10-Q 1 k62507e10-q.txt QUARTERLY REPORT DATED 3/31/01 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2001. 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) (734) 414-6100 (Registrant's telephone number, including area code) 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 proceeding 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 ------------ -------------- The number of shares outstanding of each of the issuer's classes of common stock as of May 8, 2001, was: Common Stock, $0.01 par value 8,182,119 ----------------------------- -------------------------- Class Number of shares 2 PERCEPTRON, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001
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 17 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 18
2 3 PERCEPTRON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, (In Thousands, Except Per Share Amounts) 2001 2000 -------------------- -------------------- NET SALES $ 11,466 $ 13,721 COST OF SALES 6,577 6,218 -------------------- -------------------- GROSS PROFIT 4,889 7,503 -------------------- -------------------- OPERATING EXPENSES Selling, general and administrative 4,829 4,981 Engineering, research and development 4,622 2,896 Restructuring charge (Note 8) 336 - -------------------- -------------------- Total operating expenses 9,787 7,877 -------------------- -------------------- OPERATING INCOME (LOSS) (4,898) (374) -------------------- -------------------- OTHER INCOME AND (DEDUCTIONS) Interest expense (233) (108) Interest income 41 45 Gain (loss) on disposal of assets - (57) Foreign currency and other 1 32 -------------------- -------------------- Total other income and (deductions) (191) (88) -------------------- -------------------- INCOME (LOSS) BEFORE INCOME TAXES (5,089) (462) INCOME TAX EXPENSE (BENEFIT) (1,713) (15) -------------------- -------------------- NET INCOME (LOSS) $ (3,376) $ (447) ==================== ==================== EARNINGS (LOSS) PER SHARE BASIC ($0.41) ($0.05) DILUTED ($0.41) ($0.05) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING BASIC 8,182 8,170 DILUTED 8,182 8,170
NINE MONTHS ENDED MARCH 31, (In Thousands, Except Per Share Amounts) 2001 2000 -------------------- -------------------- NET SALES $ 37,046 $ 50,725 COST OF SALES 20,037 22,570 -------------------- -------------------- GROSS PROFIT 17,009 28,155 -------------------- -------------------- OPERATING EXPENSES Selling, general and administrative 14,146 15,404 Engineering, research and development 10,910 9,365 Restructuring charge (Note 8) 336 - -------------------- -------------------- Total operating expenses 25,392 24,769 -------------------- -------------------- OPERATING INCOME (LOSS) (8,383) 3,386 -------------------- -------------------- OTHER INCOME AND (DEDUCTIONS) Interest expense (521) (355) Interest income 129 114 Gain (loss) on disposal of assets 226 (112) Foreign currency and other (49) 18 -------------------- -------------------- Total other income and (deductions) (215) (335) -------------------- -------------------- INCOME (LOSS) BEFORE INCOME TAXES (8,598) 3,051 INCOME TAX EXPENSE (BENEFIT) (3,391) 1,411 -------------------- -------------------- NET INCOME (LOSS) $ (5,207) $ 1,640 ==================== ==================== EARNINGS (LOSS) PER SHARE BASIC ($0.64) $0.20 DILUTED ($0.64) $0.20 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING BASIC 8,176 8,170 DILUTED 8,176 8,201
The notes to the consolidated financial statements are an integral part of these statements. 3 4 PERCEPTRON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, JUNE 30, (IN THOUSANDS) 2001 2000 ------------------ ------------------ (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ $ 6,067 $ $ 5,947 Receivables: Billed receivables, net of allowance for doubtful accounts 20,370 26,507 of $354 and $268, respectively Unbilled and other receivables 7,846 6,126 Inventories, net of reserves of $2,239 and $1,200, respectively 13,503 12,582 Deferred taxes and other current assets 1,637 1,564 ------------------ ------------------ Total current assets 49,423 52,726 ------------------ ------------------ PROPERTY AND EQUIPMENT Building and land 6,032 6,004 Machinery and equipment 10,380 9,598 Furniture and fixtures 1,211 1,195 ------------------ ------------------ 17,623 16,797 Less - Accumulated depreciation and amortization (7,230) (6,125) ------------------ ------------------ Net property and equipment 10,393 10,672 ------------------ ------------------ OTHER ASSETS Intangible assets, net of accumulated amortization 1,137 1,313 of $904 and $660, respectively Deferred tax asset and other 5,650 1,516 ------------------ ------------------ Total other assets 6,787 2,829 ------------------ ------------------ TOTAL ASSETS $ 66,603 $ $ 66,227 ================== ================== LIABILITIES AND COMMON SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 3,817 $ 4,549 Accrued liabilities and expenses 3,897 4,642 Notes Payable (Note 3) 13,500 - Income taxes payable 909 87 Accrued compensation 383 2,785 ------------------ ------------------ Total current liabilities 22,506 12,063 ------------------ ------------------ LONG-TERM LIABILITIES Notes payable (Note 3) 1,040 4,595 ------------------ ------------------ Total long-term liabilities 1,040 4,595 ------------------ ------------------ Total liabilities 23,546 16,658 ------------------ ------------------ 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 8,182 and 8,170 at March 31, 2001 and June 30, 2000, respectively 82 82 Accumulated other comprehensive income (loss) (Note 5) (5,070) (3,723) Additional paid-in capital 41,052 41,010 Retained earnings 6,993 12,200 ------------------ ------------------ Total shareholders' equity 43,057 49,569 ------------------ ------------------ TOTAL LIABILITIES AND COMMON SHAREHOLDERS' EQUITY $ 66,603 $ 66,227 ================== ==================
