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Executives

Harry T. Rittenour – Former President and Chief Executive Officer

Jeffrey M. Armstrong – President and Chief Executive Officer

Jack H. Lowry – Vice President and Chief Financial Officer

Mark S. Hoefing – Senior Vice President

Analysts

Les Sulewski – Sidoti & Co. LLC

Marco A. Rodriguez – Stonegate Securities, Inc.

Dennis J. Scannell – Rutabaga Capital Management LLC

Perceptron, Inc. (PRCP) F1Q 2014 Earnings Conference Call November 14, 2013 10:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Perceptron First Quarter Fiscal Year 2014 Results Conference Call. Today’s call is being recorded.

I would now like to turn the call over to Harry Rittenour. Please go ahead, sir.

Harry T. Rittenour

Thanks, Gwen. Good morning and thank you for joining us today. As I am sure most of your are aware, we are in the midst of a planned CEO transition with my retirement and the appointment of Jeff Armstrong as Perceptron’s new President and CEO. I have been privileged to serve as President and CEO for the past six years and I truly appreciated the interactions that I’ve had with all of you. I am very positive on where the company stands today, as well as its outlook for the future.

I will now turn the call over to Jeff.

Jeffrey M. Armstrong

Thanks, Harry. I’m very pleased to be here and to be given the opportunity to lead Perceptron and while I’ve only been on the job about 10 days now, really I’m pleased with the strengths of the management team and the opportunities that they’ve enabled for us. I would say that Harry has done a superb job as CEO, really bringing the company forward during his tenure over the past six years and transit over to me a very strong position.

Firstly, we’ll have the ability of drawn Harry’s knowledge, deep knowledge of the company, as he’ll be staying on with us for several months as a consultant working with me on high value projects as we go forward. As you likely read in the press release from our Chairman, the Board’s search and vetting process was national and very thorough.

As part of that process and a lot of time meeting with the Board, I learned a great deal about the company and their individual and collective enthusiasm that the Board of Directors has for the business. My background in business engineering and operations managers – management is very well aligned with the needs of the business and has thus far enabled a very easy transition.

My major objectives over the next few months are to really learn the inner workings of the business, our technology and to validate and refine our strategic objectives. Since I was not here for the first quarter, I would like to ask Jack Lowry, our CFO, to provide you an overview of our financial results and operational highlights for the quarter. Jack?

Jack H. Lowry

Thanks, Jeff, and good morning, everyone. Also here today are Sylvia Smith, our Vice President and Controller; Mark Hoefing, our Senior Vice President; and Heribert Viehweber, our Vice President of Operations and Quality. We issued our press release outlining the results of the first quarter of fiscal year 2014 yesterday through Marketwire. If you don’t have access to it, please call me after this conference call at 734-414-4816 and I’ll get a copy to you. In accordance with SEC rules, I’d like 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 other things. 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 first quarter of fiscal year 2014.

Our first quarter results were impacted by two primary factors. The first was, while our sales increased modestly by $224,000 over the first quarter of last year, they were relatively low at $12.4 million. The second was that our gross margin declined a 34.7% this year and 46.1% last year. The margin decline was primarily due to timing differences between the recognition of sales and material and labor costs related to the sales. Our gross margin is generally lower in quarters where our sales are relatively soft due to the fixed nature of certain of our costs of goods sold.

This year, we had higher labor cost than that were expensed on certain projects in the quarter, where a larger portion of the corresponding sales was recognized in a previous quarter. In the first quarter last year, we had higher gross margin than we would normally expect on $12.1 million of revenue. It isn’t unusual for us to see significant quarter-to-quarter variations in sales bookings and gross margins. Our expectation is the gross margins will return to more normal levels for the rest of fiscal year 2014.

I’d also like to provide some perspective on our first quarter sales. In six of the past seven years, our sales in the first quarter were the lowest quarterly sales of the fiscal year. The only year that was an exception was the first quarter of our fiscal year 2009, when the first half of the fiscal year started out well, but the bottom fell out in the second half due to the severe decline in the U.S. and global economies in general and the automobile industry in particular. While our sales were soft at $12.4 million, I did a check back, fairly quick check back to fiscal 2001 and found that our sales were the second highest first quarter sales we have had since that time. Only the first quarter of fiscal year 2006 had higher sales and they were at $12.8 million.

