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, 2006.
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer Accelerated filer Non-accelerated filer 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, 2006, was:
Common Stock, $0.01 par value 8,128,779
Class Number of shares
PERCEPTRON, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2006
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 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1A. Risk Factors 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 5. Other Information 22
Item 6. Exhibits 22
SIGNATURES 23
2
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
(In Thousands, Except Per Share Amount) 2006 2006
------------- --------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 24,627 $ 25,188
Receivables:
Billed receivables, net of allowance for
doubtful accounts of $389 and $352,
respectively 12,834 15,623
Unbilled receivables 896 994
Other receivables 909 577
Inventories, net of reserves of $825 and $554,
respectively 7,896 6,433
Deferred taxes 1,481 1,481
Other current assets 943 521
-------- --------
Total current assets 49,586 50,817
PROPERTY AND EQUIPMENT
Building and land 6,013 6,013
Machinery and equipment 11,910 11,566
Furniture and fixtures 1,098 1,093
-------- --------
19,021 18,672
Less - Accumulated depreciation and amortization (11,588) (11,264)
-------- --------
Net property and equipment 7,433 7,408
DEFERRED TAX ASSET 4,456 4,170
-------- --------
TOTAL ASSETS $ 61,475 $ 62,395
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,738 $ 1,667
Accrued liabilities and expenses 2,320 2,277
Accrued compensation 1,088 1,740
Income taxes payable 166 145
Deferred revenue 2,742 2,336
-------- --------
Total current liabilities 8,054 8,165
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 8,292 and 8,352, respectively 83 84
Accumulated other comprehensive (loss) 208 (15)
Additional paid-in capital 38,721 39,111
Retained earnings 14,409 15,050
-------- --------
Total shareholders' equity 53,421 54,230
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 61,475 $ 62,395
======== ========
The notes to the consolidated financial statements are an integral part of these
statements.
3
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
(In Thousands, Except Per Share Amounts) 2006 2005
------- -------
NET SALES $10,710 $12,760
COST OF SALES 6,223 7,177
------- -------
GROSS PROFIT 4,487 5,583
OPERATING EXPENSES
Selling, general and administrative 3,887 3,292
Engineering, research and development 1,732 1,872
------- -------
Total operating expenses 5,619 5,164
------- -------
OPERATING INCOME (LOSS) (1,132) 419
OTHER INCOME AND (EXPENSES)
Interest income, net 314 147
Foreign currency gain (loss) (5) 49
Other 5 (1)
------- -------
Total other income (expenses) 314 195
------- -------
INCOME (LOSS) BEFORE INCOME TAXES (818) 614
INCOME TAX EXPENSE (BENEFIT) (177) 345
------- -------
NET INCOME (LOSS) $ (641) $ 269
======= =======
EARNINGS (LOSS) PER COMMON SHARE
Basic ($0.08) $ 0.03
Diluted ($0.08) $ 0.03
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 8,343 8,830
Dilutive effect of stock options -- 446
------- -------
Diluted 8,343 9,276
======= =======
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)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
(In Thousands) 2006 2005
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (641) $ 269
Adjustments to reconcile net income (loss) to net cash
provided from (used for) operating activities:
Depreciation and amortization 333 315
Stock compensation expense 275 185
Deferred income tax benefit (286) (264)
Stock option income tax benefit -- 22
Loss on disposal of fixed assets and other 125 6
Changes in assets and liabilities, exclusive of
changes shown separately 692 302
------- -------
Net cash provided from operating activities 498 835
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving credit borrowings 33 105
Revolving credit repayments (33) (105)
Proceeds from stock plans 266 51
Repurchase of company stock (932) (132)
------- -------
Net cash used for financing activities (666) (81)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (448) (320)
------- -------
Net cash used for investing activities (448) (320)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 55 (14)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (561) 420
CASH AND CASH EQUIVALENTS, JULY 1 25,188 20,374
------- -------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30 $24,627 $20,794
======= =======
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES
SHOWN SEPARATELY
Receivables, net $ 2,614 $ 834
Inventories (1,463) (678)
Accounts payable 71 523
Other current assets and liabilities (530) (377)
------- -------
$ 692 $ 302
======= =======
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 2006 Annual Report on Form 10-K. 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 of $825,000 and $554,000 at September 30, 2006 and June 30, 2006,
respectively, is comprised of the following (in thousands):
SEPTEMBER 30, JUNE 30,
2006 2006
------------- --------
Component Parts $3,427 $3,038
Work In Process 570 309
Finished Goods 3,899 3,086
------ ------
Total $7,896 $6,433
====== ======
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 No. 123 (revised 2004), Share-Based
Payment, ("SFAS 123R"), 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 258,000 and 832,000 shares of common stock outstanding in
the three months ended September 30, 2006 and 2005, 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 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.
