer bankruptcy during fiscal 2005 that
resulted in a write-off of approximately $500,000.
The Company had no debt outstanding at September 30, 2005. The Company has a
$7.5 million secured Credit Agreement with Comerica Bank, which expires on
November 1, 2007. Proceeds under the Credit Agreement may be used for working
capital and capital expenditures. The security for the loan is substantially all
assets of the Company held in the United States. Borrowings are designated as a
Prime-based Advance or as a Eurodollar-based Advance. Interest on Prime-based
Advances is payable on the last day of each month and is calculated daily at a
rate that ranges from a 1/2% below to a 1/4% above the bank's prime rate (6.75%
as of September 30, 2005) dependent upon the Company's ratio of funded debt to
earnings before interest, taxes, depreciation and amortization ("EBITDA").
Interest on Eurodollar-based Advances is calculated at a specific margin above
the Eurodollar Rate offered at the time and for the period chosen (approximately
5.96% as of September 30, 2005) dependent upon the Company's ratio of funded
debt to EBITDA and is payable on the last day of the applicable period.
Quarterly, the Company pays a commitment fee on the daily unused portion of the
Credit Agreement based on a percentage dependent upon the Company's ratio of
funded debt to EBITDA. The Credit Agreement prohibits the Company from paying
dividends. In addition, the Credit Agreement requires the Company
18
to maintain a Tangible Net Worth, as defined in the Credit Agreement, of not
less than $34.4 million as of September 30, 2005 and to have no advances
outstanding for 30 consecutive days each calendar year.
At September 30, 2005, the Company's German subsidiary (GmbH) had an unsecured
credit facility totaling 500,000 Euros (equivalent to approximately $602,400 at
September 30, 2005). The facility may be used to finance working capital needs
and equipment purchases or capital leases. Any borrowings for working capital
needs will bear interest at 9.0% on the first 100,000 Euros of borrowings and
2.0% for borrowings over 100,000 Euros. The German credit facility is cancelable
at any time by either GmbH or the bank and any amounts then outstanding would
become immediately due and payable. At September 30, 2005, GmbH had no
borrowings outstanding. The facility supported outstanding letters of credit
totaling 139,000 Euros (equivalent to approximately $167,000 at September 30,
2005).
On September 9, 2005, the Company's Board of Directors approved a stock
repurchase program authorizing the Company to repurchase up to $5.0 million of
the Company's common stock during fiscal year 2006. The Company may buy shares
of its common stock on the open market or in privately negotiated transactions
from time to time, based on market prices. The program may be discontinued at
any time. The Company also announced that it has entered into a Rule 10b5-1
trading plan ("Repurchase Plan") with Barrington Research Associates, Inc. to
purchase up to $5.0 million of the Company's common stock during fiscal year
2006 (less the dollar amount of purchases by the Company outside the Repurchase
Plan), in open market or privately negotiated transactions, in accordance with
the requirements of Rule 10b-18. Pursuant to the authorization, the Company
repurchased 20,300 shares of common stock for $132,000 during the period from
September 12, 2005 to September 30, 2005.
See Note 8 to the Consolidated Financial Statements, "Commitments and
Contingencies", contained in this Quarterly Report on Form 10-Q, Item 3, "Legal
Proceedings" and Note 6 to the Consolidated Financial Statements,
"Contingencies", of the Company's Annual Report on Form 10-K for fiscal year
2005, for a discussion of certain contingencies relating to the Company's
liquidity, financial position and results of operations. See also, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Critical Accounting Policies - Litigation and Other Contingencies"
of the Company's Annual Report on Form 10-K for fiscal year 2005.
The Company expects to spend approximately $1.5 million during fiscal year 2006
for capital equipment, although there is no binding commitment to do so.
Based upon the Company's current business plan, the Company believes that
available cash on hand and existing credit facilities will be sufficient to fund
its currently anticipated fiscal 2006 cash flow requirements and its cash flow
requirements for at least the next few years, except to the extent that the
Company implements new business development opportunities, which would be
financed as discussed below. The Company does not believe that inflation has
significantly impacted historical operations and does not expect any significant
near-term inflationary impact. The foregoing statements are "forward-looking
statements" within the meaning of the Securities Exchange Act of 1934, as
amended. See Item 2 "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Safe Harbor Statement" for a discussion of a number
of uncertainties which could cause actual results to differ materially from
those set forth in the forward-looking statements.
The Company will consider evaluating business opportunities that fit its
strategic plans. There can be no assurance that the Company will identify any
opportunities that fit its strategic plans or will be able to enter into
agreements with identified business opportunities on terms acceptable to the
Company. The Company intends to finance any such business opportunities from
available cash on hand, existing credit facilities, issuance of additional
shares of its stock or additional sources of financing, as circumstances
warrant.
