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Perceptron, Inc. (NASDAQ:PRCP)

F4Q2013 Earnings Call

August 29, 2013 10:00 AM ET

Executives

Harry Rittenour - President and CEO

Jack Lowry - CFO

Sylvia Smith - VP and Controller

Mark Hoefing - SVP

Herbert Viehweber - VP of Operations and Quality

Analysts

Landon Shanks - Century Management

Dennis Scannell - Rutabaga Capital

Chuck Dickenson - Private Investor

George Melas - MKH Management

Operator

Good morning ladies and gentlemen and welcome to the Perceptron Fourth Quarter Fiscal Year 2013, financial results conference call, please note that this call is being recorded. At the end of today's prepared remarks we will have a question and answer session. (Operator Instructions) I will now direct the call to President and CEO Harry Rittenour, please go ahead Mr. Rittenour.

Harry Rittenour

Thank you, Elizabeth. Good morning and thank you for joining us today, with me are Jack Lowry our CFO, Sylvia Smith Vice President and Controller; Mark Hoefing, Senior Vice President and Herbert Viehweber, Vice President of Operations and Quality. A copy of our press release outlining the results for the fourth quarter of our FY '13 was distributed through Marketwire yesterday. If you don't have access to that, please call Jack after this conference call and he will forward a copy to you.

In accordance with SEC rules we want to inform you that a number of the matters we discuss today may constitute forward-looking statements as defined by the SEC including those concerning the company’s future results and the company’s product development efforts, among others. Actual results may differ materially from those we discuss today and involve a number of uncertainties that are detailed in the press release announcing the operating results for the fourth quarter. On today's call, Jack will review the financial results and I will follow up with comments on our operations, plans and outlook. We will conclude the call with a question and answer session. Jack?

Jack Lowry

Thanks Harry and good morning everyone. I'll start with the discussion of our fourth quarter results and then move to our full year fiscal 2013. We got a very good fourth quarter and are pleased not only with our sales, but also with our bookings, gross margin, operating income, net income and earnings per share. The quarter exceeded our expectations in all respects. Sales were 20.7 million compared to 12.8 million last year with the increase occurring in Europe and Asia. Europe sales were up above 5.1 million due largely to an increase in automated systems projects. Asia sales increased approximately 2.7 million with the most significant increase coming from China. China's first nine months of sales have been below fiscal 2012 but their sales in the fourth quarter exceeded last year's fourth quarter by approximately 3.1 million.

Our gross margin was very solid at 48.1% compared to a low margin of 32.2% in the fourth quarter of last year. The increase in margin percentage is largely due to our revenue levels in the (refractive) periods and that as well as the nature of our revenue. Generally, we experience higher margins at higher sales levels because a portion of our cost to goods sold is relatively fixed in nature. In addition, in the fourth quarter this year, we were successful in being able to recognize more revenue from receiving customer buy-offs on projects. In our business, revenue from customer buy-offs may or may not have a significant cost associated with it, depending on when and how much of our final work was performed in the period that we accomplished the buy-off.

Our operating expenses, consisting of SG&A and engineering R&D costs increased by approximately 1.6 million in the quarter this year compared to last year. The largest contributor to the increase was profit sharing costs. For the past several years, we've had a profit sharing and incentive compensation plan in place for our employees, if the company meets or exceeds certain financial performance metrics. Because the fourth quarter exceeded our expectations, we accrued a large portion of the full year amount for profit sharing in the fourth quarter.

Our operating income for the quarter was 3.7 million compared to a loss of $495,000 last year and represented 18% of sales. Other income/expense in the fourth quarter included approximately a $1.1 million gain we recorded from the June redemption, at par, of one of our preferred stock holdings on which we had recorded an impairment charge in fiscal year 2009. That gain was partially offset by a $240,000 foreign exchange loss in the quarter, principally due to weakness in the Brazilian Real and Japanese Yen.