6
At September 30, 2006, the Company had forward exchange contracts to sell 2.0
million Euros ($2.6 million equivalent) at a weighted average settlement rate of
1.28 Euros to the United States Dollar. The contracts outstanding at September
30, 2006, mature through January 31, 2007. 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 $73,000 in other comprehensive income (loss)
for the unrealized change in value of the forward exchange contracts during the
quarter ended September 30, 2006. Offsetting this amount in other comprehensive
income (loss) was 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, 2005, the Company had approximately $4.8 million of forward
exchange contracts between the United States Dollar and the Euro with a weighted
average settlement price of 1.24 Euros to the United States Dollar. The Company
recognized income of $40,000 in other comprehensive income (loss) for the
unrealized change in value of forward exchange contracts during the quarter
ended September 30, 2005.
5. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in common shareholder's equity
during a period from transactions and events from non-owner sources, including
net income. Other items of comprehensive income include revenues, expenses,
gains and losses that are excluded from net income. Total comprehensive income
for the applicable periods is as follows (in thousands):
THREE MONTHS ENDED SEPTEMBER 30, 2006 2005
- -------------------------------- ----- ----
Net Income (Loss) $(641) $269
Other Comprehensive Income (Loss):
Foreign currency translation adjustments 150 (71)
Forward contracts 73 40
----- ----
Total Comprehensive Income (Loss) $(418) $238
===== ====
6. CREDIT FACILITIES
The Company had no debt outstanding at September 30, 2006.
The Company has a $7.5 million secured Credit Agreement with Comerica Bank,
which expires on November 1, 2008. 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 (8.25% as of September 30, 2006) 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 7.25% as of September 30, 2006) 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
7
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 $36.0
million as of September 30, 2006 and to have no advances outstanding for 30
consecutive days each calendar year.
At September 30, 2006, the Company's German subsidiary (GmbH) had an unsecured
credit facility totaling 500,000 Euros (equivalent to approximately $634,400 at
September 30, 2006). 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, 2006, GmbH had no
borrowings outstanding. The facility supported outstanding letters of credit
totaling 99,500 Euros (equivalent to approximately $126,000 at September 30,
2006).
7. STOCK-BASED COMPENSATION
The Company adopted 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. The Company continues to use the Black
Scholes model for determining stock option valuations. 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 Black Scholes
method used under SFAS 123, except that an estimate of expected forfeitures is
used rather than actual forfeitures.
The Company recognized as an operating expense non-cash stock-based compensation
cost in the amount of $275,000 and $185,000 in the three months ended September
30, 2006 and 2005, respectively. This had the effect of decreasing net income by
$219,000, or $0.03 per diluted share, and $150,000, or $0.02 per diluted share,
for the three months ended September 30, 2006 and 2005 respectively. As of
September 30, 2006, the total remaining unrecognized compensation cost related
to non-vested stock options amounted to $1.2 million. The Company expects to
recognize this cost over a weighted average vesting period of 1.42 years.
The Company maintains a 1992 Stock Option Plan ("1992 Plan") and a 1998 Global
Team Member Stock Option Plan ("1998 Plan") covering substantially all company
employees and certain other key persons and a Directors Stock Option Plan
("Directors 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
Management Development compensation and Stock Option Committee (the "Management
Development Committee"). The 1998 Plan is administered by the President of the
Company.
8
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.
The Company did not grant any 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, 2006 using the Black Scholes option-pricing model,
was as follows:
THREE MONTHS ENDED
SEPTEMBER 30, 2006
------------------
Weighted average estimated fair value per share of
options granted during the period $ 3.03
Assumptions:
Amortized dividend yield --
Common stock price volatility 32.78%
Risk free rate of return 5.13%
Expected option term (in years) 5
The Company received $229,000 in cash from option exercises under all
share-based payment arrangements for the three months ended September 30, 2006.
