Perceptron's (PRCP) CEO Jeffrey Armstrong On Q3 2014 Results - Earnings Call Transcript

| About: Perceptron, Inc. (PRCP)

Perceptron Inc. (NASDAQ:PRCP)

Q3 2014 Earnings Conference Call

May 08, 2014 10:00 a.m. ET

Executives

Jeffrey M. Armstrong – President and CEO

Keith R. Marchiando – VP and CFO

Sylvia Smith – VP, Controller and Chief Accounting Officer

Mark S. Hoefing – COO

Analysts

Les Sulewski – Sidoti & Company, LLC

Christopher Owens – Heights Capital Partners, LP

Operator

Please standby, we are about to being. Good morning, ladies and gentlemen, and welcome to the Perceptron Third Quarter Fiscal Year 2014 Conference Call. At this time I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. There will be a digital rebroadcast of this call available beginning at 2 PM today. At the request of the company, we will open the conference for questions-and-answers after the presentation. I will now direct the call to Jeff Armstrong, President and CEO of Perceptron. Go ahead, Mr. Armstrong.

Jeffrey M. Armstrong

Good morning, everybody, and thank you for joining us. With me here today are Keith Marchiando, our Chief Financial Officer; Sylvia Smith, our Chief Accounting Officer, Mark Hoefing, our Chief Operating Officer. Our press release outlining the results of the third quarter fiscal year ’14 was distributed yesterday. If you’ve not yet seen the release, it is available on our Web site at perceptron.com or you can call our offices at 734-414-6100 and we will get one 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 SEC regulations, 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 third quarter of fiscal year 2014.

As anticipated, the results of the first nine months were solid. Revenue was strong due to our large backlog and we start installation activities for the large German order that we have previously reported being delayed approximately six months. We are clearly pleased with the strong revenue and healthy gross margins we are able to return to profitability year-to-date.

In February, Keith Marchiando joined our team as the Chief Financial Officer after Jack Lowry retired at the end of the year. Keith brings in wealth of relevant experience to the role and be a key agent in helping to drive our business improvements. He is a quick study and I am more than pleased to have him with us. Keith will now give you an overview of our third quarter and year-to-date results after which I will talk a bit more about our strategy and plans going forward. Keith.

Keith R. Marchiando

Good morning, everyone and thank you Jeff for the nice introduction. First, I’d like to say how excited I am to be the Chief Financial Officer of Perceptron. This is a great company with a rich history, excellent people and unsurpassed products and technology. I look forward to being part of the Perceptron team that will take this company into the future and I look forward to communicating the Perceptron story and sharing with you our quarterly and annual results.

So let’s jump right into the results for the third quarter for fiscal year 2014 and just so I can preface all my comments, any amounts I am talking about should be considered to be US dollars and all references to years will be for our fiscal years that end in June.

We saw strong financial performance in the third quarter as we had expected when Jeff and Sylvia discussed second quarter results on the call on February. Our revenue rebounded and ended at $17.3 million. We returned to profitability and posted operating income of $2.6 million, this equates to $0.26 per diluted share.

Our liquidity remains enviable with $33.9 million of cash and short-term investments, and we have no debt. And although as expected, our bookings were less than revenue, we still maintain a historically large backlog. Our third quarter profitability was influenced by two primary factors. First, revenue rebounded as expected to a level consistent with our full year outlook, and second, one time cost associated with senior management changes continued in the third quarter.

As I said, global revenue for the third quarter was $17.3 million, which was an increase of 17% from the same quarter last year. Approximately $540,000 of this increase was attributed to the efforts of currency changes, primarily across Europe and in China. Of the remaining increase of $2 million, about $250,000 can be attributed to pricing actions and the balance is due to higher sales in Asia that more than offset a reduction in sales in the Americas.

Bookings of new orders in the quarter were approximately $13.2 million, $1.7 million lower than the third quarter last year. These lower levels of new bookings in the Americas and Asias was in line with our expectations given the relatively high level of bookings in those two regions reported in the second quarter of this year. Bookings in Europe increased $1.2 million from a year ago.