We expect fiscal 2014 will follow the recent pattern where the first quarter sales are the lowest of the four quarters. As was true in fiscal years 2012 and 2013, we expect the second half of fiscal 2014 to have considerably higher sales than the first half of the fiscal year.

On the [Audio Dip] side, our first quarter bookings were strong at $17.8 million. Bookings in the first quarter were approximately 39% higher than in the first quarter of fiscal 2013 and increased in all three geographic regions. The largest increase was in Europe and was principally due to the receipt of a very large automated systems project. The stronger year also contributed about $425,000 to Europe’s increase.

Asia’s increase was due to higher orders in China for automated systems projects and while the increase in the Americas’ occurred in United States and was also principally due to automated systems project. The strong bookings in conjunction with our sales in the quarter resulted in an increase in our backlog at September 30 to $35.9 million, which is a record level. Our backlog was $30.8 million at the end of the first quarter last year. Europe’s backlog increased by approximately $5.5 million or 43%, while Asia's backlog increased by $2.6 million or 32%. Both were due to strong bookings for automated systems projects. The backlog decline in the Americas occurred about equally between the United States and Brazil. Brazil had several large automated system projects underway last year that have largely been completed, while the United States had fewer orders for upgrades and additions to existing systems in the first quarter this year.

Selling, general and administrative expenses or SG&A were approximately $3.5 million, an increase of 3.4% compared to the first quarter of last year. The increase occurred in sales and marketing costs primarily in Europe and the U.S. The effect of the stronger euro in the first quarter this year increased European SG&A expense by approximately $50,000. Engineering, research and development expenses were approximately $1.7 million, an increase of 6.2% over the first quarter last year. The increase primarily resulted from higher salary and salary related costs in the first quarter this year compared to last year. Our balance sheet at September 30 remained strong with $32.8 million in cash and short-term investments, no debt and shareholder equity of $58.6 million or $6.62 per share based on approximately 8,844,000 total shares outstanding at September 30.

Turning now for a few minutes to operations. Europe experienced strong bookings, as I mentioned, in the first quarter. We received a particularly large order there from a luxury automotive manufacturer that is expected to ship near the end of fiscal 2014. We also had a European customer to lay the shipment and installation of a larger order for six months from the original schedule date. That order is now expected to be delivered and installed in our third and fourth quarters of fiscal 2014 instead of the first and second quarters, as it was originally scheduled. As a result, we anticipate that Europe sales will be considerably stronger in the second half of the fiscal year compared to the first half.

I am pleased to report that we recently received a third order from a Japanese OEM that we mentioned in our last earnings call as being a new customer for us in Europe and China. Like the second order we received, this order is also for installation in one of their manufacturing facilities in China. It’s our first order from them for a Gap and Flush system using our TriCam sensors in the final assembly area and it will be our first Gap and Flush installation in China. We are optimistic that we’ll be successful in winning additional orders from this customer over the next couple of years.

Another piece of exciting news is that we received an order for two inline gauging systems and a robot guidance system for our global automotive OEM building a new production line in India. This order helps build our confidence in the growth potential for our automated systems products in India. We continue to make progress with Helix sales and bookings in the first quarter. It continues to meet or exceed our ramp up expectations for fiscal 2014. We’re continuing our efforts to validate and convert all of our existing TriCam based applications and installation processes to Helix.

Our engineering and R&D efforts remain on track and we expect to issue the next release of our Vector Software platform within the next 12 months. That release will provide us with the opportunity to utilize our Helix technology in a broader range of automotive applications as Helix sales continue to ramp up.

Based on our customers’ current delivery and installation schedules and our record backlog level, we expect quarterly sales improvement during the fiscal year with the second half of the year expected to be considerably stronger than the first half and a profitable fiscal 2014.

Finally, on a personal note, as many of you may be aware, we recently announced that I am also planning to retire, while I’m planning work until my replacement is found we have begun to look for my replacement and depending on how quickly that search goes, it’s possible that this could be my last earnings call.

Any event that it is, I’d just like to say that I particularly enjoyed all of the interactions I’ve had with many of you these past few years. I tried to bring our shareholders’ perspectives to our management discussion, because they add value. It’s been a pleasure to get to know each of you.

We’re happy now to answer any questions that you may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll take our first question from Les Sulewski with Sidoti & Company.

Les Sulewski – Sidoti & Co. LLC

Good morning, gentlemen.

Jeffrey M. Armstrong

Good morning.

