GERBER SCIENTIFIC INC - 10-Q Quarterly Report

Back to GetFilings.com

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


	FORM 10-Q


(MARK ONE) QUARTERLY REPORT /X/ OR TRANSITION REPORT / / PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarter ended October 31, 2002		Commission File No. 1-5865

Gerber Scientific, Inc.
(Exact name of Registrant as
specified in its charter)

Connecticut		06-0640743
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

83 Gerber Road West, South Windsor, Connecticut		06074
(Address of principal executive offices)		(Zip Code)

Registrant's Telephone Number, including area code		(860)644-1551

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes /X/. No / /.

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes /X/. No / /.

At October 31, 2002, 22,152,010 shares of common stock of the Registrant were outstanding.

GERBER SCIENTIFIC, INC.
AND SUBSIDIARIES
CONTENTS OF QUARTERLY REPORT ON FORM 10-Q

Quarter Ended October 31, 2002

			Page
Part I - Financial Information

	Item 1.	Consolidated Financial Statements (Unaudited):

		Consolidated Statements of Operations for the three months ended October 31, 2002 and 2001	2-3

		Consolidated Statements of Operations for the six months ended October 31, 2002 and 2001	4-5

		Consolidated Balance Sheets at October 31, 2002 and April 30, 2002	6-7

		Consolidated Statements of Cash Flows for the six months ended October 31, 2002 and 2001	8

		Notes to Consolidated Financial Statements	9

		Independent Accountants' Report	21

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

	Item 4.	Controls and Procedures	29


Part II - Other Information

	Item 2.	Changes in Securities and Use of Proceeds	31

	Item 4.	Submission of Matters to a Vote of Security Holders	31

	Item 6.	Exhibits and Reports on Form 8-K	32


Signature			34

Certifications			35-37

Exhibit Index			38

PART I - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GERBER SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)	Three Months Ended October 31,
		(Restated, Note 2)
In thousands, except per share data	2002	2001
Revenue:
Product sales	$114,869	$119,242
Service	13,911	12,376
	128,780	131,618
Costs and Expenses:
Cost of product sales	75,799	78,795
Cost of service	7,145	6,867
Selling, general and administrative	32,417	32,779
Research and development expenses	6,516	7,027
Restructuring charges (Note 4)	---	(26)
Write-down of assets	---	41
	121,877	125,483
Operating income	6,903	6,135

Other (expense)	(340)	(563)
Interest expense	(2,146)	(3,106)

Income from continuing operations before income taxes	4,417	2,466
Provision for income taxes	1,300	660
Income from continuing operations	3,117	1,806
Discontinued operations:
Income from operations of disposed business, net of tax	---	255
Gain on sale of disposed business, net of tax	---	---
Income before cumulative effect of accounting change	3,117	2,061
Cumulative effect of accounting change	---	---
Net earnings (loss)	$ 3,117	$ 2,061
	=======	=======


Earnings (loss) per share of common stock:
Basic:
Income from continuing operations	$ .14	$ .08
Discontinued operations	---	.01
Cumulative effect of accounting change	---	---
Net earnings (loss)	$ .14	$ .09
	=======	=======
Diluted:
Income from continuing operations	$ .14	$ .08
Discontinued operations	---	.01
Cumulative effect of accounting change	---	---
Net earnings (loss)	$ .14	$ .09
	=======	=======

Dividends	$ ---	$ ---

Average shares outstanding:
Basic	22,137	22,058
Diluted	22,137	22,204

See accompanying notes to consolidated financial statements.