In the fourth quarter this year, we recorded a gain of $23,000, net of taxes from discontinued operations of the commercial products business units also known as CBU. In the fourth quarter last year, we recorded a loss of 1.3 million from the discontinued operations of CBU. Net income for the fourth quarter was 4 million or $0.46 per diluted share and represented 19.3% of sales. The reversal of the impairment charge I referred to earlier increased our earnings per diluted share by approximately $0.12.

In the fourth quarter of fiscal 2012, we had a net loss of 2.6 million or $0.31 per diluted share. The net loss in the fourth quarter last year included an income tax expense of 1.2 million for the establishment of the valuation reserve against the portion of a company’s deferred tax assets.

Our bookings of 21.4 million in the fourth quarter this year were very robust and were approximately 700,000 above our sales in the quarter. As a result, our backlog increased to 30.4 million at June 30, 2013. That compares favorably with our backlog of 30.2 million at June 30, 2012 and provides us with a solid book of business as we entered fiscal year 2014.

Turning now to our full year fiscal 2013 results, our sales of 60.9 million were a record for our continuing operations while our sales were at the record level for the year; it’s also significant to note that our bookings at 61.1 million exceeded our sales. Sales and bookings were particularly strong in Europe which posted significant year-over-year increases.

The increases were primarily from significantly higher bookings in sales of automated systems products this year. Those increases were partially offset by a decline in sales of technology component products and value-added services. Sales and bookings in Asia were fairly flat but are expected to show improvement in fiscal 2014.

Sales in bookings declined in the Americas following a strong rebound in fiscal year 2012 from the significant downturn that occurred in our fiscal years 2009 and 2010. Sales in the Americas are expected to stabilize while bookings are expected to improve in fiscal year 2014.

Our gross margin for the year was 46.2% compared to 42.1% in fiscal year 2012. The improvement in margin occurred in part from a higher sales level in fiscal 2013 but also from better margins on our automated systems product projects.

Operating expenses increased 14% to 21.3 million in fiscal 2013 compared to 18.6 million in fiscal 2012. The largest increase occurred in profit sharing expense. Without profit sharing, the increase in operating expenses would have been approximately 7.8% that increase was primarily due to the full year impact of salary increases given to our team members late in fiscal 2012, higher engineering R&D cost due to our decision to invest in Helix development and higher international G&A cost. We expect only modest growth in operating expenses in fiscal 2014.

Income from continuing operations was 6.1 million or 10.1% of sales compared to 2.8 million or 4.9% of sales in fiscal year 2012. Income from continuing operations benefited from the fourth quarter reversals of the impairment charge we originally recorded in fiscal year 2009 what was reduced by $647,000 of foreign currency losses primarily again related to the Japanese Yen and the Brazilian Real.

Our tax rate was low in fiscal year 2013 due primarily to the low rate and the gain from the reversal of impairment on the preferred stock along with the mix of countries in which we were profitable and their effective tax rates.

In fiscal 2013, we have a gain net of tax of $80,000 from the discontinued operations of CBU while in fiscal 2012 we had a net loss of 3.2 million from the discontinued operations of CBU and the litigation settlement from our discontinued Forest Products Business unit.

Net income was 6.2 million in fiscal 2013 or 10.2% of sales compared to a loss of $333,000 in fiscal 2012. Earnings per diluted share were $0.72 compared to a loss of $0.04 in fiscal 2012.

Our fiscal year 2013 ending balance sheet is very strong. We had 26.7 million in cash and short-term investments, no debt and book value of $6.60 per share based on 8,619,000 total shares outstanding on June 30, 2013.

All in all, the company had its best financial year in a long time in fiscal 2013 and we’re pleased with how it’s positioned heading into fiscal 2014.

Harry, I’ll turn it back over to you.

Harry Rittenour

Hi, fine thanks Jack. As Jack mentioned, FY13 was a very good year for the company and its shareholders in a number of ways. From a financial perspective, our continuing business exceeded $60 million in sales for the very first time. Our gross margin improved and our operating income improved, both in total dollars and as a percent of sales. Our bookings were higher than our sales during FY13 positioning us to enter FY14 with a strong backlog.

