Forward-Looking Statements
This Annual Report on Form 10-K (the Report), including Managements Discussion and Analysis of Financial
Condition and Results of Operations in Item 7, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results of Schmitt Industries, Inc. and
its consolidated subsidiaries (the Company) that are based on managements current expectations, estimates, projections and assumptions about the Companys business. Words such as expects, anticipates,
intends, plans, believes, sees, estimates and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees
of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to
numerous factors, including, but not limited to, those discussed in the Risk Factors section in Item 1A, Managements Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and
elsewhere in this Report as well as those discussed from time to time in the Companys other Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions. Such
forward-looking statements speak only as of the date of this Report or, in the case of any document incorporated by reference, the date of that document, and we do not undertake any obligation to update any forward-looking statement to reflect
events or circumstances after the date of this Report. If we update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect to other forward-looking
statements.
Introduction
Schmitt Industries, Inc. (the Company), an Oregon corporation, designs, manufactures and sells high precision test and measurement products for two main
business segments: the Balancer segment and the Measurement segment. For the Balancer segment, the Company designs, manufactures and sells computer-controlled vibration detection, balancing and process control systems for the worldwide machine tool
industry, particularly for grinding machines. Through its wholly owned subsidiary, Schmitt Measurement Systems, Inc., an Oregon corporation, the Company designs, manufactures and sells laser and white light sensors for distance, dimensional and area
measurement for a wide variety of commercial applications and ultrasonic measurement products that accurately measure the fill levels of tanks holding propane, diesel and other tank-based liquids and transmit that data via satellite to a secure web
site for display and data management (the Measurement segment). In addition, the Measurement segment includes the Companys laser-based microroughness measurement products for the semiconductor wafer and hard disk drive industries and for other
industrial applications and laser-based surface analysis and measurement products that can be used for a variety of scientific applications. The Company also provides sales and service for Europe and Asia through its wholly owned subsidiary, Schmitt
Europe Limited (SEL), located in Coventry, England and through its sales representative office located in Shanghai, China. The Companys corporate office is located at 2765 N.W. Nicolai Street, Portland, Oregon.
SBS, Acuity, Xact, SMS, Lasercheck and AccuProfile are registered trademarks
owned by the Company.
Balancer Segment
The Companys principal product line for the Balancer segment is the Schmitt Dynamic Balance System (SBS), which consists of a vibration sensor, a computer control unit, and a balance head that is
placed either externally on the grinding wheel spindle with the use of a spindle mounted adaptor or internally inside the spindle bore. SBS products are designed as economical yet highly precise measurement and control devices for permanent or
Page 2
portable installation on grinding machines that can detect and correct imbalance caused by vibration as small as 0.02 microns. Customers can also detect and analyze the acoustic emission signal
generated during grinding or wheel dressing to help monitor and improve the grinding process. Customers include both end user operators as well as manufacturers of grinding machines worldwide for a wide variety of industries that utilize the
grinding process, including the automotive, industrial, aerospace, and medical industries where specifications and operating tolerances on machined parts are increasingly precise. The following products are currently offered under the SBS brand:
SB-5500 Products
The SB-5500 product line is fully automated, eliminating the need to
pre-balance
parts such as grinding wheels. This reduces machine setup time and ensures a smoother and more efficient grinding process. Operating on a principle of mass compensation for wheel imbalance, the balance
head contains two movable eccentric weights, each driven by electric motors through a precision gear train. These weights are repositioned to offset any imbalance in a grinding wheel or other application. Imbalance or vibration is picked up by the
vibration sensor that feeds the detected signal to the control unit, which filters the signal by revolutions per minute. The controller then automatically drives the balance head weights in a direction that reduces the amplitude of the vibration
signal. The balance cycle is complete when the weights are positioned to achieve the lowest vibration level, as low as 0.02 microns.
The SB-5500 control panel contains up to four slots for additional, optional circuit boards designed for specific functions, such as manual balancing, balancing using hydro chambers and process
monitoring, which involves the detection and analysis of high frequency noise, known as acoustic emission (AE), generated by the grinding process.
The optional Acoustic Emission Monitoring System (AEMS) control card uses proprietary acoustic sensor technology to monitor the AE signal generated on the grinding machine during key events in the
grinding process. The AEMS card allows rapid, automatic grinding wheel in-feed, right up to the point of initial contact of the grinding wheel with a new part loaded in the machine. The system can automatically detect the initial contact and very
quickly report this event to the machine control, stopping the wheel in-feed without operator intervention. Part crash occurs when a part or fixture is incorrectly loaded into a grinding machine or some abnormal condition occurs. Rapid in-feed of
the wheel may then result in a dangerous or costly crash. The AEMS card allows the grinding machines operating system (known as a computer numeric control or CNC system) on the machine to monitor the acoustic levels and detect any unexpected
contact when it happens. The system then reports that abnormal contact and instructs the CNC program to stop the grinding process, usually within one millisecond.