2-3

GERBER SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)	Six Months Ended October 31,
		(Restated, Note 2)
In thousands, except per share data	2002	2001
Revenue:
Product sales	$227,096	$232,064
Service	27,562	24,444
	254,658	256,508
Costs and Expenses:
Cost of product sales	150,613	153,920
Cost of service	14,337	13,791
Selling, general and administrative	64,130	64,139
Research and development expenses	12,792	14,207
Restructuring charges (Note 4)	(100)	(56)
Write-down of assets	---	82
	241,772	246,083
Operating income	12,886	10,425

Other (expense)	(1,206)	(691)
Interest expense	(4,377)	(6,607)

Income from continuing operations before income taxes	7,303	3,127
Provision for income taxes	1,964	720
Income from continuing operations	5,339	2,407
Discontinued operations:
Income from operations of disposed business, net of tax	172	524
Gain on sale of disposed business, net of tax	1,222	---
Income before cumulative effect of accounting change	6,733	2,931
Cumulative effect of accounting change	---	(114,653)
Net earnings (loss)	$ 6,733	$(111,722)
	=======	=======


Earnings (loss) per share of common stock:
Basic:
Income from continuing operations	$ .24	$ .11
Discontinued operations	.06	.02
Cumulative effect of accounting change	---	(5.20)
Net earnings (loss)	$ .30	$ (5.07)
	=======	=======
Diluted:
Income from continuing operations	$ .24	$ .11
Discontinued operations	.06	.02
Cumulative effect of accounting change	---	(5.17)
Net earnings (loss)	$ .30	$ (5.04)
	=======	=======

Dividends	$ ---	$ ---

Average shares outstanding:
Basic	22,123	22,053
Diluted	22,123	22,179

See accompanying notes to consolidated financial statements.

4-5

GERBER SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

In thousands, except share data	October 31, 2002	April 30, 2002
Assets:	(Unaudited)
Current Assets:
Cash and short-term cash investments	$ 24,746	$ 16,220
Accounts receivable, net of allowance for doubtful accounts of $7,782 and $7,229, respectively	85,830	84,539
Inventories	61,248	59,351
Deferred income taxes	12,402	11,951
Prepaid expenses	6,580	8,680
Net assets held for sale (Note 11)	---	3,968
	190,806	184,709
Property, Plant and Equipment	117,489	116,125
Less accumulated depreciation	69,097	64,761
	48,392	51,364
Intangible Assets:
Goodwill (Note 5)	47,921	49,966
Prepaid pension cost	11,557	11,557
Patents and other intangible assets, net of accumulated amortization (Note 5)	6,784	6,918
	66,262	68,441
Deferred Income Taxes	2,219	2,959
Other Assets	3,507	4,120
	$311,186	$311,593
	=======	=======
Liabilities and Shareholders' Equity

Current Liabilities:
Short-term line of credit	$ 39	$ 228
Credit facility	109,183	41,929
Accounts payable	41,445	41,756
Accrued compensation and benefits	17,268	19,136
Other accrued liabilities	22,911	21,071
Deferred revenue	9,574	9,511
Advances on sales contracts	784	897
	201,204	134,528

Noncurrent Liabilities:
Other liabilities	6,713	6,678
Long-term debt	6,000	86,000
	12,713	92,678


Contingencies and Commitments (Note 12)

Shareholders' Equity:
Preferred stock, no par value; authorized 10,000,000 shares; no shares issued	- --	- ---
Common stock, $1.00 par value; authorized 65,000,000 shares; issued 22,911,259 and 22,879,425 shares, respectively	22,911	22,879
Paid-in capital	43,927	44,090
Retained earnings	64,986	58,253
Treasury stock, at cost (759,249 and 773,546 shares, respectively)	(15,612)	(15,906)
Unamortized value of restricted stock grants	(319)	(411)
Accumulated other comprehensive income (loss)	(18,624)	(24,518)
	97,269	84,387
	$311,186	$311,593
	=======	=======

See accompanying notes to consolidated financial statements.

