NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
Accounting Policies
Perceptron, Inc. (“Perceptron” “we”, “us” or “our”) develops, produces and sells a comprehensive range of automated industrial metrology products and solution
s to manufacturers
for dimensional gauging, dimensio
nal inspection and 3D scanning
. Our products provide solutions for manufacturing process control as well as sensor and software technologies for non-contact measurement, scanning and inspection applications. We also offer
v
alue
a
dded
s
ervices such as traini
ng and customer support
.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and within the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. Our Consolidated Financial Statements include the accounts of Perceptron and our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In our opinion, these statements include all normal recurring adjustments necessary 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 fiscal year. The accompanying unaudited Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements in our 2017 Annual Report on Form 10-K for the fiscal year ended June 30, 2017.
Use of Estimates
Management is required to make certain estimates and assumptions under U.S. GAAP during the preparation of these Consolidated Financial Statements. These estimates and assumptions may affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassification
Certain prior period amounts have been reclassified in the Consolidated Statements of Cash Flow to conform to the current period presentation.
2.
New Accounting Pronouncements
In May 2014, the
Financial Accounting Standards Board
(“
FASB
”)
issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. In March 2016, the FASB issued the final guidance to clarify the principal versus agent guidance (i.e., whether an entity should report revenue gross or net). In April 2016, the FASB issued final guidance to clarify identifying performance obligation and the licensing implementation guidance. In May 2016, FASB updated the guidance in ASU No. 2014-09, which updated implementation of certain narrow topics within ASU 2014-09. Finally, in December 2016, the FASB issued several technical corrections and improvements, which clarify the previously issued standards and corrected unintended application of previous guidance. These standards (collectively “ASC 606”) will be effective for annual periods beginning after December 15, 2017 (as amended in August 2015, by ASU 2015-14,
Deferral of the Effective Date
), and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the applications of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We have commenced a detailed analysis of our contracts under ASC 606. Based on our preliminary analyses, we
have decided to utilize the cumulative effect method for transition. Furthermore, we expect
changes in timing of revenue recognition related to several of our performance obligations; in general, we believe we will be recognizing revenue more quickly than under current revenue re
cognition guidance. Finally
, we believe that our Consolidated Balance Sheet will be impacted as we identify Contract Assets
as allowed under ASC 606
. We do not expect a change to the level of disaggregation for our disclosures, although we do expect to provide additional detail about the timing of revenue recognition for several of our performance obligations and about our Contract Assets and Contract Liabilities.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01,
Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
(ASU 2016-01), which amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments.
In February 2018, the FASB issued Accounting Standards Update No. 2018-03
—Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
(ASU 2018-03)
, which
contains
technical corrections and improvements related to
ASU
2016-01.
Both ASU
2016-01
and ASU 2018-03 are
effective for Perceptron on July 1, 2018 and
are
not expected to have a significant impact on our consolidated financial statements or disclosures.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02
Leases
(ASU 2016-2), which establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. A modified retrospective transition approach is required for lessees with capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.
In January 2018, the FASB issued Accounting Standards Update No. 2018-01,
Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842
, which permits an entity to elect an optional transition practical expedient to not evaluate
land easements
under Topic 842
.
We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13,
Financial Instruments – Credit Losses (Topic 326)
(ASU 2016-13), which requires the measurement of all expected credit losses for financial assets held at the reporting date to be based on historical experience, current conditions as well as reasonable and supportable forecasts. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
(ASU 2016-15), which will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for Perceptron beginning on July 1, 2018 and requires us to utilize a retrospective adoption unless it is impracticable for us to apply, in which case, we would be required to apply the amendment prospectively as of the earliest date practicable.
ASU 2016-15
is not expected to have a significant impact on our consolidated financial statements
or disclosures
.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
(ASU 2016-16), which requires that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. ASU 201
6-16
is effective for Perceptron on July 1, 2018 and is not expected to have a significant impact on our consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
(ASU 2016-18), which requires a company to present their Statement of Cash Flows including amounts generally described as restricted cash or restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted.
We hold restricted cash in short-term bank guarantees to provide financial assurance that we will fulfill certain customer obligations in China. These balances are currently part of ‘Short-term investments’ on our Consolidated Balance Sheet and the movement is part of ‘Purchases of short-term investments’ and ‘Sales of short-term investments’ in the investing activities section of our Consolidated Statement of Cash Flow. This bal
ance will be reclassified into “Cash and cash equivalents”
on our Consolidated Balance Sheet as of July 1, 2018 and will no longer be considered an investing activity on our Consolidated Statement of Cash Flow.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
(ASU 2017-01), which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for Perceptron on July 1, 2018 and is not expected to have a significant impact on our consolidated financial statements or disclosures.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04,
Intangibles—Goodwill and Other (Topic 350)
(ASU 2017-04), which simplifies the Test for Goodwill Impairment.
ASU
2017-04 is effective for annual reporting periods beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of the adoption of ASU 2017-04 on our consolidated financial statements and disclosures.
In February 2017, the FASB issued Accounting Standards Update No. 2017-05,
Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets
(ASU 2017-05), which clarifies the scope of Subtopic 610-20 and adds guidance for partial sales of nonfinancial assets. Subtopic 610-20, which was issued in May 2014 as a part of Accounting Standards Update No. 2014-09, provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. ASU 2017-05 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period with early application permitted only as of annual reporting periods beginning after December 15, 2016. We do not expect ASU 2017-05 to have a significant impact on our consolidated financial statements or disclosures.
In May 2017, the FASB issued Accounting Standards Update No. 2017-09,
Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting
(ASU 2017-09), which provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718,
Compensation—Stock Compensation
, to a change to the terms or conditions of a share-based payment award. ASU 2017-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. We do not expect ASU 2017-09 to have a significant impact on our consolidated financial statements or disclosures.
In February 2018, the FASB issued
A
ccounting Standards Update 2018-02
—Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
(ASU 2018-02)
,
which
allow
s for
a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act.
AS
U
2018-02 is effective for Perceptron on July 1, 2019 and is not expected to have a significant impact on our consolidated financial statements or disclosures.
Recently Adopted Accounting Pronouncements
In July 2015, the FASB issued Accounting Standards Update No. 2015-11,
Simplifying the Measurement of Inventory
(ASU 2015-11), which requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We adopted this standard on July 1, 2017. Adoption of this guidance did not have a material impact on our consolidated financial statements.
I
n November 2015, the FASB issued Accounting Standards Update No. 2015-17,
Balance Sheet Classification of Deferred Taxes
(ASU 2015-17), which requires all deferred tax assets and liabilities, including related valuation allowances, be classified as non-current on our consolidated balance sheets. We adopted this standard on July 1, 2017, and as a result, reclassified $438,0
00 of previously
“
Short-term deferred income tax
assets
”
to
“
Long-Term Deferred Income Tax Asset
”
and recla
ssified $752,000 of previously
“
Short-term deferred income tax liability
”
to
“
Long-Term Deferred Income Tax Liability
”
on our consolidated balance sheet. Our Consolidated Balance Sheet as of June 30, 2017 was not retrospectively adjusted.
In March 2016, the FASB
issued Accounting Standards Update No. 2016-09,
Compensation - Stock Compensation (Topic 718)
(ASU 2016-09), which simplifies several aspects of accounting for share-based payment award transactions, including income tax consequences, classification
of awards as either equity or liabilities and classification on the statement of cash flows. Certain of these changes are required to be applied retrospectively, while other changes are required to be applied prospectively. We adopted this standard on July 1, 2017. ASU 2016-09 requires prospective recognition of excess tax benefits and deficiencies in the income statement. Due to the fact that our U.S. Federal Deferred Taxes have a full valuation allowance, there was no net impact to our consolidated financial statements related to our adoption of ASU 2016-09. We elected to continue to estimate forfeiture rates at the time of grant, instead of accounting for them as they occur. Finally, as excess tax benefits are no longer recognized in additional paid-in capital
, we excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of diluted earnings per share for the nine months ended March 31, 2018.
3.
Goodwill
Goodwill represents the excess purchase price over the fair value of the net amounts assigned to assets acquired and liabilities assumed in connection with our acquisitions. Under ASC Topic 805
“
Business Combinations”
, we are required to test goodwill for impairment annually or more frequently, whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit with goodwill below its carrying amount. Application of the goodwill impairment test requires judgment, including assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and determination of the fair value of each reporting unit.
The qualitative events or circumstances that could affect the fair value of a reporting unit could include economic conditions; industry and market considerations, including competition; increases in raw materials, labor, or other costs; overall financial performance such as negative or declining cash flows; relevant entity-specific events such as changes in management, key personnel, strategy, or customers; sale or disposition of a significant portion of a reporting unit and regulatory or political developments. Companies have the option under ASC Topic 350
“Intangibles – Goodwill and Other”
to evaluate goodwill based upon these qualitative factors, and if it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, then no further goodwill impairment tests are necessary. If the qualitative review indicates it is more likely than not that the fair value of the reporting unit is less than its carrying amount, or if we choose not to perform a qualitative assessment, a two-step quantitative impairment test is performed to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be
recognized, if any. In
fiscal
year
2017, we
elected the two-step
quantitative
goodwill
impairment test.
Step 1 is to identify potential impairment by comparing fair value of a reporting unit with its carrying value, including goodwill. If the fair value is lower than the carrying value, this is an indication of goodwill impairment and Step 2 must be performed. Under Step 2, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. This analysis requires significant judgment in developing assumptions, such as estimating future cash flows, which is dependent on internal forecasts, estimating the long-term rate of growth for our business, estimating the useful life over which cash flows will occur and calculating our weighted average cost of capital. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, foreign currency fluctuations and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and could result in goodwill impairment for a reporting unit, negatively impacting our results of operations for the period and financial position.
During the fourth quarter of fiscal year 2017, we completed Step 1 of our goodwill impairment testing. Based on the results of this test, the fair value of our tested reporting unit exceeded our carrying value
by
26%
. Furthermore, through March 31, 2018, there are no indicators of impairment; therefore we did not complete a quantitative assessment this quarter.
Goodwill is recorded on the local books of Coord3 and NMS and foreign currency effects will impact the balance of goodwill in future periods. Our goodwill balance was
$8,505,000
and
$7,793,000
as of March 31, 2018, and June 30, 2017, respectively, with the increase due to the differences in foreign currency
rates at March 31, 2018
compared to June 30, 2017.
4.
Intangibles
We acquired intangible assets in addition to
goodwill in connection with the
acquisitions
of Coord3 and NMS in the third quarter of fiscal 2015.
Furthermore, we continue to develop intangibles, primarily software.
These assets are susceptible to shortened estimated useful lives and changes in fair value due to changes in their use, market or economic changes, or other events or circumstances. We evaluate the potential impairment of these intangible assets whenever events or circumstances indicate their carrying value may not be recoverable. Factors that could trigger an impairment review include historical or projected results that are less than the assumptions used in the original valuation of an intangible asset, a change in our business strategy or our use of an intangible asset or negative economic or industry trends.
If an event or circumstance indicates that the carrying value of an intangible asset may not be recoverable, we assess the recoverability of the asset by comparing the carrying value of the asset to the sum of the undiscounted future cash flows that the asset is expected to generate over its remaining economic life. If the carrying value exceeds the sum of the undiscounted future cash flows, we compare the fair value of the intangible asset to the carrying value and record an impairment loss for the difference. We generally estimate the fair value of our intangible assets us
ing the income approach based
on a discounted cash flow model. The income approach requires the use of many assumptions and estimates including future revenues and expenses, discount factors, income tax rates, the identification of groups of assets with highly independent cash flows, and assets’ economic lives. Volatility in the global economy makes these assumptions and estimates more judgmental. Actual future operating results and the remaining economic lives of our intangible assets could differ from those used in assessing the recoverability of these assets and could result in an impairment of intangible assets in future periods.