The SB-5500 also offers two process control cards that fit inside the control panel to provide enhanced control of the grinding process: the ExactControl card and the ExactDress card. The
ExactControl process control card offers multi-functional grinding process control capability by detecting and analyzing either the AE signal pattern or the machine power fluctuations and then using one of seven process control strategies to adjust
and optimize the grinding process based on that signal data, resulting in improved part quality and reduced operating costs. Software control strategies include ExactDisplay (graphically displays the measurement signal), ExactGap (displays and
evaluates the measurement signal against a predetermined signal threshold to automatically determine when the grinding wheel touches the work piece and to shorten the time between grinding work pieces), ExactTime (displays and evaluates the time
interval of a measurement signal that is above a predetermined signal threshold to monitor the minimum or maximum processing time, ExactIntegral (displays and evaluates the area under a measurement signal curve to optimize the grinding process for
the particular work piece), and ExactDress (displays and evaluates the measurement signal and compares it to a standard threshold to optimize the grinding wheel dress process).
The ExactDress control strategy is also available in a separate process control card as part of the AEMS system to automatically monitor and control the grinding wheel dressing process. The AE signal
pattern of a wheel dress is displayed and compared to a stored master AE signal pattern and indicates when the dressing process has been successfully completed. Monitoring for AE levels during wheel dressing permits the operator or CNC
control to determine if the wheel is being dressed fully across its width, control the aggressiveness of the process and maintain the quality of the dressed wheel to conserve wheel material.
Page 3
SB-2000 and AE-1000 Products
Additional SBS products include the
SB-2000 and the AE-1000. The SB-2000 is an easy-to-use, compact manual balancing system offering both one and two plane manual balancing capabilities. The system comes in a dedicated machine installation version (SB-2000) and a portable version
(SB-2000-P). Each version of the system displays up to four digits of resolution for vibration and six digits for RPM readings and supports a spindle speed range of 30 to 100,000 RPM. The portable SB-2000-P version attaches magnetically to any
location on the machine for easy setup and use. The AE-1000 is a dedicated AE control platform that reduces air machine grinding time and alerts the operator to potential grinding wheel crash conditions by using proprietary AE detection technology
to monitor the high frequency signals generated by the grinding process.
Notable features of the SBS system include its ability to fit almost
all grinding machines, ease of installation, compact and modular construction, ability to balance a wheel while on a machine, virtual elimination of wheel vibration, automatic monitoring of balancing, display in a variety of languages and in metric
units of measurement, instrument grade calibration, short balance process, measurement of both displacement and/or velocity and minimal operator maintenance. The SB-5500 also offers the capability of fully integrating its operation and output within
any grinding machines CNC operating system by the use of its IVIS (Intelligent Visualization) software.
Benefits of using the SBS
system include improved quality of finished parts, elimination of grinding gap time in the grind cycle resulting in increased efficiency and part throughput, ease of product adaptation, monitoring and correction of part crash, minimal downtime,
complete and ready installation, elimination of static balancing, longer life of the grinding wheel, diamond dressings and spindle bearings, the ability to balance within 0.02 microns and its adaptability to all types of machines.
Precision grinding is necessary in major manufacturing areas including the automotive industry (gear trains, camshafts, crankshafts, valves), bearings
(roller and tapered types), ceramics (precision shaping), electric motors (shafts), pumps (shafts and turbines), aircraft (engine parts such as turbine blades), and general manufacturing. Precision grinding has an established worldwide presence in
all industrialized countries and is expanding as a method of material removal and part processing.
Within the Companys customer base
for the SBS system, there are three major market segments:
Machine Tool
Builders
These companies design and manufacture a variety of specialty application grinding machines. SBS systems are distributed to markets throughout the world through machine tool original equipment
manufacturers (OEMs), who incorporate the SBS system into their products.
Examples of some
well-known
worldwide machine tool builders who have offered and/or installed the SBS System include ANCA (Australia), Capco Machinery (U.S.), Drake Manufacturing (U.S.), Ecotech/SMTW (China/U.S.), Erwin Junker
(U.S.), Matrix Machine Tool (UK), Schleifring Group (Germany, China), Shaanxi Qinchuan Machinery Development Co. (China), Cinetic Landis Grinding (U.S.), Koyo Machinery (U.S./Japan), Micron Machinery Limited (Japan/U.S.), USACH Technologies (U.S.)
and Weldon Solutions (U.S.). The Company currently sells its products directly to major machine builders throughout the world.
Machine Tool Rebuilders
These customers, found in most industrialized nations, develop
their business by offering to completely update and refurbish older grinding machines. These rebuilders typically tear the old machine apart and install new components, such as the SBS system. The Company currently sells its products directly to
major machine tool rebuilders throughout the world.
Grinding Machine Users
These end users become aware of the SBS system through trade shows, trade magazine advertising, distributors, field representatives, referrals and new machine suppliers. The Companys business is conducted worldwide with some better known
customers including: Black & Decker, Briggs and Stratton, Schaeffler, Caterpillar, Eaton, Emerson Power Transmission, Cummins Engine, Ford Motor Company, General Electric, General Motors, Ingersoll Rand, Komatsu, Sumitomo Heavy Industries,
SKF Bearing Industries, Timken, TRW Automotive Components and Universal Bearing.
Page 4
For the years ended May 31, 2017, May 31, 2016 and May 31, 2015 (Fiscal 2017, 2016 and
2015), net sales of the Companys balancing products totaled $7,082,474, $6,962,746 and $7,850,236, respectively. Net sales of balancing products accounted for 57%, 60% and 60% of the Companys total sales in Fiscal 2017, 2016 and 2015,
respectively. See Note 5 to Consolidated Financial Statements.