19
CRITICAL ACCOUNTING POLICIES
A summary of critical accounting policies is presented in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Critical Accounting Policies" of the Company's Annual Report on Form 10-K for
fiscal year 2005. Effective July 1, 2005, the Company adopted SFAS 123R that
required the Company to record non-cash stock-based compensation expense for its
stock compensation plans. Previously, the Company generally did not record
non-cash stock-based compensation as an expense following the requirements of
Accounting Principles Board Opinion 25. SFAS 123R was adopted using the modified
prospective method of application, which requires the Company to recognize
compensation expense on a prospective basis. As a result, prior period financial
statements have not been restated. Under SFAS 123R, the Company recorded in the
first quarter of fiscal 2006 $185,000 of non-cash stock-based compensation
expense related to the amortization of the fair value of previously granted
stock options that had not vested as of June 30, 2005 and, to a smaller extent,
the amortization of the fair value of the Company's Employee Stock Purchase
Plan. The non-cash stock-based compensation expense had the effect of reducing
net income $150,000 during the quarter or $0.02 per diluted share.
MARKET RISK INFORMATION
The Company's primary market risk is related to foreign exchange rates. The
foreign exchange risk is derived from the operations of its international
subsidiaries, which are primarily located in Germany and for which products are
produced in the United States. The Company may from time to time have interest
rate risk in connection with its investment of its cash.
FOREIGN CURRENCY RISK
The Company has foreign currency exchange risk in its international operations
arising from the time period between sales commitment and delivery for contracts
in non-United States currencies. For sales commitments entered into in the
non-United States currencies, the currency rate risk exposure is predominantly
less than one year with the majority in the 120 to 150 day range. At September
30, 2005, the Company's percentage of sales commitments in non-United States
currencies was approximately 39.5% or $8.0 million, compared to 45.0% or $6.1
million at September 30, 2004.
The Company may use, from time to time, a limited hedging program to minimize
the impact of foreign currency fluctuations. These transactions involve the use
of forward contracts, typically mature within one year and are designed to hedge
anticipated foreign currency transactions. The Company may use forward exchange
contracts to hedge the net assets of certain of its foreign subsidiaries to
offset the translation and economic exposures related to the Company's
investment in these subsidiaries.
At September 30, 2005, the Company had forward exchange contracts to sell 4.0
million Euros ($4.8 million equivalent) at a weighted average settlement rate of
1.24 Euros to the United States Dollar. The contracts outstanding at September
30, 2005, mature through February 28, 2006. The objective of the hedge
transactions is to protect designated portions of the Company's net investment
in its foreign subsidiary against adverse changes in the Euro/U.S. Dollar
exchange rate. The Company assesses hedge effectiveness based on overall changes
in fair value of the forward contract. Since the critical risks of the forward
contract and the net investment coincide, there was no ineffectiveness. The
accounting for the hedges is consistent with translation adjustments where any
gains and losses are recorded to other comprehensive income. The Company
recognized income of approximately $40,000 in other comprehensive income (loss)
for the unrealized change in value of the forward exchange contracts during the
quarter ended September 30, 2005. Offsetting this amount was an increase in
other comprehensive
20
income (loss) for the translation effect of the Company's foreign subsidiary.
Because the forward contracts were effective, there was no gain or loss
recognized in earnings. The Company's forward exchange contracts do not subject
it to material risk due to exchange rate movements because gains and losses on
these contracts offset losses and gains on the assets, liabilities, and
transactions being hedged.
At September 30, 2004, the Company had $10.9 million of forward exchange
contracts between the United States Dollar and the Euro with a weighted average
settlement price of 1.21 Euros to the United States Dollar. The Company
recognized a charge of $143,000 in other comprehensive income (loss) for the
unrealized change in value of forward exchange contracts during the quarter
ended September 30, 2004.
The Company's potential loss in earnings that would have resulted from a
hypothetical 10% adverse change in quoted foreign currency exchange rates
related to the translation of foreign denominated revenues and expenses into
U.S. dollars for the three months ended September 30, 2005 and 2004, would have
been approximately $86,000 and $17,000, respectively.
INTEREST RATE RISK
The Company invests its cash and cash equivalents in high quality, short-term
investments with primarily a term of three months or less. Given the short
maturities and investment grade quality of the Company's investment holdings at
September 30, 2005, a 100 basis point rise in interest rates would not be
expected to have a material adverse impact on the fair value of the Company's
cash and cash equivalents. As a result, the Company does not currently hedge
these interest rate exposures.
NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new accounting pronouncements, see Note 9 to the
Consolidated Financial Statements, "New Accounting Pronouncements".
