FORM 10-Q

_________________________________________________________

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

__________________

FORM 10-Q
__________________

x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934


For the Quarterly Period Ended October 31, 2006

OR

¨      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission file number 1-5865
___________________________
Gerber Scientific, Inc.
(Exact name of registrant as specified in its charter)
_____________________________

Connecticut
(State or other jurisdiction of incorporation or organization)

  

06-0640743
(I.R.S. Employer Identification No.)
 

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

06074
(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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨                                    Accelerated filer x                                      Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨     No x

Common stock $0.01 par value per share.
Total shares outstanding November 30, 2006

22,976,912

_________________________________________________________

 

GERBER SCIENTIFIC, INC.
INDEX
Quarter Ended October 31, 2006

Page
Number

Part I.

Financial Information

 

Item 1.

Financial Statements

 

Condensed Consolidated Statements of Operations .....................................................................

2-3

 

Condensed Consolidated Balance Sheets ....................................................................................

4

 

Condensed Consolidated Statements of Cash Flows ....................................................................

5

 

Notes to Condensed Consolidated Financial Statements ..............................................................

6-14

 

Item 2.

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

15-26

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk .........................................................

26

 

Item 4.

Controls and Procedures ............................................................................................................

26

Part II.

Other Information

Item 1A.

Risk Factors ...............................................................................................................................

27

Item 4.

Submission of Matters to a Vote of Security Holders....................................................................

27

 

Item 6.

Exhibits ......................................................................................................................................

28

Signature .................................................................................................................................................................

29

Exhibit Index ...........................................................................................................................................................

30

 

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS


GERBER SCIENTIFIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
   


 Quarter Ended         
            October 31,            

In thousands, except per share data

2006   

2005   

Revenue:

      

     Product sales

$128,423 

  

$ 118,376 

     Service sales

   16,626 

  

   15,585 
 

145,049 

  

133,961 

Costs and Expenses:

      

     Cost of products sold

91,272 

  

84,205 

     Cost of services sold

10,145 

  

9,306 

     Selling, general and administrative expenses

30,990 

  

29,308 

     Research and development

6,175 

  

6,518 

     Restructuring charges

           --- 

  

      (195)
 

  138,582 

  

 129,142 

Operating income

6,467 

  

4,819 
       

Other income (expense), net

279 

  

(508)

Loss on early extinguishment of debt

--- 

  

(2,483)

Interest expense

       (971)

  

   (1,525)

Income before income taxes

5,775 

  

303 

Income tax expense

      2,086 

  

        427 

Net income (loss)

$    3,689 

  

$     (124)
       

Earnings (Loss) per share of common stock:

      

     Basic

$    0.16 

  

$    (0.01)

     Diluted

$    0.16 

  

$    (0.01)
       

Weighted average shares outstanding:

      

     Basic

22,854 

  

22,368 

     Diluted

23,343 

  

22,368 
       

See accompanying notes to condensed consolidated financial statements.

- 2 -

 

 

GERBER SCIENTIFIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


   Six Months Ended      
         October 31,           

In thousands, except per share data

2006    

  

2005    

Revenue:

     Product sales

$ 249,835 

  

$ 231,793 

     Service sales

    32,702 

    30,932 

282,537 

262,725 

Costs and Expenses:

     Cost of products sold

177,520 

  

164,070 

     Cost of services sold

19,680 

  

18,949 

     Selling, general and administrative expenses

62,353 

  

58,883 

     Research and development

12,143 

  

12,830 

     Restructuring charges

           --- 

  

       (231)
 

  271,696 

  

  254,501 

Operating income

10,841 

8,224 

Other income (expense), net

120 

(683)

Loss on early extinguishment of debt

--- 

(2,483)

Interest expense

    (1,748)

  

    (2,956)

Income before income taxes

9,213 

  

2,102 

Income tax expense

      3,500 

  

      3,309 

Net income (loss)

$    5,713 

$   (1,207)

Earnings (Loss) per share of common stock:

     Basic

$      0.25 

  

$     (0.05)

     Diluted

$      0.25 

$     (0.05)

Weighted average shares outstanding:

      

     Basic

22,737 

  

22,340 

     Diluted

23,183 

  

22,340 
       

See accompanying notes to condensed consolidated financial statements.

- 3 -

 

GERBER SCIENTIFIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)


In thousands

October 31,
2006      

April 30,
2006   

Assets

Current Assets:

     Cash and cash equivalents

$    10,312 

$   14,145 

     Accounts receivable, net

100,150 

92,422 

     Inventories

59,163 

53,794 

     Deferred tax assets

9,711 

10,651 

     Prepaid expenses and other current assets

       6,389 

       6,067 

        Total current assets

   185,725 

   177,079 

Property, plant and equipment, net

36,617 

    38,366 

Goodwill

52,218 

51,554 

Deferred tax assets

28,285 

27,696 

Other assets, net

     15,500 

     15,785 

        Total Assets

$ 318,345 

$ 310,480 

Liabilities and Shareholders' Equity

Current Liabilities:

     Current portion of long-term debt

$        831 

$        284 

     Accounts payable

47,852 

53,886 

     Accrued compensation and benefits

18,609 

21,670 

     Other accrued liabilities

24,118 

21,539 

     Deferred revenue

     13,638 

     14,039 

        Total current liabilities

   105,048 

   111,418 

Long-term debt

39,954 

36,836 

Accrued pension benefit liabilities

18,996 

19,641 

Other liabilities

    17,013 

     16,969 

    75,963 

     73,446 

Commitments and contingencies

 

 

Shareholders' Equity:

     Preferred stock

---  

---  

     Common stock

236 

233 

     Additional paid-in capital

71,350 

 67,339 

     Retained earnings

75,495 

69,782 

     Treasury stock, at cost 

(13,173)

(13,496)

     Unamortized value of restricted stock grants

---

(136)

     Accumulated other comprehensive income

       3,426 

       1,894 

   137,334 

   125,616 

Total Liabilities and Shareholders' Equity

$ 318,345 

$ 310,480 


See accompanying notes to condensed consolidated financial statements.