The notes to the consolidated financial statements are an integral part of these statements. 4 5 PERCEPTRON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
NINE MONTHS ENDED MARCH 31, (In Thousands) 2001 2000 -------------------- ------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (5,207) $ 1,640 Adjustments to reconcile net income (loss) to net cash provided from (used for) operating activities: Depreciation and amortization 1,495 1,748 Deferred income taxes (3,992) 1,906 Other 1,208 169 Changes in assets and liabilities, exclusive of changes shown separately (1,836) 713 -------------------- ------------------- Net cash provided from (used for) operating activities (8,332) 6,176 -------------------- ------------------- CASH FLOWS FROM FINANCING ACTIVITIES Revolving credit borrowings 24,810 12,790 Revolving credit repayments (14,865) (16,015) Proceeds from stock plans 42 30 -------------------- ------------------- Net cash provided from (used for) financing activities 9,987 (3,195) -------------------- ------------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (1,393) (1,255) Sale of assets 270 - -------------------- ------------------- Net cash used for investing activities (1,123) (1,255) -------------------- ------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (412) (247) -------------------- ------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 120 1,479 CASH AND CASH EQUIVALENTS, JULY 1 5,947 4,205 -------------------- ------------------- CASH AND CASH EQUIVALENTS, MARCH 31 $ 6,067 $ 5,684 ==================== =================== CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY Receivables, net $ 3,397 $ (737) Inventories (1,959) (634) Accounts payable (733) 178 Other current assets and liabilities (2,541) 1,906 -------------------- ------------------- $ (1,836) $ 713 ==================== ===================
The notes to the consolidated financial statements are an integral part of these statements. 5 6 PERCEPTRON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying consolidated financial statements should be read in conjunction with Perceptron's 2000 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 2001 presentation. In the opinion of management, the unaudited information furnished herein reflects all adjustments necessary, consisting of normal recurring adjustments and adjustments related to the Company's restructuring discussed in Note 8 below, 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 and other matters that affect the value of the inventory. When inventory is disposed of, the obsolescence reserve is released. Inventory, net of reserves, is comprised of the following (in thousands):
MARCH 31, JUNE 30, 2001 2000 ---------------- ---------------- Component Parts $ 6,892 $ 7,214 Work In Process 1,637 1,204 Finished Goods 4,974 4,164 ---------------- ---------------- Total $ 13,503 $ 12,582 ================ ================
3. CREDIT FACILITIES The Company's principal bank has agreed to provide short-term unsecured credit facilities of 1.0 million Deutsche marks and $1.0 million Canadian dollars. The facilities may be used to finance working capital needs and equipment purchases or capital leases. Any borrowings will bear interest at the bank's prime rate (7.5% as of April 20, 2001). The credit facilities expire on July 31, 2001, unless canceled earlier by the Company or the bank. The Company had no borrowings outstanding under these credit facilities at March 31, 2001. The Company has a $15 million unsecured Revolving Credit Agreement (Revolver) that expires on July 31, 2002. Proceeds under the Revolver may be used for general corporate purposes and can be designated as a Floating Rate Loan or as a Eurodollar Rate Loan. Interest on Floating Rate borrowings is calculated daily at 1/2% below the bank's prime rate (7.50% as of April 20, 2001) and is payable on the last day of each month. Interest on Eurodollar Rate borrowings is calculated at a Eurodollar Rate for the period chosen (approximately 6.50% as of April 20, 2001) and is payable on the last day of the applicable period. Quarterly, the Company pays a commitment fee of 1/4% per annum on the daily unused portion of the Revolver. The Revolver prohibits the Company from paying dividends. In addition, the Revolver contains various financial covenants that, among other things, restrict dividend payments by requiring the 6 7 Company to maintain a Fixed Charge Coverage Ratio and a Total Liabilities to Tangible Net Worth Ratio and require the Company to maintain certain levels of earnings before interest, taxes, depreciation and amortization ("EBITDA"). The Company's EBITDA for the nine months ended March 31, 2001 was below the level required by the financial covenant. The Company's bank waived the covenant default through March 31, 2001. The Company and its bank are currently in the process of negotiating two new secured credit facilities that combined are expected to provide for borrowings in excess of $15.0 million. Because the contemplated new credit facilities reset the covenant levels to be maintained by the Company, the Company and its bank decided not to amend the existing Revolver for future covenants that may not be satisfied. As a result, the Revolver has been classified as current in the March 31, 2001 period. The Company had $13.5 million outstanding under the Revolver at March 31, 2001. 