Through March 31, 2018,
there are no indications of potential impairment of these intangible assets.
O
ur intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
|
|
June 30,
|
|
|
|
2018
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
2017
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
Customer/Distributor Relationships
|
|
$
|
3,523
|
|
$
|
(2,173)
|
|
$
|
1,350
|
|
$
|
3,263
|
|
$
|
(1,524)
|
|
$
|
1,739
|
Trade Name
|
|
|
2,735
|
|
|
(843)
|
|
|
1,892
|
|
|
2,533
|
|
|
(591)
|
|
|
1,942
|
Software
|
|
|
1,393
|
|
|
(447)
|
|
|
946
|
|
|
677
|
|
|
(312)
|
|
|
365
|
Other
|
|
|
131
|
|
|
(131)
|
|
|
-
|
|
|
121
|
|
|
(94)
|
|
|
27
|
Total
|
|
$
|
7,782
|
|
$
|
(3,594)
|
|
$
|
4,188
|
|
$
|
6,594
|
|
$
|
(2,521)
|
|
$
|
4,073
|
Amortization expense was
$312,000
and
$261,000
for the three month periods ended March 31, 2018 and 2017, respectively. Amortization expense was
$874,000
and
$803,000
for the nine month periods ended March 31, 2018 and
201
7
, respecti
vely.
The estimated amortization of the remaining intangible assets by year is as follows (in thousands):
|
|
|
|
|
|
Years Ending June 30,
|
Amount
|
2018 (excluding the nine months ended March 31, 2018)
|
|
328
|
2019
|
|
1,256
|
2020
|
|
886
|
2021
|
|
417
|
2022
|
|
417
|
after 2022
|
|
884
|
|
$
|
4,188
|
5.
Revenue Recognition
Revenue related to products and services is recognized upon shipment when title and risk of loss has passed to the customer or upon completion of the service, there is persuasive evidence of an arrangement, the sales price is fixed or determinable, collection of the related receivable is reasonably assured and customer acceptance criteria, if any, have been successfully demonstrated.
We also have multiple element arrangements in our Measurement Solutions product line
,
which may include elements such as, equipment, installation, labor support and/or training. Each element has value on a stand-alone basis and the delivered elements do not include general rights of return. Accordingly, each element is considered a separate unit of accounting. When available, we allocate arrangement consideration to each element in a multiple element arrangement based upon vendor specific objective evidence (“VSOE”) of fair value of the respective elements. When VSOE cannot be established, we attempt to establish the selling price of each element based on relevant third-party evidence. Our products contain a significant level of proprietary technology, c
ustomization or differentiation;
therefore, comparable pricing of products with similar functionality cannot be obtained. In these cases, we utilize our best estimate of selling price (“BESP”). We determine the BESP for a product or service by considering multiple factors including, but not limited to, pricing practices, internal costs, geographies and gross margin.
For multiple element arrangements, we defer from revenue recognition the greater of the relative fair value of any undelivered elements of the contract or the portion of the sales price of the contract that is not payable until the undelivered elements are completed. As part of this evaluation, we limit the amount of revenue recognized for delivered elements to the amount that is not contingent on the future delivery of products or services, including a consideration of payment terms that delay payment until those future deliveries are completed.
Some multiple element arrangements contain installment payment terms with a final payment (“final buy-off”) due upon the completion of all elements in the arrangement or when the customer’s final acceptance is received. We recognize revenue for each completed element of a contract when it is both earned and realizable. A provision for final customer acceptance generally does not preclude revenue recognition for the delivered equipment element because we rigorously test equipment prior to shipment to ensure it will function in our customer’s environment. The final acceptance amount is assigned to specific element(s) identified in the contract, or if not specified in the contract, to the last element or elements to be delivered that represent an amount at least equal to the final payment amount.
Our Measurement Solutions are designed and configured to meet each customer’s specific requirements. Timing for the delivery of each element in the arrangement is primarily determined by the customer’s requirements and the number of elements ordered. Delivery of all of the multiple elements in an order will typically occur over a
three
to
15
month period after the order is received.
We do not have price protection agreements or requirements to buy back inventory. Our history demonstrates that sales returns have been insignificant.
6
.
Short-Term and Long-Term Investments
We account for our investments in accordance with ASC 320,
“Investments – Debt and Equity Securities
”. Investments with a term to maturity between three months to one year are considered short-term investments and are classified as available-for-sale investments. Investments with a term to maturity beyond one year may be classified as available for sale if we reasonably expect the investment to be realized in cash or sold or consumed during the normal operating cycle of the business. Investments are classified as held-to-maturity if the term to maturity is greater than one year and we have the intent and ability to hold such investments to maturity. All investments are initially recognized at fair value. Subsequent measurement for available-for-sale investments is recorded at fair value. Unrealized gains and losses on available-for-sale investments are recorded in other comprehensive income. Held-to-maturity investments are subsequently measured at amortized cost. At each balance sheet date, we evaluate all investments for possible other-than-temporary impairment
,
which involves significant judgment.
In making this judgment, we review factors such as the length of time and extent to which fair value has been below the cost basis, the anticipated recovery period, the financial condition of the issuer, the credit rating of the instrument and our ability and intent to hold the investment for a period of time which may be sufficient for recovery of the cost basis. Any losses determined to be other-than-temporary are charged as an impairment loss and recorded in earnings. If market, industry, and/or investee conditions deteriorate, future impairments may be incurred.
As of
March
31
, 2018 and June 30, 2017,
we held restricted cash
in short-term bank guarantees
.
The restricted cash
provides
financial assurance that we will fulfill certain customer obligations in China. The cash is restricted as to withdrawal or use while the related bank guarantee is outstanding. Interest is earned on the restricted cash and recorded as interest
income.
At
March
31
, 2018
and June 30, 201
7
,
we had short-term bank guarantees of
$72,000
and
$239,000
respectively
.
At
March
31
, 2
018
,
we
held a
long-term investment in preferred stock that is not registered under the Sec
urities Act of 1933, as amended
and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The preferred stock investment is currently recorded at
$725,000
after consideration of impairment charges recorded in fiscal years 2008 and 2009.
We estimated that the fair market value
of this investment at March
31
, 2018
exceeded $725,000 based on an internal valuation model
,
which included the use of a discounted cash flow model.
The fair market analysis cons
idered the following key inputs:
|
|
|
|
(i)
|
the underlying structure of the security;
|
|
(ii)
|
the present value of the future principal, discounted at rates considered to reflect current market conditions; and
|
|
(iii)
|
the time horizon that the market value of the security could return to its cost and be sold.
|
Under ASC 820
“Fair Value Measurements
and Disclosures
”
(“ASC 820”)
such valuation assumptions are defined as Level 3 inputs.
The foll
owing table presents our Short-Term and Long-T
erm Investments by category
at March
31
, 2018 and June 30, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
Cost
|
|
Fair Value or
Carrying Value
|
Short-Term Investments
|
|
|
|
|
|
Bank Guarantees
|
$
|
72
|
|
$
|
72
|
Mutual Funds
|
|
39
|
|
|
39
|
Time/Fixed Deposits
|
|
2,326
|
|
|
2,326
|
Total Short-Term Investments
|
$
|
2,437
|
|
$
|
2,437
|
|
|
|
|
|
|
Long-Term Investments
|
|
|
|
|
|
Preferred Stock
|
$
|
3,700
|
|
$
|
725
|
Total Long-Term Investments
|
|
3,700
|
|
|
725
|
|
|
|
|
|
|
Total Investments
|
$
|
6,137
|
|
$
|
3,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
Cost
|
|
Fair Value or
Carrying Value
|
Short-Term Investments
|
|
|
|
|
|
Bank Guarantees
|
$
|
239
|
|
$
|
239
|
Time/Fixed Deposits
|
|
1,333
|
|
|
1,333
|
Total Short-Term Investments
|
$
|
1,572
|
|
$
|
1,572
|
|
|
|
|
|
|
Long-Term Investments
|
|
|
|
Preferred Stock
|
$
|
3,700
|
|
$
|
725
|
Total Long-Term Investments
|
$
|
3,700
|
|
$
|
725
|
|
|
|
|
|
|
Total Investments
|
$
|
5,272
|
|
$
|
2,297
|
7
.
Financial Instruments
For a discussion on
our
fair value measurement policies for Financial I
nstruments, refer to Note 1 in our
Consolidated Financial Statements, “Summary of Significant Accounting Policies – Financial Instruments”, of
our
An
nual Report on Form 10-K for
fiscal year ended June 30, 201
7
.
We have not changed our
valuation techniques in measuring the fair value of any financial assets and liabilities during the period.
The following table presents
our investments at
March
31
, 2018
and June 30, 201
7
that are measured and recorded at fair value on a recurring basis consistent with the fair value hierarchy provisions of ASC 820
(in thousands). The fair value of
our
short-term
investments approximates their cost basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
March 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Mutual Funds
|
$
|
39
|
|
$
|
39
|
|
$
|
-
|
|
$
|
-
|
Time/Fixed Deposits and Bank Guarantees
|
|
2,398
|
|
|
-
|
|
|
2,398
|
|
|
-
|
Preferred Stock
|
|
725
|
|
|
-
|
|
|
-
|
|
|
725
|
Total
|
$
|
3,162
|
|
$
|
39
|
|
$
|
2,398
|
|
$
|
725
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
June 30, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Time/Fixed Deposits and Bank Guarantees
|
$
|
1,572
|
|
$
|
-
|
|
$
|
1,572
|
|
$
|
-
|
Preferred Stock
|
|
725
|
|
|
-
|
|
|
-
|
|
|
725
|
Total
|
$
|
2,297
|
|
$
|
-
|
|
$
|
1,572
|
|
$
|
725
|
Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates.
8
.
Inventory
Inventory is stated at the lower of cost
or net realizable value using
the first-in, first-out (“FIFO”) method.
We provide
a reserve for obsolescence to recognize inventory impairment for the effects of engineering change orders, age and use of inventory that affect the value of the inventory. The reserve for obsolescence creates a new cost basis for the impaired inventory. When inventory that has previously been impaired is sold or disposed of, the related obsolescence reserve is reduced resulting in the reduced cost basis being reflected in cost of goods sold. A detailed review of the inventory is performed annually with quarterly updates for known changes that have occurred since the annual review. Inventory, net of reserves
of
$1,808,000
and
$1,918,000
at
March
31
, 2018 and June 30, 2017
, respectively, is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
At June 30,
|
|
2018
|
|
2017
|
Component Parts
|
$
|
5,584
|
|
$
|
4,445
|
Work in Process
|
|
4,696
|
|
|
3,864
|
Finished Goods
|
|
4,944
|
|
|
3,157
|
Total
|
$
|
15,224
|
|
$
|
11,466
|
9.