- 4 -

 

GERBER SCIENTIFIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 Six Months Ended     
           October 31,          

In thousands

2006   

2005   

Cash flows from operating activities:

     Net income (loss)

$     5,713 

$  (1,207)

     Adjustments to reconcile net income (loss)
        to cash (used for) provided by operating activities:



          Depreciation and amortization

4,209 

4,307 

          Restructuring charges

--- 

(231)

          Deferred income taxes

448 

726 

          Loss on early extinguishment of debt

--- 

2,483 

          Stock-based compensation cost

611 

29 

          Other non-cash items

617 

1,159 

     Changes in operating accounts:

          Accounts receivable

(8,224)

1,621 

          Inventories

(4,929)

(39)

          Prepaid expenses and other assets

441 

(107)

          Accounts payable and other liabilities

(4,446)

1,702 

          Accrued compensation and benefits

     (3,232)

      3,159 

Net cash (used for) provided by operating activities

     (8,792)

    13,602 

Cash flows from investing activities:

     Capital expenditures

(1,533)

(5,241)

     Proceeds from sale of investments

365 

--- 

     Purchases of investments

(163)

--- 

     Proceeds from sale of assets

---

434 

     Acquisitions of intangible assets

        (338)

       (532)

Net cash used for investing activities

     (1,669)

    (5,339)

Cash flows from financing activities:

     Debt repayments

(139,179)

(157,656)

     Debt proceeds

142,840 

157,852 

     Debt issue costs

--- 

(1,146)

     Excess tax benefits from stock-based compensation

902 

--- 

     Stock issued under employee plans

       2,677 

         419 

Net cash provided by (used for) financing activities

       7,240 

       (531)

Effect of exchange rate changes on cash

(612)

(1,675)

(Decrease) Increase in cash and cash equivalents

(3,833)

6,057 

Cash and cash equivalents at beginning of year

     14,145 

      6,148 

Cash and cash equivalents at end of period

$   10,312 

$  12,205 

See accompanying notes to condensed consolidated financial statements.

- 5 -

 

GERBER SCIENTIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

Note 1.   Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Gerber Scientific, Inc. and its subsidiaries (collectively, the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America 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 disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. All significant intercompany transactions have been eliminated in the condensed consolidated financial statements. The condensed consolidated financial statements have been prepared, in all material respects, in accordance with the same accounting principles followed in the preparation of the Company's annual financial statements for the fiscal year ended April 30, 2006, except for the adoption of the Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment" ("SFAS 123R"), on May 1, 2006. Management believes that all adjustments, which include only normal recurring adjustments necessary to fairly present the Company's consolidated financial position, results of operations and cash flows for the periods reported, have been included. The financial information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2006, filed with the Securities and Exchange Commission on July 28, 2006. The condensed consolidated balance sheet has been derived from the April 30, 2006 audited consolidated financial statements, but does not include all of the information and disclosures required by accounting principles generally accepted in the United States of America. Certain reclassifications have been made to the prior year amounts disclosed in the condensed consolidated financial statements to conform to the presentation for the fiscal quarter and six months ended October 31, 2006.

The Company has expanded its Revenue Recognition significant accounting policy disclosure in order to provide an improved understanding of its accounting for distribution-related sales. The paragraph below should be read in conjunction with the Company's significant accounting policies disclosed in its Annual Report on Form 10-K for the fiscal year ended April 30, 2006.

Distribution - The Company's Apparel and Flexible Materials sales are primarily made through its domestic and international in-house direct distribution and service network. Independent agents and third party distributors are used in certain foreign countries. The Ophthalmic Lens Processing sales are primarily made through its in-house sales force and through independent agents in certain foreign countries. The Sign Making and Specialty Graphics segment's sales are made through both third party distributors and the Company's wholly-owned subsidiary, Spandex. The Company's sales of third-party purchased products are recorded on a gross revenue basis in accordance with Emerging Issues Task Force Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent." The Company is the primary obligor in these transactions, bears general inventory and credit risks and sets the pricing terms with its customers.

- 6 -

 

Note 2.   Stock-Based Compensation

The Company has stock-based compensation plans under which incentive and non-qualified stock options and restricted stock may be granted to employees from common stock. Directors may receive share grants from treasury stock. Options issued by the Company under its stock plans have a term of ten years and generally vest ratably over a period of three years. Restricted stock grants are expensed over the vesting period of the award. Under all stock plans, the exercise price of the stock option is set on the grant date and may not be less than the fair market value per share on that date.

On May 1, 2006, the Company adopted the provisions of SFAS 123R, which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS 123R, stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity grant). Prior to May 1, 2006, the Company accounted for stock-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations. The Company also followed the disclosure requirements of SFAS 123, "Accounting for Stock-Based Compensation," as amended by SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." The Company elected to adopt the prospective transition method as provided by SFAS 123R and, accordingly, financial statement amounts for the periods prior to May 1, 2006 presented in this Form 10-Q have not been restated to reflect the fair value method of expensing stock-based compensation.