Competition
Competitors in the Balancer segment primarily come from Germany and Italy. These competitors produce electromechanical and water balancers and process
control products similar to SBS. The Companys primary competitors are Marposs S.p.A., Balance Systems S.r.l. and MPM Micro Prazision Marx GmbH.
Measurement Segment
The Companys principal product lines for the
Measurement segment are the Acuity and Xact product lines. Within the Acuity line, the Company designs, manufactures and sells laser and white light sensors for fast and accurate distance, dimensional and area measurement in a wide variety of
commercial applications. Within the Xact product line, the Company designs, manufactures and sells ultrasonic measurement products that accurately measure the fill levels of tanks holding propane, diesel and other tank-based liquids and transmit
that data via satellite to a secure web site for display and data management. The Measurement segment also includes laser-based microroughness measurement products that can be used in the semiconductor wafer and hard disk drive industries and for
other industrial applications and other laser-based surface analysis and measurement products that can be used for a variety of scientific applications, although the products in these two product lines are no longer significant for the Company.
Acuity Products
Products sold under the Acuity brand include lasers utilizing both triangulation and time-of-flight methods of measurement, and confocal chromatic white
light sensors that are used in a wide range of industrial applications including manufacturing, lumber production, steel casting, glass and paper production, medical imaging, crane control and micron-level part and surface inspection. The following
products are currently offered under the Acuity brand:
AccuRange (AR) Distance Measurement Sensors
The AR distance measurement lasers utilize pulsed time of flight measurement principles to accurately measure distances of up to 30 meters (up to 300 meters with retro-reflective tape) with the AR1000, up to 100 meters (500
meters with retro-reflective tape) with the AR2000, up to 50 meters (500 meters with retro-reflective tape) with the AR2500 and up to 300 meters (3000 meters with retro-reflective tape) with the AR3000. These products are highly versatile, being
able to measure distances both indoors and outdoors. Applications include, but are not limited to, load confirmation, alignment, lumber positioning, crane monitoring, fill level measurement, velocity measurement and laser altimeter.
AR Triangulating Laser Displacement Sensors
The AR200 line is the Companys most compact
series of triangulating laser displacement sensors. Four models cover metric measurement ranges from 6 to 100 millimeters. All models boast a 1/500 accuracy rating for measurements within twelve microns. All models are standard with analog, limit
switch and serial outputs. The AR200 sensors project a beam of visible laser light that creates a spot on the target surface. Reflected light from the surface is viewed from an angle by a line scan camera and the targets distance is computed
from the image pixel data. The AR200 displacement sensor cannot be overloaded and measures accurately even when a mirror reflects the entire light beam back to the detector. The AR500 is a compact triangulation laser displacement sensor that
provides accurate measurements (+/- 0.15% linearity) at high speeds (standard to 9400 Hz, high speed option up to 56K Hz). The same compact enclosure houses models with ranges from 5 to 1000 millimeters. Sensor options include blue laser diodes,
faster speeds and cooling jackets. Applications include radiating surfaces and high speed applications such as road texture, ballistics and high speed event monitoring. The AR700 is a triangulation
Page 5
laser displacement sensor that provides superior performance in terms of accuracy, repeatability, and sample speed. The AR700 boasts output speeds up to 9400 Hz and resolutions as low as
one-sixth of a micrometer. The laser will output 9400 distance readings in a single second. The unit is also very compact, measuring approximately 80% smaller than its predecessor, the AR600. Model variations permit applications up to 50 inches in
range. Applications include high speed road profiling, product dimensional or thickness measurement, rubber thickness measurement, lumber or plywood thickness measurement, carton dimensioning and product positioning.
AR Chromatic Confocal Sensors
The AR CCS Prima white light confocal-chromatic displacement sensor is the most
precise measurement system from Acuity. Using a novel optical principle of measuring the reflected lights component wavelengths, these confocal sensors measure both distance and position to within nanometers. These compact probes can measure
to opaque, shiny or even transparent surfaces. Unlike the other Acuity distance sensors, the Prima Confocal systems are comprised of an optical measurement pen and a separate controller. This controller houses all of the electronics,
light source, etc. Only emitted white light and reflected signals are passed between the pen and the controller via a thin fiber-optic transmission cable. The Confocal-Chromatic Sensors (CCS) are offered in a variety of measurement ranges and
standoff distances, each with a corresponding resolution. The shortest-range models resolve to 5 nanometers of height change. The AR CCS Initial confocal sensor is an extremely precise point sensor for measuring displacement and thickness. Each
system includes a controller unit, a fiber optic cable, a measuring probe and all necessary cables and software. The CCS Initial measures distance and topography of varied targets, including silicon, polished metals, glass, contoured lenses,
polymers, semiconductor masks and natural materials. The technology in the CCS Initial supports nanometer-scale resolutions and the system comes in five different measurement models that range from 0.4 to 12.0 mm.
