Summary of PERCEPTRON INC/MI

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT
We make statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations that may be "forward-looking statements" within the meaning of the Securities Exchange Act of 1934, including the Company's expectation as to its fiscal year 2009 and future new order bookings, revenue, expenses, net income and backlog levels, trends affecting its future revenue levels, the rate of new orders, the timing of revenue and net income increases from new products which we have recently released or have not yet released and from our plans to make important new investments, largely for personnel, for newly introduced products and geographic growth opportunities in the U.S., Europe, Eastern Europe, Asia, the timing of the introduction of new products, our ability to fund our fiscal year 2009 and future cash flow requirements and the amount of cost reductions from recently announced cost reduction actions. We may also make forward-looking statements in our press releases or other public or shareholder communications. When we use words such as "will," "should," "believes," "expects," "anticipates," "estimates" or similar expressions, we are making forward-looking statements. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of our forward-looking statements. While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which speak only as of the date made. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different. Factors that might cause such a difference include, without limitation, the risks and uncertainties discussed from time to time in our reports filed with the Securities and Exchange Commission, including those listed in "Item 1A - Risk Factors" in this report and in the Company's Annual Report on Form 10-K for fiscal year 2008 and Quarterly Reports on Form 10-Q for the quarters ended September 30, 2008 and December 31, 2008. Other factors not currently anticipated by management may also materially and adversely affect our financial condition, liquidity or results of operations. Except as required by applicable law, we do not undertake, and expressly disclaim, any obligation to publicly update or alter our statements whether as a result of new information, events or circumstances occurring after the date of this report or otherwise. The Company's expectations regarding future bookings and revenues are projections developed by the Company based upon information from a number of sources, including, but not limited to, customer data and discussions. These projections are subject to change based upon a wide variety of factors, a number of which are discussed above. Certain of these new orders have been delayed in the past and could be delayed in the future. Because the Company's Automated Systems segment products are typically integrated into larger systems or lines, the timing of new orders is dependent on the timing of completion of the overall system or line. In addition, because the Company's Automated Systems segment products have shorter lead times than other components and are required later in the process, orders for the Company's Automated Systems segment products tend to be given later in the integration process. The Company's Technology Products segment products are subject to the timing of firm orders from its customers, which may change on a monthly basis. In addition, because the Company's Technology Products segment products require short lead times from firm order to delivery, the Company purchases long lead time components before firm orders are in hand. A significant portion of the Company's projected revenues and net income depends upon the Company's ability to successfully develop and introduce new products and expand into new geographic markets. Because a significant portion of the Company's revenues are denominated in foreign currencies and are translated for financial reporting purposes into U.S. Dollars, the level of the Company's reported net sales, operating profits and net income are affected by changes in currency exchange rates, principally between U.S. Dollars and Euros. Currency exchange rates are subject to significant fluctuations, due to a