Property and Equipment
Our property and equipment consisted of the following as of March 31, 2018 and June 30, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
At June 30,
|
|
2018
|
|
2017
|
Building and Land
|
$
|
7,945
|
|
$
|
7,788
|
Machinery and Equipment
|
|
14,842
|
|
|
16,414
|
Furniture and Fixtures
|
|
1,062
|
|
|
1,054
|
|
|
23,849
|
|
|
25,256
|
Less: Accumulated Depreciation
|
|
(17,123)
|
|
|
(17,879)
|
|
$
|
6,726
|
|
$
|
7,377
|
Depreciation expense
was
$250,000
and
$257,000
for the three month periods ended March 31, 2018 and 2017, respectively. Depreciation expense was
$827,000
and
$857,000
for
the nine month periods ended March
31, 201
8
and 201
7
, respectively.
10.
Warranty
Our In-Line and Near-Line Measurement Solutions generally carry a
one
to
three
-year warranty for parts and a
one
-year warranty for labor and travel related to warranty. Product sales to the forest products industry carry a
three
-year warranty for TriCam® sensors. Sales of ScanWorks® have a
one
-year warranty for parts. Sales of WheelWorks products have a
two
-year warranty for parts. We provide a reserve for warranty based on our experience and knowledge. Our Off-Line Measurement Solutions generally carry a
twelve
-month warranty after the machine passes the acceptance test or a
fifteen
-month warranty from the date of shipment, whichever date comes first, on parts only.
Factors affecting our warranty reserve include
the number of units sold or in
service as well as historical and anticipated rates of claims and cost per claim. We periodically assess the adequacy of our warranty reserve based on changes in these factors. If a special circumstance arises which requires a higher level of warranty, we make a special warranty provision commensurate with the facts. Changes to our warranty reserve
are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
March 31,
|
|
2018
|
|
2017
|
Beginning Balance at July 1,
|
$
|
548
|
|
$
|
370
|
Accruals - Current Year
|
|
712
|
|
|
553
|
Settlements/Claims (in cash or in kind)
|
|
(863)
|
|
|
(425)
|
Effects of Foreign Currency
|
|
7
|
|
|
(1)
|
Ending Balance at March 31,
|
$
|
404
|
|
$
|
497
|
11
.
Credit Facilities
We
had
approximately
$1,747,000
and
$1,705,000
outstanding under
our line
s
of credit and
short-term
notes payable at
March
31
, 2018
and June 30, 201
7
, respectively.
In addition, we had
approximately
$18,000
and
$171,000
in
long-term d
ebt outstanding
included in
‘Other Long-Term Liabilities’
at
March
31
, 201
8
and June 30, 2017
,
respectively
on our Consolidated Balance Sheet.
On
December 4, 2017
,
we
entered into
a Loan Agreement (the “Loan Agreement”)
with Chemical Bank (“Chemical”), and related documents, including a Promissory Note
. The Loan Agreement
is an on-demand line of credit and is cancelable at any time by either Perceptron or Chemical and any amounts outstanding would be immediately due and payable. The Loan Agreement is guaranteed by our U.S. subsidiaries. The Loan Agreement
allows for maximum permitted borrowings
of
$8.0
million. The borrowing base is
calculated at the lesser of (i) $8.0 million or (ii) the sum of
80%
of eligible accounts receivable balances
of U.S. customers and subject to limitations, certain foreign customers
, plus the lesser of
50%
of eligible inventory or
$3.0
million.
At March 31, 2018
, our additional available borrowing under this facility was approximately
$4.9
million
.
Security for the Loan Agreement is substantially all of
our assets
in the
U.S
.
Interest is calculated at
2.65%
above the 30 day LIBOR rate. We are not allowed to pay cash dividends under the Loan
Agreement.
We had
$1,525,000
in
borrowings outstanding under the Loan
Agreement at
March
31
,
2018.
Prior to December 4, 2017, we were party to an Amended
and
Restated Credit Agreement with Comerica Bank. We had
$1,500,000
outstanding at
June 30, 2017
under this agreement
.
On December 4, 2017, in connection with entering into the Loan Agreement, we repaid in full and terminated our Amended and Restated Credit Agreement with Comerica Bank and related documents. There were no prepayment fees payable in connection with the repayment of the loan.
During the third quarter of fiscal 2016, our Italian subsidiary, Coord3, exercised an option to purchase their current manufacturing facility. The total remaining principal payments of
€195,000
(equivalent
to
approximately
$240,000
)
payable over the
following
13
months at a
7.0%
annual interest rate are recorded in ‘Short-term notes payable’ and ‘Other Long-Term Liabilities’ on our
Consolidated Balance Sheet at
March
31
, 201
8
.
Our Brazilian subsidiary (“Brazil”) has several credit lines and overdraft facilities with their current local bank. Br
azil can borrow a total of
B$401,000
(
equivalent to
approximately
$121,000
).
The Brazil facilities are cancelable at any time by either Brazil or the bank and any amounts then outstanding would become immediately due and payable. The monthly interest rates for
these facilities range
from
2.53%
to
12.30%
. We had
no
borrowings
under t
hese facilities at
March
31
, 2018
and June 30, 201
7
, respectively.
12.
Severance, Impairment and Other Charges
During the third quarter of fiscal 2016, we announced a financial improvement plan that resulted in a reduction in global headcount of approximately
11%
. This plan was implemented to re-align our fixed costs with our near-term to mid-term expectations for our business. In addition, during the first quarter of fiscal 2017, we decided
to
terminate
production and marketing of a specific product line due to limitations in its design.
Since this decision was made, we have written
off
$290,000
, net related to inventory and
impaired certain customer receivable balances in the amount of
$127,000
. By the second quarter of fiscal 2018, we had substantially completed the plan that was announced; as of
March
31
, 2018, we have incurred
total pre-tax cash and non-cash charges relating to the original restructuring plan, as well as the additional charges from the terminated product line, of
$3,531,000
.
In July 2017, we announced that we had entered into an agreement to settle the civil suit that was filed by 3CEMS, a Cayman Island and People’s Republic of China corporati
on, in January 2015 (see Note 17, “
Commitments and Co
ntingencies – Legal Proceedings” for further discussion)
.
The settlement of
$1,000,000
was
recorded as a liability
in fiscal
2017.
In
January 2018
,
a judge in a trade secrets case brought by Perceptron granted the defendants’ motions for recovery of their attorney fees
(
see Note 17, “Commitments and Contingencies” for further discussion relating to this matter
). A charge in the amount of
$675,000
was recorded as a liability
in the second quarter of fiscal 2018. We have appealed the court’s decision to grant summary disposition and the award of the attorney fees.
The charges recorded as Severance, Impairment and Other Charges are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Nine Months Ended March 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Severance and Related Costs
|
$
|
-
|
|
$
|
105
|
|
$
|
(13)
|
|
$
|
280
|
Court Award
|
|
-
|
|
|
-
|
|
|
675
|
|
|
-
|
Impairment
|
|
-
|
|
|
-
|
|
|
(42)
|
|
|
145
|
Inventory Write-Off
|
|
(3)
|
|
|
(102)
|
|
|
(17)
|
|
|
295
|
Total
|
$
|
(3)
|
|
$
|
3
|
|
$
|
603
|
|
$
|
720
|
For the three months ended March 31, 2018, t
he decrease of the inventory write-off was due to finding other uses for some of the inventory originally designated as impaired.
Severance expense
(income)
for
the three months ended March 31, 2017
was associated with an
adjustmen
t at our U.S. location (expense
of
$121,000
) partially offset by an adjustment
at our German location (income
of
$16,000
). The decrease of the inventory write-off was due to settling outstanding purchase orders as well as finding other uses for some of the inventory originally designated as impaired.
Severance expense (income) for the nine months ended
March
31
, 2018 was
associated with adjustments at our China (income of
$15,000
) and U.S. (expense of
$2,000
) locations as we reached final settlements related to several individuals impacted by the reduction in force.
The decrease in the impairment for the nine months ended March 31, 2018 was due to a collection of an accounts receivable balance that was previously written off. The decrease of the inventory write-off was due to finding other uses for some of the inventory originally designated as impaired.
Severa
nce expense (income) for the nine months ended March 31, 2017
was associated with adjustments at our U.S. (expense of
$292,000
), Chinese (expense of
$82,000
) and German (income of
$94,000
) locations, as we reached final settlements related to several individuals impacted by the reduction in force.
The following table reconciles the activity for the Reserves for Restructuring and Other Charges (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
March 31,
|
|
2018
|
|
2017
|
Beginning Balance at July 1,
|
$
|
1,113
|
|
$
|
814
|
Accruals - Severance Related
|
|
(13)
|
|
|
280
|
Accruals - Court Award
|
|
675
|
|
|
-
|
Payments
|
|
(849)
|
|
|
(880)
|
Ending Balance at March 31,
|
$
|
926
|
|
$
|
214
|
The remaining accrued balance at
March
31
, 2018 includes the final payment of
$250,000
to be made related to
our legal settlement with 3CEMS
,
which is expected to be paid out
in May
2018
, as well as the accrual for the judgment related to the trade secrets case
. Due to our appeal
of
the court decisions in the trade secrets case, the timing of any payments related to this matter is unknown to us at this time.
1
3
.
Current and Long-Term Taxes Payable
We
acquired current and long-term taxes payable as part of the purchase of Coord3. The tax liabilities represent income and payroll related taxes that are payable in accordance with government authorized installment payment plans. These installment plans require varying monthly payments through
January 2021
.
14
.
Other Long-Term Liabilities
Other long-term liabilities at March
31
, 2018
and June 30, 201
7
include
$631,000
and
$614,000
, respectively for long-term contractual and statutory severance liabilities
acquired as part of the purchase of Coord3 that represent amounts that will be payable to employees
upon termination of employment. See Note 11, “Credit Facilities”,
for
the
description of long-term debt included
in ‘Other Long-Term Liabilities’ at March
31
, 2018.
1
5
.
Stock-Based Compensation
We maintain a 2004 Stock Incentive Plan (“2004 Plan”) covering substantially all company employees, non-employee directors and certain other key persons. The 2004 Plan is administered by a committee of our Board of Directors: The Management Development, Compensation and Stock Option Committee.
Awards under the 2004 Plan may be in the form of stock options, stock appreciation rights, restricted stock or restricted stock units, performance share awards, director stock purchase rights and deferred stock units, or any combination thereof. The terms of the awards are determined by the Management Development, Compensation and Stock Option Committee, except as otherwise specified in the 2004 Plan.
Stock Options
Options outstanding under the 2004 Plan generally become exercisable at
25%
or
33.3%
per year beginning
one
year after the date of grant and expire
ten
years after the date of grant. Option prices from options granted under these plans must not be less than the fair market value of our stock on the date of grant. We use the Black-Scholes model for determining stock option valuations. The Black-Scholes model requires subjective assumptions, including future stock price volatility and expected time to exercise, which affect the calculated values. The expected term of option exercises is derived from historical data regarding employee exercises and post-vesting employment termination behavior. The risk-free rate of return is based on published U.S. Treasury rates in effect for the corresponding expected term. The expected volatility is based on historical volatility of our stock price. These factors could change in the future, which would affect the stock-based compensation expense in future periods.
We recognized operating expense for non-cash stock-based compensation costs related to stock options in the
amount of
$78,000
and
$275,000
in
the three and nine month periods ended
March
31
, 201
8
, respectively.
We recognized operating expense for non-cash stock-based compensation costs related to stock options in the amount
of
$78,000
and
$298,000
in
the three and nine month periods ended
March
31
, 2017, respectively.
A
s of
March
31
, 201
8
, the total remaining unrecognized compensation cost related to non-vested stock options amounted to
approximately
$348,000
.
We expect to recognize this cost over a weighted average vesting period
of
2.0
years
.