AccuProfile (AP) Laser Line Scanner
The laser line sensors in this series are mid-level
two-dimensional CMOS digital sensors for industrial surface dimensioning and measurement applications. The AP820 is a two-dimensional laser line scanner that measures surface height profiles by projecting a beam of visible laser light that creates a
line on a targeted surface. The AP820 is a highly accurate sensor for industrial surface dimensional and measurement applications. The scanner quickly and accurately generates low-noise 2D or 3D profile scans of objects, surfaces or scenes. The
sensor has an onboard processor and comes with AcuityView image analysis software. Typical scanner applications include weld gap tracking and weld bead profiling, positional control of objects and surfaces, tire profiling, wheel profiling, surface
profiling, 3D profile generation and dimensional measurement.
Acuity (AQ) 2D Laser Line
Scanner
The AQ6 laser line sensor offers higher speed and higher resolution, with models from 0.3 megapixels to over 12 megapixels. The AQ6 uses the latest in new high density CMOS camera design with new Gigabit
Ethernet communications and the newly released GeniCam high speed vision protocols. This allows the customer to increase the resolution on the target and reduce the amount of sensors needed for larger parts. The new outputs also will allow for a
faster and less expensive integration of the sensor into the customers application. Applications include pipe and tube manufacturers, large laser line applications for flaw detection, and high accuracy scans of difficult targets. The AQ6 also
lends itself to custom OEM applications with laser lines of over 80 inches in length. Currently there are 9 models of the AQ6 available.
Competition
The Company believes
the principal elements of competition include quality of ongoing technical support and maintenance coupled with responsiveness to customer needs, as well as price, product quality, reliability and performance. The market for the Acuity products is
extremely competitive, characterized by rapidly changing technology, and includes multinational competitors. Company pricing is intended to obtain market share and meet competitive supplier prices. The market strategy is to establish products with
the best quality, reliability and performance and superior economic value.
Page 6
Xact Remote Tank Monitoring Products
The Companys Xact Remote Tank Monitoring products provide remote fill level monitoring of propane, diesel and other tank-based
liquids for tanks, large or small, anywhere in the world. Accessing accurate fill level information is essential to effectively manage inventory, improve delivery efficiency, reduce operating costs and increase profitability, and justify capital
expenditures. The Xact system utilizes an ultrasonic sensor that is applied externally to the tank to calculate the fill level inside the tank with great accuracy. The Xact system can also be installed to measure the fill levels of bobtail and
transport trucks. For smaller tanks that are difficult to access or where the precise accuracy provided by the ultrasonic sensor is not as important, Xact also offers a sensor that is affixed to the dial of a preinstalled float gauge (known as a
gauge reader) which detects the fill level that is reported by the gauge. Tank fill data is then transmitted via the Globalstar
®
satellite network to a secure website for display. The transmission of data via satellite does not rely on phone land lines or cellular networks and therefore no
dropped data. The use of satellite telemetry permits monitoring of any tank anywhere in the world. With the Xact system, minimum or maximum alarm or fill levels can be set to automatically notify operators by email anytime a particular tank reading
exceeds thresholds or needs refilling. The Xact system can be used to monitor tanks as small as 125 gallons (473 liters) and as large as 90,000 gallons (340,686 liters). With Xact, operators can obtain timely and accurate readings of inventory
levels and tank refill requirements on a predetermined timely basis.
There are three main components to the Xact Tank Monitoring System:
Tank Sensor
The Xact ultrasonic sensor incorporates patented technology and is
externally mounted to the bottom of the tank. The sensor produces a small electrical pulse, or a ping, that travels through the tanks steel shell, which is reflected off the bottom surface of the liquid stored in the tank in the
form of an echo that is detected by the sensor. The time of flight between the ping and the echo, which is measured in milliseconds, is then calculated to determine, based upon additional data regarding tank size and shape, the volume of
liquid the tank contains. This information is then remotely transmitted via a satellite radio transmitter. For smaller tanks that are difficult to access or where the precise accuracy provided by the ultrasonic sensor is not as important, Xact also
offers a sensor that is affixed to the dial of a preinstalled float gauge (known as a gauge reader).The gauge reader detects the fill level that is reported by the gauge and transmits that data by satellite in the same manner as the
ultrasonic sensor. Float gauges have a typical accuracy range of +/- 8% to 12%.
Satellite Radio
Transmitter
The Xact radio transmitter is placed on the top of the tank and is connected by cable to the tank sensor or gauge reader. The satellite transmitter transmits the tank data using the GlobalStar
®
satellite network to a GlobalStar
®
ground station and then to the Xact secure website where the tank data is displayed or is automatically directed to a customers automated inventory, delivery
management system or logistics system.
Xact Website
The Xact website is a secured
location providing controlled access to the tank data for each customers various tank locations. The tank fill level data and geometry of the tank are used to calculate and display the precise fill level at predetermined measurement times
along with additional information such as temperature, battery status, GPS coordinates and map location, fill levels that trigger email notification and the list of email recipients. In addition to the data being displayed on the website, the data
can also be automatically directed to a customers automated inventory or delivery management system for full automation of the delivery process. Operators can now obtain highly accurate readings and tank information from even the most remote
tanks conveniently and cost-effectively using their desktop computer, laptop, tablet or smart phone.