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number of factors beyond the control of the Company, including general economic conditions in the United States and other countries. Because the Company's expectations regarding future revenues, order bookings, backlog and operating results are based upon assumptions as to the levels of such currency exchange rates, actual results could differ materially from the Company's expectations.
OVERVIEW
Perceptron, Inc. ("Perceptron" or the "Company") develops, produces and markets non-contact metrology solutions for manufacturing process control as well as sensor and software technologies for non-contact measurement and inspection applications. Perceptron's product offerings are designed to improve quality, increase productivity and decrease costs in manufacturing and product development. Perceptron also produces innovative technology solutions for scanning and inspection, serving industrial, trade and consumer applications. The solutions offered by the Company are divided into two groups: 1) The Automated Systems Group made up of AutoGaugeā, AutoFitā, AutoScanā, and AutoGuideāproducts and training, consulting and non-warranty support services; and 2) The Technology Products Group made up of ScanWorksā, Non-Contact Wheel Alignment ("WheelWorksā"), TriCamāsensors for the forest products industry, and commercial products. The Company services multiple markets and its primary operations are in North America, Europe and Asia.
The Company expects sales from its Technology Products segment, in large part due to anticipated growth in commercial products, to continue to become a greater percentage of overall revenue in fiscal 2009, although at a slower rate than originally anticipated because of less demand due to general economic conditions. During the third quarter of fiscal 2009, the Company continued to see steady sales of its commercial product sold by Snap-on Tool Company under the BK5500 name and the commercial product sold by Ridge Tool Company under the name microEXPLORER™ Digital Inspection Camera. The microEXPLORER™ utilizes significantly more advanced and sophisticated technology than the SeeSnakeā microŌ. The microEXPLORER™ has a self-leveling feature for a consistently upright picture, has zoom capabilities, is water proof, is able to save images and video to a SD Card, and can transfer files to a computer. In addition, during the second quarter, the Company began shipments to North America and Europe of the second generation of the new 9.5 millimeter and 17 millimeter imager head SeeSnake® micro™ sold by Ridge Tool. The Company is currently manufacturing four commercial products and expects to manufacture three additional products in the fourth quarter of fiscal 2009.
New vehicle tooling programs represent the most important selling opportunity for the Company's automotive related sales. The number and timing of new vehicle tooling programs varies in accordance with individual automotive manufacturers' plans and is also influenced by the state of the economy. The Company has seen changes in new tooling programs, including reductions in scope and timing, which have resulted in several of the Company's orders being cancelled or delayed. These have been driven by the global recession, significant decline in automotive sales worldwide and particularly the severely distressed financial conditions of the automotive manufacturers. The uncertainty associated with the future of General Motors Corporation and Chrysler LLC has had a significant negative impact on the Company's new order bookings and sales in North America. Although the Company expects the turbulent economic conditions in the automotive industry to continue through calendar year 2009, the Company believes there are long-term opportunities as the automobile manufacturers transition to production of new models that are more fuel efficient. The Company has seen a trend toward more robot-based Automated Systems that have lower hardware content and increased labor content. Also, due to plant closings and the growing installed base of robot-based systems, an increased number of the Company's Automated Systems orders involve refurbishing and reconfiguring the customer's existing equipment.

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On April 30, 2009, Chrysler LLC filed for Chapter 11 bankruptcy protection in the United States. On that date, Chrysler LLC owed the Company receivables totaling approximately $133,000. Payments on these pre-bankruptcy receivables are subject to the bankruptcy proceedings. Chrysler LLC has assured all of its suppliers that any equipment supplied and services rendered post bankruptcy will be paid. Also on April 30, 2009, Chrysler LLC announced an alliance with Fiat SpA. Currently, the Company is a supplier of choice for inline gauging equipment with Fiat SpA in Europe and believes it is positioned well to benefit from the alliance between these two companies.
The Company expanded its presence in Asia by opening an office in India during the third quarter of fiscal 2009 but has temporarily delayed adding additional resources in other parts of Asia while turbulence remains in the global automotive markets. The Company believes growth in Asia will recover earlier than in other areas and expects to be in position to take advantage of sales growth opportunities in these markets.
The Company's financial base remains strong with no debt and approximately $24.2 million of cash and short-term investments at March 31, 2009 available to support its growth plans. Near-term the Company will continue to focus on the successful production and release of an expanded line of commercial electronic inspection products.
In response to recent reductions in the level of new orders and the negative outlook for the automotive industry in the next twelve to eighteen months, the Company undertook a significant cost reduction plan during the third quarter of fiscal 2009 that is expected to reduce costs by approximately $4.7 million in fiscal 2010. The cost reductions occurred primarily in the Company's North American Automated Systems business in response to the economic environment affecting the automotive market, with smaller reductions in Europe. In planning and implementing these cost reductions, the Company focused on maintaining sufficient resources to continue growth in its Technology Products segment and develop new, advanced technologies for its Automated Systems segment. The Company did not make any reductions in its personnel in Asia but did delay adding additional resources until growth resumes in this area. During the third quarter of fiscal 2009, the Company recorded a charge of approximately $1.0 million related to severance and other related costs.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008 Overview - For the third quarter of fiscal 2009, the Company reported a net loss of $2.7 million, or $0.31 per share, compared to net income of $211,000 or $0.02 per diluted share, for the third quarter of fiscal 2008. During the quarter, the Company recorded several significant charges that had a material negative effect on net income. These included a $1.5 million non-cash other-than-temporary decline in the Company's long-term investments, a $1.0 million restructuring charge, a $500,000 provision for bad debts and penalties and interest of $100,000 on an unfavorable Brazilian tax appeal recorded in Selling General and Administrative Expenses and Interest Income, net. Specific line item results are described below.
Sales - Net sales were $13.2 million for the third quarter of fiscal 2009 compared to net sales of $18.2 million for the same period one year ago. The following tables set forth comparison data for the Company's net sales by segment and geographic location.