6-7

GERBER SCIENTIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)	Six Months Ended October 31,
		(Restated)
In thousands	2002	2001
Cash Provided by (Used for):
Operating Activities:
Net earnings (loss)	$ 6,733	$(111,722)
Adjustments to reconcile net earnings (loss) to cash provided by operating activities:
Cumulative effect of accounting change	---	114,653
Depreciation and amortization	6,751	8,010
Restructuring charges	(100)	(56)
Gain on sale of disposed business, net of taxes	(1,222)	---
Write-down of assets	---	82
Deferred income taxes	289	2,941
Other non-cash items	550	645
Changes in operating accounts:
Receivables	1,360	8,341
Inventories	(380)	(308)
Prepaid expenses	2,903	(4,721)
Accounts payable and accrued expenses	(4,198)	(5,162)
Provided by Operating Activities:	12,686	12,703
Investing Activities:
Additions to property, plant and equipment	(900)	(2,844)
Intangible and other assets	(480)	(886)
Proceeds from sales of assets	3,937	17,183
Proceeds from sale of disposed business	6,595	---
Provided by Investing Activities:	9,152	13,453
Financing Activities:
New borrowings from credit facility	3,000	23,000
Repayments of credit facility	(16,673)	(56,922)
Net short-term financing	(205)	---
Debt issue costs	(376)	(48)
Exercise of stock options	---	32
Other common stock activity	53	(32)
(Used for) Financing Activities:	(14,201)	(33,970)

Effect of exchange rate changes on cash	889	254

Increase (Decrease) in Cash and Short-Term Cash Investments	8,526	(7,560)
Cash and Short-Term Cash Investments, Beginning of Period	16,220	20,866
Cash and Short-Term Cash Investments, End of Period	$24,746	$13,306
	======	======

See accompanying notes to consolidated financial statements.

GERBER SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and six-month periods ended October 31, 2002 are not necessarily indicative of the results that may be expected for the year ended April 30, 2003. The financial information included herein should be read in conjunction with the financial statements and notes in the Company's Annual Report incorporated by reference in Form 10-K for fiscal year 2002.

The balance sheet at April 30, 2002 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.

NOTE 2. Restatement and Reclassifications

Financial statements for the three and six months ended October 31, 2001 have been restated. The restatements principally reflect results of an internal review conducted under the direction of the Audit and Finance Committee of the Company's Board of Directors. Certain items also have been reclassified.

Adjustments and reclassifications to the consolidated statement of operations for the three months ended October 31, 2001 are summarized below.

	Three Months Ended October 31, 2001
In thousands, except per share data	As Previously Reported	Reclassifications	Adjustments	As Restated
Revenue:
Product sales	$ 118,979	$1,266	$ ---	$120,245
Service	12,376	---	---	12,376
	131,355	1,266	---	132,621
Costs and Expenses:
Cost of product sales	77,883	1,266	(53)⁽¹⁾	79,096
Cost of service	6,867	---	---	6,867
Selling, general and administrative expenses	33,063	(15)	(10)⁽²⁾	33,038
Research and development expenses	7,065	---	---	7,065
Restructuring charges	---	(26)	---	(26)
Write-down of assets	---	41	---	41
	124,878	1,266	(63)	126,081
Operating income (loss)	6,477	---	63	6,540

Other income (expense)	(397)	---	(176)⁽³⁾	(573)

Interest expense	(3,106)	---	---	(3,106)
Earnings (loss) before income taxes and cumulative effect of accounting change	2,974	- ---	(113)	2,861
Provision (benefit) for income taxes	800	---	---	800
Earnings (loss) before cumulative effect of accounting change	2,174	---	(113)	2,061
Cumulative effect of accounting change	---	---	---	---
Net earnings (loss)	$ 2,174	$ ---	$ (113)	$ 2,061
	========	=====	======	=======
Earnings (loss) per share of common stock:
Basic:
Earnings (loss) before cumulative effect of accounting change	$ .10	$ ---	$ (.01)	$ .09
Cumulative effect of accounting change	---	---	---	---
Net earnings (loss)	$ .10	$ ---	$ (.01)	$ .09
	=======	=====	=====	=======
Diluted:
Earnings (loss) before cumulative effect of accounting change	$ .10	$ ---	$ (.01)	$ .09
Cumulative effect of accounting change	---	---	---	---
Net earnings (loss)	$ .10	$ ---	$ (.01)	$ .09
	=======	=====	=====	=======