The following table illustrates the effects on net loss and loss per share for the quarter and six months ended October 31, 2005 as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee awards.


In thousands

Quarter Ended   
October 31, 2005

Six Months Ended
October 31, 2005 

Net loss, as reported

$ (124)

$ (1,207)

Add:  Stock-based compensation expense included in reported net loss,
            net of related tax effects


7 


14 

Less: Stock-based employee compensation expense determined under
            the Black-Scholes option pricing model, net of related tax effects


     (89)


      (177)
Net loss, pro forma

$ (206)

$ (1,370)
     

Loss per share:

    

Basic, as reported

$(0.01)

$(0.05)

Basic, pro forma

$(0.01)

$(0.06)
     

Diluted, as reported

$(0.01)

$(0.05)

Diluted, pro forma

$(0.01)

$(0.06)

The Company's condensed consolidated statements of operations included $0.2 million and $0.4 million, net of $0.1 million and $0.2 million of tax benefits, respectively, of stock-based compensation expense for the fiscal quarter and six months ended October 31, 2006. The stock-based compensation expense was recorded substantially within selling, general and administrative expenses.

- 7 -

 

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company's stock over the expected option term and the risk-free interest rate over the expected option term. No dividend yield was assumed for the fiscal quarter or six months ended October 31, 2006 or 2005. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards.

The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions.

 

Quarter and Six
Months Ended
October 31, 2006

Quarter and Six
Months Ended
October 31, 2005

Expected option term1

6.0 years

5.7 years

Expected volatility2

55%

70%

Risk-free interest rate3

4.8%

3.9%

(1)

The option term was determined using the simplified method for estimating expected option life. The Company's options qualify as "plain-vanilla" options.

(2)

The stock volatility for each grant is measured using the weighted average of historical daily price changes of the Company's common stock over the most recent period equal to the expected option life of the grant.

(3)

The risk-free interest rate is based on the U.S. Treasury note yield in effect at the time of grant.

The Company did not recognize compensation expense for employee stock-based awards for the fiscal quarter or six months ended October 31, 2005. The Company recognized compensation expense under APB 25 related to restricted stock.

Stock option activity under all of the Company's stock plans since April 30, 2006 is summarized as follows:

Shares
(in thousands)

Weighted-
Average
Exercise
   Price   

Weighted-
Average
Remaining
Contractual
     Term     

Aggregate
Intrinsic
Value
 (in millions) 

Outstanding as of April 30, 2006

2,846 

$11.08

5.2 years

Options granted

5 

$15.00

 

 

Options exercised

(350)

$  7.71

 

$2.3

Options canceled

  (224)

$15.04

 

 

Outstanding as of October 31, 2006

 2,277 

$11.21

5.0 years

$11.0

Options exercisable at October 31, 2006

 1,798 

 $8.5

 

 

 

The following table summarizes information about stock options outstanding as of October 31, 2006:

- 8 -

 

                          Outstanding Options                        

           Exercisable Options           




Range of Exercise
Prices




Shares     
(in thousands)

Weighted-
Average  
Remaining
Contractual
     Term     


Weighted-
Average 
Exercise 
   Price    




Shares      
(in thousands)


Weighted-
Average  
Exercise  
   Price     

$3.35 - $5.03

247

5.6 years

$  3.42

247

$  3.42

$5.04 - $7.54

580

6.5 years

$  6.80

413

$  6.88

$7.55 - $11.31

644

6.9 years

$  9.32

342

$  9.20

$11.32 - $16.96

408

2.7 years

$14.37

398

$14.39

$16.97 - $25.44

377

1.6 years

$21.99

377

$21.99

$25.45 - $28.12

     21

1.0 years

$27.33

     21

$27.33
 

2,277

5.0 years

$11.21

1,798

$11.92

 

The following table summarizes the activity for the Company's nonvested shares of restricted stock during the fiscal six months ended October 31, 2006:

In thousands except per share amounts



Shares

Weighted-
Average  
Fair Value

Nonvested as of April 30, 2006

23 

$  8.03

Granted

2 

$15.43

Vested

(5)

$  6.92

Forfeited

 (1)

$  9.45

Nonvested as of October 31, 2006

 19 

$  8.92

As of October 31, 2006, there was $1.8 million of unrecognized compensation cost related to nonvested stock-based compensation arrangements granted under the Company's stock plans. That cost is expected to be recognized over a weighted-average period of 2.6 years.

Note 3.   Inventories

Inventories, net of reserves, were as follows:

In thousands

October 31, 2006

April 30, 2006

Raw materials and purchased parts

$ 46,039

$ 41,061

Work in process

1,454

1,497

Finished goods

   11,670

   11,236

        Total inventories

$ 59,163

$ 53,794

Note 4.   Restructuring

The Company's restructuring accrual as of April 30, 2006 was related to a leased facility consolidation in the Sign Making and Specialty Graphics segment that was initiated in the fiscal year ended April 30, 2004. During the six months ended October 31, 2006, payments of $0.1 million reduced the accrual to an ending balance of $1.3 million. The remaining cash payments will continue over the life of the lease, through the fiscal year ending April 30, 2019.