In addition, we paid a special dividend along with our first annual dividend to shareholders. The two dividends combined with the increase in our stock price during FY13 resulted in our total return to shareholders being significantly higher than the overall market return for the same 12-month period. Early in FY13, we successfully completed this sale of substantially all of the assets of CBU.

Finally, our strategy to continue to hold our Primus preferred stock rather than sell it at less than full price was rewarded in FY13 with a full redemption of that investment.

Operationally, we recently completed the release of all five sensors in the Helix family of sensors. The release of the additional sensors will increase the opportunities and the scope of customer applications we can address using our Helix technology. Sales associated with products involving Helix, in FY13, met our expectations and are ramping-up nicely. Sales involving Helix exceeded 10% of the total of the sales in the fourth quarter.

Our percentage of bookings involving Helix were considerably higher in the fourth quarter than in any of the first three quarters and Helix bookings for the year were considerably higher than Helix related sales. While, it is still early, it appears that our Helix bookings and sales ramp-up are on track to meet or exceed our expectations for FY14.

Operationally, there were several other noteworthy items that occurred in the fourth quarter and in FY13. Our order win ratio was the best in FY13 than it has been in recent years. We previously announced in a press release, we won an order from a Japanese OEM in the UK in the fourth quarter of FY13.

I am pleased to report that we now have received a second order from that OEM, this time for our plant in China. We are optimistic that we will successfully implement these two orders; we’ll satisfy our customer and show real evidence of our value.

Our operations in Europe had an excellent year in FY13. Sales and bookings were high and our prospects for FY14 look good in Europe. In Asia, China finished the year strong and we continue to expect growth in Asia to resume in FY14.

We remain confident in our outlook for continued sales growth in FY14. An independent industry forecast continue to show that worldwide automotive sales and new model introductions will continue to grow in each of the next two to three years. This provides us with a good environment in which to sell our products to automobile manufactures around the world.

Historically, we’ve experienced volatility in our quarterly sales with the first quarter of the fiscal year generally being the softest. We anticipate that first quarter will be our softest quarter in FY14.

We continue to expect our Helix technology to become a more significant portion of our product portfolio in FY14 and provide us with more inline dimensional gauging opportunities and capabilities than in the past. This should also help us to maintain or improve our gross profit margins. As a result, we anticipate another year of profitable growth for the company in FY14.

We are now happy to take any questions you may have.

Question and Answer Session

Operator

(Operator Instructions). We’ll go first to Landon Shanks with Century Management. Please go ahead.

Landon Shanks - Century Management

I remember last time you all said that you’re starting to gain some traction with some of the actual car manufactures that are in China, some of the companies actually started there. Do you all have any updates on that on how that’s coming along?

Harry Rittenour

Yes, I will let Mark refer to that.

Mark Hoefing

We’ve continued to make progress with the domestic Chinese manufactures and in fact in the last fiscal year we received (inaudible) from the street and asset manufacturers for gauging systems and we expect that to continue growing as a percentage of our revenue, our sales in China in the future.

Harry Rittenour

And we also continue to increase our headcount there in order to support not only the joint ventures but these indigenous products.

Landon Shanks - Century Management

And are those companies, are they moving from using a different product, are they’re moving from actually not having even those types of testing abilities?

Harry Rittenour

They're moving from using other methods to control their dimensions and their processes and their plants. So they're moving from sampling methods or using checking fixtures to using inline gauging.

Landon Shanks - Century Management

I see, okay and then I guess with the Japanese OEM the order that you'll got from China's from the same company that you got from the order for Europe, is that correct?

Jack Lowry

Yes, that is correct and it's a follow on to the success we had with our order in the UK.

Landon Shanks - Century Management

That went great, and then how about, I think you'll said a second Japanese OEM, are they still in the testing phase? I remember last quarter you all mentioned that they were currently testing a product.

Jack Lowry

Yes, they were testing an application that we don't today offer. So it's a new application. That's why it's taking them quite a bit, I mean they're taking their time, you know how thorough the Japanese are.

Operator

And we have no questions remaining (operator instructions). We'll take our next question from Dennis Scannell with Rutabaga Capital.