SAFE HARBOR STATEMENT
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations may be "forward-looking statements" within
the meaning of the Securities Exchange Act of 1934, including the Company's
expectation as to fiscal 2006 and future new order bookings, revenue, expenses
and net income levels, the rate of new orders, the timing of revenue and net
income increases from the Company's plans to make important new investments,
largely for personnel, for newly introduced products and geographic growth
opportunities in the U.S., Europe, Eastern Europe, Asia and the ability of the
Company to fund its fiscal year 2006 cash flow requirements. The Company assumes
no obligation for updating any such forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting such
forward-looking statements. Actual results could differ materially from those in
the forward-looking statements due to a number of uncertainties in addition to
those set forth in the press release, including, but not limited to, the
dependence of the Company's revenue on a number of sizable orders from a small
number of customers, the dependence of the Company's net income levels on
increasing revenues, continued pricing pressures from the Company's customers,
the timing of orders and shipments which can cause the Company to experience
significant fluctuations in its quarterly and annual revenue, order bookings,
backlog and operating results, timely receipt of required supplies and
components which could result in delays in anticipated shipments, continued
access to third party components for our ScanWorks(R) systems, the ability of
the Company to successfully compete with alternative and similar technologies,
the timing, number and continuation of the Automotive industry's retooling
programs, including the risk that the Company's customers postpone new tooling
programs as a result of economic conditions or otherwise, the ability of
21
the Company to develop and introduce new products, the ability of the Company to
expand into new markets in Eastern Europe and Asia, the ability of the Company
to attract and retain key personnel, especially technical personnel, the quality
and cost of competitive products already in existence or developed in the
future, rapid or unexpected technological changes and the effect of economic
conditions, particularly economic conditions in the domestic and worldwide
Automotive industry, which has from time to time been subject to cyclical
downturns due to the level of demand for, or supply of, the products produced by
companies in this industry. The ability of the Company to develop and introduce
new products, especially in markets outside of automotive, is subject to a
number of uncertainties, including general product demand and market acceptance
risks, the ability of the Company to resolve technical issues inherent in the
development of new products and technologies, the ability of the Company to
identify and satisfy market needs, the ability of the Company to identify
satisfactory distribution networks, the ability of the Company to develop
internally or identify externally high quality cost effective manufacturing
capabilities for the products, general product development and commercialization
difficulties, and the level of interest existing and potential new customers may
have in new products and technologies generally. The ability of the Company to
expand into new geographic markets is subject to a number of uncertainties,
including the timing of customer acceptance of the Company's products and
technologies, the impact of changes in local economic conditions, the ability of
the Company to attract the appropriate personnel to effectively represent,
install and service the Company's products in the market and uncertainties
inherent in doing business in foreign markets, especially those that are less
well developed than the Company's traditional markets, such as the impact of
fluctuations in foreign currency exchange rates, foreign government controls,
policies and laws affecting foreign trade and investment, differences in the
level of protection available for the Company's intellectual property and
differences in language and local business and social customs. The Company's
expectations regarding future bookings and revenues are projections developed by
the Company based upon information from a number of sources, including, but not
limited to, customer data and discussions. These projections are subject to
change based upon a wide variety of factors, a number of which are discussed
above. Certain of these new orders have been delayed in the past and could be
delayed in the future. Because the Company's products are typically integrated
into larger systems or lines, the timing of new orders is dependent on the
timing of completion of the overall system or line. In addition, because the
Company's products have shorter lead times than other components and are
required later in the process, orders for the Company's products tend to be
given later in the integration process. A significant portion of the Company's
projected revenues and net income depends upon the Company's ability to
successfully develop and introduce new products and expand into new geographic
markets. Because a significant portion of the Company's revenues are denominated
in foreign currencies and are translated for financial reporting purposes into
U.S. Dollars, the level of the Company's reported net sales, operating profits
and net income are affected by changes in currency exchange rates, principally
between U.S. Dollars and Euros. Currency exchange rates are subject to
significant fluctuations, due to a number of factors beyond the control of the
Company, including general economic conditions in the United States and other
countries. Because the Company's expectations regarding future revenues, order
bookings, backlog and operating results are based upon assumptions as to the
levels of such currency exchange rates, actual results could differ materially
from the Company's expectations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required pursuant to this item is incorporated by reference herein
from Item 2 "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Market Risk Information".