- 9 -

 

Note 5.   Goodwill and Intangible Assets

The table below presents the gross carrying amount and accumulated amortization of the Company's acquired intangible assets other than goodwill included in Other assets, net on the Company's Condensed Consolidated Balance Sheets:

 

      October 31, 2006          

              April 30, 2006          



In thousands

Gross  
 Carrying
 Amount 


Accumulated
Amortization

Gross  
 Carrying
 Amount 


Accumulated
Amortization

Amortized intangible assets:

      

  Patents

$ 7,366

$ 2,860

$ 7,313

$ 2,775

  Other

      517

      215

      525

      194
Total amortized intangible assets

$ 7,883

$ 3,075

$ 7,838

$ 2,969

Intangible asset amortization expense was $0.2 million and $0.3 million for the quarter and six months ended October 31, 2006, respectively. Intangible asset amortization expense was $0.1 million and $0.3 million for the quarter and six months ended October 31, 2005, respectively. Intangible asset amortization is estimated to be approximately $0.5 million annually for the fiscal year ending April 30, 2007, and $0.4 million for each of the fiscal years ending April 30, 2008 through 2012.

There were no impairments of goodwill during the six months ended October 31, 2006 or 2005. Balances and changes in the carrying amount of goodwill for the six months ended October 31, 2006 were as follows:



In thousands

Sign Making
and Specialty
Graphics   

Apparel and
Flexible   
Materials  

Ophthalmic
Lens     
Processing



Total

Balance as of April 30, 2006

$ 22,060

$ 12,498 

$ 16,996

$51,554

Effects of currency translation

         756

         (92)

           ---

        664
Balance as of October 31, 2006

$ 22,816

$ 12,406 

$ 16,996

$52,218

Note 6.   Segment Reporting

The Company's operations are classified into three reportable operating segments: Sign Making and Specialty Graphics, Apparel and Flexible Materials and Ophthalmic Lens Processing. The Sign Making and Specialty Graphics reportable operating segment is comprised of the Gerber Scientific Products and Spandex, Ltd. business units.

The following table presents revenue by operating segment.

 

 Quarter Ended     
          October 31,        

Six Months Ended     
              October 31,         

In thousands

2006

2005

2006

2005

Sign Making and Specialty Graphics:

        

   Gerber Scientific Products

$   23,298

$   22,985

$   46,435

$   45,779

   Spandex

     52,283

     48,051

   102,305

     95,177

Sign Making and Specialty Graphics

75,581

71,036

148,740

140,956

Apparel and Flexible Materials

49,038

44,653

95,581

86,882

Ophthalmic Lens Processing

     20,430

     18,272

     38,216

     34,887

    Consolidated revenue

$ 145,049

$ 133,961

$ 282,537

$ 262,725

- 10 -

 

The table below presents operating income (loss) by segment and a reconciliation to consolidated operating income.

 

 Quarter Ended      
          October 31,       

Six Months Ended     
            October 31,         

In thousands

2006

2005

2006

2005

Sign Making and Specialty Graphics:

        

   Gerber Scientific Products

$ 1,557 

$ 1,539 

$  3,263 

$ 3,662 

   Spandex

  1,717 

  1,120 

    3,249 

   2,077 

Sign Making and Specialty Graphics

3,274 

2,659 

6,512 

5,739 

Apparel and Flexible Materials

7,008 

5,744 

12,975 

10,812 

Ophthalmic Lens Processing

     381 

     670 

       641 

      (12)

   Segment operating income

10,663 

9,073 

20,128 

16,539 

Corporate operating expenses

 (4,196)

 (4,254)

  (9,287)

 (8,315)

   Consolidated operating income

$ 6,467 

$ 4,819 

$10,841 

$ 8,224 

Note 7.   Comprehensive Income (Loss)

The Company's total comprehensive income (loss) was as follows:

 

 Quarter Ended       
              October 31,         

Six Months Ended    
              October 31,         

In thousands

2006

2005

2006

2005

Net income (loss)

$ 3,689

$ (124)

$ 5,713

$ (1,207)

Other comprehensive income (loss):

        

    Foreign currency translation adjustments

597

215 

1,427

(6,135)

    Unrealized investment income, net of taxes

      148

       --- 

      105

         --- 

    Total comprehensive income (loss)

$ 4,434

$     91 

$ 7,245

$ (7,342)

Note 8. Earnings (Loss) Per Share

Basic and diluted earnings (loss) per common share are calculated in accordance with the provisions of FASB Statement of Financial Accounting Standards No. 128, "Earnings per Share." Basic earnings (loss) per common share are equal to net income (loss) divided by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share are equal to net income (loss) divided by the weighted average number of common shares outstanding during the period, including the effect of stock options and stock awards, where such effect is dilutive. The following tables set forth the computation of basic and diluted net earnings (loss) per common share:

 

   Quarter Ended                
                 October 31, 2006              

Quarter Ended                  
                 October 31, 2005               


In thousands except per share amounts


Net   
Income


Average
Shares 

Per  
Share 
Amount


Net 
Loss


Average
Shares 

Per   
Share 
Amount

Basic earnings (loss) per share

$ 3,689

22,854

$ 0.16

$ (124)

22,368

$ (0.01)

Effect of dilutive options and awards

        ---

     489

       ---

       --- 

        ---

        --- 
Diluted earnings (loss) per share

$ 3,689

23,343

$ 0.16

$ (124)

22,368

$ (0.01)

- 11 -

 
 

          Six Months Ended           
                    October 31, 2006           

 Six Months Ended                
                 October 31, 2005                


In thousands except per share amounts


Net   
 Income


Average
Shares 

Per   
Share 
Amount


Net 
 Loss


Average
Shares 

Per   
Share 
Amount
Basic earnings (loss) per share

$ 5,713

22,737

$ 0.25

$ (1,207)

22,340

$ (0.05)
Effect of dilutive options and awards

        ---

     446

      ---

         --- 

       ---

       --- 
Diluted earnings (loss) per share

$ 5,713

23,183

$ 0.25

$ (1,207)

22,340

$ (0.05)

For both the quarter and six months ended October 31, 2005, stock options exercisable for 0.2 million shares of common stock were excluded from the calculation of diluted loss per share because the Company reported a net loss for those periods.