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                                Third                  Third
    Sales (by segment)         Quarter                Quarter
    (in millions)                2009                   2008              Increase/(Decrease)
    Automated Systems     $  7.4        56.1 %   $ 11.1        61.0 %   $    (3.7 )        (33.3 )%
    Technology Products      5.8        43.9 %      7.1        39.0 %        (1.3 )        (18.3 )%

    Totals                $ 13.2       100.0 %   $ 18.2       100.0 %   $    (5.0 )        (27.5 )%




                                Third                  Third
    Sales (by location)        Quarter                Quarter
    (in millions)                2009                   2008              Increase/(Decrease)
    Americas              $  7.8        59.1 %   $  8.8        48.4 %   $    (1.0 )        (11.4 )%
    Europe                   4.8        36.4 %      8.1        44.5 %        (3.3 )        (40.7 )%
    Asia                     0.6         4.5 %      1.3         7.1 %        (0.7 )        (53.8 )%

    Totals                $ 13.2       100.0 %   $ 18.2       100.0 %   $    (5.0 )        (27.5 )%

The decrease in Automated Systems sales was primarily due to the turbulent times in the automotive industry which resulted in decreased new systems sales and to a lesser extent decreased spare parts sales. The decline occurred in each geographic region, with $2.5 million in Europe. The Technology Product sales decrease was primarily the result of lower WheelWorks® and ScanWorks®sales that are primarily sold to the automotive industry. An increase in sales of the Company's commercial products in the United States partially mitigated the decrease in Technology Products. The increase in sales of the Company's commercial products was primarily due to products the Company began shipping this fiscal year, in particular the BK5500 sold to Snap-on and the microEXPLORER™ Digital Inspection Camera sold to Ridge Tool. The decrease in all three geographic regions reflected decreased sales in both product segments. The sales comparison in Europe also included the impact of the weaker Euro exchange rate during the third quarter of fiscal 2009 compared to the fiscal 2008 quarter that reduced sales approximately $800,000, of which approximately $670,000 related to Automated Systems and approximately $130,000 related to Technology Products.
Bookings - Bookings represent new orders received from customers. The Company had new order bookings during the quarter of $8.9 million compared with new order bookings of $20.6 million for the third quarter ended March 31, 2008. The amount of new order bookings during any particular period is not necessarily indicative of the future operating performance of the Company. The following tables set forth comparison data for the Company's bookings by segment and geographic location.

                                  Third                 Third
    Bookings (by segment)        Quarter               Quarter
    (in millions)                 2009                   2008              Increase/(Decrease)
    Automated Systems       $ 5.0        56.2 %   $ 11.8        57.3 %   $     (6.8 )       (57.6 )%
    Technology Products       3.9        43.8 %      8.8        42.7 %         (4.9 )       (55.7 )%

    Totals                  $ 8.9       100.0 %   $ 20.6       100.0 %   $    (11.7 )       (56.8 )%

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                                  Third                 Third
   Bookings (by location)        Quarter               Quarter
   (in millions)                  2009                   2008              Increase/(Decrease)
   Americas                 $ 4.4        49.4 %   $ 11.3        54.8 %   $     (6.9 )       (61.1 )%
   Europe                     3.9        43.8 %      7.6        36.9 %         (3.7 )       (48.7 )%
   Asia                       0.6         6.8 %      1.7         8.3 %         (1.1 )       (64.7 )%

   Totals                   $ 8.9       100.0 %   $ 20.6       100.0 %   $    (11.7 )       (56.8 )%

The Company's level of new orders fluctuates from quarter to quarter. As was experienced by many companies, the rate of decline in bookings during the third quarter of fiscal 2009 was more severe than previously anticipated. Bookings in both segments declined significantly in the third quarter of 2009 compared to 2008 due to current economic conditions, especially in the automotive market, which affected orders for the Automated Systems products and WheelWorks® and ScanWorks® in the Technology Products segment. This was the primary reason for the lower bookings in both the Americas and Europe. Also contributing to the decrease in new order bookings for Technology Products in the Americas were lower orders for the Company's commercial products from our two primary customers because of less demand due to general economic conditions. The decline in bookings in the Americas was evenly split between the two segments. The decrease in Asia bookings was primarily from Automated Systems orders with lower Technology Products bookings contributing to the decrease.
Backlog - Backlog represents orders or bookings received by the Company that have not yet been filled. The Company's backlog was $14.8 million as of March 31, 2009 compared with $23.7 million as of March 31, 2008. The following tables set forth comparison data for the Company's backlog by segment and geographic location.