	Adjustment Description for Three Months Ended October 31, 2001
1.	Correction of inventory reserves and other cost of sales related accruals.
2.	Adjustments of facility closure expenses and employee related accruals.
3.	Adjustment of foreign currency transaction gains and losses between the foreign currency translation adjustment and other income/expense.

Adjustments and reclassifications to the consolidated statement of operations for the six months ended October 31, 2001 are summarized below.

	Six Months Ended October 31, 2001
In thousands, except per share data	As Previously Reported	Reclassifications	Adjustments	As Restated
Revenue:
Product sales	$ 231,805	$2,508	$ (293)⁽¹⁾	$234,020
Service	24,444	---	---	24,444
	256,249	2,508	(293)	258,464
Costs and Expenses:
Cost of product sales	151,744	2,508	243 ⁽²⁾	154,495
Cost of service	13,791	---	---	13,791
Selling, general and administrative expenses	65,092	(26)	(425)⁽³⁾	64,641
Research and development expenses	14,268	---	---	14,268
Restructuring charges	---	(56)	---	(56)
Write-down of assets	---	82	---	82
	244,895	2,508	(182)	247,221
Operating income (loss)	11,354	---	(111)	11,243

Other income (expense)	(218)	---	(487)⁽⁴⁾	(705)

Interest expense	(6,607)	---	---	(6,607)
Earnings (loss) before income taxes and cumulative effect of accounting change	4,529	- ---	(598)	3,931
Provision (benefit) for income taxes	1,100	---	(100)⁽⁵⁾	1,000
Earnings (loss) before cumulative effect of accounting change	3,429	---	(498)	2,931
Cumulative effect of accounting change	(134,251)	---	19,598 ⁽⁶⁾	(114,653)
Net earnings (loss)	$ (130,822)	$ ---	$19,100	$(111,722)
	========	=====	======	========
Earnings (loss) per share of common stock:
Basic:
Earnings (loss) before cumulative effect of accounting change	$ .16	$ ---	$ (.03)	$ .13
Cumulative effect of accounting change	(6.09)	---	.89	(5.20)
Net earnings (loss)	$ (5.93)	$ ---	$ .86	$ (5.07)
	=======	=====	=====	=======
Diluted:
Earnings (loss) before cumulative effect of accounting change	$ .15	$ ---	$ (.02)	$ .13
Cumulative effect of accounting change	(6.05)	---	.88	(5.17)
Net earnings (loss)	$ (5.90)	$ ---	$ .86	$ (5.04)
	=======	=====	=====	=======

	Adjustment Description for Six Months Ended October 31, 2001
1.	Correction of sales rebates not eliminated in consolidation.
2.	Correction of inventory reserves and other cost of sales related accruals.
3.	Adjustments of facility closure expenses and employee related accruals.
4.	Adjustment of foreign currency transaction gains and losses between the foreign currency translation adjustment and other income/expense.
5.	Income tax effect of restated items.
6.	Adjustment of goodwill impairment due to correction of Spandex goodwill foreign currency translation between goodwill and cumulative translation adjustment of $17,568 and correction of accruals and allowances originally recorded as purchase price adjustments for business acquisitions.

With respect to the Consolidated Statement of Cash Flows for the six-month period ended October 31, 2001, the effect of exchange rate changes on cash in the amount of $254, which had previously been showed as an investing activity, has been reclassified to a separate line item.