Our backlog on March 31, 2014 remained a robust $36.3 million, down from our record level at the end of the prior quarter as we projected in our press release last quarter. And although we are down from last quarter, this level is in fact our second highest backlog in the company’s recent history. In comparison to last year, this quarter’s backlog was $6.5 million, or 22% higher, and reflected increases in all geographic areas.

Gross (profit) for the quarter was $8.2 million, and was $817,000 higher than the same period last year. Increases in gross margin driven by volume, pricing and exchange rates were partially offset by product mix and anticipated year-over-year economics. Although the absolute level of gross margin increased in the quarter, unfavorable product mix and cost economics resulted in our gross margin percentage dropping 2.6 points to 47.1%.

SG&A expenses increased by approximately $500,000 over the third quarter last year, largely because of additional cost associated with senior management changes and increased headcounts to support localized geographic growth and our strategic initiatives that Jeff will review in a few minutes. Planned year-over-year cost increases for salary and salary related cost also contributed to the increase.

Engineering, research and development expenses were $1.6 million for the quarter and essentially flat versus the third quarter last year. Higher salary and salary related costs were just about fully offset by lower engineering materials compared to fiscal 2013.

The company had operating income of $2.6 million compared to operating income of $2.3 million in the third quarter of fiscal 2013. As I noted, higher sales, product pricing and currency effects were partially offset by product mix and higher SG&A expenses in the present quarter. The company’s effective tax rate for the period was approximately 11% and earnings per share, as I mentioned earlier, for the quarter was $0.26 per diluted share.

Now I will take a few minutes and we will talk about our results year-to-date. For the first three quarters of the year, our revenue was $42.2 million, a $2.1 million increase versus the same three quarters in fiscal year 2013. Currency movements contributed $1.2 million of the increase, higher product pricing roughly $400,000 and increased volume another $500,000.

Our year-to-date bookings were $8.2 million or 20.6% higher than bookings for the same period last year. Bookings for 2014 year-to-date are cumulative $48 million, reflecting increases in all geographies and led by our automotive systems products. The strengthening of major currencies this year contributed approximately $1 million to the total bookings amount, but the remaining $7.2 million of additional bookings was due to the strength of the Perceptron products, technology and our people.

Gross margin was down $716,000 in the first three quarters of this fiscal year as the positive effects of volume, product pricing and exchange rates were outweighed by headwinds from year-over-year economics on both production materials and labor and the negative effects of product mix. SG&A and research and development spending were up on a year-to-date basis for the same reasons that drove the increase in the third quarter, including our continued investment in personnel and other cost to support our strategic initiatives.

The company reported a cumulative operating income in the first three quarters of the year as our healthy third quarter profits more than overcame the losses accumulated in the first six months of this year. Year-to-date operating income of $1.5 million is below the $3.1 million and operating income we reported for the same period in fiscal 2013's for all the reasons noted earlier.

As I mentioned briefly in my earlier comments, the company’s balance sheet remained strong. Cash and short-term investments were $33.9 million at the end of March 2014, and the company has no debt and shareholders’ equity was $6.75 per diluted share.

Now let me close with just a quick note on our full-year forecast or outlook. We continue to believe sales in 2014 will be about the same level as in 2013. Notwithstanding a lower selling rate in the first half of this year, our sales for the third quarter were strong and we believe our fourth quarter sales will continue this trend. In addition, we returned to profitability in the third quarter this year, expect to be profitable in the fourth quarter and therefore expect full profitability for the full-year 2014.

Now I’ll pass the meeting back over to Jeff for his comments. Jeff.

Jeffrey M. Armstrong

Thanks Keith. As anticipated, our year-to-date results have recovered well. We continue to maintain a large backlog and we are driving to show modest growth in year-over-year sales and we expect to be solidly profitable for the full year.

Looking ahead, we started moving forward on a number of actions that support four strategic initiatives. These initiatives are profitable growth in our core markets; two, prudent market diversification; three, broaden and extend our technical leadership; and four, operational excellence and fiscal discipline. A little bit on each of these items.

Profitable organic growth. Despite a strong presence in our core automotive business, we still see significant opportunities with new and existing customers. We’ve also begin to focus more on our 3D scanning products that offer higher growth rates, better gross margin and a natural path to diversification.