The benefits of using the Xact Tank
Monitoring System include external mounting with no reliance on existing mechanical gauges when using the ultrasonic sensors, tank fill data is sent directly and instantly from the tank to the user via satellite, no reliance on telephone lines or
cellular networks and no dropped data, temperature adjusted readings for accuracy within +/- 2% for large tanks and +/- 1% for smaller tanks when using the ultrasonic sensor, user-set alarm levels and automatic low tank-level messaging via email or
cell phone, the
Page 7
ability to operate in a wide range of operating environments from -40ºC to 60ºC, long battery life, quick and easy installation, secure data transmission via satellite, the ability to
integrate directly into delivery scheduling management systems and the ability to monitor any tank anywhere in the world.
Customers
Customers of the Xact Tank Monitoring System include large, regional and local propane distributors, such as Superior Propane
(Canada), Suburban Propane (U.S.), AmeriGas (U.S.), Pacific Propane (U.S.) and TermoGas (Mexico). The Company is focusing its business development efforts on the propane and diesel industries in the United States and Canada.
Competition
Management believes
that the Xact Tank Monitoring System offers the only ultrasonic sensor specifically designed to provide independent precise tank level calculation while most other competitors utilize gauge-reading technology, which reads the tank fill level from a
pre-installed float gauge and is less accurate. Competitors offer telemetry options based on cellular or closed loop communication networks whereas Xact telemetry is satellite based. Competitors include, but are not limited to, Independent
Technologies, Inc. (Wesroc), NasCorp (SkyTracker), WacnGo, Silicon Controls, TankLink, Centeron, TankScan and Enertrack.
Other
Measurement Segment Products
Also included in the Measurement segment are the following products; however, these products are being
phased out by the Company:
TMS
TMS (Texture Measurement System) 2000-RC is an
accurate non-contact texture measurement system. The product (used on aluminum substrates) provides fast, accurate and repeatable microroughness measurements while quadrupling production throughput when compared to other testing devices. Surface
roughness can be measured to levels below 0.5 Angstroms. An Angstrom (Å) is a unit of measure equal to 1 hundred-millionth of a centimeter (the point of a needle is one million Å in diameter).
Lasercheck
Lasercheck is a unique laser-based non-contact roughness gauge incorporating patented
laser light-scatter technology that can make precise and repeatable surface roughness measurements in the 0.025 to 2 micron (<1.0 to 80 micro inches) range. Lasercheck provides high-speed in-process measurements in a fraction of a second and is
optimized for surface measurements of ground, sanded, polished, honed, super-finished and shot-blasted surfaces.
Complete Angle Scatter Instrument (CASI Scatterometers)
The CASI Scatterometer uses visible,
ultraviolet or infrared laser light as a nondestructive probe to measure surface quality, optical performance, smoothness, appearance, defects and contamination on a wide variety of materials. These products are scientific measurement instruments
providing customers with molecular-level precision in roughness measurement of optical surfaces, diffuse materials, semiconductor wafers, magnetic storage media and
precision-machined
surfaces, as well as
surfaces affecting the cosmetic appearance of consumer products. During FY2017, the Company signed an agreement to transfer the assets and technology associated with the CASI products in exchange for royalty payments over a seven year period.
MicroScan
The MicroScan system is a portable device consisting of a
hand-held
control unit, an interchangeable measurement head and a separate charging unit. To perform a measurement, the operator places the measurement head on the objective area and presses a button. Each
measurement takes less than five seconds with results displayed and stored in system memory. The MicroScan can store 700 measurements in 255 files and provides the capability to program pass/fail criteria. Software is available for control,
analysis and file conversion. From a single measurement, a user can determine RMS surface roughness, reflectance and scatter light levels (BRDF) on either flat or curved surfaces and under any lighting conditions.
Page 8
In Fiscal 2017, 2016 and 2015, net sales of Measurement products totaled $5,315,169, $4,722,607 and
$5,218,855, respectively, and accounted for 43%, 40% and 40% of the Companys total sales in Fiscal 2017, 2016 and 2015, respectively. See Note 5 to Consolidated Financial Statements.
Sales by Geographic Area
In Fiscal 2017, 2016 and 2015, the Company recorded net sales of its products in the United States, its country of domicile, of $6,797,469, $6,931,278 and
$7,174,257, respectively. Net sales in the last three fiscal years by geographic areas were:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
|
Europe
|
|
|
Asia
|
|
|
Others
|
|
Fiscal 2017
|
|
$
|
8,162,340
|
|
|
$
|
1,451,293
|
|
|
$
|
2,500,191
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$
|
283,819
|
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Fiscal 2016
|
|
$
|
7,749,753
|
|
|
$
|
1,435,280
|
|
|
$
|
2,288,550
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|
|
$
|
211,770
|
|
Fiscal 2015
|
|
$
|
8,165,269
|
|
|
$
|
1,194,186
|
|
|
$
|
3,388,757
|
|
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$
|
320,879
|
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Business and Marketing Strategy
The Company designs, manufactures and markets all of its products with operations divided into a number of different channels and geographies.
Balancer Segment Products
The Company markets and sells its SBS products in a
variety of ways. First, selling channels are provided by independent manufacturers representatives and distributors. There are currently approximately 65 individuals and/or organizations throughout the world acting in one of these capacities,
including approximately 15 in the United States and seven in China.