9-11

NOTE 3. Inventories

The classification of inventories was as follows (in thousands):

	October 31, 2002	April 30, 2002
Raw materials & purchased parts	$34,059	$31,514
Work in process	3,078	2,780
Finished goods	24,111	25,057
	$61,248	$59,351
	======	======

NOTE 4. Restructuring Charges

In fiscal 2002, the Company recorded restructuring charges, consisting of employee separation costs, associated with ongoing efforts to reduce costs. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended April 30, 2002 filed on August 27, 2002.

As of April 30, 2002, accruals of approximately $2.2 million for severance costs remained, the majority of which represented severance and other amounts payable to the former Chief Executive Officer. In the six months ended October 31, 2002, approximately $0.8 million in cash payments were charged against this accrual, reducing the balance to $1.4 million at October 31, 2002. As of October 31, 2002, 162 of 165 scheduled headcount reductions were implemented with the balance targeted for completion by January 31, 2003.

NOTE 5. Goodwill and Other Intangible Assets

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets," which established financial accounting and reporting standards for acquired goodwill and other intangible assets and superseded APB Opinion No. 17, "Intangible Assets." The Company adopted SFAS No. 142 on May 1, 2001, ceased amortization of goodwill (its only intangible asset with an indefinite useful life), and performed a transitional goodwill impairment evaluation. The Company identified assets and liabilities associated with its business units (including goodwill) as of May 1, 2001. The fair value of each unit was estimated using a combination of present value and earnings multiple valuation techniques. As a result of this review, it was determined that goodwill associated with the Ophthalmic Lens Processing and Sign Making and Specialty Graphics segments was impaired as of May 1, 2001. The amount of impairment was e stimated by comparing the implied fair value of the business unit's goodwill to its carrying value. Implied fair value of goodwill was determined by allocating the estimated fair value of each business unit's assets and liabilities in a manner similar to a purchase price allocation. Effective May 1, 2001, an impairment loss of $114.7 million was recognized as the cumulative effect of a change in accounting principle.

Circumstances leading to the goodwill impairment in the Ophthalmic Lens Processing segment of $21.7 million included softness in end sales of prescription optical lenses, consolidation in retail and wholesale segments of the ophthalmic industry, and global economic weakness for that segment's capital equipment products. These negative industry and economic trends had lowered the business' operating profits and cash flows over the last two fiscal years and current earnings expectations do not reflect improvement. Fair value used to measure impairment was based on a strategic review conducted by the Company in the fourth quarter of 2001.

Goodwill impairment for the European business units of the Sign Making and Specialty Graphics segment reflected increased competition in aftermarket supplies and weaker demand for sign making capital equipment consistent with worsening global economic trends. Lower than expected operating profits and cash flows resulted and are evidence that growth expectations assumed when these businesses were acquired have not materialized. Fair value used to determine the impairment loss in the Sign Making and Specialty Graphics segment, which amounted to $93.0 million, was based on a combination of earnings multiples and discounted cash flow valuation techniques.

Other intangible assets include:

	As of October 31, 2002
	Gross Carrying Amount	Accumulated Amortization
Amortized intangible assets:
Patents	$ 10,248	$ 3,802
Other	3,222	2,884
	13,470	6,686
Unamortized intangible assets:
Goodwill	47,921	---
Prepaid pension cost	11,557	---
	59,478	---
	$ 72,948	$ 6,686
	======	=====

Intangible amortization expense was $0.3 million and $0.6 million for the three and six months ended October 31, 2002 and was $0.3 million and $0.6 million for the three and six months ended October 31, 2001, respectively. Intangible amortization expense is estimated to be approximately $0.9 million in fiscal 2003 and approximately $0.5 million annually for fiscal years 2004-2007.