Dennis Scannell - Rutabaga Capital

So couple of quick things, Harry I think you said that Helix sales in the fourth quarter were more than 10% of total sales; bookings were higher than sales. Can you give a little bit more kind a data there I mean in terms of sales where Helix sales, I'm sorry in terms of Helix orders in the fourth quarter? Was it 15%, 20% or just we're going to say a little bit higher than 10% and then kind of expectations of Helix sales in Fiscal '14 as a percent of total.

Jack Lowry

Hi Dennis, this is Jack. The percentage of sales for Helix in the fourth quarter was just slightly above the 10% level. And it's continuing to ramp up and I think that’s the point we were trying to make, not that the absolute number was so high but rather that fairly early in our ramp up cycle we're seeing that it's improving.

And the comment on the bookings is that we're seeing higher booking so far than sales. So again in the fourth quarter the bookings were about 19% of total bookings in the quarter. So as we've said before, we're expecting a ramp up of Helix sales throughout fiscal '14.

It started really in the second half of Fiscal '13, and it came through in the fourth quarter results as we mentioned. So I think the point being that we're probably a little ahead of where we thought we would be at this point in time which is a good indicator. So that's kind of the way I would read it.

Dennis Scannell - Rutabaga Capital

Okay that's helpful, thank you. And in terms of your expectations for '14 then, we are expecting sales growth on top of what we achieved on '13. I just want to make sure I understood that, is that what you were saying Harry?

Harry Rittenour

We're expecting a growth above '12, well not '12, but above '13 and a profitable '14.

Dennis Scannell - Rutabaga Capital

Got it, and understood the first quarter will be softer, coming off a huge fourth quarter like you are. Could we see back in kind of that $12 million range that we saw on the first fiscal quarter for '13 or?

Harry Rittenour

It's going to be a bit better than ‘13s.

Dennis Scannell - Rutabaga Capital

So first quarter '14 will be a little better than what we saw in first quarter of '13?

Harry Rittenour

That's correct. And just to put a little perspective on the strength of the fourth quarter, as you may know there is a July shutdown period. And so the first quarter in this particular case, we had a lot of, we even got an order that we weren't expecting and it came late in the quarter and we were able to ship it and so it was one of these things where companies or new model introductions decided that they needed to pull some stuff in.

Operator

We'll take the next question from Chuck Dickenson, a private investor.

Chuck Dickenson - Private Investor

Are you folks still looking at other applications, manufacturing, industrial applications for Helix outside of the automobile sector? I know you're ramping there the bookings relative to sales indicate that that's progressing at least as you expected maybe better than expected; so maybe you got a full plate with that but in the past I think you'd mentioned that you know there were other possible applications, don’t be seeing about this simply as a automobile related marketplace for us.

There is other places to look; we have cash on the balance sheet. There is other things to consider so is that a near-term thing is that still in play as an idea or are you more than satisfied with what you have gone on here in the auto sector at this point?

Harry Rittenour

That’s a very good question. The initial answer is yes; new industry is a new applications are still on the table but they are probably out about two to three years and the reason for that is we have much more on our plate to satisfy our existing customers and new customers that were getting primarily from transplant in tiers to occupy our development team for the next year and half to two years.

So, yes it’s still on the table. We recognize we have to diversify. But with the resources we have and our strategic direction of profitable organic growth, we need to address the near-term things before we move to the new industries. Now, something more to come our way, we would certainly consider and evaluate it but we are not out looking right now.

Chuck Dickenson - Private Investor

Okay and the only other question I had was, I mean intuitively it seems that as the technology for automobiles becomes more highly engineered, more sophisticated and I am thinking of things like, I don’t know what’s out there now you got, self stopping cars, self parking cars. And then you know in another five to eight years talking about self-driving cars.

Is there something that’s particularly applicable or more advantageous in terms of having a Helix technology to meet that increasing, highly engineered aspect as cars evolve or not? I mean in other words does Helix not only have, sort of have a purpose now for the business as you see it but going forward as cars become more highly engineered, is it going to come to a point where you really have to have that sort of in-line gauging and sort of three dimensional Cloud Point (ph) data and all that other stuff going forward.