W
e
granted
zero
and
100,000
stock
options
in the three and nine
month periods
ended
March
31
, 201
8,
respectively.
We granted
35,000
and
166,500
stock options
in the three and nine
month periods
ended
March
31
, 201
7,
respectively.
The estimated fair value as of the date options were granted during the periods presented, using the Black-Scholes option-pricing model,
is shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Nine Months Ended March 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Weighted average estimated fair value per
|
|
|
|
|
|
|
|
|
|
|
|
share of options granted during the period
|
$
|
N/A
|
|
$
|
3.10
|
|
$
|
3.96
|
|
$
|
3.02
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
Dividend Yield
|
|
N/A
|
|
|
-
|
|
|
-
|
|
|
-
|
Common Stock Price Volatility
|
|
N/A
|
|
|
49.01%
|
|
|
49.01%
|
|
|
48.25%
|
Risk Free Rate of Return
|
|
N/A
|
|
|
1.98%
|
|
|
1.81%
|
|
|
1.81%
|
Expected Option Term (In Years)
|
|
N/A
|
|
|
5.4
|
|
|
5.4
|
|
|
5.5
|
We received
$441,000
cash
from option exercises under our
share
-based payment arrangements for
the
three and ninth
mont
h periods
ended
March
31
, 2018
, respectively.
We received approximately
$83,000
and
$139,000
in cash
from option exercises under our
share-based payment arrangeme
nts for the three and nine month periods ended March
31, 201
7
, respectively.
Restricted Stock and Restricted Stock Units
Our restricted stock and restricted stock units under the 2004 Plan generally have been awarded by
four methods as follows:
(1)
|
Awards that are earned based on an individual’s achievement of performance goals during the initial fiscal year with either a subsequent
one
-
year service vesting period or with a one-third vesting requirement on the
first
,
second
and
third
anniversaries of the issuance, provided the individual’s employment has not terminated prior to the vesting date and are freely transferable after vesting;
|
(2)
|
Awards that are earned based on achieving certain revenue and operating income results with a subsequent one-third vesting requirement on the
first
,
second
and
third
anniversaries of the issuance provided the individual’s employment has not terminated prior to the vesting date and are freely transferable after vesting;
|
(3
)
|
Awards to non-management members of our Board of Directors with a subsequent one-third vesting requirement on the
first
,
second
and
third
anniversaries of the issuance provided the service of the non-management member of our Board of Directors has not terminated prior to the vesting date and are freely transferable after vesting
, and
|
(4)
|
Awards that are granted with a one-third vesting requirement on the
first
,
second
and
third
anniversaries of the issuance provided the individual’s employment has not terminated prior to the vesting date and are freely transferable after vesting, including restricted stock units granted as part of the Fiscal Year 2018 Long-Term Incentive Compensation Plan.
|
The grant date fair value associated with granted restricted stock is calculated in accordance with ASC 718
“Compensation – Stock Compensation”
. Compensation expense related to restricted stock awards is based on the closing price of our Common Stock on the grant date authorized by our
Management Development, Compensation and Stock Option Committee
, multiplied by the number of restricted stock
and restricted stock unit
awards expected to be issued and vested
,
and is amortized over the combined performance and service periods. The non-cash stock-based compensation expense recorded for restricted stock and restricted stock unit awar
ds for the three and nine
month
periods
ended
March
31
, 201
8
was
$27,00
0
and
$159,000
,
respectively.
The non-cash stock-based compensation expense recorded for restricted stock and restricted stock unit awar
ds for the three and nine
month
periods
ended
March
31
, 201
7
was
$20,00
0
and
$123,000
, respectively.
As of
March
31
, 201
8
, the total remaining unrecognized compensation cost related to
the
restricted stock and
restricted stock
unit awards is
approximately
$265,000
.
We expect
to recognize this cost over a weighted average vesting period
of
2.5
years
.
A summary of the status of restricted stock and restricted stock unit awards issued at
March
31
, 201
8
is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Nonvested
|
|
Grant Date
|
|
Shares
|
|
Fair Value
|
Non-vested at June 30, 2017
|
|
11,776
|
|
$
|
8.08
|
Granted
|
|
85,112
|
|
|
7.67
|
Vested
|
|
(21,518)
|
|
|
7.75
|
Forfeited or Expired
|
|
(500)
|
|
|
7.95
|
Non-vested at March 31, 2018
|
|
74,870
|
|
$
|
7.71
|
Performance Stock
Units
During the second quarter of fiscal 2018, our
Management Development, Compensation and Stock Option Committee
granted certain employees
40,150
shares of
Performance S
hare
Units (“PSUs”) as part of the Fiscal Year 2018 Long-Term Incentive Compensation Plan. The Performance Measures were defined by the
Committee
as a specific Target level of Revenue and Operating Income for each of the following:
fiscal year 2018, fiscal year 2019 and fiscal year 2020
.
Up to
one
third of the PSUs can be earned each year based upon actual performance levels achieved in that fiscal year.
One
half of the award earned each fiscal year is bas
ed upon the achievement of the two
Performance Target
s
in that fiscal year, provided that a minimum level of Operating Income is achieved for that fiscal year. T
he actual award level
for each fiscal year
can range from
50%
to
150%
(for Revenue Target) or
75%
to
200%
(for Operating Income Target)
of the target awards
depending on actual performance levels achieved in each fiscal year co
mpared to that year’s target
.
The non-cash stock-based compensation
expense recorded for performance
s
hare
unit a
wards for the three and nine
month periods ended
March
31, 201
8
was
$33,000
and $100,000, respectively
.
As of March
31, 201
8
, the total remaining unrecognized compensation cost related to
performance
s
hare
unit awards is
approximately
$246,000
.
We expect to recognize this cost over a weighted average vesting
period of
1.6
years
.
Board of Directors Fees
Our Board of Directors’ fees are typically payable in cash on September 1, December 1, March 1, and June 1 of each fiscal year; however, under our 2004 Plan each director can elect to receive our stock in lieu of cash on a calendar year election.
Each of our Directors has elected
to receive stock in lieu of cash for calendar year 2017; however all Board members have elected cash for calendar year 2018
.
We
issued
29,527
shares
and re
corded expense
of
$257,000
to our Directors
related to the portion of our fiscal year that fell
in
calendar year
201
7
.
1
6
.
Earnings Per Share
Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Other obligations, such as stock options
and restricted stock awards,
are considered to be potentially dilutive common shares. Diluted EPS assumes the issuance of potential dilutive common shares outstanding during the period and adjusts for any changes in income and the repurchase of common shares that would have occurred from the assumed issuance, unless such effect is anti-dilutive. The calculation of diluted shares also takes into effect the average unrecognized non-cash stock-based compensation
expense and additional adjustments for tax benefits related to non-cash stock-based compensation expense. Furthermore, we exclude all outstanding options to purchase common stock from the computation of diluted EPS in periods of net losses because the effect is anti-dilutive.
Options to
purchase
20,910
and
106,601
shares of common stock outstanding in the three months ended
March
31
, 2018 and 2017,
respectively,
were not included in the computation of diluted EPS because the effect would have been anti-dilutive.
Options to
purchase
63,365
and
128,879
shares of common stock outstandin
g in the nine
months ended
March
31
, 2018 and 2017,
respectively,
were not included in the computation of diluted EPS because the effect would have been anti-dilutive.
1
7
.
C
ommitments and Contingencies
We may, from time to time, be subject to litigation and other claims in the ordinary course of our business. We accrue for estimated losses arising from such litigation or claims if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. To estimate whether a loss contingency should be accrued by a charge to income, we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss. Since the outcome of litigation and claims is subject to significant uncertainty, changes in the factors used in our evaluation could materially impact our financial position or results of operations.
We are
currently unaware of any significant pending litigation affecting
us
other than the matters set forth below.
We were
a party to a civil suit filed by 3CEMS, a Cayman Islands and People’s Republic of China corporation, in the U.S. District Court for the Eastern District of Michigan
and served on
us
on or about Ja
nuary 7, 2015. The suit alleged
that
we
breached
our
contractual obligations by failing to pay for component parts to be used to manufacture optical video scopes for
our
discontinued Commercial Products Business Unit. 3CEMS alleged that it purchased the component parts in advanc
e of the receipt of orders
based upon instructions they claimed to have received from
us
. The suit alleged damages of not less than
$4.0
million.
In July 2017,
we entered into an agreement with 3CEMS to settle this suit
and recorded the expense in the fourth quarter of fiscal 2017
. As part of the settlement, we agreed to pay
3CEMS
$1,000,000
in
four
equal payments of
$250,000
each over a period of
ten
m
onths beginning in August 2017 (s
ee Note 1
2,
“
Severanc
e, Impairment and Other Charges”
for further discussion)
.
In May 2017, a judge in a trade secrets case brought by Perceptron
,
granted the defendants’ motions for summary disposition
. Furthermore,
in January 2018
the judge
granted their motions for recovery of their attorney fees in the amount of
$675,000
, plus interest. We are appealing
the court’s decisi
on to grant summary disposition
and
the award of the attorney fees. In the second quarter of fiscal 2018, we recorded a charge in the amount of
$675,000
relating to this matter (see Note 12 “Severance, Impairment and Other Charges” for further discussion).
Due to our appeal
of
the court decisions in the trade secrets case, the timing of any payments related to this matter is unknown to us at this time
.
As part of
our
routine evaluation procedures,
we
identified a potential concern regarding the employment status and withholding for several individuals in one of
our
foreign jurisdictions. During fiscal 2015,
we
estimated a range of the potential financial liability related to
this matter of
€486,000
to
€1
million
.
We were
not able to reasonably estimate the amount within this range that
we
would be required to pay for this matter. As a result,
in fiscal 2015, we
recorded a reserve of
€486,000
(equivalent to approximately
$582,000
) representing the minimum amount
we
estimated would be paid.
In the fourth quarter of fiscal 2016, we received the final notice regarding this issue, and as a result, we recorded an additional expense of
€227,000
(equivalent to approximately
$272,000
). To date, we have paid
a total of
€677,000
(equivalent to approximately
$810,000
). We believe that the Slovakian authorities have closed this issue and therefore, in the second quarter of fiscal 2018, we reversed the remaining accrual.
In the third quarter of fiscal 2018, the Canadian Revenue Agency (CRA) completed a Good
s
and Services Tax/Harmonized Sales Tax Returns (GST/HST) audit. Based on this audit,
the CRA has preliminarily
proposed to assess us approximately
C$1,266,000
(equivalent to approximately
$982,000
) in taxes related to sales from 2013 through 2018
.
CRA has indicated that we are entitled to invoice our customers to recover this amount and our customer
s are required to remit payment
. In addition, we will be charged interest and penalties if this preliminary finding is finalized. Our response to the CRA was delivered in April 2018. We did not record an accrual related to this preliminary audit finding because we are disputing several of the CRA’s conclusions, as well
as due to the fact that we expect to
ultimately receive the funds from our customers (excludi
ng any interest or penalties),
although there may be a timing difference between when we must pay the CRA and when we collect the funds from our customers.
1
8.
Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted
by the U.S.
The Act implements comprehensive tax legislation
which, among other changes, reduce
s
the federal statutory corporate tax rate from
35%
to
21%
and implements a territorial tax system that eliminates the ability to credit certain foreign taxes.
Additionally,
i
n
December 2017,
the Securities and Exchange Commission staff issued Staff Accounting Bulletin
No.