                                 Third                  Third
    Backlog (by segment)        Quarter                Quarter
    (in millions)                 2009                   2008              Increase/(Decrease)
    Automated Systems      $ 13.7        92.6 %   $ 15.3        64.6 %   $    (1.6 )        (10.5 )%
    Technology Products       1.1         7.4 %      8.4        35.4 %        (7.3 )        (86.9 )%

    Totals                 $ 14.8       100.0 %   $ 23.7       100.0 %   $    (8.9 )        (37.6 )%




                                 Third                  Third
   Backlog (by location)        Quarter                Quarter
   (in millions)                  2009                   2008              Increase/(Decrease)
   Americas                $  4.6        31.1 %   $ 15.0        63.3 %   $    (10.4 )       (69.3 )%
   Europe                     9.6        64.9 %      7.3        30.8 %          2.3          31.5 %
   Asia                       0.6         4.0 %      1.4         5.9 %         (0.8 )       (57.1 )%

   Totals                  $ 14.8       100.0 %   $ 23.7       100.0 %   $     (8.9 )       (37.6 )%

The Company generally expects to be able to fill substantially all of the orders in backlog during the following twelve months. The decrease in Automated Systems backlog compared to a year ago was principally due to lower AutoScan® and Value Added Services. The decrease in Technology Products backlog was primarily due to commercial products and reflected the fact that the Company is off backorder status. Lower backlog for WheelWorks® and ScanWorks® also contributed to the overall lower Technology Products backlog. The level of backlog during any particular period is not necessarily

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indicative of the future operating performance of the Company. Most of the backlog is subject to cancellation by the customer.
Gross Profit - Gross profit was $4.7 million, or 35.2% of sales, in the third quarter of fiscal year 2009, compared to $7.7 million, or 42.2% of sales, in the third quarter of fiscal year 2008. The decrease of $3.0 million in gross profit this quarter was primarily due to lower Automated Systems sales in fiscal 2009 compared to the fiscal 2008 quarter. The weaker Euro also negatively impacted the gross profit by approximately $475,000. The gross margin percentage decline in the current quarter was related to the lower Automated Systems sales level in the current quarter with relatively fixed labor costs and lower WheelWorks® and ScanWorks® sales. Also impacting the gross profit percentage were several new system orders that had billing terms that required a greater percentage of revenue to be deferred than orders in the comparable quarter of fiscal 2008. Selling, General and Administrative (SG&A) Expenses - SG&A expenses were $4.1 million in the quarter ended March 31, 2009 compared to $5.6 million in the third quarter a year ago. The decrease of $1.5 million in the current quarter was primarily related to approximately $900,000 of higher costs recorded in the fiscal 2008 quarter of which $600,000 was related to the retirement of the Company's CEO and $300,000 was related to audit and contract services related to the fiscal 2008 implementation of Sarbanes Oxley Act Section 404 requirements relating to the audit of the Company's internal controls. Contributing to the decrease in expenses in the fiscal 2009 quarter were lower employee related costs of approximately $300,000 primarily related to the work force reduction the Company implemented during the third quarter of fiscal 2009, legal fees of approximately $230,000, and advertising and promotion expenses of $180,000. The weaker Euro also had the effect of reducing expenses by approximately $200,000 in the fiscal 2009 quarter compared to the fiscal 2008 quarter. Mitigating these reductions in expenses was higher bad debt expense of approximately $500,000 in the fiscal 2009 quarter compared to the fiscal 2008 quarter, primarily related to one customer and to a lesser extent increased exposure in some receivables in Europe.
Engineering, Research and Development (R&D) Expenses - Engineering and R&D expenses were $1.9 million in the quarter ended March 31, 2009 compared to $2.1 million in the third quarter a year ago. The $254,000 decrease was primarily due to lower employee related costs related to the work force reduction the Company implemented during the third quarter of fiscal 2009 and lower contract services.
Restructuring Charge - During the quarter ended March 31, 2009, the Company implemented a significant cost reduction plan for its Automated Systems business. The cost reduction actions were taken in response to recent, negative trends in the automotive market and their effect on the Company's business. The actions did not affect the commercial products portion of the Company's business. Most of the cost reduction actions took place in North America with a smaller amount in Europe. The actions included reducing personnel, benefits, contract services and other related expenses that are expected to decrease annual costs by approximately $4.7 million in fiscal 2010. During the quarter ended March 31, 2009, the Company recorded a restructuring charge of approximately $1.0 million related to severance and other related costs. Interest Income, net - Net interest income was $103,000 in the third quarter of fiscal 2009 compared with net interest income of $267,000 in the third quarter of fiscal 2008. The decrease was primarily due to lower interest rates on higher average invested cash balances compared to one year ago. Also contributing to the comparison was higher interest expense in the fiscal 2009 third quarter of $43,000 related to a foreign tax assessment.