Harry Rittenour

Well, I think you just hit the point. As cars become more sophisticated the materials that are used are more sophisticated. For example composites, Helix has the capability to measure those as cars become more sophisticated as the engine technology goes from six to four cylinders, aerodynamics fit in and finish are going to be particularly important.

And Helix it will add to that capability. So, it’s not as much as the technology inside the car as it is the way the car is put together. There will be different ways to put the cars together and our technology will enhance those new techniques for manufacturing.

Chuck Dickenson - Private Investor

And nobody else still has a product like Helix out there, is that correct?

Harry Rittenour

No and you know we could be surprised walk around the corner but the expertise and the techniques that we are building with Helix are going to be we make the entry level considerably or increasingly higher as time goes on.

Operator

We’ll take the next question from George Melas of MKH Management.

George Melas - MKH Management

I came in during the call little bit late and may be you addressed that. Just trying to understand a little bit more the adoption with Helix. It seems to be going very well. Just trying to understand by geographies and customers, is it adoptions sort of across all geographies or some geographies taking it faster? And are people using Helix in conjunction with the older technologies or would you get orders that are just entirely Helix at this point?

Mark Hoefing

We have seen more early adoption from the European manufacturers but we have also seen Helix as a real door opener into some of the Asian companies. As far as order levels they have been higher in Europe than either in the Americas or Asia. We are starting to ramp up in both the Americas and Asians with orders, it just taken a little longer.

A lot of early technology adaptors are in Europe and they have been very receptive to the conditional functionality that you experienced to that with an additional value that they can get from those systems. Does that answer the question?

George Melas - MKH Management

It does and it’s in Europe that I believe that you have some small private competitors and so that doesn’t seem to increase the adoption in Europe.

Mark Hoefing

Yes, you are right. There are more competitors in Europe and that’s why it’s really very gratifying that we are able to get some of the early adoption in Europe to fight back aggressively against some competitor.

Jack Lowry

And George I would add, this is Jack, that I think one other aspect of the question you asked was whether is Helix is being adopted by itself for in conjunction with our existing TriCam and its primarily in conjunction with the existing TriCam, we had anticipated that would be the way our customers adopt the technology. And so they’re, we’re still working on furthering some of the application capabilities and as we do more and more of that then I think the content will be more and more Helix over time.

Harry Rittenour

And a part of our strategy was to allow customers to add Helix into existing systems and have the ability to core exist the two different technologies so that we can take advantage of our installed base. And also until we get all of the functionality that we are able to achieve with our TriCam systems, it’s important that we don’t give up anything, don’t lose any functionality.

So we can keep using TriCam where it’s got a better value proposition and then add Helix in over time. And that was part of our strategy in using the same software platform, our Vector Software platform and adding the Helix capability into that and it’s been working well for us.

George Melas - MKH Management

And just one question on the Japanese OEM that purchased your product for the UK. Is it implemented there?

Harry Rittenour

Yes.

George Melas - MKH Management

Okay. Its introduction and you’re getting results.

Harry Rittenour

It is installed but it’s not in full production. It’s in initial production and ramping up. In other words what they do it’s installed, but there will be low volume, they’ll run low volume to make sure the whole line is working and then they’ll ramp-up production. So, it’s installed and in its additional, it is in low volume right now.

George Melas - MKH Management

The decision making process there, is it done in Japan or the decision process done in the UK?

Harry Rittenour

It was done in both areas. This is an example of our global capability and in fact the U.S. team supported it, the Japanese team supported it and the UK team led the effort. And that’s been real advantage for us.

Operator

And with no questions remaining, I’d like to turn the call back over to Harry Rittenour for any closing comments.

Harry Rittenour

Thanks, Elizabeth. I’d like to thank everybody for joining us today, good questions. Just to wrap up, we’re very pleased obviously with FY ‘13, we’re going into FY ‘14 with the strong backlog. And we’re looking forward to the growth of Helix, the expansion of our applications as a result of Helix and another profitable year for FY ‘14.

Thank you very much.

Operator

Once again, that does conclude today’s conference and we thank you for your participation.

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