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 $6.0 million using a September 30,
2006 exchange rate. GDS and Carbotech have filed for bankruptcy protection in
Canada. The Company intends to vigorously defend GDS' claims.
9
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.
Based upon a recent review by the Company of a third party licensing agreement
under which the Company licenses certain software included in its products, the
Company has begun discussions with the third party licensor to resolve potential
instances of non-compliance by the Company with the terms of the licensing
agreement.. The Company anticipates that it will incur additional royalty costs
for prior periods and has recorded a reserve for the amount it believes will be
required to resolve the matter. The final resolution may be different from the
estimate recorded.
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 claims and 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
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Current Year Misstatement." This bulletin
requires analysis of misstatements using both an income statement (rollover)
approach and a balance sheet (iron curtain) approach in assessing materiality
and provides for a one-time cumulative effect transition adjustment. This
bulletin is effective for the Company's 2007 fiscal year annual financial
statements. The Company is currently assessing the potential impact that the
adoption of this bulletin will have on the Company's financial statements;
although the impact is not expected to be material.
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements". This statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (GAAP), and
expands disclosures about fair value measurements. This statement does not
require any new fair value measurements, but does provide guidance on how to
measure fair value by providing a fair value hierarchy used to classify the
source of the information. This statement is effective for fiscal years
beginning after November 15, 2007. The impact of adopting this Statement on the
Company's financial statements has not yet been evaluated.
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109". This Interpretation prescribes a
recognition threshold and a measurement attribute for the financial statement
reporting of tax positions taken in tax returns. The Interpretation is effective
for fiscal years beginning after December 15, 2006. The impact of adopting this
Statement on the Company's financial statements has not yet been evaluated.
10
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 non-contact metrology solutions for manufacturing process control as
well as sensor and software technologies for non-contact measurement and
inspection applications. 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 four 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; 3) The Value Added Services Group providing
consulting, training and non-warranty support services, and 4) The Commercial
Products Group providing electronic inspection products for trade professionals
and consumers.. 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
$24.6 million of cash at September 30, 2006 available to support its growth
plans. Near-term the Company will focus on the successful production and release
of its recently announced new line of electronic inspection products and its
previously announced growth strategy in untapped geographic markets, principally
in Asia.
The Company's growth strategies in Asia are generating customer interest in this
region. This region represents approximately one-third of global light vehicle
production and sales and with the development of China's light vehicle market
will become more important to the Company. As a result, the Company will
continue to hire sales and technical personnel during fiscal 2007 to support its
long term growth opportunities in Asia.
The Company's sales 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 Automated Systems Group. The number and
timing of new vehicle tooling programs can be influenced by economic conditions.
Therefore, the Company continues to assess the global economy and its likely
effect on the Company's automotive customers and markets served to determine if
actions are required. The Company views 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 its automotive Automated Systems Group business. The Company is
continuing its efforts to identify opportunities outside the automotive
industry, principally through its Technology Components Group and Commercial
Products Group.
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
OVERVIEW - For the first quarter of fiscal 2007, the Company reported a net loss
of $641,000, or $0.08 per diluted share, compared to net income of $269,000 or
$0.03 per diluted share, for the first quarter of fiscal 2006. Specific line
item results are described below.
11
SALES - Net sales were $10.7 million for the first quarter of fiscal 2007
compared to net sales of $12.8 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.