Note 9.   Guarantees

The Company extends financial and product performance guarantees to third parties. There have been no material changes to guarantees outstanding during the quarter and six months ended October 31, 2006.

Changes in the carrying amounts of product warranties were as follows:

 

  Six Months Ended    
            October 31,        

In thousands

2006

2005

Beginning balance

$  2,445 

$  1,782 

Warranties issued in the current period

2,453 

1,487 

Reductions for costs incurred

  (2,627)

  (1,678)

Ending balance

$  2,271 

$  1,591 

Note 10.  Employee Benefit Plans

Components of net periodic benefit cost were as follows:

Quarter Ended    
           October 31,      

    Six Months Ended   
               October 31,        

In thousands

2006

2005

2006

2005

Service cost

$    614 

$    765 

$  1,228 

$  1,530 

Interest cost

1,576 

1,484 

3,151 

2,968 

Expected return on plan assets

(1,533)

(1,511)

(3,066)

(3,023)

Amortization of:

        

   Prior service cost

73 

73 

146 

146 

   Actuarial loss

      188 

      456 

      376 

       913 

Net periodic benefit cost

$    918 

$ 1,267 

$ 1,835 

$  2,534 

For the quarter and six months ended October 31, 2006, $1.4 million and $2.2 million, respectively, in cash contributions were made to the Gerber Scientific, Inc. and Participating Subsidiaries Pension Plan. The Company expects to contribute $4.1 million to the plan for the fiscal year ending April 30, 2007 in accordance with funding requirements.

- 12 -

 

Note 11.  Income Taxes

The Company's effective tax rate was 36.1 percent and 38.0 percent for the quarter and six months ended October 31, 2006, respectively, and 140.9 percent and 157.4 percent for the quarter and six months ended October 31, 2005, respectively. As compared with the statutory rate of 35.0 percent, the higher consolidated tax rate for the quarter and six months ended October 31, 2006 was primarily attributable to the establishment of certain valuation allowances for anticipated losses for the fiscal year ending April 30, 2007 in certain foreign jurisdictions where the Company was unable to take a tax benefit. The higher consolidated tax rates for the quarter and six months ended October 31, 2005 were primarily attributable to a tax charge of $2.3 million recorded as a result of a change in United Kingdom tax law and the application of interim tax reporting requirements related to losses incurred in foreign jurisdictions where the Company was unable to take a tax benefit. Additionally, the establishment of valuation allowances for anticipated losses for the fiscal year ended April 30, 2006 in those jurisdictions also negatively impacted the consolidated tax rate.

Note 12. Recently Issued Accounting Standards

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("SFAS 157"), which is effective for the Company beginning in the fiscal year ending April 30, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands related disclosure requirements. The Company is evaluating the potential impact of SFAS 157 on its consolidated financial position, results of operations and cash flows.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"). SFAS 158 requires balance sheet recognition of the overfunded or underfunded status of pension plans. Under SFAS 158, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic benefit cost. SFAS 158 is required to be adopted as of April 30, 2007. Based on the Company's unfunded obligation as of April 30, 2006, the adoption of SFAS 158 would decrease total assets by approximately $1.4 million, increase total liabilities by approximately $13.5 million and reduce total shareholders' equity by approximately $14.9 million. The adoption of SFAS 158 will not affect the Company's results of operations. At the time of adoption on April 30, 2007, plan performance and actuarial assumptions used could have a significant impact on the actual amounts recorded.

In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return (including a decision whether to file or not file a return in a particular jurisdiction). Under FIN 48, the financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities' full knowledge of the position and all relevant facts, but without considering time values. FIN 48 substantially changes the applicable accounting model and is likely to cause greater volatility in income statements as more items are recognized discretely within income tax expense. The Interpretation also revises disclosure requirements and introduces a prescriptive, annual tabular rollforward of the unrecognized tax benefits. FIN 48 is effective for the Company beginning May 1, 2007. The Company is evaluating the potential impact of adopting FIN 48 on its consolidated financial position and results of operations.

- 13 -

 

Note 13. Subsequent Event

On November 3, 2006, the Company acquired for cash certain assets and assumed certain liabilities of Rápida, a former distributor of the Company's Gerber Technology business in Spain. The acquisition of certain of the former distributor's business operations is expected to provide the Company with greater flexibility and improved profitability in Spain through a more focused direct sales and service effort to Gerber Technology customers. Under the terms of the asset purchase agreement, the Company paid $1.5 million to Rápida. The Company funded this acquisition through borrowings on its existing credit facility and operating cash flows.

The Company also assumed certain current liabilities. In addition, the agreement provides for additional consideration in the form of commission payments to be paid contingent upon the closing of certain sales contracts in-progress at the time of acquisition. The operating results of this business will be included in the Company's consolidated financial statements from the date of acquisition.