Second, OEMs integrate the SBS products on the machine tools they
produce. Users thus purchase the SBS products concurrently with the machine tools. Conversely, end users of grinding machines that have purchased the SBS system directly from the Company, after enjoying the benefits of our products, often request
that SBS products be included with the new equipment they order from OEMs. The SBS systems are often installed by machine tool builders prior to displaying their own machine tools at various trade shows, becoming endorsements that prove beneficial
to the Companys sales efforts.
Third, worldwide trade shows have proven to be an excellent source of business. Company representatives,
usually one or more of the marketing managers and the CEO and/or VP of Operations, attend these events along with local Company representatives. These individuals operate a display booth featuring an SBS System demonstration stand and product and
technical literature. Representatives from all facets of the Companys target markets attend these trade shows.
In North America and
Asia, products are shipped directly to customers from the Companys factory in Portland, Oregon. Where the Company has distributors, the product is shipped to the distributor, who in turn pays the Company directly and then delivers and installs
the product for the end user. European distribution to customers is handled by shipping the product directly from the Companys Portland headquarters to its European subsidiary in the United Kingdom, which in turn sells and distributes the
products.
Measurement Segment Products
Similar to the Balancer segment, the Measurement segment uses a variety of methods to market and sell its products. Primarily, our sales and marketing managers direct the overall worldwide sales and
marketing efforts for the Acuity and Xact products, including the management of distributors in selected markets. In addition, trade
Page 9
shows have recently proven to be an excellent source of business. Representatives from all facets of the Companys target markets attend these trade shows. All Measurement segment products
are assembled in the Portland, Oregon facility and shipped worldwide directly to customers.
Backlog
The Company does not generally track backlog. Normally, orders are shipped within one to two weeks after receipt unless the customer requests otherwise.
Manufacturing
There are no unique sources of supply or raw materials in any product lines. Essential electronic components, available in large quantities from various
suppliers, are assembled into the Balancing and Measurement electronic control units under the Companys quality and assembly standards. Company-owned software and firmware are coupled with the electronic components to provide the basis of the
Companys various electronic control units. Management believes several supply sources exist for all electronic components and assembly work incorporated into its electronic control systems. Mechanical parts for the Companys products are
produced by high quality machine shops. The Company is not dependent on any one supplier of mechanical components. In the event of supply problems, the Company believes that two or three alternatives could be developed within 30 days. The Company is
subject to availability and pricing on the various components parts purchased, which has had, and may continue to have, a material impact on operations.
The Company uses
in-house
skilled assemblers to construct and test vendor-supplied components. Component inventory of finished vendor-supplied parts is held on
Company property to assure adequate flow of parts to meet customer order requirements. Inventory is monitored by a computer control system designed to assure timely re-ordering of components. In-house personnel assemble various products and test all
finished components before placing them in the finished goods inventory. Finished goods inventory is maintained via computer to assure timely shipment and service to customers. All customer shipments are from the finished goods inventory.
The Companys Quality Control Program first received full ISO 9001 certification in 1996. In 2005, the Company received its
certification to the newer ISO 9001:2000 requirements and in 2011 and 2014 received its recertification.
Proprietary Technology
The Companys success depends in part on its proprietary technology, which the Company protects through patents, copyrights,
trademarks, trade secrets and other measures. The Company has U.S. patents covering both Balancer and Measurement products, processes and methods that the Company believes provide it with a competitive advantage. The Company has a policy of seeking
patents, where appropriate, on inventions concerning new products and improvements developed as part of its ongoing research, development and manufacturing activities. While patents provide certain legal rights of enforceability, there can be no
assurance the historic legal standards surrounding questions of validity and enforceability will continue to be applied or that current defenses with respect to issued patents will, in fact, be considered substantial in the future. There can be no
assurance as to the degree and range of protection any patent will afford and whether patents will be issued or the extent to which the Company may inadvertently infringe upon patents granted to others.
The Company manufactures its Balancer segment products under copyright protection in the U.S. for electronic board designs. Encapsulation of the finished
product further protects the Companys technologies including software.
The Company also relies upon trade secret protection for its
confidential and proprietary information. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Companys trade secrets or disclose
such technology or that the Company can meaningfully protect its trade secrets.
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While the Company pursues patent, trademark, trade secret and copyright protection for products and various
trademarks, it also relies on know-how and continuing technology advancement, manufacturing capabilities, affordable high-quality products, new product introduction and direct marketing efforts to develop and maintain its competitive position.
Product Development
The Company maintains an ongoing research and development program to expand the product lines and capabilities of its business segments. The goal of this program is to expand the product base in historic
markets and to enter new market areas so as to reduce reliance on historic market segments. During Fiscal 2017, 2016 and 2015, the Companys research and development expense totaled $256,164, $287,672 and $378,305, respectively.
Employees
As
of July 31, 2017, the Company employed 50 individuals worldwide on a full-time basis. There were no part-time or temporary employees. None of the Companys employees are covered by a collective bargaining agreement.
The following are important
factors that could cause actual results or events to differ materially from those contained in any forward-looking statements made by or on behalf of the Company (see the forward-looking statements disclaimer at the beginning of Part 1, Item 1
in this Report). In addition, the risks and uncertainties described below are not the only ones that the Company faces. Unforeseen risks could arise and problems or issues that the Company now views as minor could become more significant. If the
Company were unable to adequately respond to any risks, the Companys business, financial condition or results of operations could be materially adversely affected. In addition, the Company cannot be certain that any actions taken to reduce
known or unknown risks and uncertainties will be effective.