Les Sulewski – Sidoti & Co. LLC

My first question was – just wanted to hear a little more color on the gross margin decline, were there any changes in the headcount, I mean is that a combination of material cost increases or is it just the labor cost increase, I understand that you’ve booked – you’ve recognized some revenue in the earlier quarter where you booked the cost this quarter. I mean is this kind of the policy overall or just if you can provide a little more detail on that that will be helpful?

Jeffrey M. Armstrong

Sure. I’ll be happy to, Les. Yes, the – our situation is that we – due to the nature of our business and our projects, experience the situation where the timing of our revenue and costs directly related to that revenue can vary from quarter-to-quarter, it’s – we’re following U.S. GAAP accounting principles every step of the way, and particularly, U.S. GAAP, when it comes to revenue recognition. the situation is that we have a portion of our labor cost that is a relatively fixed amount. it’s the people that we have hired that our employees that spend full time doing fieldwork, installations, training et cetera, project design you name it.

We supplement that with outside contractors who, we used to provide assistance in a variety of ways, depending on the peaks and valleys of our workload and the other element that changes from quarter-to-quarter is what I refer to is the mix of revenue, we may have a quarter that has a disproportionately heavy proportion of material shipments, and margin that we’ll learn on that can be a bit different than it would be on the labor portions, which would include the installation, launch support, training things like that.

So in particular, the comparison between the first quarter of this year and last year is pretty dramatic, there was about 11, 12 point drop between the two quarters. In the first quarter last year, we had surprisingly high gross margin, I would not expect in a typical quarter to earn 46% on $12.1 million of sales. This time, it went the other way and we had a very, very large fourth quarter and what we experienced was some of the costs associated with that came in, in the first quarter and mix of the revenue was a bit different this time as well.

So it was one of those perfect storm alignments, I guess is the way I describe it that had a detrimental effect on our margins. As I mentioned, during my remarks though, it’s not something that we expect to continue through the rest of the year and if you’ve followed our quarterly results over time, you’ll see that variations like that do occur. So hopefully that helps.

Les Sulewski – Sidoti & Co. LLC

Yes. That’s definitely clarified it a little bit better, thank you. And then shifting to your bookings and some of your activity in the Americas, where are you seeing more strength and then the weaknesses may be geographically in areas or any color you could provide there, that would be helpful as well.

Mark S. Hoefing

Hi, Les. This is Mark Hoefing. Our bookings in Brazil have dropped off the last two quarters, really so we do see some weakness there, but it wasn’t unexpected, it really had to do with the kind of ebb and flow of the significant new tooling projects that are being put in. there isn’t as much installed base down there. so the major projects we work on are going to come in big lumps and then we work those off and work on the next project.

So we have been somewhat soft in Brazil. We also saw a big increase a few years ago in North America, had a lot of project work and the automotive OEMs shift their capital investments from different areas of manufacturing for a year or two, maybe in the assembly area when they come up a new sheet metal, new models, new look for the cars and then when they shift that into engine and transmissions or electronics. So these are normal kind of investment cycles and they do go up and down, which impacts the business that we get. So we’re somewhat down in North America, but certainly haven’t dropped off as much as we’ve seen in Brazil. Does that give you the flavor you’re looking for?

Les Sulewski – Sidoti & Co. LLC

Yes, for sure, for sure. Thank you.

Jeffrey M. Armstrong

Les, I would add one comment – if I could just add one comment on to what Mark said. The other aspect of it is, we have not seen based on everything that we monitor, any deterioration in our market share. so it’s not like we’re losing orders to somebody else, it’s more got to do with the cycles of their capital projects that include our equipment.

Les Sulewski – Sidoti & Co. LLC

Okay. Great, thank you. And perhaps any short-term guidance you can give us for next quarter?

Jeffrey M. Armstrong

We tend not to give quarterly guidance due to the volatility that I just described, rather to provide general directional guidance more for the full year. We do sometimes also give some guidance in half-year increments and as I mentioned before, we do think the second half of the year will be quite a bit stronger than the first half. That was also the pattern we saw the last two fiscal years. So as our businesses shifted in the last two, three years to a greater percentage of automated systems projects that pattern seems to come up and emerged.

Les Sulewski – Sidoti & Co. LLC

All right. Thank you, gentlemen.

Operator

(Operator Instructions) We’ll take next question from Marco Rodriquez with Stonegate Securities.