4. FOREIGN EXCHANGE CONTRACTS The Company may use, from time to time, a limited hedging program to minimize the impact of foreign currency fluctuations. As the Company exports products, it may enter into limited hedging transactions relating to the accounts receivable arising as a result of such shipments. These transactions involve the use of forward contracts. During the periods presented, the Company did not engage in any hedging activities. In the first quarter of fiscal 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 requires recognition of all derivative financial instruments as either assets or liabilities in the consolidated balance sheet, measured at fair value and sets forth conditions in which a derivative instrument may be designated as a hedge. The statement requires that changes in the fair value of derivatives be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to be recorded to other comprehensive income or to offset related results on the hedged item in earnings. Adoption of SFAS No. 133 did not have a material effect on the Company's consolidated financial statements. 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 MARCH 31, 2001 2000 --------------- --------------- Net Income (Loss) $ (3,376) $ (447) Other Comprehensive Income (Loss): Foreign currency translation adjustments (1,042) (792) --------------- --------------- Total Comprehensive Income (Loss) $ (4,418) $ (1,239) =============== ===============
NINE MONTHS ENDED MARCH 31, 2001 2000 --------------- --------------- Net Income (Loss) $ (5,207) $ 1,640 Other Comprehensive Income (Loss): Foreign currency translation adjustments (1,347) (1,020) --------------- --------------- Total Comprehensive Income (Loss) $ (6,554) $ 620 =============== ===============
7 8 6. EARNINGS PER SHARE Basic earnings per share ("EPS") is calculated by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Other obligations, such as stock options and warrants, 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. A reconciliation of both calculations is shown below (in thousands, except per share amounts):
WEIGHTED AVG. EARNINGS (LOSS) NET INCOME (LOSS) COMMON SHARES PER SHARE THREE MONTHS ENDED MAR. 31, 2001 2000 2001 2000 2001 2000 ---------- --------- ---------- ----------- --------- --------- Basic EPS $(3,376) $(447) 8,182 8,170 $(0.41) $(0.05) Effect of Dilutive Securities: Stock options - - - - - - ---------- --------- ---------- ----------- --------- --------- Diluted EPS $(3,376) $(447) 8,182 8,170 $(0.41) $(0.05) ========== ========= ========== =========== ========= ========= WEIGHTED AVG. EARNINGS (LOSS) NET INCOME (LOSS) COMMON SHARES PER SHARE NINE MONTHS ENDED MAR. 31, 2001 2000 2001 2000 2001 2000 ---------- --------- ---------- ----------- --------- --------- Basic EPS $(5,207) $1,640 8,176 8,170 $(0.64) $0.20 Effect of Dilutive Securities: Stock options - - - 31 - - ---------- --------- ---------- ----------- --------- --------- Diluted EPS $(5,207) $1,640 8,176 8,201 $(0.64) $0.20 ========== ========= ========== =========== ========= =========
During the three and nine month periods ended March 31, 2001, options to purchase 1,411,000 and 1,425,000 shares of common stock, respectively, were outstanding and were not included in the computation of diluted EPS because the effect would have been anti-dilutive. For the comparable three and nine month periods ended March 31, 2000, options to purchase 1,165,000 and 1,194,000 shares of common stock, respectively, were outstanding and were not included in the computation of diluted EPS because the effect would have been anti-dilutive. 7. COMMITMENTS AND CONTINGENCIES The Company may, from time to time, be subject to legal proceedings and claims. Litigation involves many uncertainties. Management is currently unaware of any significant pending litigation affecting the Company, other than the matters discussed below. On September 25, 1998, the U.S. District Court for the Eastern District of Michigan dismissed, with prejudice, a suit filed against the Company by Speroni, S.p.A. ("Speroni"). Speroni has appealed the dismissal. The appeal has been stayed pending the arbitration decision discussed below. The suit alleged tortious interference in conjunction with exclusive distributorship contracts covering the sale of P-1000 products in Italy and France between Perceptron B.V., a wholly-owned subsidiary of the Company, and Speroni. Speroni sought unspecified compensatory damages and punitive damages. Perceptron B.V. terminated the exclusive distributorship contracts in 1997 for breach of contract by Speroni and has sought arbitration of this matter with the International Chamber of Commerce International Court of Arbitration ("ICC"), to confirm the terminations and to award damages. Speroni has filed counterclaims with the ICC alleging breach of the exclusive distributorship contracts and 8 9 seeking damages of $6.5 million. On February 12, 2001, the arbitrator determined that 1) Speroni breached its duty to properly inform Perceptron B.V., but did not act in bad faith, and so Perceptron B.V. did not satisfy the conditions required under French law and Italian law to rightfully terminate the distributorship agreements without prior notice; and 2) Perceptron B.V. did not breach its agreements with Speroni by providing certain information to a customer of both Perceptron B.V. and Speroni and by submitting a bid to a customer of both Perceptron B.V. and Speroni outside of Speroni's territories, but did not act in good faith in not informing Speroni of these activities. Damages, if any, on the claims on which the arbitrator found in favor of Speroni shall be decided in the second phase of the arbitration proceedings. The Company intends to vigorously