General economic conditions and uncertainties may adversely affect the
Companys business, operating results and financial condition
The Companys operations and performance depend significantly on
worldwide economic conditions, particularly in the industrial, manufacturing and automotive sectors in the U.S., Asia and Europe, and their impact on levels of capital spending, which have deteriorated significantly in the past and may become
depressed, or be subject to further deterioration. Economic factors that could adversely influence demand for the Companys products include uncertainty about global economic conditions leading to reduced levels of investment, reduction in
demand for our customers products, customers and suppliers access to credit and the stability of the global financial system, the overall health of our markets, unemployment and other macroeconomic factors generally affecting
commercial and industrial spending behavior.
Past distress in the global financial markets and global economy resulted in reduced liquidity
and a tightening of credit markets. If these conditions were to reoccur, the Company could experience several potential adverse effects, including the inability of customers to obtain credit to finance purchases of the Companys products, the
insolvency of customers resulting in reduced sales and bad debts, and the insolvency of key suppliers resulting in product development and production delays.
The Companys primary markets are volatile and unpredictable
The Companys
business depends on the demand for our various products in a variety of commercial and industrial markets. In the past, demand for our products in these markets has fluctuated due to a variety of factors, some of which are beyond our control,
including: general economic conditions, both domestically and
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internationally, the timing, number and size of orders from, and shipments to, our customers as well as the relative mix of those orders and variations in the volume of orders for a particular
product line in a particular quarter.
New products may not be developed to satisfy changes in consumer demands
The failure to develop new products or enhance existing products or react to changes in existing technologies could result in decreased revenues and a
loss of market share to competitors. Financial performance depends on the ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis. New product opportunities may
not be identified and developed and brought to market in a timely and cost-effective manner. Products or technologies developed by other companies may render products or technologies obsolete or noncompetitive, or a fundamental shift in technologies
in the product markets could have a material adverse effect on the Companys competitive position within historic industries.
Competition is intense and the Companys failure to compete effectively would adversely affect its business
Competition in the markets for the Companys products is intense. The speed with which the Company can identify new applications for the
Companys various technologies, develop products to meet those needs and supply commercial quantities at low prices to those new markets are important competitive factors. The principal competitive factors in the Companys markets are
product features, performance, reliability and price. Many of the Companys competitors have greater financial, technical, engineering, production and marketing resources than we do. Those competitors with greater resources may, in addition to
other things, be able to better withstand periodic downturns, compete more effectively on the basis of price and technology, or more quickly develop enhancements to products that compete with the products we manufacture and market. New companies may
enter the markets in which we compete, further increasing competition in those markets. No assurance can be given that the Company will be able to compete effectively in the future, and the failure to do so would have a material adverse effect on
the Companys business, financial condition and results of operations.
The Company may experience increased pricing pressure
We have experienced and continue to experience pricing pressure in the sale of our products, from both competitors and customers. Pricing
pressures typically have become more intense during cyclical downturns when competitors seek to maintain or increase market share, reduce inventory or introduce more technologically advanced products or lower cost products. In addition, we may agree
to pricing concessions or extended payment terms with our customers in connection with volume orders or to reduce cost of ownership in highly competitive applications. Our business, financial condition, margins or results of operations may be
materially and adversely affected by competitive pressure and intense price-based competition.
Production time and the overall cost of
products could increase if any of the primary suppliers are lost or if a primary supplier increased the prices of raw materials
Manufacturing operations depend upon obtaining adequate supplies of raw materials on a timely basis. The results of operations could be adversely affected
if adequate supplies of raw materials cannot be obtained in a timely manner or if the costs of raw materials increased significantly.
The
Company may not be able to ramp up manufacturing to satisfy increasing orders, which may lead to the loss of significant revenue opportunities
The Company manufactures several different product lines, all of which involve complicated technology and individual attention for each product made. The production time for each product can vary,
depending on a variety of circumstances, including component availability, timing of delivery of components from suppliers and employee availability. Should the Company receive a large increase in orders, an increase in the size of orders or a
shortening of the required delivery time on existing orders, the Company may not be able to ramp up manufacturing to satisfy customer expectations, which may lead to the loss of significant revenue opportunities.
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The Company maintains a significant investment in inventories in anticipation of future sales
The Company believes it maintains a competitive advantage by shipping product to its customers more rapidly than its competitors. As a
result, the Company has a significant investment in inventories. These inventories are recorded using the lower of cost or market method, which requires management to make certain estimates. Management evaluates the recorded inventory values based
on customer demand, market trends and expected future sales, and changes these estimates accordingly. A significant shortfall of sales may result in carrying higher levels of inventories of finished goods and raw materials thereby increasing the
risk of inventory obsolescence and corresponding inventory write-downs. As a result, the Company may not carry adequate reserves to offset such write-downs.
The Companys existing cash may not be sufficient and the Company may not be able to obtain financing to fund operations or future growth
The Company had a cash balance of $867,607 as of May 31, 2017, compared to $988,686 as of May 31, 2016, and has no bank line of credit facility.