SALES (BY GROUP) FIRST QUARTER FIRST QUARTER INCREASE/
(in millions) 2007 2006 (DECREASE)
- ---------------- ------------- ------------- -------------
Automated Systems $ 6.7 62.6% $ 9.1 71.1% $(2.4) (26.4)%
Technology Components 2.9 27.1% 2.8 21.9% 0.1 3.6%
Value Added Services 1.1 10.3% 0.9 7.0% 0.2 22.2%
----- ----- ----- ----- -----
TOTALS $10.7 100.0% $12.8 100.0% $(2.1) (16.4)%
===== ===== ===== ===== =====
SALES (BY LOCATION) FIRST QUARTER FIRST QUARTER INCREASE/
(in millions) 2007 2006 (DECREASE)
- ------------------- ------------- ------------- -------------
North America $ 4.5 42.1% $ 6.4 50.0% $(1.9) (29.7)%
Europe 5.6 52.3% 5.9 46.1% (0.3) (5.1)%
Asia 0.6 5.6% 0.5 3.9% 0.1 20.0%
----- ----- ----- ----- -----
TOTALS $10.7 100.0% $12.8 100.0% $(2.1) (16.4)%
===== ===== ===== ===== =====
Sales of the Company's Automated Systems products decreased primarily due to
customer delivery requirements. Several orders scheduled for delivery this
quarter were shipped in the fourth quarter of fiscal 2006 because it was
determined by our customers that system installation could be accomplished more
efficiently during that period. This was the primary cause for the sales
decrease in North America. Within the Technology Components Group, sales of the
ScanWorks(R) product line were significantly higher than the first quarter of
fiscal 2006 when a supplier issue caused production and sales of this product to
decline. Sales of other products within the Technology Components Group were
down compared to last year due to lower customer requirements. The Company has
focused resources on the sale of Value Added Services and believes that the
sales improvement for this group is beginning to reflect the results from this
effort. The sales decrease in Europe was mitigated by a favorable strengthening
of the Euro during the first quarter of fiscal 2007 that based on conversion
rates in effect during the quarter, resulted in approximately $270,000 of higher
sales than rates in effect in the corresponding quarter of fiscal 2006 would
have yielded.
BOOKINGS - The Company had new order bookings during the quarter of $9.6 million
compared with new order bookings of $16.3 million in the fourth quarter of
fiscal 2006 and $15.0 million for the quarter ended September 30, 2005. 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.
12
BOOKINGS (BY GROUP) FIRST QUARTER FIRST QUARTER INCREASE/
(in millions) 2007 2006 (DECREASE)
- ------------------- ------------- ------------- -------------
Automated Systems $5.2 54.2% $11.5 76.7% $(6.3) (54.8)%
Technology Components 3.0 31.2% 2.6 17.3% 0.4 15.4%
Value Added Services 1.4 14.6% 0.9 6.0% 0.5 55.5%
---- ----- ----- ----- -----
TOTALS $9.6 100.0% $15.0 100.0% $(5.4) (36.0)%
==== ===== ===== ===== =====
BOOKINGS (BY LOCATION) FIRST QUARTER FIRST QUARTER INCREASE/
(in millions) 2007 2006 (DECREASE)
- ---------------------- ------------- ------------- -------------
North America $6.3 65.6% $10.1 67.3% $(3.8) (37.6)%
Europe 2.8 29.2% 4.5 30.0% (1.7) (37.8)%
Asia 0.5 5.2% 0.4 2.7% 0.1 25.0%
---- ----- ----- ----- -----
TOTALS $9.6 100.0% $15.0 100.0% $(5.4) (36.0)%
==== ===== ===== ===== =====
The Company's level of new orders, particularly as they relate to the Automated
Systems Group, does fluctuate from quarter to quarter. The low level of new
orders this quarter was expected because several automated systems' orders that
the Company expected to receive this quarter were received in the fourth quarter
of fiscal 2006. Based on the number and value of projects currently being
considered by our customers, the Company believes that the rate of new orders
for automated systems will improve significantly for the balance of fiscal 2007.
The foregoing statement is a "forward-looking statement" 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 new order increase for the Technology Component
Group compared to one year ago primarily reflected the timing of customer
requirements. The Company has focused resources on the sale of Value Added
Services and believes that the improvement in new orders for this group compared
to one year ago is beginning to reflect the results of this resource commitment.
BACKLOG - The Company's backlog was $17.7 million as of September 30, 2006
compared with $18.8 million as of June 30, 2006 and $20.2 million as of
September 30, 2005. The following tables set forth comparison data for the
Company's backlog by product groups and geographic location.