defend against any damage claim made against it by Speroni. The Company is a party to a suit filed by Analog Technologies, Inc. ("Analog") on October 8, 1999 in the Circuit Court for the County of Oakland, Michigan. The suit alleges that the Company breached a non-disclosure agreement and misappropriated Analog's confidential information and trade secrets in connection with the Company's development of a potential new product. The potential new product involved is one of a number of new products under development by the Company, which have not been discussed in the Company's filings with the Securities and Exchange Commission. On February 15, 2000, the Oakland County Circuit Court denied Analog's motion for preliminary injunction against the Company. Analog also seeks unspecified compensatory damages in excess of $25,000. The Company believes that Analog's claims are without merit and intends to vigorously defend against Analog's claims. 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, however, 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 these customers, it is not possible to estimate the ultimate effect, if any, of this matter on the Company's financial statements. 8. RESTRUCTURING CHARGE The Company recorded a $1.6 million restructuring charge during the third quarter of fiscal 2001. Approximately $1.3 million of the charge was recorded to engineering, research and development and related to reserving for write-offs of inventory and capital assets that were purchased to support product development projects that were either stopped or put on hold and for which it was determined that alternative uses were no longer available. The balance totaling $336,000 was recorded as a restructuring charge and primarily related to closing leased facilities. During the fourth quarter of fiscal 2001, the Company also implemented a work force reduction. The estimated separation costs of $550,000 associated with this reduction will be reported as a restructuring charge during the fourth quarter in accordance with generally accepted accounting principles. 9. NEW ACCOUNTING PRONOUNCEMENT In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". SAB 101 summarizes certain of the SEC's views on applying generally accepted accounting principles to revenue recognition in financial statements. The Company is required to adopt SAB 101 by the fourth quarter of fiscal 2001 (retroactive 9 10 to July 1, 2000) and is currently reviewing interpretive guidance issued recently by the SEC to complete its assessment of the impact that SAB 101 may have on the Company's financial statements. 10. SEGMENT INFORMATION The Company has two reportable segments: Automotive and Industrial Businesses. The Automotive segment designs, manufactures, and markets information-based measurement and inspection focused solutions for process improvements within the automotive industry. The Industrial Businesses segment employs the same technology providing products and services to the markets served by the Forest Products business unit and the Emerging Markets business unit. The Company evaluates performance based on operating income. Company-wide costs are allocated between the segments based on revenues and/or labor as deemed appropriate. Segment detail is summarized as follows (in thousands):
THREE MONTHS ENDED AUTOMOTIVE INDUSTRIAL BUSINESSES CONSOLIDATED ------------------------ -------------------- ---------------------- ---------------------- MARCH 31, 2001 Revenues $ 8,307 $ 3,159 $ 11,466 Operating Income (Loss) (3,131) (1,767) (4,898) Total Assets 55,830 10,773 66,603 MARCH 31, 2000 Revenues $ 9,986 $ 3,735 $ 13,721 Operating Income (Loss) 347 (721) (374) Total Assets 51,610 8,465 60,075
NINE MONTHS ENDED AUTOMOTIVE INDUSTRIAL BUSINESSES CONSOLIDATED ------------------------ -------------------- ---------------------- ---------------------- MARCH 31, 2001 Revenues $ 27,027 $ 10,019 $ 37,046 Operating Income (Loss) (3,548) (4,835) (8,383) Total Assets 55,830 10,773 66,603 MARCH 31, 2000 Revenues $ 39,582 $ 11,143 $ 50,725 Operating Income (Loss) 5,051 (1,665) 3,386 Total Assets 51,610 8,465 60,075
10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Three Months Ended March 31, 2001, Compared to Three Months Ended March 31, 2000 Overview - The Company reported a net loss of $3.4 million, or $0.41 per share, for the third quarter of fiscal 2001, compared to a net loss of $447,000 or $0.05 per share, in the quarter ended March 31, 2000. Net sales of $11.5 million for the three months ended March 31, 2001, were down $2.2 million compared to the prior year's sales of $13.7 million. Automotive sales accounted for 72% of total sales during the third quarter of fiscal 2001 compared to 73% in the quarter ended March 31, 2000. Industrial Businesses sales represented 28% of total sales for the quarter ended March 31, 2001, compared to 27% in the same quarter of 2000. Gross profit for the third quarter of fiscal 2001 was 42.6% compared to 54.7% in the quarter ended March 31, 2000. In the fiscal 2001 quarter, the gross profit rate was reduced approximately one third as a result of the product mix sold by the Forest Products business unit that included high outside purchased material content with lower margin, approximately 40% as a result of unfavorable fixed overhead absorption due to the lower sales level in the fiscal 2001 period and approximately 20% from competitive pricing pressure in Europe and the foreign currency effect of the weak euro. Operating expenses were up $1.9 million in the third quarter of fiscal 2001 compared to the quarter ended March 31, 2000. Most of the increase in operating expenses was the result of a $1.6 