22
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934. Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that, as of September
30, 2005, the Company's disclosure controls and procedures were effective in
causing the material information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange Act of 1934 to be
recorded, processed, summarized and reported, to the extent applicable, within
the time periods required for the Company to meet the Securities and Exchange
Commission's ("SEC") filing deadlines for these reports specified in the SEC's
rules and forms. There have been no significant changes in the Company's
internal controls over financial reporting during the quarter ended September
30, 2005 identified in connection with the Company's evaluation that has
materially affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth information concerning the Company's repurchases
of its common stock during the quarter ended September 30, 2005. All shares were
purchased pursuant to the Company's stock repurchase program described below:
<Table>
<Caption>
(c) TOTAL NUMBER (d) MAXIMUM NUMBER (OR
(a) TOTAL OF SHARES APPROXIMATE DOLLAR
NUMBER OF (b) AVERAGE PURCHASED AS PART VALUE) OF SHARES THAT
SHARES PRICE PAID OF PUBLICLY MAY YET BE PURCHASED
PERIOD PURCHASED PER SHARE ANNOUNCED PROGRAM UNDER THE PROGRAM
- -------------------- --------- ----------- ----------------- ----------------------
July 1-31, 2005 -- -- -- --
August 1- 31, 2005 -- -- -- --
September 1-30, 2005 20,300 $ 6.44 20,300 $4,869,182
------ -------- ------ ----------
Total 20,300 $ 6.44 20,300 $4,869,182
====== ======== ====== ==========
</Table>
On September 9, 2005, the Company's Board of Directors approved a stock
repurchase program authorizing the Company to repurchase up to $5.0 million of
the Company's common stock during fiscal year 2006. The Company may buy shares
of its common stock on the open market or in privately negotiated transactions
from time to time, based on market prices. The program may be discontinued at
any time. The Company also announced that it has entered into a Rule 10b5-1
trading plan ("Repurchase Plan") with Barrington Research Associates, Inc. to
purchase up to $5.0 million of the Company's common stock during fiscal year
2006 (less the dollar amount of purchases by the Company outside the Repurchase
Plan), in open market or privately negotiated transactions, in accordance with
the requirements of Rule 10b-18. This stock repurchase program replaces the
Company's stock repurchase program for fiscal year 2005, which terminated on
June 30, 2005.
On September 1, 2005, four members of the Company's Board of Directors became
entitled to receive a total of 3,988 shares of Common Stock at $6.27 per share
pursuant to the Directors Stock Purchase Rights Option under the 2004 Stock
Incentive Plan which was approved by shareholders in December 2004. The 2004
Stock Incentive Plan permits non-employee directors to purchase shares of Common
Stock through the 2004 Stock Incentive Plan in exchange for all or a portion of
the cash fees payable to
23
them for serving as directors of the Company. The transactions by the Company
with the four directors did not involve a public offering and are exempt under
Section 4(2) of the Securities Exchange Act of 1933 and Rules 505 and 506
promulgated thereunder.
ITEM 5. OTHER INFORMATION
On October 19, 2005, the Company entered into a Fifth Amendment to the Credit
Agreement dated October 24, 2002 between the Company and Comerica Bank. The
Fifth Amendment extends the maturity date of the Credit Agreement to November 1,
2007 and permits the Company to repurchase up to $5.0 million of its common
stock through June 30, 2006. The Fifth Amendment has been filed as Exhibit 4.10
to the Form 10-Q and is incorporated herein by reference.
ITEM 6. EXHIBITS
4.10 Fifth Amendment to Credit Agreement dated October 24, 2002,
between Perceptron, Inc. and Comerica Bank.
31.1 Certification by the Chief Executive Officer of the Company
pursuant to Rule 13a -- 14(a) and Rule 15d -- 14(a).
31.2 Certification by the Chief Financial Officer of the Company
pursuant to Rule 13a -- 14(a) and Rule 15d -- 14(a).
32.1 Certification by the Chief Executive Officer of the Company
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer of the Company
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERCEPTRON, INC.
(Registrant)
Date: November 14, 2005 By: /S/ Alfred A. Pease
------------------------------------------
Alfred A. Pease
President and Chief Executive Officer
Date: November 14, 2005 By: /S/ John J. Garber
------------------------------------------
John J. Garber
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: November 14, 2005 By: /S/ Sylvia M. Smith
------------------------------------------
Sylvia M. Smith
Controller and Chief Accounting Officer
(Principal Accounting Officer)
25
EXHIBIT INDEX
<Table>
<Caption>
EX NO. DESCRIPTION
- ------ -----------
4.10 Fifth Amendment to Credit Agreement dated October 24, 2002, between
Perceptron, Inc. and Comerica Bank.
31.1 Certification by the Chief Executive Officer of the Company pursuant to
Rule 13a -- 14(a) and Rule 15d -- 14(a).
31.2 Certification by the Chief Financial Officer of the Company pursuant to
Rule 13a -- 14(a) and Rule 15d -- 14(a).
32.1 Certification by the Chief Executive Officer of the Company pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer of the Company pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
</Table>
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