118
(“SAB 118”)
,
which addresses how a company recognizes provisional amounts when a company does
not
have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. The measurement period
, as defined in SAB 118,
ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond
one
year.
As we have a June 30 fiscal year end, the lower income tax rates will be phased in, resulting in a blended rate for fiscal 2018 and a
21%
rate for years thereafter
.
Based on the provisions of the Act, we re
-measured our U.S. deferred tax assets and related valuation allowance
and adjusted our estimated annual federal income tax rate to incorporate the lower corporate tax rate into our tax provision for the current quarter as the change represents a discrete item for purposes of income tax accounting.
The re
-
measurement of
U.S.
deferred tax
assets and related valuation allowance
at the lower enacted corporate tax rate resulted in a
net change of zero.
Furthermore, t
he new Act repeals
the Alternative Minimum Tax (“
AMT
”)
on corporations.
A
ny AMT credit carryforwards can be used to offset regular tax for any tax year and is refundable
, subject to limitation in
2018 - 2021. With this change
,
we expect to be able to use or monetize
the
AMT
credit in the next
four
years
,
and therefore
,
the valuation allowance recorded against the credit
was
removed.
As a result, we recorded a tax benefit in the amount of
$279,000
in the second quarter of fiscal 2018.
The Act imposes a tax on the
untaxed foreign earnings of foreign subsidiaries of U.S. companies by deeming those earnings to be repatriated
(the “Transition Tax”)
.
Generally, f
oreign earnings held in the form of cash and cash equivalents are taxed
by the U.S.
at a
15.5%
rate
and the remai
ning earnings are taxed at an
8%
rate. The Transition T
ax generally may be paid in installments over an
eight
-year period.
While we currently have foreign earnings held in the form of cash and cash equivalents, we may be able to use our net operating loss carry forwards included in our existing deferred tax assets to offset the taxable income resulting from the Transition Tax. In calculating the Transition Tax, we must calculate the cumulative earnings and profits and related tax pools of each of our non-U.S. subsidiaries back to 1987. We are in the process of evaluating the effect of the Transition Tax on us, and at this time, we cannot make a reasonable estimate of a liability. As a
result, as allowed to us under SAB 118, we have not recorded a liability at March 31, 2018. We expect to complete this evaluation and related calculations and record any tax due by the end of our fiscal year 2018, although it is possible that it could take us longer to complete this process.
19.
Subsequent Event
We perform review procedures for subsequent events and determine any necessary disclosures that arise from such evaluations, up to the date of issuance of our annual and interim reports.
ITEM 2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SAFE HARBOR STATEMENT
Certain statements in this report, including statements made 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 our expectation as to our fiscal year 2018 and future results, operating data, new order bookings, revenue, expenses, net income and backlog levels, trends affecting our future revenue levels, the rate of new orders, the timing of revenue and net income increases from new products which we have recently released or have not yet released, the timing of the introduction of new products and our ability to fund our fiscal year 2018 and future cash flow requirements. We may also make forward-looking statements in our press releases or other public or shareholder communications. Whenever possible, we have identified these forward-looking statements by words such as “target,” “will,” “should,”
“could,”
“believes,” “expects,” “anticipates,” “estimates,” “prospects,” “outlook
,
”
“guidance”
or similar expressions. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of our forward-looking statements. While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which speak only as of the date made. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different. Factors that might cause such a difference include, without limitation, risks associated with changes in our sales strategy and structure, including the impact of such changes on booking and revenue levels and customer purchase decisions, and the risks and uncertainties discussed from time to time in our periodic reports filed with the Securities and Exchange Commission, including those listed in “Item 1A
:
Risk Factors” of our Annual Report on Form 10-K for our fiscal year 2017
and in our Quarterly Report on Form 10-Q for the period ended December 31, 2017
. Except as required by applicable law, we do not undertake, and expressly disclaim, any obligation to publicly update or alter our statements whether as a result of new information, events or circumstances occurring after the date of this report or otherwise.
EXECUTIVE SUMMARY
Perceptron, Inc. (“Perceptron”, “we”, “us” or “our”) develops, produces and sells a comprehensive range of automated industrial metrology products and solutions to manufacturing organizations for dimensional gauging, dimensional inspection and 3D scanning. Our primary operations are in North America, Europe and Asia. All of our products rely on our core technologies and are divided into the following:
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In-Line and Near-Line Measurement Solutions - engineered metrology systems for industrial automated process control and assembly using fixed and robot mounted laser scanners. We also provide Value Added Services including training, field service, calibration, launch support services, consulting services, maintenance agreements and repairs related to our In-Line and Near-Line Measurement Solutions.
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·
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Off-Line Measurement Solutions - tailored metrology products for industrial gauging and dimensional inspection using
standalone
robot-mounted laser scanners and Coordinate Measuring Machines (“CMM”). We also provide Value Added Services including training, calibration, maintenance agreements and repairs related to our Off-Line Measurement Solutions.
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·
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3D Scanning Solutions - laser scanner products that target the digitizing, reverse engineering, inspection and original equipment manufacturers wheel alignment markets.
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The largest end-use market we serve is the automotive industry. New automotive tooling programs represent the most important selling opportunity for our In-Line and Near-Line Measurement Solutions. The number and timing of new vehicle tooling programs vary based on the plans of the individual automotive manufacturers. The existing installed base of In-Line and Near-Line Measurement Solutions also provides a continuous revenue stream in the form of system additions, upgrades and modifications as well as Value Added Services such as customer training and support.
Our Off-Line Measurement and 3D Scanning Solutions are utilized by a wide variety of targeted industrial customers, with the automotive industry representing the largest market for industrial metrology product
s
.
The results of the first nine months of our fiscal 2018 represent ongoing progress in the turn-around that started with the Financial Improvement Plan that was announced in the third quarter of fiscal 2016.
Our bookings levels have been at least $20.0 million in seven of the last eight quarters
. Furthermore,
our backlog level has consistently been greater than $40.0 million since the first quarter of fiscal 2017
and reached more than $50.0 million at the end of this quarter.
Our gross profit margin increased by
310
basis points and our operating
income
increased by almost 300% in
fiscal
year-to-date
2018 compared to fiscal
year-to-date
2017.
As we continue to see strength in customer demand, we believe we are making substantial progress in our transformation efforts.
RESULTS OF OPERATIONS
Three Months Ended March
3
1
, 201
8
Compared to Three Months Ended
March
3
1
, 201
7
Overview
– We reported net income of $
1.0
million, or
$0.
11
per diluted share, for the third
quarter of fiscal 201
8 compared with a net loss of $0
.
6 million, or (
$0.
06)
per diluted share, for the third
quarter of fiscal 201
7
.
Our quarterly results vary from quarter to quarter and are dependent upon delivery and installation schedules determined by our customers. These schedules are subject to change by the customer and are not controlled by us.
Bookings
– Bookings represent new orders received from our customers. We expect the level of new orders to fluctuate from quarter to quarter and do not believe new order bookings during any particular period are indicative of our future operating performance.
Bookings by geographic location were (in millions):
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Three Months Ended March 31,
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2018
|
|
2017
|
|
Increase/(Decrease)
|
Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Americas
|
|
$
|
10.3
|
|
42.7%
|
|
$
|
11.3
|
|
48.7%
|
|
$
|
(1.0)
|
|
(8.8%)
|
Europe
|
|
|
9.4
|
|
39.0%
|
|
|
7.0
|
|
30.2%
|
|
|
2.4
|
|
34.3%
|
Asia
|
|
|
4.4
|
|
18.3%
|
|
|
4.9
|
|
21.1%
|
|
|
(0.5)
|
|
(10.2%)
|
Totals
|
|
$
|
24.1
|
|
100.0%
|
|
$
|
23.2
|
|
100.0%
|
|
$
|
0.9
|
|
3.9%
|
The increase in bookings in the third quarter of fiscal 2018 as compared to the third quarter of fiscal 2017 of $0.9 million, including a favorable currency impact of $2.6 million, is primarily due to an increase of $1.7 million in our Off-Line Measurement Solutions and an increase of $0.1 million in our Value Added Services
,
partially offset by a decrease of $0.5 million in our In-Line and Near-Line Measurement Solutions and a decrease of $0.4
million
in our 3D Scanning Solutions. On a geographic basis, the $2.4 million increase in our Europe region is primarily due to an increase of $1.1 million in our Off-Line Measurement Solutions, an increase of $0.8 million in our In-Line and
Near-Line Measurement Solutions
and an increase of $0.5 million in our 3D Scanning Solutions. The $1.0 million decrease in our Americas region is primarily due to a decrease of $1.1 million in our In-Line and
Near-Line Measurement Solutions and
a decrease of $0.2 million in our 3D Scanning Solutions, partially offset by an increase of $0.2 mill
ion in our Value Added Services
and an increase of $0.1 million in our Off-Line Measurement Solutions.
The $0.5 million decrease in our Asian region is primarily due to a decrease of $0.
7
million in our 3D Scanning Solutions
,
a decrease of $0.2 million in our In-Line and Near-Line Measurement Solutions and a decrease of $0.
1
million in our Value Added Services, partially offset by an increase of $0.5 million in our Off-Line Measurement Solutions.
Backlog
–
Backlog represents orders or bookings we have received but have not yet been filled.
We believe that the level of backlog during any particular period is not necessarily indicative of our future operating performance. Although most of the backlog is subject to cancellation by our customers, we expect to fill substantially all of the orders in our backlog during the next twelve months.
Backlog by geographic location was (in millions):
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As of March 31,
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2018
|
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2017
|
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Increase/(Decrease)
|
Geographic Region
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|
|
|
|
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|
|
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Americas
|
|
$
|
20.2
|
|
39.5%
|
|
$
|
20.9
|
|
43.0%
|
|
$
|
(0.7)
|
|
(3.3%)
|
Europe
|
|
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18.9
|
|
36.9%
|
|
|
16.7
|
|
34.3%
|
|
|
2.2
|
|
13.2%
|
Asia
|
|
|
12.1
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|
23.6%
|
|
|
11.0
|
|
22.7%
|
|
|
1.1
|
|
10.0%
|
Totals
|
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$
|
51.2
|
|
100.0%
|
|
$
|
48.6
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|
100.0%
|
|
$
|
2.6
|
|
5.3%
|
The current quarter ending
backlog
increased by $2.6 million compared to the end
ing backlog at
March 31
, 201
7
.
The increase in our backlog was primarily due to an increase of $3.8 million in our Off-Line Measurement Solutions, partially offset by a decrease of $0.7 million in our 3D Scanning Solutions
, a decrease of $0.4 million in our Value Added Services and a decrease of $0.1 million in In-Line and N
ear-Line Measurement Solutions.
On a geographic basis, the $2.2 million increase in our Europe region is primarily due to an increase of $1.6 million in our
Off-Line Measurement Solutions and
an increase of $0.8 million in our In-Line and Near-Line Measurement Solutions, partially offset by a decrease of $0.2 million in our
3D Scanning Solutions
.
The $1.1 million increase in our Asian region is primarily due to an increase of $2.2 million in our Off-Line Measurement Solutions, partially offset by a d
ecrease of $0.4 million in our
Value Added Services, a decrease of $0.4 million in our 3D Scanning Solutions and a decrease of $0.3 million in our In-Line and Near-Line Measurement Solutions. The $0.7 million decrease in our Americas region is due to a decrease of $0.6 million in our In-Line and Near-Line Measurement and a decrease of $0.1 million in our 3D Scanning Solutions.