Prudent diversification. We have set a target to expand our non-automotive business from 10% to 30% of total revenue within three years through a combination of organic and acquisition growth opportunities.

Broaden and extend our technical leadership. As you are aware, we invest significant resource to maintain our technical leadership. While we do not perceive any need to increase our research and development spending as a percentage of sales, we have begun to target a portion of these investments toward adjacent and transformational opportunities.

Operational excellence and fiscal discipline. During any period of significant change it is critical that the company maintains a clear focus on operational excellence and continue to maintain very high customer satisfaction that we have achieved. We will pursue these opportunities so they benefit the business and add value for all of our shareholders.

With that let me open the call for questions. Naomi.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will take our first question from Les Sulewski with Sidoti & Company.

Les Sulewski - Sidoti & Company, LLC

Good morning. Thank you for taking my questions. I wanted to start out first with Helix. Can you talk about what percentage in terms of backlog that accounted for and then what kind of order activity are you seeing in the product?

Jeffrey M. Armstrong

Yeah, good morning, Les and I look forward to seeing you Friday at your conference. We generally don’t speak of Helix as a percentage of revenue and as a backlog. We maintain our internal investment calculations that we did based on that research and development. What I can confirm to you though is that two things, one is, on Helix, the product sales are at and trending above where we had forecasted based on our investment analysis, which is very positive. And we continue to get feedback from our sales teams that they see more opportunities with new customers and with existing company – customers for opportunities that we may not have been able to address using our legacy products in the past.

Les Sulewski - Sidoti & Company, LLC

Thank you. And what kind of traction are you seeing in outside of automotive industry at the moment?

Jeffrey M. Armstrong

We’re working on a couple of different ways. We get inquiries frequently from a variety of industries trying to find out if our products have a fit into that. The most compelling for me right now is probably in the white good sector where we have active request from major appliance makers looking for us to see if we can fulfil their needs. We have given them preliminary proposals and we’re having ongoing discussions with two major providers.

Les Sulewski - Sidoti & Company, LLC

Okay. That’s helpful. And then perhaps if you can maybe help me out with this and on the gross margin side, looking at perhaps the fourth quarter, maybe similar run rate and revenue perhaps, maybe a little bit lower than a year ago. What kind of gross margin can we look forward to and then maybe if you can perhaps just look at 2015 and kind of generalize that if you could?

Jeffrey M. Armstrong

Yeah, with regard to the fourth quarter, I think you’re spot on on where we’re looking at revenue coming out. I mean we don’t comment specifically and give guidance on margins, but obviously a higher level of revenue is certainly a better indicator for us of margins versus last year – fourth quarter of last year was pretty much an out-of-the-box quarter for us with regards to revenue and also product mix and the margins were very high. So I think you’re down the right path here. I think revenue in the fourth quarter – to give us about year-over-year flat full-year revenue, I don't see the margins certainly being as high as fourth quarter in 2013 fiscal year.

Keith R. Marchiando

One thing I will add for you, Les, is you know where I feel comfortable with is we’ve established for ourselves a benchmark for gross margin, 45%, I think that’s achievable on a go-forward basis with the product mix that we have and the ideas that we are looking for, you know, potentially higher gross margin product mix as well as something that might be dilutive. So internally that’s where we’ve established the benchmark on a go-forward basis.

Les Sulewski - Sidoti & Company, LLC

So if I understand, 45% kind of internal goal and that’s probably on an annual basis due to the lumpiness in the quarterly sales, is that essentially way to look at it?

Jeffrey M. Armstrong

Yeah, absolutely.

Les Sulewski - Sidoti & Company, LLC

Okay, all right. Thank you. And one more with the cash on the balance sheet, I mean pretty significant there, what kind of outlook can we expect in terms of acquisitions in short term especially?

Jeffrey M. Armstrong

So the intention of acquisitions, the Board had confirmed guidance from I think going back to 2011 that we would always keep our opportunities available for acquisitions for companies that make good sense for us and our business going forward. One of the things that I have done in preparation for that is that we have continued to support and improve our internal vetting processes, all of the due diligence activities that we would need in preparation for executing any kind of a deal, and then finally all the integration activities. My background and Keith comes from companies that had very strong acquisition activities and a very robust process to do that because as everybody is aware, you can buy a company in a very good price and poorly execute the due diligence and/or poorly execute the integration and make a mess of it. In the near-term, if we are continuing to vet companies that are of interest to us, that make good sense for us and if we do find an opportunity, obviously we do have the wherewithal, the cash, and the credit opportunities to move forward on that.