million restructuring charge. Approximately $1.3 million of the charge was recorded to engineering, research and development and related to reserving for write-offs of inventory and capital assets that were purchased to support product development projects that were either stopped or put on hold and for which it was determined that alternative uses were no longer available. The balance of the charge was primarily related to closing leased facilities and was recorded as a restructuring charge. Automotive - Sales of $8.3 million in the third quarter of fiscal 2001 were down $1.7 million from $10.0 million for the quarter ended March 31, 2000. The sales decrease was primarily due to the Company's customers' delaying major capital spending projects and fewer major North American customer new tooling projects in the 2001 quarter compared to 2000. P-1000 sales accounted for approximately 28% of net automotive sales in the third quarter of fiscal 2001 compared to approximately 44% in the same period a year ago. The percentage sales decrease reflected customers' migration to the Company's web-based IPNet(TM) product. Sales of the Company's IPNet(TM) product totaled approximately 40% of net automotive sales in the third quarter of fiscal 2001 compared to 20% in the third quarter of fiscal 2000. RGS and NCA systems sales accounted for 25% of net automotive sales in the quarter ended March 31, 2001, compared to 22% one year ago. The change in RGS and NCA systems sales is a function of the timing of orders by the Company's customers. Other product sales and training and service accounted for the remainder of net sales in both years. Industrial Businesses - At the present time, the Industrial Businesses segment's principal market is the Forest Products industry. Third quarter sales were $3.2 million in fiscal 2001 compared to $3.7 million in the third quarter of fiscal 2000. Forest Products sales represented $2.7 million in the quarter ended March 31, 2001 and $2.8 million in the quarter ended March 31, 2000. The balance of the sales came from emerging businesses and were down approximately $400,000 principally due to lower sales to the steel industry. Bookings & Backlog - New order bookings for the three months ended March 31, 2001, were $13.1 million compared to $16.2 million in the comparable quarter of 2000. Automotive bookings totaled 11 12 $10.8 million in the fiscal 2001 quarter compared to $11.8 million a year ago. During the quarter ended March 31, 2001, automotive bookings primarily represented 40% IPNet(TM), 33% P-1000 and 19% RGS and NCA. Automotive bookings for the comparable 2000 period primarily represented 26% IPNet(TM), 54% P-1000, and 13% RGS and NCA. Industrial Businesses bookings were $2.3 million in the quarter ended March 31, 2001, compared to $4.4 million a year ago. Backlog at March 31, 2001, was $23.4 million compared to $24.4 million at March 31, 2000. The Company expects to be able to fill substantially all of the orders in backlog during the following twelve months. The amount of new order bookings and the level of backlog during any particular period are not necessarily indicative of the future operating performance of the Company. Selling, General and Administrative (SG&A) Expenses - SG&A expenses decreased $152,000 to $4.8 million in the quarter ended March 31, 2001, from $5.0 million in the comparable 2000 quarter. The decrease was primarily due to reductions in legal and depreciation expenses offset by higher personnel related costs. Engineering, Research and Development (R&D) Expenses - Engineering and R&D expenses increased $1.7 million from $2.9 million in the quarter ended March 31, 2000, to $4.6 million in the third quarter of fiscal 2001. Approximately $1.3 million of the increase in fiscal 2001 was primarily due to reserving for write-offs of inventory and capital assets related to product development projects that were either stopped or put on hold and for which it was determined that alternative uses were no longer available. The remaining increase was primarily due to increases in personnel related costs and engineering materials. Restructuring Charge - During the fiscal 2001 quarter, the Company recorded a restructuring charge of $336,000 related to the closing of leased facilities (see also Engineering, Research and Development (R&D) Expenses). During the fourth quarter of fiscal 2001, the Company also implemented a work force reduction. The estimated separation costs of $550,000 associated with this reduction will be reported during the fourth quarter in accordance with generally accepted accounting principles. These initiatives are expected to reduce operating expenses by approximately $5 million annually without adversely impacting the Company's revenue potential or customer support. 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. Income Taxes - Income tax benefits for the quarter ended March 31, 2001, reflect the effect of the mix of operating profit and loss among the Company's various operating entities. Outlook -The restructuring program was implemented to more closely match operating expenses with the current level of sales. The lower level of sales and order bookings experienced recently have been the result of the Company's customers delaying major capital spending projects. Because customers have indicated that these projects have only been delayed and not cancelled, the Company has the opportunity for the rate of new orders and sales to begin to improve during fiscal year 2002. 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. 