A summary of our operating results is shown below (in millions):
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Three Months Ended March 31,
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2018
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% of Sales
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2017
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% of Sales
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Americas Sales
|
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$
|
8.1
|
|
|
37.8%
|
|
$
|
6.0
|
|
|
36.8%
|
Europe Sales
|
|
|
10.1
|
|
|
47.2%
|
|
|
6.5
|
|
|
39.9%
|
Asia Sales
|
|
|
3.2
|
|
|
15.0%
|
|
|
3.8
|
|
|
23.3%
|
Net Sales
|
|
$
|
21.4
|
|
|
100.0%
|
|
$
|
16.3
|
|
|
100.0%
|
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|
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Cost of Sales
|
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|
13.5
|
|
|
63.1%
|
|
|
11.1
|
|
|
68.1%
|
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Gross Profit
|
|
|
7.9
|
|
|
36.9%
|
|
|
5.2
|
|
|
31.9%
|
|
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|
|
|
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Operating Expenses
|
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Selling, General and Administrative
|
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4.7
|
|
|
22.0%
|
|
|
4.0
|
|
|
24.5%
|
Engineering, Research and Development
|
|
|
2.1
|
|
|
9.8%
|
|
|
1.7
|
|
|
10.4%
|
Severance, Impairment and Other Charges
|
|
|
-
|
|
|
0.0%
|
|
|
-
|
|
|
0.0%
|
|
|
|
|
|
|
|
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|
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|
Operating Income (Loss)
|
|
|
1.1
|
|
|
5.1%
|
|
|
(0.5)
|
|
|
(3.0%)
|
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|
Other Income and (Expenses), net
|
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|
|
Interest Expense, net
|
|
|
-
|
|
|
0.0%
|
|
|
(0.1)
|
|
|
(0.6%)
|
Foreign Currency Gain (Loss), net
|
|
|
-
|
|
|
0.0%
|
|
|
0.1
|
|
|
0.6%
|
Other Income and (Expense), net
|
|
|
-
|
|
|
0.0%
|
|
|
-
|
|
|
0.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
|
1.1
|
|
|
5.1%
|
|
|
(0.5)
|
|
|
(3.0%)
|
Income Tax Expense
|
|
|
(0.1)
|
|
|
(0.4%)
|
|
|
(0.1)
|
|
|
(0.6%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
1.0
|
|
|
4.7%
|
|
$
|
(0.6)
|
|
|
(3.6%)
|
Sales
–
Net sales of $21.4 million for the third quarter of our fiscal year 2018 increased $5.1 million, or 31.3%, including a favorable currency impact of $1.6 million
,
when
compared to the same period a year ago.
The increase is primarily due to a
n in
crease of $
4.7
million in our In-Line and
Near-Line Measurement Solutions, an increase of $1.1 million in our
Off-Line Measurement Solutions
and
an increase of $0.6 million in our Value Added Services, partially offset by a decrease of $1.3 million in our 3D Scanning Solutions. On a geographic basis, the increase of $3.6 million in our Europe region is primarily due to an increase of $2.4 million in our In-Line and
Near-Line Measurement Solutions, an
increase of $0.9 million in our
Off-Line Measurement Solutions and
an increase of $0.4 million in our Value Added Services, partially offset by a decrease of $0.1 million in our 3D Scanning Solutions. The increase of $2.1 million in our Americas region is primarily due to an increase of $2.6 million in our In-Line and Near-Line Measurement Solutions and a
n in
crease of $0.2 million in our Value Added Services, partially offset by a decrease of $0.6 million in our 3D Scanning Solutions and a
decrease of $0.1 million in our Off-Line Measurement Solutions. The decrease of $0.6 million in our Asian region is primarily due to a decrease of $0.6 milli
on in our 3D Scanning Solutions
and a decrease of $0.3 million in our In-Line and Near-Line Measurement Solutions, partially offset by an increase of $0.3 million in our Off-Line Measurement Solutions.
Gross Profit
–Gross profit percentage was
36.
9% in the third
quart
er of fiscal 2018 compared to 31
.
9% in the same period
a year ago. The
higher
gros
s profit percentage in the third
quarter of fiscal 2018 was primarily due to
higher volume of revenue, the mix of
revenue
and the
timing of certain expenses in cost of goods sold under applicable accounting rules
, partially offset by higher Off-Line Measurement Solutions sales that have a lower gross profit level than our other products
as well as
a
higher bonus accrual due to improved financial results
, increased outside contractor costs due to higher sales levels and increased warranty costs
.
Selling, General and Administrative (SG&A)
Expenses
– SG&A expenses were approximately
$
4.
7 million in the third
quarter of fiscal 2018,
an increase of $0.
7 million compared to the same period
a year ago.
The increase is primarily due to increases in employee-related costs of $0.6 million, including a higher bonus accrual due to improved financial results and increased use of outside contractors and increased
allowance for doubtful accounts
of $0.2 million, pa
rtially offset by lower finance and bank fees of $0.1 million
.
Engineering, Research and Development (R&D) Expenses
– Engineering, research and development expenses were approximately
$2
.1 million in the third
quarter of fiscal 2018
,
an increase of $0.4
million compared to the third quarter of fiscal 2017
.
The increase is primarily due to increases in employee-related costs due to recent investments in additional resources to develop new products as well as a higher bonus accrual due to improved financial results.
Interest Expense, net
– Net interest
expense was immaterial
for the third
quarter of fiscal 2018 compared to a net expe
nse of $0.1 million in the third
quarter of fiscal 2017.
The slight improvement was primarily due to less usage of the U.S. credit facility during the third quarter of fiscal 2018 compared to the third quarter of fiscal 2017 as well as the continued pay-down of liabilities incurred in the acquisition of Coord3.
Foreign Currency Gain (Loss), net
– Foreign Currency Gain (Loss), net was
immaterial
in the third
quarter of fis
cal 2018. The net gain of $0.1 million in the third quarter of fiscal 2017 was primarily related to the Japanese Yen.
Income Taxes
–
Our effectiv
e tax rate for the third
quarter of fiscal year 2018 was
9.5%
compared to
(26.1
%
) in the third
quarter of fiscal year 2017. We have previously established full valuation allowances against our U.S. Federal, Germany, Japan, Singapore and Brazil net deferred tax assets. The effective tax rate in fiscal 2018
and fiscal 2017
is impacted by
not recognizing tax expense
o
n pre-tax income in
some of
these
jurisdictions.
Nine Months Ended March
3
1, 2018 Compared to Nine
Months Ended
March
3
1
, 201
7
Overview
– We reported net income of
$
2.9
million, or
$
0.
31
per diluted share, for the first nine months
of fiscal 201
8 compared with a net loss of $0
.
4 million, or ($0.05)
per diluted share, for the first nine months
of fiscal 201
7
.
Bookings
– Bookings represent new orders received from our customers. We expect the level of new orders to fluctuate from quarter to quarter and do not believe new order bookings during any particular period are indicative of our future operating performance.
Bookings by geographic location were (in millions):
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Nine Months Ended March 31,
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|
2018
|
|
2017
|
|
Increase/(Decrease)
|
|
Geographic Region
|
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|
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|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
26.8
|
|
39.8%
|
|
$
|
30.6
|
|
46.4%
|
|
$
|
(3.8)
|
(12.4%)
|
|
Europe
|
|
|
26.8
|
|
39.8%
|
|
|
21.8
|
|
33.1%
|
|
|
5.0
|
22.9%
|
|
Asia
|
|
|
13.7
|
|
20.4%
|
|
|
13.5
|
|
20.5%
|
|
|
0.2
|
1.5%
|
|
Totals
|
|
$
|
67.3
|
|
100.0%
|
|
$
|
65.9
|
|
100.0%
|
|
$
|
1.4
|
2.1%
|
|
|
|
|
|
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|
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The increase
in bookings
in the
first nine months
of fiscal 2018 as compared to the
first nine months
of fiscal 2017
of $1.4 million
, including
a favorable currency impact of $5.1 million, is pr
imarily due to an increase of $4
.
8
million in our Off-Line Measurement Solutions and an increase of $0.
1
million in our Value Added Services, partia
lly offset by a decrease of $3
.
2
million in our 3D Scanning Solutions
and a decrease of $0.3 million in our
In-Line and Near-Line Measurement Solutions
. On a geographic basis, the $5
.
0
million increase in our Europe region is primarily due to an increase of $3.4 million in our In-Line and Near-Line Measurement Solutions and an increase of $2.0 million in our Off-Line Measurement Solutions, partially offset by a decrease of $0.
3
million in our 3D Scanning Solutions and a decrease of $0.1 million in our Value Added Services. The $0.2 million increase in our Asian region is primarily due to an increase of $2.3 million in our Off-Line Measurement Solutions, part
ially offset by a decrease of $1
.
5
million in our 3D Scanning Solutions, a decrease of $0.5 million in our In-Line and Near-Line Measurement Solutions
and a decrease of
$0.
1
million in our
Value Added
Services. The $3.8 million decrease in our Americas region is primarily due to a decrease of $3.2 million in our In-Line and Near-Line Measurement Solutions and a decrease of $1.4 million in our 3D Scanning Solutions, partially offset by an increase of $0.5 million in our Off-Line Measurement Solutions and an increase of $0.3 million in our Value Added Services.
A summary of our operating results is shown below (in millions):
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Nine Months Ended March 31,
|
(in million)
|
|
2018
|
|
|
% of Sales
|
|
2017
|
|
|
% of Sales
|
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|
|
|
|
|
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|
Americas Sales
|
|
$
|
26.1
|
|
|
42.7%
|
|
$
|
20.3
|
|
|
36.5%
|
Europe Sales
|
|
|
24.3
|
|
|
39.8%
|
|
|
24.2
|
|
|
43.5%
|
Asia Sales
|
|
|
10.7
|
|
|
17.5%
|
|
|
11.1
|
|
|
20.0%
|
Net Sales
|
|
$
|
61.1
|
|
|
100.0%
|
|
$
|
55.6
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
38.1
|
|
|
62.4%
|
|
|
36.4
|
|
|
65.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
23.0
|
|
|
37.6%
|
|
|
19.2
|
|
|
34.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative
|
|
|
13.6
|
|
|
22.3%
|
|
|
12.8
|
|
|
23.0%
|
Engineering, Research and Development
|
|
|
5.7
|
|
|
9.2%
|
|
|
4.9
|
|
|
8.8%
|
Severance, Impairment and Other Charges
|
|
|
0.6
|
|
|
1.0%
|
|
|
0.7
|
|
|
1.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
3.1
|
|
|
5.1%
|
|
|
0.8
|
|
|
1.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income and (Expenses), net
|
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|
|
|
|
|
|
|
|
|
|
|
Interest Expense, net
|
|
|
(0.1)
|
|
|
(0.2%)
|
|
|
(0.2)
|
|
|
(0.4%)
|
Foreign Currency Gain (Loss), net
|
|
|
-
|
|
|
0.0%
|
|
|
(0.2)
|
|
|
(0.4%)
|
Other Income and (Expense), net
|
|
|
-
|
|
|
0.0%
|
|
|
-
|
|
|
0.0%
|
|
|
|
|
|
|
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|
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|
Income Before Income Taxes
|
|
|
3.0
|
|
|
4.9%
|
|
|
0.4
|
|
|
0.6%
|
Income Tax Expense
|
|
|
(0.1)
|
|
|
(0.2%)
|
|
|
(0.8)
|
|
|
(1.2%)
|
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|
|
|
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|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
2.9
|
|
|
4.7%
|
|
$
|
(0.4)
|
|
|
(0.6%)
|
Sales
– Net sales
of $61.1 million for the first
nine months
of our fiscal year
2018 increased $5.5 million
,
or 9.9%,
including
a
favorable currency impact of
$2
.