Marco A. Rodriguez – Stonegate Securities, Inc.

Good morning, guys. Thank you for taking my questions. Just kind of wanted to follow-up in regard to your revenue expectations, obviously you’ve mentioned second half will be stronger than your first half in line with your last couple of fiscal years, just trying to get a sense though do you expect that strength to be greater this year than the subsequent two?

Jeffrey M. Armstrong

Well, the pattern between the quarters can be different each and every year. Last year, we had a particularly strong fourth quarter, a year before; we had a very strong third quarter. So sometimes, it can be difficult to say that there is going to – it will follow exactly the same pattern year-over-year. but I guess, the way I would phrase it is that we do expect the second half to be stronger. Is it going to arrive last year in the fourth quarter, that’s a pretty tough quarter to match up against, it was a record sales quarter of all-time for the company. So I’m not – we’re not in a position to say that, but between the third and the fourth quarters, we see it as being a strong half.

Marco A. Rodriguez – Stonegate Securities, Inc.

Right. And do you expect that second half – I mean, how much of a delta compared to your first half or should we be thinking about them or any kind of color you can provide there?

Jeffrey M. Armstrong

Again, we haven’t provided anything on that side, Marco.

Marco A. Rodriguez – Stonegate Securities, Inc.

Okay. Fair enough. And then on the gross margin side, just want to make sure, I’m kind of understanding what’s happening here, I understand obviously that it jumps around on a quarterly basis, but are you – are you expecting to make up that margin for the rest of the year, such that full year gross profit margins are similar to fiscal 2013 or should we expect that it drops a bit?

Jeffrey M. Armstrong

No, our expectation is that the margins will improve during the year. We do have a lower margin expectation at this point in time over our rest of the year.

Marco A. Rodriguez – Stonegate Securities, Inc.

Okay. Perfect. And then in terms of the new Helix systems that have been installed with your customers, any kind of a color or a commentary that you can provide that you’ve been receiving from customers now that they have kind of installed it and they’ve seen it a little bit more in action on their floors?

Mark S. Hoefing

I’ll take that one, this is Mark. We continue to ramp up Helix and we’re certainly installing a lot right now. The feedback that we’re getting is that it’s doing what they expected to do. In other words, they’re able to measure additional features that they weren’t able to measure before. They’re able to get some cases more measurements than the available cycle time. So it’s living up to their expectations. We are seeing a ramp up in that both – on our side, being able to ramp up our production, ramp up our ability to install support equipment, as well as a ramp up on the customer side.

They need to change their processes, think sometimes a little differently about what things they measure. We’re able to do some things, we – they weren’t able to do before. So they need to maybe, add in additional measurements that they didn’t have in their measurement plans in the past. So these things take time to work through. The automotive companies, they don’t always move it at real fast pace, but they’re moving it pretty much to the pace that we expected and the feedback that we’re getting is positive.

The customers that are buying are planning to buy more in the future. So I think that’s a good signal that it’s doing what they like it to do. We’re also taking advantage of some of the functionality of Helix to try to reduce our costs for installation, make those installations more efficient. We’re doing some things like technique, we call it teach to CAD, which let us do more of the configuration of these systems in our building before the system is shipped, reducing our project engineering time on the plant floor. It’s always more efficient to do the work in our building than on the customer’s plant floor. Helix enabled some of that, so there’s both customer benefits, and some internal financial and efficiency benefits for us, as we ramp up Helix. Those processes do take time to establish, test, prove out, get our people trained on and that’s what we’re going through now as ramping that up.

Marco A. Rodriguez – Stonegate Securities, Inc.

Great, that’s very helpful. And last quick question and I’ll jump back in the queue, the India client or installation that you mentioned in your prepared remarks, was this an existing customer that was familiar with your guys’ abilities or there’s a new client, any kind of color you can provide there?

Jack H. Lowry

It was a customer that – it’s a global customer that we do business with regularly. So they were familiar with our equipment. It is part of their normal process to put in this type of equipment.

Marco A. Rodriguez – Stonegate Securities, Inc.

Got it. and are you expecting further gains with this particular client in Asia or?

Jack H. Lowry

We certainly are expecting them to buy more equipment for new lines that they’re putting in other locations and we’re working on expanding the scope in this particular plant also. Based on their budgets and their willingness to invest, there is some variability on what equipment they’ve put in on – in new plants that may not follow the template they were putting, I’ll say European plant or a North American plant. So there’s some opportunity there for us to upsell, increase the scope.