12 13 Nine Months Ended March 31, 2001, Compared to Nine Months Ended March 31, 2000 Overview - The Company reported a net loss of $5.2 million, or $0.64 per share, for the first nine months of fiscal 2001, compared to net income of $1.6 million, or $0.20 per share, in the nine months ended March 31, 2000. Net sales of $37.0 million for the nine months ended March 31, 2001, were down $13.7 million, or 27%, over the prior year's sales of $50.7 million. Most of the sales decrease was attributable to the Automotive segment as explained below. Automotive sales accounted for approximately 73% of total sales during the nine-month period ended March 31, 2001 compared to 78% during the nine months ended March 31, 2000. Industrial Businesses sales represented 27% and 22% of total sales for the nine-month periods ended March 31, 2001 and 2000, respectively. Gross profit for the first nine months of fiscal 2001 was 45.9% compared to 55.5% in the nine months ended March 31, 2000. The gross profit rate in the fiscal 2001 nine-month period was reduced approximately half as a result of unfavorable fixed overhead absorption due to the low sales level in the fiscal 2001 period, one third as a result of the product mix sold by the Forest Product business unit that included high outside purchased material content with lower margins and the balance was the result of competitive pricing pressure in Europe and the effect of the weak euro. Operating expenses increased $623,000 in the first nine months of fiscal 2001 compared to the nine months ended March 31, 2000. The restructuring charge of $1.6 million recorded in the fiscal 2001 third quarter was partially offset by reduced personnel related costs for the nine month comparable periods of approximately $1.0 million. Automotive - Sales in the first nine months of fiscal 2001 decreased $12.6 million to $27.0 million compared to $39.6 million in the nine months ended March 31, 2000, primarily due to the Company's customers' delaying major capital spending projects and fewer major North American customer new tooling projects in the 2001 period compared to last year. P-1000 sales accounted for approximately 24% of net automotive sales in the first nine months of fiscal 2001 compared to approximately 48% in the same period a year ago. The percentage sales decrease reflected our customers' migration to the Company's IPNet(TM) product. Sales of the Company's new IPNet(TM) product totaled approximately 44% of net automotive sales in the first nine months of fiscal 2001 compared to 22% in the nine months ended March 31, 2000. RGS and NCA systems sales accounted for 20% of net sales in the nine months ended March 31, 2001, compared to 23% in the comparable period one year ago. Other product sales and training and service accounted for the remainder of net sales in both years. Industrial Businesses - At the present time, the Industrial Businesses segment's principal market is the Forest Products industry. Sales in the first nine months of fiscal 2001 were $10.0 million, of which $8.9 million was delivered by the Forest Products business unit. Sales for the same period last year were $11.1 million with $9.5 million delivered by the Forest Products business unit. Approximately $600,000 of the sales decline in the current period was primarily due to lower sales in the forest products industry as falling lumber prices caused customers to postpone capital spending. Approximately $500,000 of the sales decline resulted from lower emerging businesses sales, primarily to the steel industry. Bookings & Backlog - New order bookings for the nine months ended March 31, 2001, were $37.3 million compared to $47.2 million for the same period one year ago. Automotive bookings totaled $27.8 million in the fiscal 2001 nine months compared to $36.7 million in the nine-month period ended March 31, 2000. During the nine months ended March 31, 2001, automotive bookings were primarily for: 38% IPNet(TM), 29% P-1000, 17% RGS and NCA and 7% paint inspection products as compared with 25% IPNet(TM), 53% P-1000, 16% RGS and NCA and 3% paint inspection products in the nine months ended March 31, 2000. Industrial Businesses bookings were $9.5 million in the nine months ended March 31, 2001, compared to $10.5 million a year ago. Forest Product bookings represented 95% and 87% of the Industrial Businesses bookings in the nine months ended March 31, 2001 and 2000, respectively. Backlog at March 31, 2001, was $23.4 million compared to $24.4 million at March 31, 2000. The 13 14 Company expects to be able to fill substantially all of the orders in backlog during the following twelve months. The amount of new order bookings and the level of backlog during any particular period are not necessarily indicative of the future operating performance of the Company. Selling, General and Administrative Expenses (SG&A) - SG&A expenses decreased $1.3 million from $15.4 million in the nine months ended March 31, 2000, to $14.1 million in the nine months ended March 31, 2001. The decrease was primarily due to reductions in personnel related costs. Engineering, Research and Development (R&D) Expenses - Engineering and R&D expenses increased $1.5 million from $9.4 million in the nine months ended March 31, 2000, to $10.9 million in the first nine months of fiscal 2001. The increase in expenses was primarily due to the $1.3 million restructuring charge related to reserving for write-offs of inventory and capital assets purchased to support product development projects that were either stopped or put on hold and for which it was determined that alternative uses were no longer available. The remaining increase was primarily related to increased personnel related costs. Restructuring Charge - A $336,000 restructuring charge was recorded during the third quarter of fiscal 2001 related to the closing of leased facilities (see also Engineering, Research and Development (R&D) Expenses). During the fourth quarter of fiscal 2001, the Company also implemented a work force reduction. The estimated separation costs of $550,000 associated with this reduction will be reported during the fourth quarter in accordance with generally accepted accounting principles. These initiatives are expected to reduce operating expenses by approximately $5 million annually without adversely impacting the Company's revenue potential or customer support. 