6
million
, when compared to the same period a year ago.
The increase is primarily due to an increase of $5.0 million in our In-Line and Near-Line Measurement Solutions,
an increase of $1
.
4
million in
our Value Added Services
and an increase of $1.4 million in our Off-Line Measurement Solutions, part
ially offset by a decrease of $2
.
3
million in our 3D Scanning Solutions. On a geog
raphic basis, the increase of $5
.8 million in our Americas region is primarily due to an increase of $6.4 million in our In-Line and Near-Line Measurement Solutions and an increase of $0.7 million in our Value Added Services, partially offset by a decrease of $1.2 million in our 3D Scanning Solutions
and
a decrease of $
0
.
1
million in our
Off-Line Measurement Solutions. The increase of $0.1 million in our Europe region is primarily due to an increase of $0.7 million in our Value Added Services
and
an increase of $0.
1
million in our Off-Line Measurement Solutions, partially offset by a decrease of $0.6 million in our In-Line and Near-Line Measurement Solutions and a decrease of $0.1 million in our 3D Scanning Solutions. The decrease of $0.4 million in our Asian region is primarily due to a decrease of $1.
0
million in our
3D Scanning Solutions and a decrease of $0.8 million in our In-Line and Near-Line Measurement Solutions
,
parti
ally offset by an increase of $1
.
4
million in our Off-Line Measurement Solutions.
Gross Profit
–Gross profit percentage was
37.6%
in the first nine months of fiscal 2018 compared to 34.5
% in the
same period
a year ago. The
higher
gros
s profit percentage in the first nine months
of fiscal 2018 was primarily due to the
higher volume level of sales as well as the mix of revenue, increased efficiencies and the timing of certain expenses in cost of goods sold u
nder applicable accounting rules as well as an increase in warranty costs
.
Selling, General and Administrative (SG&A)
Expenses
– SG&A expenses were approximately
$1
3.6 million in the first nine months
of fiscal 2018,
an
increase of $0.
8 million compared to the same period
a year ago.
The increase is primarily due to $0.6 million increase in employee-related costs, including higher usage of outside contractors, higher Board of Director fees of $0.2 million as a result of the reinstatement of director fees in November 2016, as well as an increase in
allowance for doubtful accounts
of $0.2 million, pa
rtially offset by lower finance and bank fees of $0.1 million, and lower advertising and marketing costs of $0.1 million
.
Engineering, Research and Development (R&D) Expenses
– Engineering, research and development expenses were approximately $
5.7 million in the first nine months
of fiscal 2018,
an increase of $0.
8 million compared to the same
period
of fiscal 2017.
The increase is primarily due to increases in employee-related costs due to recent investments in additional resources to develop new products as well as a
slightly
higher bonus accrual due to improved financial results.
Severance, Impairments and Other Charges
– Severance, impairments
and other charges for the first nine months
of fiscal 2018 was
$0.6
million
,
primarily
due to
the charge we recorded related to
an award of attorney fees in a trade secrets case brought by us, as described in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources – Commitments and Contingencies”,
partially offset by
an adjustment related to
severance at our
Chinese
location, a collection of an accounts receivable bala
nce that was previously written
off
,
as well as a reduction in the inventory write-off due to finding other uses for some of the inventory originally designated as impaired. We have incurred $
3.5
million of expense
related to
the financial improvement plan
that
commenced in March 2016
, and we have substantially completed the plan that was announced
.
See Note 12, of the Notes to the Consolidated Financial Statements, “Severance, Impairment and Other Charges”
contained in this
Quarterly
Report on Form 10-
Q for further discussion.
Interest Expense, net
– Net interest
expense was
$0.1
million for the first nine months
of fiscal 2018 compared to a net expe
nse of $0.2 million in the first nine months
of fiscal 2017.
The improvement was primarily due to less usage of the U.S. credit facility during the first nine months of fiscal 2018 compared to the first nine months of fiscal 2017, as well as the continued pay-down of liabilities incurred in the acquisition of Coord3.
Foreign Currency Gain (Loss), net
– Foreign Currency Gain (Loss), net was
immaterial in
the first nine months
of fis
cal 2018. The net loss of $0.2 million in the first nine months of fiscal 2017 was primarily related to the Japanese Yen and the Brazilian Real.
Income Taxes
–
Our
effective tax rate for the first nine months
of fiscal year 2018 was
1.5%
compared
to (217
.
1
%
) in the first nine months
of fiscal year 2017. We have previously established full valuation allowances against our U.S. Federal, Germany, Japan, Singapore and Brazil net deferred tax assets. The effective tax rate in
fiscal 2018
and fiscal 2017
is impacted by not recognizing tax expenses on pre-tax income in these jurisdictions.
Furthermore, due to the passage of the U.S. Tax Cuts and Jobs Act, in the second quarter of fiscal 2018, we were able to reverse a valuation allowance of $0.3 million that we had previously recorded on AMT credit carryforwards.
See Note 18, of the Notes to the Consolidated Financial Statements, “Income Taxes,” Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Capital Resources and Outlook” and Item 1A,
“Risk Factors” contained in our
Quarterly Report on Form 10-Q
for the period ended December 31, 2017
for further discussion.
LIQUIDITY AND CAPITAL RESOURCES
Our prima
ry liquidity needs are to fund product development and capital expenditures as well as
support working capital requi
rements
. In general, our principal sources of liquidity are cash and cash equivalents on hand, cash flows fr
om operating activities
and
borrowings under available credit facilities.
Cash on Hand.
Our cash and cash equivalents
were
$5.4 million
at
March
3
1, 2018, compared to $3
.
7
million at June 30, 201
7
.
Cash Flow.
The $1.7 million increase in cash from June 30, 2017 to March 31, 2018 was primarily related to $2.6 million of cash provided by operations and $0.3 million of cash provided by financing activities and $0.3 million impact from changes in exchange rates, partially offset by $1.5 million of cash used for investing activities.
During the nine-month period ended March 31, 2018, cash provided by operations resulted from our net income of $2.9 million and $2.0 million in adjustments from non-cash items, partially offset by cash outflows related to working capital changes of $2.3 million. The use of cash from working capital items included cash used by net inventory purchases of $3.2 million, other assets and liabilities of $1.2 million, accounts payable of $1.0 million, a reduction in deferred revenue of $0.4 million and net payments of accrued liabilities and expenses of $0.1 million, partially offset by cash provided by accounts receivable of $3.6 million. The increase in inventory relates to purchases required for our new products that were introduced in the second quarter of fiscal 2018, several “end of life” purchases for specific components related to products that will be replaced by the new products and the timing of projects in process compared to shipments to our end customers. The change in other assets and liabilities relates primarily to the timing of several prepaid assets, including our corporate insurance coverage which renews on July 1
st
each year. The change in payables is due to timing of payments on increased inventory purchases in the period.
The decrease in deferred revenue is due to the timing of revenue recognition on projects that had started in previous periods compared to new projects commencing in the third quarter of fiscal 2018. T
he
decrease in accrued expenses and liabilities is primarily due to payment on the restructuring reserve related to the previously announced financial improvement plan, the legal settlement that was announced in July 2017, as well as annual
short-term incentive
payments made in the first quarter of fiscal 2018 that related to fiscal year 2017 performance, partially offset by the charge we recorded related to an award of attorney fees in a trade secrets case brought by us.
Finally, t
he decrease in accounts receivable primarily relates to the timing of our cash collections, primarily from the strong sales levels we experienced in the fourth quarter of fiscal 2017 in the U.S.
Cash used for investing activities in the f
irst nine months
of fiscal 2018 is due to
the
net purchase
s
of short-term investments of $
0.7
million
, and
capital expenditures
, including development of intangibles,
of
$
0.
8
million.
Cash provided by financing activities in the first nine months of fiscal 2018 was primarily due to cash received from proceeds on our stock compensation plan of $0.5 million, partially offset by cash paid on our short-term borrowings of $0.2 million.
Working Capital Reserves.
We provide
a reserve for obsolescence to recognize inventory impairment for the effects of
engineering change orders as well as the age and usage
of inventory that affect the value of the inventory. The reserve for obsolescence creates a new cost basis for the impaired inventory. When inventory that has previously been
impaired is sold or disposed
, the related obsolescence reserve is reduced resulting in the reduced cost basis being reflected in cost of goods sold. A detailed review of the inventory is performed annually with quarterly updates for
known changes that have occurred since the
annual review. During the nine
-month period ended
March
3
1
, 201
8
, we
decreased our reserve for obsolescence by $0.1 million.
We determine our allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, our customer’s current ability to pay their outstanding balance due to us, and the condition of the general economy and the industry as a whole. We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
During the nine
-month
period ended March
3
1, 2018,
we
increased our allowance for doubtful accounts by $0.1 million.
Investments.
At
March
3
1
, 2018
, we had short-term investments
totaling $2.4 million
and
a long-term investment recorded at
$
0.7
million compared to short-term investments totaling $
1.6
million and
a long-term investment recorded at $
0.7
million at June 30, 201
7
. See Note
6
, of the Notes to the Consolidated Financial Statements, “Short-
Term and Long-Term Investments”
contained in this
Quarterly
Report on Form 10-
Q
for further information on our investments and their current valuation. The market for our long-term investment is currently illiquid.
In our short-term investments,
$0.1 million
serve
s
as collateral for bank guarantees that provide financial assurance that we will fulfill certain customer obligations in China. The cash is restricted as to withdrawal or use while the related bank guarantee is outstanding. Interest is earned on the restricted cash and recorded as interest income.
Credit Facilities
. W
e
had
approximately $1.7 million
outstanding under our lines of credit and short-term notes payable
at
both March
31
,
2018
and June 30, 201
7
.
In addition, we had
an immaterial amount
and $0.2 million in long-term debt outstanding included in “Other Long-Term Liabilities” at March
3
1, 2018 and June 30, 2017, respectively, on our Consolidated Balance Sheet.
On December 4, 2017, we entered into a Loan Agreement (the “Loan Agreement”) with Chemical Bank (“Chemical”), and related documents, including a Promissory Note.
The Loan Agreement
is an on-demand line of credit and is cancelable at any time by either Perceptron or Chemical and any amounts outstanding would be immediately due and payable.
The Loan Agree
ment is guaranteed by our U.
S
.
subsidiaries.
The Loan Agreement
allows for maximum permitted borrowings
of
$8.0
million. The borrowing base is
calculated at the lesser of (i) $8.0 million or (ii) the sum of 80% of eligible accounts receivable balances,
of
U.S.
customers and, subject to limitations, certain foreign customers,
plus the lesser of 50% of eligible inventory or $3.0 million.
At March
31, 201
8
, our additional available borrowing under this facility was
approximately $4.9 million
.
Security for the Loan Agreement is substantially all of
our assets in the U.S
.
Interest is calculated at 2.65% above the 30 day LIBOR rate. We are not allowed to pay cash dividends under the Loan
Agreement.
We had
$
1.5 million
in
borrowings outstanding under our Loan
Agreement at
March
31
,
2018.
Prior to December 4, 2017, we were party to an Amended
and
Restated Credit Agreement with Comerica Bank. We had $1.5 million outstanding at
June 30, 2017
under this agreement
.