Marco A. Rodriguez – Stonegate Securities, Inc.

Got it. Thanks a lot guys.

Jack H. Lowry

Thank you.

Operator

(Operator Instructions) We’ll go next to Dennis Scannell with Rutabaga Capital.

Dennis J. Scannell – Rutabaga Capital Management LLC

Yes, good morning, gentlemen.

Jack H. Lowry

Good morning, Dennis.

Dennis J. Scannell – Rutabaga Capital Management LLC

Just a couple of quick things, Jack, over the years, I’ve definitely understood the difference in terms of timing of revenue recognition and having the expense, labor costs that are incurred, but I’ve always been of the assumption that that typically is a result of recognizing labor costs now and then the revenues are recognized in later quarters when the customer actually access the system. Although it sounds like in the most recent quarter, the revenues were recognized in the fourth quarter and yet we had more expenses in the fiscal first quarter. Can you help me understand what was going on there? Was there a problem with an installation that didn’t quite do what you had hoped?

Jack H. Lowry

The situation there it involved outside contractors and their invoicing to us, and so again, depending on the terms and conditions of the agreement and so forth, we found a situation where we saw some invoicing come in that we didn’t realize had not been in for the fourth quarter and it impacted Q1.

Harry T. Rittenour

I guess, let me add a little bit on to that. There’s also variation from quarter-to-quarter of the mix of revenue that Jack mentioned earlier, their difference – I guess different margins, whether it’s hardware and software versus the labor. If we have a lot of shipments in a quarter, we’ll recognize a larger percent of the revenue on a project than we will later as we work off the labor portions of it. So the revenue recognition can be somewhat lumpy depending on if you have a lot of shipments one quarter versus the progress payments and buy-off payments that are associated with the labor.

Dennis J. Scannell – Rutabaga Capital Management LLC

Okay. Thank you, thank you, that’s helpful. One other thing on the guidance for fiscal 2014, are we still expecting – I was looking back to my notes on kind of what sort of framework you were giving after your fourth quarter conference call a few months ago and my understanding was that the expectations for 2014 with that, we would see some modest sales growth, the modest improvements in net income as well, our operating margins. Are we still there or is that – it will actually show in revenue growth be tougher this year do you think?

Jeffrey M. Armstrong

We’ve always expected revenue would be a modest growth this year. We have not changed our guidance in that regard and as the profitability we’re starting from a bit of a hole here, compared to last year.

Dennis J. Scannell – Rutabaga Capital Management LLC

Yes.

Jeffrey M. Armstrong

Last year also had, you may recall about $0.11 a share was related to the redemption of the primmest investment at full value that we had previously taken a charge against on our books. So that is not expected to reoccur this year. So there is a difference there.

Jeffrey M. Armstrong

Okay, okay, I think I get that. Terrific, okay, that’s all I have, but maybe as a final note I want to thank both Harry and Jack for your service since taking over from Al, Harry you delivered a significant amount of value to the company to shareholders today notwithstanding. We hope this is temporary and that again, Mark and Jeff will be able to realize the potential of Helix and generate some good earnings of the backlog that you’re leaving them with and I wish you both the very best in your retirement.

Harry T. Rittenour

Thanks very much, Jeff or Dennis got emotional as it is, but thanks very much. I’ve enjoyed meeting you and meeting our other investors; I’m going to certainly miss that interaction. but as I mentioned in my comments, I feel really good about where the company is today. So thanks very much, Dennis.

Jeffrey M. Armstrong

Thanks, Dennis.

Dennis J. Scannell – Rutabaga Capital Management LLC

Thank you.

Operator

And there are no other questions at this time. I’d like to turn the conference back to Jeff Armstrong for any closing remarks.

Jeffrey M. Armstrong

Yes, thank you, Gwen. Les, Marco, Dennis and rest of the investment committee on the phone, thanks very much for your time today. Like I said, I am very fortunate, feel very fortunate to be, have the ability to lead this company. I think I concur with Harry that he has handed over the reins of business in very good condition with a lot of growth potential in the future. and I can assure you that we’re really over the next couple of years, I will do my absolute best to bring that to realization with a very strong team. So thank you very much for your time.

Operator

Thank you everyone. That does conclude today’s conference. We thank you for your participation.

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