BACKLOG (BY GROUP) FIRST QUARTER FIRST QUARTER INCREASE/
(in millions) 2007 2006 (DECREASE)
- ------------------ ------------- ------------- -------------
Automated Systems $13.7 77.4% $16.7 82.7% $(3.0) (18.0)%
Technology Components 1.8 10.2% 2.4 11.9% (0.6) (25.0)%
Value Added Services 2.2 12.4% 1.1 5.4% 1.1 100.0%
----- ----- ----- ----- -----
TOTALS $17.7 100.0% $20.2 100.0% $(2.5) (12.4)%
===== ===== ===== ===== =====
13
BACKLOG (BY LOCATION) FIRST QUARTER FIRST QUARTER INCREASE/
(in millions) 2007 2006 (DECREASE)
- --------------------- ------------- ------------- -------------
North America $ 9.9 55.9% $12.6 61.4% $(2.7) (21.4)%
Europe 7.5 42.4% 7.3 37.0% 0.2 2.7%
Asia 0.3 1.7% 0.3 1.6% 0.0 0.0%
----- ----- ----- ----- -----
TOTALS $17.7 100.0% $20.2 100.0% $(2.5) (12.4)%
===== ===== ===== ===== =====
The Company expects to be able to fill substantially all of the orders in
backlog at September 30, 2006 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 $4.5 million, or 41.9% of sales, in the first
quarter of fiscal year 2007, as compared to $5.6 million, or 43.8% of sales, in
the first quarter of fiscal year 2006. The gross profit margin reduction was due
to higher installation labor and manufacturing cost as a percent of sales at the
relatively low level of sales for the first quarter of fiscal 2007 and included
a reserve for royalty costs, see note 8 to the Consolidated Financial
Statements, "Commitments and Contingencies". The reduction was mitigated by the
benefit from the strengthening Euro exchange rate this quarter and a favorable
product mix compared with the first quarter of fiscal 2006.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES - SG&A expenses were $3.9
million in the quarter ended September 30, 2006 compared to $3.3 million in the
first quarter a year ago. SG&A expenses were higher primarily due to increases
for personnel additions, recruiting and relocation, and travel of approximately
$220,000 related to the Company's new sales growth opportunities in Asia and to
support the new commercial products business initiatives. The balance of the
increase was due to higher costs for various expenses including salary and
benefit increases, non-cash stock option expenses, the unfavorable effect of the
strengthening Euro on expenses, audit fees, legal, and an increase in the
reserve for doubtful accounts.
ENGINEERING, RESEARCH AND DEVELOPMENT (R&D) EXPENSES - Engineering and R&D
expenses were $1.7 million in the quarter ended September 30, 2006 compared to
$1.9 million in the first quarter a year ago. The decrease was principally due
to lower expenses related to engineering materials and contract services.
INTEREST INCOME, NET - Net interest income was $314,000 in the first quarter of
fiscal 2007 compared with net interest income of $147,000 in the first quarter
of fiscal 2006. The increase was primarily due to higher interest rates and
higher cash balances available for investment in cash equivalents this quarter
compared to the first quarter of fiscal 2006.
FOREIGN CURRENCY- There was a net foreign currency transaction loss of $5,000
compared with a net foreign currency gain of $49,000 in the first quarter of
fiscal 2006 due to foreign currency changes, particularly the Euro and Brazilian
Real, within the respective quarters.
INCOME TAXES - The effective tax rates for the first quarter of fiscal 2007 and
2006 of 21.6% and 56.2% 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 2007 had
increased income in Europe and a loss in the United States compared to income in
the fiscal 2006 quarter.
OUTLOOK - As previously indicated, the Company does expect the rate of new
orders and sales for its core business to improve significantly compared with
the first quarter of fiscal 2007. In addition, the
14
Company is very excited about prospects for the new line of electronic
inspection products targeting both the professional tradesman and the do it
yourself market. The Company expects to ship the first production units before
the end of the calendar year 2006, with the products entering Ridge Tool's
channels of distribution during the first quarter of calendar year 2007.
Principally due to sales of new products, including sales of the new electronic
inspection products, the Company expects sales for fiscal 2007 to be
approximately 10% to 15% higher than those of fiscal 2006.
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 automotive 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 Company's new order bookings and sales forecast relating to its new
electronic inspection products is based upon preliminary customer and internal
forecasts.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $24.6 million at September 30,
2006, compared to $25.2 million at June 30, 2006. The cash decrease of $561,000
for the quarter ended September 30, 2006 resulted primarily from $932,000 of
cash used to repurchase Company stock and $448,000 used for capital expenditures
that were offset by $498,000 of cash generated from operations and $266,000
received from the Company's stock plans.