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. Gain on Sale of Assets - During the nine months ended March 31, 2001, the Company recorded a gain on sale of assets of $226,000. This gain was primarily the result of the sale of intellectual property and equipment related to a medical lab that the Company had acquired in 1998 when it purchased the assets of the Sonic group. Income Taxes - Income tax benefit for the nine months ended March 31, 2001, reflects the effect of the mix of operating profit and loss among the Company's various operating entities. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents were $6.1 million at March 31, 2001, compared to $5.9 million at June 30, 2000. The increase of $200,000 in cash for the nine months resulted from $10.0 million of cash provided from financing activities that offset the $8.3 million of cash used in operations and $1.1 million used for net capital spending. The foreign currency effects of the euro reduced cash $412,000 for the nine months. The use of cash for operations reflected the net loss for the period adjusted for non-cash items and increased working capital requirements of $1.8 million. Receivables, net of foreign currency translation adjustments, decreased $3.4 million. Offsetting the cash provided from receivables was a $2.5 million change in current assets and liabilities that primarily reflected the use of cash to pay incentive 14 15 compensation and liabilities accrued at June 30, 2000, a $733,000 decrease in accounts payable and a $2.0 million increase in inventory. Financing activities during the period reflected net working capital borrowings of $9.9 million. The Company has a $15 million unsecured Revolving Credit Agreement (Revolver) that expires on July 31, 2002. The Revolver contains various financial covenants that, among other things, restrict dividend payments by requiring the Company to maintain a Fixed Charge Coverage Ratio and a Total Liabilities to Tangible Net Worth Ratio and require the Company to maintain certain levels of earnings before interest, taxes, depreciation and amortization ("EBITDA"). The Company's EBITDA for the nine months ended March 31, 2001 was below the level required by the financial covenant. The Company's bank waived the covenant default through March 31, 2001. The Company and its bank are currently in the process of negotiating two new secured credit facilities that combined are expected to provide for borrowings in excess of $15.0 million. Because the contemplated new credit facilities reset the covenant levels to be maintained by the Company, the Company and its bank decided not to amend the existing Revolver for future covenants that may not be satisfied. As a result, the Revolver has been classified as current in the March 31, 2001 period. The Company had $13.5 million outstanding under the Revolver at March 31, 2001. The Company believes that available cash on hand and the credit facilities currently being negotiated will be sufficient to fund its currently anticipated calendar year 2001 cash flow requirements. 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. MARKET RISK INFORMATION Perceptron's primary market risks are related to foreign exchange rates and interest rate risk in connection with its borrowings. The foreign exchange risk is derived from sales by its international operations, which are primarily located in Germany and The Netherlands and for which products are produced in the U.S. During the periods presented the Company did not use any market risk instruments for trading purposes. 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-U.S. currencies. For sales commitments entered into in the non-U.S. currencies, the currency rate risk exposure is predominantly less than one year with the majority in the 120 to 150 day range. At March 31, 2001, the Company's percentage of sales commitments in non-U.S. currencies was 35.7% or $8.3 million. The Company may use, from time to time, a limited hedging program to minimize the impact of foreign currency fluctuations. As the Company exports products, it may enter into limited hedging transactions relating to the accounts receivable arising as a result of such shipment. These transactions involve the use of forward contracts. During the periods presented the Company did not engage in any hedging activities. 15 16 INTEREST RATE RISK The Company is subject to interest rate risk in connection with borrowings under its variable rate revolving line of credit and from fixed rate debt assumed in conjunction with the purchase of ultrasound intellectual property in October 1998. The Company's exposure to interest rate risk arises primarily from changes in the prime rate and changes in Eurodollar rates in the London interbank market. See Note 3 of "Notes to Consolidated Statements" for a description of the Company's outstanding debt. NEW ACCOUNTING PRONOUNCEMENTS In the first quarter of fiscal 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 requires recognition of all derivative financial instruments as either assets or liabilities in the consolidated balance sheet, measured at fair value and sets forth conditions in which a derivative instrument may be designated as a hedge. The statement requires that changes in the fair value of derivatives be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to be recorded to other comprehensive income or to offset related results on the hedged item in earnings. Adoption of SFAS No. 133 did not have a material effect on the Company's consolidated financial statements. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". SAB 101 summarizes certain of the SEC's views on applying generally accepted accounting principles to revenue recognition in financial statements. The Company is required to adopt SAB 101 by the fourth quarter of fiscal 2001 (retroactive to July 1, 2000) and is currently reviewing interpretive guidance issued recently by the SEC to complete its assessment of the impact that SAB 101 may have on the Company's financial statements. 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 2001, 2002 and future revenue, order booking levels and earnings levels, the timing of new product releases, the expansion of the Company into new markets, the impact of the Company's cost reduction initiatives and the execution of a new credit agreement with the Company's bank. 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, 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 timing of orders and shipments which can cause the Company to experience significant fluctuations in its quarterly and annual revenue and operating results, timely receipt of required supplies and components which could result in delays in anticipated shipments, general product demand and market acceptance risks, the ability of the Company to successfully compete with alternative and similar technologies, the timing and continuation of the automotive industry's retooling programs, 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, general product development and commercialization difficulties, 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, the level of interest existing and potential new customers may have in new products and 16 17 technologies generally, rapid or unexpected technological changes, a determination by the Company's bank not to execute the expected new credit agreement as a result of changes in economic conditions, the Company's financial position or other concerns, the effect of economic conditions, particularly economic conditions in the domestic and worldwide Automotive and Forest Products industries, both of which have 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 these industries, variations in the amount of cost savings anticipated from the cost reduction initiatives and the impact of cost reduction initiatives on the Company's revenues, order bookings and earnings. The Company's expectations regarding future bookings are based upon oral discussions with customers and are subject to change based upon a wide variety of factors, including economic conditions and system implementation delays. 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 are 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. 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". PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As previously described in the Company's Form 8-K filed February 23, 2001 under Item 5, on February 12, 2001, the arbitrator appointed by the International Chamber of Commerce International Court of Arbitration to hear the arbitration between Perceptron, Inc.'s wholly-owned subsidiary, Perceptron B.V. and Speroni S.p.A., as described in the Company's Form 10-K for the year ended June 30, 2000 under Item 3, determined that 1) Speroni breached its duty to properly inform Perceptron B.V., but did not act in bad faith, and so Perceptron B.V. did not satisfy the conditions required under French law and Italian law to rightfully terminate the distributorship agreements without prior notice; and 2) Perceptron B.V. did not breach its agreements with Speroni by providing certain information to a customer of both Perceptron B.V. and Speroni and by submitting a bid to a customer of both Perceptron B.V. and Speroni outside of Speroni's territories, but did not act in good faith in not informing Speroni of these activities. Damages, if any, on the claims on which the arbitrator found in favor of Speroni shall be decided in the second phase of the arbitration proceedings. The Company intends to vigorously defend against any damage claim made against it by Speroni. 17 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits None (B) Reports on Form 8-K: The Company's current report on Form 8-K, dated February 23, 2001, which disclosed information under Item 5 concerning determinations by the arbitrator appointed by the International Chamber of Commerce International Court of Arbitration to hear the arbitration between Perceptron, Inc.'s wholly-owned subsidiary, Perceptron B.V. and Speroni S.p.A. as described in the Company's Form 10-K for the year ended June 30, 2000 under Item 3. 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: May 14, 2001 By: /S/ Alfred A. Pease ----------------------------------------------------- Alfred A. Pease President and Chief Executive Officer Date: May 14, 2001 By: /S/ John J. Garber ----------------------------------------------------- John J. Garber Vice President and Chief Financial Officer (Principal Financial Officer) Date: May 14, 2001 By: /S/ Sylvia M. Smith ----------------------------------------------------- Sylvia M. Smith Controller and Chief Accounting Officer (Principal Accounting Officer)
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