Les Sulewski - Sidoti & Company, LLC

Yeah, thank you. That was very helpful. I think that will do it for me. And I look forward to seeing you guys on Friday. Thank you.

Jeffrey M. Armstrong

Thanks Les.

Keith R. Marchiando

Thanks Les.

Operator

(Operator Instructions) At this time we’ll go next to Chris Owens with Heights Capital Partners.

Christopher Owens - Heights Capital Partners, LP

Hey, good morning guys.

Jeffrey M. Armstrong

Good morning, Chris.

Christopher Owens - Heights Capital Partners, LP

I just wanted to congratulate you on a great quarter and for doing what you said you’d do on the last call. So just as a shareholder, I just wanted to convey a couple of observations that I had from the outside and they’re mainly pertaining to capital allocation. So I guess the first thing that strikes you when you look at Perceptron’s financial statements is this is really an A-plus business with kind of a C-minus capital structure and return on capital. And perhaps that’s due to some of what happened in the financial crisis and maybe what happened once you had a very conservative balance sheet that subsequently become somewhat of a lazy balance sheet. And for instance, despite the fact that you don’t operate in the capital intensive business, working capital turns look like they’ll be just above one times of share. So that just acts as a very massive parachute on return on invested capital and free cash flow. So I think if you follow from this, I think you need an outlet for this excess capital, some of which you’ve touched upon, but I think – first and foremost, I think Perceptron should have a share repurchase authorization in place. You know, your market caps is $100 million and you have $50 million of working capital, so that means that the market is evaluating your ongoing business at $50 million. And I would just hope that you would agree that that’s a very cheap evaluation. So I think having a share repurchase authorization allows you to return capital to shareholders on a tax free basis and it also helps support your stock price, which if you’re thinking about making acquisitions, I think you would want a buyable acquisition currency. So I agree with you, you should be looking at acquisitions, you spend a lot on R&D and anyway you can sort of leverage that effort will – a lot of that will fall through to the bottom line. So, again, I think you guys have done a great job. I look forward to you guys as the management but something I wanted to convey as a shareholder.

Jeffrey M. Armstrong

Chris, first of all I appreciate your thoughtful input. I would tend to agree with your assessment and one of the things that I’m very, very sensitive on is capital allocations and how to do that prudently and intelligently. I mean one of the things that I think and I really pride is having Keith by my side to help drive this business and his real strings of experience as to the best ways to use capital and maximize the use of that. We will take on board the opportunity to have a share repurchase authorization. I certainly think it is a valuable tool when share prices predicate doing that. That’s the best place to put the money, but certainly having that vehicle available – I would tend to agree with you it’s good to have as a tool in the tool chest. Thank you.

Christopher Owens - Heights Capital Partners, LP

Yeah, and it’s not something that you have to use, but I think it’s an option. And I think if you look back at sort of company that have had very, very high returns for their shareholders, which is ultimately what you’re trying to do, it’s guys that have had operational excellence, which I think you do have, combined with capital allocation excellence. So you look at Henry Singleton of Teledyne, you look at Bill Stiritz at Ralston Purina, you look at John Malone at TCI and Liberty Media – Liberty Global. I mean these are people that combine the two trades well and I think as CEO those are sort of two things to really work on it. And the great news is you have an awesome business, and I think that there is a huge lever to pull here in terms of really using your balance sheet to facilitate growth in your income statement.

Jeffrey M. Armstrong

Yeah, absolutely. Thank you very much, and I look forward to meeting you at some point.

Christopher Owens - Heights Capital Partners, LP

Great. Thanks.

Operator

And we have no other questions at this time.

Jeffrey M. Armstrong

Very good. Thank you all for joining us today. Over the coming months we look forward to updating our shareholders and investors on our plans, and we look forward to those conversations. Thank you very much for your time.

Operator

This does conclude the conference. We thank you for your participation.

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