The $498,000 in cash provided from operations was primarily generated from
changes in net working capital of $692,000, the add back of non-cash items, such
as depreciation of $333,000, and non-cash stock-based compensation expense of
$275,000, which was offset by cash used by the net loss of $641,000 and the
change in deferred income taxes of $286,000. 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 $2.6 million that were offset by an
increase in inventory of $1.5 million and a reduction in other current assets
and liabilities of $530,000. The $2.6 million reduction in receivables primarily
related to cash collections during the quarter exceeding new sales in the
quarter. Inventory increased $1.5 million 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 2007, the Company's German subsidiary made a change to separate its
reserve for obsolescence from its inventory value to reflect the methodology
used by the rest of the Company. As a result, the inventory of the German
subsidiary is reported at a gross value and the reserve for obsolescence
increased by $273,000. Also during the first
15
quarter of fiscal 2007, the Company disposed of $2,000 of inventory that had
previously been reserved for at June 30, 2006.
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 increased its
allowance for doubtful accounts by $51,000 and wrote off $14,000 of receivables
during the first quarter of fiscal 2007.
The Company had no debt outstanding at September 30, 2006. The Company has a
$7.5 million secured Credit Agreement with Comerica Bank, which expires on
November 1, 2008. 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 (8.25%
as of September 30, 2006) 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
7.25% as of September 30, 2006) 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 $36.0
million as of September 30, 2006 and to have no advances outstanding for 30
consecutive days each calendar year.
At September 30, 2006, the Company's German subsidiary (GmbH) had an unsecured
credit facility totaling 500,000 Euros (equivalent to approximately $634,400 at
September 30, 2006). 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, 2006, GmbH had no
borrowings outstanding. The facility supported outstanding letters of credit
totaling 99,500 Euros (equivalent to approximately $126,000 at September 30,
2006).
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. The Company was authorized to buy shares of its
Common Stock on the open market or in privately negotiated transactions from
time to time, based on market prices. In July 2006, the Company completed its
fiscal 2006 stock repurchase program.
On August 7, 2006, the Company's Board of Directors approved a stock repurchase
program authorizing the Company to repurchase up to $3.0 million of the
Company's Common Stock through August 2007. 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 $3.0 million of the Company's Common Stock through August 2007 (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. See Part II Item 2 "Unregistered Sales of Equity Securities and
Use of Proceeds" for a discussion of the Repurchase Plan.
16
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
2006, 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 2006.
The Company expects to spend approximately $1.5 million during fiscal year 2007
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 2007 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.
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 2006.
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, 2006, the Company's percentage of sales commitments in non-United States
currencies was approximately 48.8% or $8.6 million, compared to 39.5% or $8.0
million at September 30, 2005.
17
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, 2006, the Company had forward exchange contracts to sell 2.0
million Euros ($2.6 million equivalent) at a weighted average settlement rate of
1.28 Euros to the United States Dollar. The contracts outstanding at September
30, 2006, mature through January 31, 2007. 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 $73,000 in other comprehensive income (loss)
for the unrealized change in value of the forward exchange contracts during the
quarter ended September 30, 2006. Offsetting this amount in other comprehensive
income (loss) was 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, 2005, the Company had $4.8 million of forward exchange
contracts between the United States Dollar and the Euro with a weighted average
settlement price of 1.24 Euros to the United States Dollar. The Company
recognized income of $40,000 in other comprehensive income (loss) for the
unrealized change in value of forward exchange contracts during the quarter
ended September 30, 2005.
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, 2006 and 2005, would have
been approximately $18,000 and $86,000, 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, 2006, 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".