On December 4, 2017, in connection with entering into the Loan Agreement, we repaid in full and terminated our Amended and Restated Credit Agreement with Comerica Bank and related documents. There were no prepayment fees payable in connection with the repayment of the loan.
During the third quarter of fiscal 2016, our Italian subsidiary, Coord3, exercised an option to purchase their current manufacturing
facility. The total remaining principal payments of €
0.2
million (equivalent to
approximately $0.2 million
) payable over the following
13 months at a 7.0% annual
interest rate are recorded in “Short-term notes payable” and “Other Long-Term Liabilities”
on our Con
solidated Balance Sheet at March
31
, 201
8
.
Our Brazilian subsidiary (“Brazil”) has several credit lines and overdraft facilities with their current local bank. Brazil can borrow a total of
B
$0.4 million
(equivalent to
approximately $
0.1
million
). The Brazil facilities are cancelable at any time by either Brazil or the bank and any amounts then outstanding would become immediately due and payable. The monthly interest rates for these facilities range
from
2.53% to 12.30%. We had no
borrowings under these facilities at March 31, 2018 and June 30, 2017, respectively.
Commitments and Contingencies
. As part of our routine evaluation procedures, we identified a potential concern regarding the employment status and withholding for several individuals in one of our foreign jurisdictions. During fiscal 2015, we estimated a range of the potential financial liability related to this matter of €0.5 million to €1.0 million. We were not able to reasonably estimate the amount within this range that we would be required to pay for this matter. As a result, in fiscal 2015, we recorded a reserve of €0.5 million (equivalent to approximately $0.6 million) representing the minimum amount we estimated would be paid. In the fourth quarter of fiscal 2016, we received the final notice regarding this issue, and as a result, we recorded an additional accrual of €0.2 million (equivalent to approximately $0.3 million). To date, we have paid a total of
€0.7
million (equivalent to approximately $
0.8 m
illion).
We believe that the Slovakian authorities have closed this issue and therefore, in the second quarter of fiscal 2018, we reversed the remaining accrual.
We were a party to a civil suit filed by 3CEMS, and served on us on or about January 7, 2015. The suit alleged damages of not less than $4.0 million. In July 2017, we entered into an agreement with 3CEMS to settle this suit
and recorded the expense in the fourth quarter of fiscal 2017
. As part of the settlement, we agreed to pay 3CEMS $1.0 million in four equal payments over a period of ten months beginning in August 2017. See Note 1
2
to the Consolidated Financial Statements, “Severance, Impairment and Other Charges”, contained in this Quarterly Report on Form 10-Q for further discussion.
In May 2017, a judge in a trade secrets case brought by Perceptron granted the defendants’ motions for summary disposition and in January 2018 granted their motion for recovery of their attorney fees in the amount of $0.7 million, plus interest. We are appealing the court’s decision to grant summary disposition and the award of attorney fees. In the second quarter of fiscal 2018, we recorded a charge in the amount of $0.7 million relating to this matter.
In the third quarter of fiscal 2018, the Canadian Revenue Agency (CRA) completed a Goods and Services Tax/Harmonized Sales Tax Returns (GST/HST) audit. Based on this audit, the CRA has preliminarily proposed to assess us approximately C$1.3 million (equivalent to approximately $1.0 million) in taxes related to sales from 2013 through 2018. CRA has indicated that we are entitled to invoice our customers to recover this amount and our customers are required to remit payment. In addition, we will be charged interest and penalties if this preliminary finding is finalized. Our response to the CRA was delivered in April 2018. We did not record an accrual related to this preliminary audit finding because we are disputing several of the CRA’s conclusions, as well as due to the fact that we expect to ultimately receive the funds from our customers (excluding any interest or penalties); although there may be a timing difference between when we must pay the CRA and when we collect the funds from our customers.
See Note 1
7
, of the Notes to the Consolidated Financial Statements, “Commitments and Contingencies”
,
contained in this Quarterly Report on Form 10-Q
. See
Item 3, “Legal Proceedings” and Note 12, of the Notes to the Consolidated Financial Statements, “Commitments and Contingencies” contained in our Annual Report on Form 10-K for fiscal year 2017 for a discussion of certain other contingencies relating to our liquidity, financial position and results of operations. See also, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies - Litigation and Other Contingencies” of our Annual Report on Form 10-K for fiscal year 2017.
Capital Spending.
We spent $0.5 million on capital equipment
and $0.3 million on intangible projects
in the first nine months of fiscal 2018 compared to $0.4 million in the first nine months of fiscal 2017 as we continue to closely scrutinize all potential capital projects compared to our current cash balances.
Capital Resources and Outlook.
Information in this “Outlook” section should be read in conjunction with the
“Safe Harbor Statement,” cautionary statements
and discussion of risk factors included elsewhere in this report and in our Annual Report on Form 10-K for the
fiscal
year ended
June 30, 2017
.
At March 31, 2018, we had $7.8 million in cash, cash equivalents and short-term investments of which $
7.7
million, or approximately
99%,
was held in foreign bank accounts. We have not been repatriating our foreign earnings.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted by the U.S. The Act implements comprehensive tax legislation which, among other changes, imposes a tax on the untaxed foreign earnings of foreign subsidiaries of U.S. companies by deeming those earnings to be repatriated (the “Transition Tax”). Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5% rate and the remaining earnings are taxed at an 8% rate. While we currently have foreign earnings held in the form of cash and cash equivalents, the Transition Tax generally may be paid in installments over an eight-year period. In calculating the Transition Tax, we must calculate the cumulative earnings and profits and related tax pools of each of our non-U.S. subsidiaries back to 1987. We have the option to either pay any such Transition Tax over the eight year period or to use our net operating loss carry forwards included in our existing deferred tax assets to offset the taxable income resulting from the Transition Tax
. We are in the process of evaluating the effects of the Transition Tax on us. We expect to complete this evaluation and related calculations and record any tax due by the end of our fiscal year 2018, although it is possible that it could take us longer to complete this process. In addition, as a result of the Act and the payment of the Transition Tax, we may be in a position to repatriate our past and future
foreign earnings to the U.S. in a more cost-effective manner than under prior law, which could positively impact our liquidity in the U.S. Any such repatriation may be subject to taxation under foreign laws or the laws of the State of Michigan.
See Note 18, of the Notes to the Consolidated Financial Statements, “Income Taxes,” and Item 1A, “Risk Factors” contained in our Quarterly Report on Form 10-Q for the period ended December 31, 2017 for further discussion.
Our current outlook for
the remainder of
fiscal 2018 is based on our internal projections about the market and related economic conditions, estimated foreign currency exchange rate effects, as well as our understanding of our key customers’ plans for their retooling projects. If our key customers’ plans differ from our understanding, this could have an adverse impact on our outlook.
We
believe our sales for the fourth
quarter of fiscal 2018 will be in the range
of $
20.0
million to $
23.0
million.
For our full fiscal year 2018, we expect revenue growth to be in the
mid-single
digits compared to fiscal 2017 as we anticipate capitalizing on the successes we had in fiscal 2017, continuing to benefit from an improving long-term revenue trend as well as consid
ering our current backlog level of $51.2 million
.
After giving recognition to the factors discussed above, we expect that the full fiscal year of 2018 operating income could improve compared to fiscal 2017, if we are successful at
identifying and implementing efficiencies
and
cost reductions as well as continue to progress with our long-term growth strategy and diversification program. Based on our business plan, we believe our level of cash, cash equivalents, short-term investments, credit facilities and expected cash flows in each jurisdiction is sufficient to fund our fiscal 2018 cash flow requirements. We continue to expect capital spending
, including development of intangible assets
to be less than $
2.0
million during fiscal 2018, although there is no binding commitment to do so. Furthermore, the level of our capital spending is dependent on our
continued financial strength.
We will evaluate business opportunities that fit our strategic plans. There can be no assurance that we will identify opportunities that fit our strategic plans or that we will be able to enter into agreements with identified business opportunities on terms acceptable to us. We anticipate that we would finance any such business opportunities from available cash on hand, borrowing from existing credit facilities, identifying additional sources of financing, or issuance of additional shares of our stock, as circumstances warrant.
CONTRACTUAL OBLIGATIONS
Our contractual obligations are described in our Form 10-K for the year ended June 30, 2017. There have been no material changes to that information since June, 2017, other than entering into the Loan Agreement with Chemical Bank and the related termination of our Amended and Restated Credit Agreement with Comerica Bank.
See Note 11, of the
Notes to the Consolidated Financial Statements, “Credit Facilities” and Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources – Credit facilities” contained in this Quarterly Report on Form 10-Q for further discussion.
CRITICAL ACCOUNTING POLICIES
A summary of critical accounting policies is presented in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” of
our
Annual Report on Form 10-K for fiscal year 201
7
.
NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new accounting pronouncements, see Note 2
, of the Notes
to the Consolidated Financial Statements, “New Accounting Pronouncements”
contained in this
Quarterly
Report on Form 10-
Q
.
MARKET RISK INFORMATION
Our primary market risk is related to foreign exchange rates. The foreign exchange risk is derived from our operations outside the U.S., which are primarily located in Germany, Italy and China. We may, from time to time, have interest rate risk in connection with the investment of our available cash balances.
Foreign Currency Risk.
We have foreign currency exchange risk in our international o
perations arising from the time
between sales commitment and delivery for contracts entered into in currencies other than the U.S. Dollar. For sales backlog entered into in currencies other than the U.S. Dollar, the currency rate risk exposure is predominantly less than one year with the majority in the 120
to 150-day range. At March
31
, 2018
, our backlog in currencies other than the U.
S. Dollar was
approximately 62% or $31.5
million, compared to
58% or $28.2 million at March
31
, 201
7
. We are most vulnerable to changes in U.S. Dollar/Euro, U.S. Dollar/Chinese Yuan and U.S. Dollar/Japanese Yen exchange rates.
The potential change in our net income
that would result from a hypothetical 10% adverse change in quoted foreign currency exchange rates related to the translation of foreign denominated revenues and expenses into U.S. Doll
ars for the three months and nine months ended March
31
, 201
8
, wo
uld have
been $0.1 million and $0.3 million
, respectively
. This sensitivity analysis assumes there are no changes other than the exchange rates.
This analysis has inherent limitations, including that it disregards the possibility that (i) the exchange rates of multiple foreign currencies may not always move in the same direction or the percentage relative to the value of the U.S. Dollar and (ii) changes in exchange rates may impact the volume of sales.
Interest Rate Risk
.
We invest our cash and cash equivalents in high quality, short-term investments, primarily with terms of three months or less. Based on our outstanding credit facilities and invested cash balances at
March
31
, 201
8
, a 1% increase in interest rates would have an immaterial impact on our interest expense and a 1% decrease in interest rates would have an immaterial effect on our interest income. As a result, we do not currently hedge these interest rate exposures.
Uncertainties in Credit Markets
.
At
March
31
, 2018
,
we hold
a long-term investment in preferred stock that is not registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
Our
long-term investment is subject to risk due to a decline in value of the investment. The investment is currently recorded at $
0.7
million,
after consideration of impairment charges recorded in fiscal years 2008 and 2009.
Based on
our
current business plan, cash
and cash equivalents
and
our
short-term investments
of $7.8 million
at
March
31
, 2018
as well as the
existing
availability on our
credit facilities,
we do
not currently anticipate t
hat the lack of liquidity in this
long-term investment will affect
our ability to operate or fund our
currently anticipated fiscal 201
8
cash flow requirements.