The Company is in the process of determining the fair value of the acquired intangible assets through the use of certain valuation models. Acquired intangible assets include a service portfolio of business, customer list and non-compete agreements. Any remaining unallocated purchase price will be recorded as goodwill of the Apparel and Flexible Materials operating segment.

- 14 -

 

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY NOTE CONCERNING FACTORS THAT MAY INFLUENCE FUTURE RESULTS

This Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements which, to the extent they are not statements of historical or present fact, constitute forward-looking statements under the securities laws. These forward-looking statements are intended to provide management's current expectations or plans for the future operating and financial performance of the Company, based on assumptions currently believed to be reasonable. Forward-looking statements can be identified by the use of words such as "believe," "expect," "intend," "foresee," "may," "plan," "anticipate" and other words of similar meaning in connection with a discussion of future operating or financial performance. These include, among others, statements relating to:

All forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. Certain risk factors that could cause actual results to differ from expectations are set forth in Item 1A. "Risk Factors" of the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2006. The Company cannot assure that its financial position, result of operations or cash flows will not be adversely affected by one or more of these factors. The Company does not undertake to update any forward-looking statement made in this report or that may from time to time be made by or on behalf of the Company, except as required by law.

- 15 -

 

RESULTS OF OPERATIONS

Overview

The Company's revenue increased by $11.1 million for the second quarter of fiscal 2007 and $19.8 million for the first six months of fiscal 2007 compared with the same periods in fiscal 2006. The increase in revenue was primarily attributable to sales of new products that the Company has been introducing over the past several months and increased revenue in Asian markets, particularly within China, associated with the Company's Apparel and Flexible Materials operating segment. Foreign currency translation favorably impacted revenue by $3.3 million and $5.8 million for the quarter and six months ended October 31, 2006, respectively, compared with the same periods in fiscal 2006.

Key new products contributed $11.5 million to revenue, an increase of $6.2 million, for the first six months of fiscal 2007 as compared with fiscal 2006. The largest contributor to this revenue increase was the Solara UV2, an internally developed ink jet printer for the Sign Making and Specialty Graphics market. The Company anticipates that the Solara UV2 will continue to contribute incremental revenue throughout fiscal 2007 and is focused on developing further enhancements to the Solara UV2 offering, such as increasing the speed performance of these ink jet printers. The DTL lens generator with a cut-to-polish feature and the CMX50 finer and polisher were launched in fiscal 2006 within the Ophthalmic Lens Processing operating segment and have been significant contributors to increased revenue in this segment as compared with the prior year. The Apparel and Flexible Materials operating segment launched the XLc7000 cutting system and XLs50 fabric spreader late in fiscal 2006, both of which are performing well in Asian markets. In November 2006, this segment launched its Fashion Lifecycle Management software suite, which is a natural upgrade for current customers using the Company's WebPDM software product.

The Company completed two additional initiatives towards incremental revenue growth in early November 2006. The Apparel and Flexible Materials segment completed an acquisition of its former distributor in Spain (see Note 13 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q) and Spandex launched its start-up operations of a newly opened sales and distribution center in Poland. The Company should begin realizing the incremental benefits of these actions in fiscal 2008.

Operating income increased $1.6 million for the second quarter of fiscal 2007 and $2.6 million for the six months ended October 31, 2006. Gross profit contributed $3.2 million and $5.6 million to operating income, respectively, compared with the prior year periods. The gross profit increases were driven by new products and increased business in Asian markets, particularly China. Increased selling, general and administrative expenses of $1.7 million and $3.5 million for the quarter and six months ended October 31, 2006, respectively, compared with the prior year, partially offset the gross profit increase. These higher costs included additional expense of $0.3 million and $0.6 million, respectively, for the expensing of stock option compensation costs as of May 1, 2006 in conjunction with the Company's adoption of Statement of Financial Accounting Standards No. 123R, "Share-Based Payment."

A focus on the implementation of "lean" processes throughout the Company was launched late in fiscal 2006. This initiative, referred to as the Gerber Business System, focuses on process improvements which are expected to contribute to improved gross margins and the control of selling, general and administrative expenses. The Company has not yet recognized significant financial benefits of this initiative through October 31, 2006, as the process improvements are still being developed and implemented.

- 16 -

 

The overall increase in net income of $3.8 million for the second quarter and $6.9 million for the six months ended October 31, 2006 compared with the same periods in the prior year reflects the operating income improvements referred to above, as well as the Company's lower cost of debt compared with periods prior to the October 31, 2005 refinancing. Additionally, the prior year results included a $2.5 million pre-tax charge associated with the early extinguishment of debt and incremental tax expense of $2.3 million related to a United Kingdom tax legislation change.

Revenue
 

Quarter Ended
                       October 31,                       

   Six Months Ended
                          October 31,                      

In thousands


2006


2005

Percent Change


2006


2005

Percent
Change

Revenue

$145,049

$133,961

8.3%

$282,537

$262,725

7.5%

Revenue increased across all operating segments and included $3.3 million and $5.8 million of favorable foreign currency translation effects as compared with the prior year second quarter and first six months, respectively. For the second quarter and first six months of fiscal 2007, excluding the favorable foreign currency translation effects, revenue increased $7.8 million and $14.0 million, respectively, as compared with the prior year. This revenue increase was primarily attributable to sales volume improvements, particularly the success of key new products, which contributed $6.9 million and $11.5 million, respectively, to revenue for the quarter and six months ended October 31, 2006. This represented an increase of $4.6 million and $6.2 million, respectively, as compared with the same periods of the prior year. In addition, the Company reported improved revenue performance in China and Europe, for the quarter and six months ended October 31, 2006, as compared with the same periods of the prior year.