18
SAFE HARBOR STATEMENT
We make statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations that may be "forward-looking statements"
within the meaning of the Securities Exchange Act of 1934, including the
Company's expectation as to fiscal 2007 and future new order bookings, revenue,
expenses, net income and backlog levels, trends affecting its future revenue
levels, the rate of new orders, the timing of revenue and net income increases
from new products which we have recently released or have not yet released and
from our 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, our ability to fund our fiscal year 2007 cash flow
requirements and customers' current and future interest in our Value Added
Services. We may also make forward-looking statements in our press releases or
other public or shareholder communications. When we use words such as "will,"
"should," "believes," "expects," "anticipates," "estimates" or similar
expressions, we are making forward-looking statements. We claim the protection
of the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995 for all of our forward-looking
statements. While we believe that our forward-looking statements are reasonable,
you should not place undue reliance on any such forward-looking statements,
which speak only as of the date made. Because these forward-looking statements
are based on estimates and assumptions that are subject to significant business,
economic and competitive uncertainties, many of which are beyond our control or
are subject to change, actual results could be materially different. Factors
that might cause such a difference include, without limitation, the risks and
uncertainties discussed from time to time in our reports filed with the
Securities and Exchange Commission, including those listed in "Item 1A - Risk
Factors" of the Company's Annual Report on Form 10-K for fiscal year 2006. Other
factors not currently anticipated by management may also materially and
adversely affect our financial condition, liquidity or results of operations, as
well as the following: the dependence of the Company's revenue on a number of
sizable orders from a small number of customers concentrated in the Automotive
industry, particularly in the United States and Europe, 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 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, the ability
of the Company to identify and satisfy demand for the Company's Value Added
Services, the ability of the Company to identify business opportunities that fit
the Company's strategic plans, the ability to implement identified business
opportunities on terms acceptable to the Company 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
19
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 ability of the Company to identify
and satisfy demand for the Company's Value Added Services is subject to a number
of uncertainties including that these services represent discretionary spending
by customers and so tend to decline during economic downturns even if product
sales do not decline. Except as required by applicable law, we do not undertake,
and expressly disclaim, any obligation to publicly update or alter our
statements whether as a result of new information, events or circumstances
occurring after the date of this report or otherwise. 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".
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, 2006, 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
20
30, 2006 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 1A. RISK FACTORS
No material changes were made to the risk factors listed in "Item 1A - Risk
Factors" of the Company's Annual Report on Form 10-K for fiscal year 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following tables set forth information concerning the Company's repurchases
of its common stock during the quarter ended September 30, 2006. The following
shares were purchased pursuant to the Company's fiscal 2006 stock repurchase
program described below.
(C) TOTAL NUMBER
(A) TOTAL OF SHARES (D) 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, 2006 20,000 $8.03 20,000 $0
------ ------
Total 20,000 $8.03 20,000 $0
====== ======
The following shares were purchased pursuant to the Company's fiscal 2007 stock
repurchase program described below.
(C) TOTAL NUMBER
(A) TOTAL OF SHARES (D) 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
- -------------------- --------- ----------- ----------------- ----------------------
August 1-31, 2006 23,300 $8.02 23,300 $2,813,152
September 1-30, 2006 71,500 $8.09 71,500 $2,234,604
------ ------
Total 94,800 $8.07 94,800 $2,234,604
====== ======
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. The Company was authorized to buy shares of its
Common Stock on the open market or in privately negotiated transactions from
time to time, based on market prices. In July 2006, the Company completed its
fiscal 2006 stock repurchase program.
On August 7, 2006, the Company's Board of Directors approved a stock repurchase
program authorizing the Company to repurchase up to $3.0 million of the
Company's Common Stock through August 2007. 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 $3.0 million of the Company's Common Stock through August 2007 (less the
dollar amount of purchases by the Company outside the Repurchase
21
Plan), in open market or privately negotiated transactions, in accordance with
the requirements of Rule 10b-18.
ITEM 5. OTHER INFORMATION
On November 6, 2006, the Company entered into a Sixth Amendment to the Credit
Agreement dated October 24, 2002 between the Company and Comerica Bank. The
Sixth Amendment extends the maturity date of the Credit Agreement to November 1,
2008, resets the Base Tangible Net Worth amount to $39.5 million for the fiscal
quarter ended December 31, 2006 and permits the Company to repurchase up to $3.0
million of its common stock through June 30, 2007. The Sixth Amendment has been
filed as Exhibit 4.11 to the Form 10-Q and is incorporated herein by reference.
ITEM 6. EXHIBITS
4.11 Sixth 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.
22
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, 2006 By: /S/ Alfred A. Pease
------------------------------------
Alfred A. Pease
President and Chief Executive
Officer
Date: November 14, 2006 By: /S/ John J. Garber
------------------------------------
John J. Garber
Vice President and Chief Financial
Officer
(Principal Financial Officer)
Date: November 14, 2006 By: /S/ Sylvia M. Smith
------------------------------------
Sylvia M. Smith
Controller and Chief Accounting
Officer
(Principal Accounting Officer)
23
EXHIBIT INDEX
Exhibit No. Description of Exhibits
- ----------- -----------------------
4.11 Sixth 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.