The following table displays the changes in the carrying amount of goodwill by operating segment for the six-months ended October 31, 2002 (in thousands):

	Sign Making & Specialty Graphics	Apparel & Flexible Materials	Ophthalmic Lens Processing	Total
Balance as of May 1, 2002	$17,460	$12,511	$19,995	$49,966
Sale of disposed business	---	---	(2,999)	(2,999)
Foreign currency translation	899	55	---	954
Balance as of October 31, 2002	$18,359	$12,566	$16,996	$47,921
	======	======	======	======

NOTE 6. Derivative Instruments and Hedging Activities

The Company is exposed to fluctuations in foreign currency exchange rates and interest rates. To manage these risks, the Company uses derivative instruments, which include forward exchange contracts and an interest rate swap. Derivative instruments used in hedging activities are viewed as risk management tools, involve little complexity, and are not used for trading or speculative purposes. Counterparties to forward exchange contracts are major international commercial banks. The Company continually monitors its open forward exchange contract position and does not anticipate non-performance by the counterparties.

Foreign Currency Risk

The Company's global presence and international sales and purchases expose it to fluctuations in foreign currency exchange rates. Foreign currency exposures are identified and managed at the operating unit level. The Company has foreign currency forward contracts that are designated as hedges of the cash flow variability arising from forecasted foreign-currency denominated sales and purchases. Gains and losses on those derivatives are recorded in shareholders' equity to the extent they are effective as hedges and reclassified into earnings in the period in which the hedged transaction impacts earnings.

As of October 31, 2002, the Company was party to approximately $19.8 million in forward exchange contracts providing for the delivery of the various currencies in exchange for others over the succeeding 9 months. The fair value of the contracts outstanding at October 31, 2002 was a $2.1 million net liability.

Interest Rate Risk

In April 1999, the Company entered into a four-year interest rate swap contract with an initial notional amount of $62.0 million that decreases ratably to $32.0 million over the term. The Company designated this swap as a hedge of its exposure to variability in future cash flows attributable to LIBOR based interest payments on the U.S. dollar denominated portion of its multi-currency revolving credit facility. The interest differential paid or received under this contract is recognized as interest expense, reflecting that portion at a fixed rate. The fair value of this swap was a $0.6 million net liability as of October 31, 2002.

Year to Date Activity

At October 31, 2002, the fair value of derivatives held by the Company was a $2.7 million net liability. The non-shareholders' changes in equity associated with hedging activity for the six months ended October 31, 2002 and 2001 were as follows:

	Six Months Ended October 31,
		(Restated)
(in thousands)	2002	2001
Balance -- May 1, 2002 and 2001	$ (669)	$ ---
Transition adjustment	---	(467)
Cash flow hedging loss	(2,160)	(919)
Net loss reclassified to cost of product sales and interest expense	1,164	313
Balance -- October 31, 2002 and 2001	$(1,665)	$(1,073)
	======	======

Of the amount recorded in shareholders' equity at October 31, 2002, a $1.7 million loss is expected to be reclassified into earnings in fiscal 2003.

Hedges of the Net Investment in a Foreign Operation

The net amount of losses on foreign currency denominated balances designated and effective as economic hedges of a net investment in a foreign entity were $0.9 million and $0.2 million for the six months ended October 31, 2002 and 2001, respectively. These losses were recorded in the cumulative translation adjustment, which is included in accumulated other comprehensive income (loss).

NOTE 7. Segment Information

The Company's operations are classified into three operating segments: Sign Making and Specialty Graphics, Apparel and Flexible Materials, and Ophthalmic Lens Processing. Those segments are determined based on management's evaluation of the Company's businesses. Financial data for the three- and six-month periods ended October 31, 2002 and 2001 are shown in the following tables.

	Three Months Ended October 31,		Six Months Ended October 31,
		(Restated)		(Restated)
In thousands	2002	2001	2002	2001

Segment revenue:
Sign Making & Specialty Graphics	$ 68,872	$ 68,947	$135,266	$132,981
Apparel & Flexible Materials	37,806	42,232	76,484	83,740
Ophthalmic Lens Processing	22,102	20,439	42,908	39,787
	$128,780	$131,618	$254,658	$256,508
	=======	=======	=======	=======