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Foreign Currency - There was a net foreign currency loss of $181,000 in the third quarter of fiscal 2009 compared with a gain of $249,000 a year ago and represents foreign currency changes, primarily related to the Yen within the respective quarters.
Impairment on Long-Term Investment - During the third quarter of fiscal 2009 the Company's long-term investments were exchanged for preferred stock of the issuers and the Company determined that these investments had been other-than-temporarily impaired. Based on an independent valuation, the Company wrote down these investments $728,000 and reclassified $767,000 from other comprehensive income for a total other-than-temporary charge of $1.5 million. In the fiscal 2008 quarter ended December 31, 2007, the Company determined that one of its investments in auction rate securities had been other-than-temporarily impaired and based on fair values provided by the Company's broker, recorded a $2.6 million other-than-temporary decline in the market value of this investment. See Note 4 of the Notes to the Consolidated Financial Statements, "Short-Term and Long-Term Investments".
Income Taxes - The effective tax rate for the third quarter of fiscal 2009 was 31.0% compared to 57.8% in the third quarter of fiscal 2008. The effective rate in both 2009 and 2008 primarily reflects the effect of the mix of pre-tax profit and loss among the Company's various operating entities and their countries' respective tax rates. The effective tax rate in the United States was 33.3% and 30.2% on a pretax loss in the fiscal 2009 and 2008 quarters, respectively. The foreign subsidiaries combined effective tax rate was 27.5% and 39.5% on a combined pretax loss in the fiscal 2009 quarter and combined pretax income in the 2008 quarter, respectively.
Outlook -The Company's strategic commercial products initiative, which began in 2007, to reduce its reliance on the automotive market has positioned the Company to weather this unprecedented time in the automotive industry. The Company expects the economic environment to be weak throughout calendar 2009 and has taken significant steps to reduce its operating costs through reductions in work force and other cost-cutting measures and will continue to review the need for further reductions if economic conditions make such actions necessary. The cost reductions were in the Company's Automated Systems business and did not affect the commercial products portion of the Company's business. The Company has decided to suspend future revenue guidance until stability returns to the automotive market and overall economic conditions improve.
Nine Months Ended March 31, 2009 Compared to Nine Months Ended March 31, 2008 Overview - The Company reported a net loss of $1.7 million, or $0.19 per diluted share, for the nine months ended March 31, 2009, compared with net income of $470,000, or $0.05 per diluted share for the nine months ended March 31, 2008. Specific line item results are described below.
Sales - Net sales in the first nine months of fiscal 2009 were $52.3 million, compared to $55.0 million for the nine months ended March 31, 2008. The following tables set forth comparison data for the Company's net sales by segment and geographic location.

    Sales (by segment)       Nine Months            Nine Months
    (in millions)           Ended 3/31/09          Ended 3/31/08          Increase/(Decrease)
    Automated Systems     $ 25.0        47.8 %   $ 29.8        54.2 %   $    (4.8 )        (16.1 )%
    Technology Products     27.3        52.2 %     25.2        45.8 %         2.1            8.3 %

    Totals                $ 52.3       100.0 %   $ 55.0       100.0 %   $    (2.7 )         (4.9 )%

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