The following table shows equipment and software product revenue and aftermarket supplies and service revenue as a percentage of total revenue for the quarter and six month periods ended October 31, 2006 and 2005.

 

Quarter Ended
       October 31,     

Six Months Ended
      October 31,    

2006

2005

2006

2005

Equipment and software revenue

33%

32%

32%

31%

Aftermarket supplies and service revenue

67%

68%

68%

69%

On a geographic basis and adjusted for foreign currency translation, the Company's second quarter and first six months fiscal 2007 business volume was higher in each geographic region, consisting of North America, Europe and the Rest of World, as compared with the same periods of fiscal 2006. The increased business reflected the success of new products globally. The European increase was across all segments, driven by a strong European economy, particularly in the Spandex distribution business, which reported significantly higher aftermarket sales. The Rest of World region increase was primarily within the Apparel and Flexible Materials segment and principally reflected increased equipment revenue within China.

- 17 -

 

Gross Profit Margins

 Quarter Ended
                        October 31,                     

Six Months Ended
                     October 31,                     


In thousands


2006


2005

Percent
Change


2006


2005

Percent
Change

Gross profit

$ 43,632

$ 40,450

7.9%

$ 85,337

$79,706

7.1%

Gross profit margin

30.1%

30.2%

  

30.2%

30.3%

  

Gross profit increased in the second quarter and six months ended October 31, 2006 by $3.2 million and $5.6 million, respectively, as compared with prior year similar periods. Higher sales volume, excluding the favorable impact of foreign currency translation, contributed approximately $2.1 million and $4.1 million, respectively, to the total increase. Gross profit margin declined 0.1 percentage points for the quarter and six months ended October 31, 2006 from the prior corresponding periods, primarily due to pricing pressures from vendors and a $0.5 million charge related to inventory held at various suppliers. The Company has launched several programs to strengthen gross profit margins, including low-cost sourcing of key parts and components of new equipment products and implementation of the Gerber Business System.

Selling, General and Administrative Expenses
  

  Quarter Ended
                       October 31,                    

 Six Months Ended
                      October 31,                   


In thousands


2006


2005

Percent
Change


2006


2005

Percent
Change

Selling, general and administrative
    expenses


$ 30,990


$ 29,308


(5.7%)


$ 62,353


$58,883


(5.9%)

Percentage of revenue

21.4%

21.9%

  

22.1%

22.4%

  

Selling, general and administrative expenses increased $1.7 million in the second quarter and $3.5 million in the first six months of fiscal 2007 from the prior year comparable periods. Foreign currency translation contributed approximately $0.6 million and $1.0 million, respectively, to these increases. The remaining increase was primarily related to higher sales and marketing, trade show and severance costs of $1.0 million and $1.7 million, respectively, for the quarter and six fiscal months ended October 31, 2006.

Research and Development

 

  Quarter Ended
                       October 31,                    

 Six Months Ended
                      October 31,                   


In thousands


2006


2005

Percent
Change


2006


2005

Percent
Change

Research and development

$ 6,175

$ 6,518

5.3%

$ 12,143

$12,830

5.4%

Percentage of revenue

4.3%

4.9%

  

4.3%

4.9%

  

Research and development ("R&D") expenses decreased in total dollars and as a percentage of revenue for both the second quarter and first six months of fiscal 2007 compared with the similar fiscal 2006 periods, primarily due to lower external project spending.

Restructuring Charges

No restructuring actions have been taken in fiscal 2007. In fiscal 2006, certain adjustments to previous restructuring estimates were recorded. The most significant of these changes in estimates was the reversal of a previous accrual of $0.3 million for severance costs related to a former employee. The effect of this reversal was partially offset by the incurrence of $0.1 million in additional employee severance related to the Ophthalmic Lens Processing segment.

- 18 -

 

Other Income (Expense), net

 

  Quarter Ended
                       October 31,                    

 Six Months Ended
                      October 31,                   


In thousands


2006


2005

Percent
Change


2006


2005

Percent Change

Other income (expense), net

$279

$(508)

154.9%

$120

$(683)

117.6%

Other income was $0.3 million in the second quarter of fiscal 2007 as compared with other expense of $0.5 million in the same prior year period. Other income was $0.1 million for the first six months of fiscal 2007 as compared with other expense of $0.7 million for the same prior year period. The second quarter of fiscal 2007 included higher foreign exchange gains of approximately $0.4 million and lower bank fees. The six months ended October 31, 2005 included higher bank fees associated with the prior credit facilities of $0.3 million and higher losses on the write-off of patents of $0.3 million.

Interest Expense
 

  Quarter Ended
                       October 31,                    

 Six Months Ended
                      October 31,                   


In thousands


2006


2005

Percent Change


2006


2005

Percent Change

Interest expense

$ 971

$ 1,525

36.3%

$ 1,748

$ 2,956

40.9%

Weighted-average credit facility
   interest rates


10.3%


14.2%

  


9.7%


13.7%

  

The decrease in interest expense in both periods of fiscal 2007 as compared with the same periods in fiscal 2006 was primarily attributable to lower average debt balances and weighted-average interest rates associated with the credit facility refinancing, which occurred at the end of the second quarter in fiscal 2006.