The Company believes that its existing cash and cash equivalents combined with the cash from operating activities will be sufficient to meet its cash requirements for the near term. However, if sales weaken and the Company is unable to reduce its
operating costs in a timely manner or access additional financing, the Company may have to continue to reduce its cash balance, which could significantly impact the liquidity or operations of the Company, and may have to explore other financing
alternatives to raise cash.
Fluctuations in quarterly and annual operating results make it difficult to predict future performance
Quarterly and annual operating results are likely to fluctuate in the future due to a variety of factors, some of which are beyond
managements control. As a result of quarterly operating fluctuations, it is important to realize quarter-to-quarter comparisons of operating results are not necessarily meaningful and should not be relied upon as indicators of future
performance.
The Company may experience a downturn due to the risks of operating a global business
Sales to customers outside the U.S. accounted for 45.2% of total sales in Fiscal 2017. We expect that sales to customers outside the U.S. will continue to
represent a significant percentage of sales in the future. We currently have a sales and service office in Coventry, England and a sales office in Shanghai, China. We may need to increase our foreign operations in the future. Our international
sales, purchases and operations are subject to risks inherent in conducting business abroad, many of which are outside of our control, including periodic local or geographical economic downturns, fluctuations in the relative values of currencies,
difficulties in protecting intellectual property, shipping delays and disruptions, local labor disputes, unexpected changes in trading policies, regulatory requirements, tariffs and duties and difficulties in managing a global presence, including
staffing, collecting accounts receivable, and managing distributors and sales representatives.
The Company faces risks from international
sales and currency fluctuations
The Company markets and sells its products worldwide and international sales have accounted for and are
expected to continue to account for a significant portion of future revenue. International sales are subject to a number of risks, including: the imposition of governmental controls; trade restrictions; difficulty in collecting receivables; changes
in tariffs and taxes; difficulties in staffing and managing international operations; political and economic instability; general economic conditions; and fluctuations in foreign currencies. In a referendum held in the United Kingdom
(UK) on June 23, 2016, a majority of those voting voted for the UK to leave the European Union (EU) (commonly referred to as Brexit). The terms of the UKs future relationship with the EU will be
negotiated over time. In the meantime, there are immediate uncertainties that face U.S. companies with operations in the UK and the EU, of which Schmitt is one of those companies. Specifically, currency
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fluctuations will impact sales, costs and earnings. At one point shortly after the Brexit vote, the British pound fell more than 10% to the lowest level since 1985. Currencies could remain
volatile for the foreseeable future. No assurances can be given that these factors will not have a material adverse effect on future international sales and operations and, consequently, on business, financial condition and results of operations.
The Company may not be able to reduce operating costs quickly enough if sales decline
Operating expenses are generally fixed in nature and largely based on anticipated sales. However, should future sales decline significantly and rapidly,
there is no guarantee management could take actions that would further reduce operating expenses in either a timely manner or without seriously impacting the operations of the Company.
Future success depends in part on attracting and retaining key management and qualified technical and sales personnel
Future success depends on the efforts and continued services of key management, technical and sales personnel. Significant competition exists for such personnel and there is no assurance key technical and
sales personnel can be retained or that other highly qualified technical and sales personnel as required can be attracted, assimilated and retained. There is also no guarantee that key employees will not leave and subsequently compete against the
Company. The inability to attract and retain key personnel could adversely impact the business, financial condition and results of operations.
Changes in the effective tax rate may have an adverse effect on the Companys results of operations
The Companys future effective tax rate may be adversely affected by a number of factors including: the jurisdictions in which profits are determined
to be earned and taxed; the resolution of issues arising from future, potential tax audits with various tax authorities; changes in the valuation of our deferred tax assets and liabilities; adjustments to estimated taxes upon finalization of various
tax returns; increases in expenses not deductible for tax purposes; changes in available tax credits; changes in stock-based compensation expense; changes in tax laws or the interpretations of such tax laws and changes in generally accepted
accounting principles.
Failure to protect intellectual property rights could adversely affect future performance and growth
Failure to protect existing intellectual property rights may result in the loss of valuable technologies or paying other companies for
infringing on their intellectual property rights. The Company relies on patent, trade secret, trademark and copyright law to protect such technologies. There is no assurance any of the Companys U.S. patents will not be invalidated,
circumvented, challenged or licensed to other companies.
Changes in securities laws and regulations have increased and could continue to
increase Company expenses
Changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley
Act of 2002 and rules promulgated by the Securities and Exchange Commission, have increased and may continue to increase Company expenses as the Company devotes resources to ensure compliance with all applicable laws and regulations. In addition,
the NASDAQ Capital Market, on which the Companys common stock is listed, has also adopted comprehensive rules and regulations relating to corporate governance. These laws, rules and regulations have increased the scope, complexity and cost of
corporate governance, reporting and disclosure practices. The Company may be required to hire additional personnel and use outside legal, accounting and advisory services to address these laws, rules and regulations. The Company also expects these
developments to make it more difficult and more expensive for the Company to obtain director and officer liability insurance in the future, and the Company may be required to accept reduced coverage or incur substantially higher costs to obtain
coverage. Further, the Companys board members, Chief Executive Officer and Chief Financial Officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty
attracting and retaining qualified board members and executive officers, which would adversely affect the Company.
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