Wednesday, November 16, 2011

Perceptron Management Responds

A few weeks ago, I wrote about the value potential (and risks involved) of investing in Perceptron, a producer of measurement and inspection products. Its CFO, Jack Lowry, has responded to the article.

In the original article, I discussed the fact that economic woes in Europe could affect the company's short-term results, to which the company responded:

"Our European business has been quite stable and profitable for several years through a wide range of economic and European Union issues. We believe that is likely to continue into the future. In addition, our European customers sell their cars globally, and while their fortunes are obviously tied to good European economic conditions, they are also based on global economic growth."

I also suggested that a dividend would be unlikely, as the company has numerous options outstanding, to which management replied:

" While dividends would have an impact on the value of options, the Board evaluates alternatives for using Perceptron’s cash based on a variety of considerations to determine the best use of cash for the benefit of all shareholders. The board has invested cash in a variety of capital investments to grow Perceptron’s business and it has returned cash to shareholders in the form of share repurchases. The Board will continue to evaluate such alternatives, including potential dividends in order to reach its goal of maximizing shareholder value."

Finally, I implied the company's customer concentration (the top 2 customers accounted for 32% of last year's sales) was a risk, to which the company responded:

"Although VW and GM represented 32% of the Company’s sales in fiscal 2011, the 32% represents sales in all regions of the world and includes sales to joint ventures of GM and VW in China. So, although there is a concentration with VW and GM, they are not monolithic in their behavior. The article also states that the reliance for a large part of revenue from just a few customers is part of the reason the Company’s sales fell so dramatically during the recession. We believe that the main cause of our decline in fiscal 2009 and 2010 was from the very significant recession in the auto industry combined with a significant global decline across most/all industries. In fact, we have noted that a peer company with over one thousand customers, none of whom makes up more than 1-2% of their sales, experienced a very similar decline to ours. In addition, Perceptron’s automotive related sales are not directly affected by the number of vehicles the OEM’s manufacture. Rather, Perceptron’s sales are more closely linked with new model introductions, model refreshes, and assembly line changes."

In addition, I was offered the opportunity to ask a few questions:

Me: What is the plan for all that cash? What level of cash (based on current sales, working capital requirements etc.) should investors consider as required by the company as opposed to excess cash that could be distributed?

Jack Lowry: We are currently evaluating strategic options for a prudent use of our cash. We realize that it is currently an underutilized asset of the Company. There are a few important considerations that must be kept in mind regarding our cash however. The cash and short-term investments amount that we report is located throughout the world. The largest balance is in located in Germany. Our ability to utilize that cash is hampered by the fact that, if we brought it back to the U.S., we would have to pay approximately 34% of the transferred balance in taxes. This is a significant deterrent to consolidating the cash and utilizing it in a strategic manner. Congress is currently considering lowering the tax on overseas profits as a way of trying to stimulate the economy and business investment. We are monitoring that situation and, if that should happen, we would likely repatriate cash back to the U.S. for strategic use.

Me: Can you spell out some more details about the $4 million i-CEM lawsuit currently pending?

Jack Lowry: As stated in the Company’s 10-K, the 3CEMS matter involves claims made by a Chinese contract manufacturer that the Company breached its contractual and common law indemnification obligations by failing to pay for component parts used to manufacture certain CBU products. The 3CEMS lawsuit is still very early in the legal process. There has been no discovery undertaken in the matter, and indicative of what we believe are the lack of merit in the case, we have filed a motion for dismissal of the claim against us on procedural and substantive grounds. It is not possible for us to estimate whether the Judge will rule in our favor on our motion or to estimate the timing with which the case will move forward.

Me: There are a large number of options outstanding (with more authorization requested in the latest proxy). Wouldn't it be a better alignment of manager and shareholder interests if restricted stock were issued (instead of options) as compensation?

Jack Lowry: The Company has the ability to grant restricted stock under the 2004 Stock Plan. The Compensation Committee of the Board will consider the use of restricted stock when making future grants.


So there you have it: more information on which to base your decision of whether or not to invest in Perceptron.

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