Income Tax Expense

 

Quarter Ended   
        October 31,          

Six Months Ended
       October 31,         

In thousands

2006

2005

2006

2005

Income tax expense

$2,086

$427

$3,500

$3,309

Effective income tax rate

36.1%

140.9%

38.0%

157.4%

The higher consolidated tax rate in the quarter and six months ended October 31, 2006, as compared with the statutory rate of 35.0 percent, was primarily attributable to the establishment of certain valuation allowances for fiscal 2007 anticipated losses in certain foreign jurisdictions where the Company was unable to take a tax benefit. The higher consolidated tax rates for the quarter and six months ended October 31, 2005 were primarily attributable to a tax charge of $2.3 million recorded as a result of a change in United Kingdom tax law and the application of interim tax reporting requirements related to losses incurred in foreign jurisdictions where the Company was unable to take a tax benefit. Additionally, the establishment of valuation allowances for anticipated fiscal 2006 losses in those jurisdictions also negatively impacted the consolidated tax rate.

- 19 -

 

SEGMENT REVIEW

Sign Making and Specialty Graphics

 

Quarter Ended                
                October 31, 2006              

Quarter Ended                
               October 31, 2005              

In thousands

GSP1

Spandex1

Total

GSP1

Spandex1

Total

Revenue

$23,298

$52,283

$75,581

$22,985

$48,051

$71,036

Segment operating profit

$1,557

$1,717

$3,274

$1,539

$1,120

$2,659

 
 

   Six Months Ended             
               October 31, 2006             

    Six Months Ended            
                October 31, 2005            

In thousands

GSP1

Spandex1

Total

GSP1

Spandex1

Total

Revenue

$46,435

$102,305

$148,740

$45,779

$95,177

$140,956

Segment operating profit

$3,263

$3,249

$6,512

$3,662

$2,077

$5,739

1 The Sign Making and Specialty Graphics segment is comprised of the Gerber Scientific Products ("GSP") and Spandex, Ltd. ("Spandex") business units. GSP engineers and manufactures sign making and specialty graphics products and distributes through Spandex and various independent distributors in the United States and internationally, as well as provides services directly to end user customers. Spandex is a distributor for GSP, as well as other equipment and aftermarket consumables suppliers of sign making and specialty graphics products, primarily serving markets in Europe, Australia and New Zealand.

Segment revenue increased $4.5 million, or 6.4 percent, from the prior year second quarter. Foreign currency translation contributed $2.4 million to the overall increase in segment revenue for the quarter. Segment revenue increased $7.8 million, or 5.5 percent, for the six months ended October 31, 2006 as compared with the six months ended October 31, 2005. Foreign currency translation contributed $4.4 million to the overall increase in segment revenue for the six months ended October 31, 2006.

On a business unit basis, excluding the favorable impact of foreign currency translation, GSP's revenue remained steady and Spandex revenue increased $2.3 million during the second quarter of fiscal 2007 as compared with the similar prior year period. For the six months ended October 31, 2006, excluding the impact of foreign currency translation, GSP's revenue declined slightly, and Spandex's revenue increased $4.0 million. The increases at Spandex were primarily driven by increased aftermarket sales volume across Europe and Rest of World regions. Additionally, Spandex revenue for the six months ended October 31, 2005 was adversely impacted by the effect of business disruption associated with the implementations of the Company's enterprise resource planning system in Australia, New Zealand and Eastern Europe.

Segment operating profit increased $0.6 million in the second quarter of fiscal 2007 as compared with the same quarter in the prior year and increased $0.8 million as compared with the first six months of fiscal 2006. GSP reported flat operating profit in the second quarter of fiscal 2007 as compared with the prior year, and lower operating profit of $0.4 million as compared with the six months ended October 31, 2005. The lower operating profit on a year-to-date basis was primarily attributable to higher overall costs in the GSP service business and higher marketing costs associated with new product introductions. Spandex reported operating profit improvements of $0.6 million and $1.2 million for the second quarter and first six months of fiscal 2007, respectively. The improved operating results primarily reflected gross profit improvements related to higher revenue coupled with a focused effort on cost control. Fiscal 2006 results included higher professional fees associated with the implementation of the Company's enterprise resource planning system in Australia, New Zealand and Eastern Europe.

- 20 -

 

Apparel and Flexible Materials

 

Quarter Ended      
           October 31,         

Six Months Ended    
          October 31,          

In thousands

2006

2005

2006

2005

Revenue

$49,038

$44,653

$95,581

$86,882

Segment operating profit

$7,008

$5,744

$12,975

$10,812

Segment revenue increased $4.4 million, or 9.8 percent, from the prior year comparable second quarter. Foreign currency translation contributed $0.6 million to the overall increase in segment revenue for the quarter. Segment revenue increased $8.7 million, or 10.0 percent, for the six months ended October 31, 2006 as compared with the six months ended October 31, 2005. Foreign currency translation contributed $1.0 million to the overall increase in segment revenue for the six months ended October 31, 2006. The revenue growth was attributable to increased sales volume, primarily related to increased cutting and spreading equipment sales.

Segment operating profit increased $1.3 million for the second quarter of fiscal 2007 as compared with the same quarter in the prior year and was $2.2 million higher for the first six months of fiscal 2007 as compared with the same period in fiscal 2006. Gross profit improved by $2.0 million and $4.1 million in the second quarter and first six months of fiscal 2007 as compared with the same periods of fiscal 2006. Increased sales volume of cutters, as well as a favorable software and service sales mix, contributed to the improvement in gross profit. Although sales volume was elevated in China and other Asian markets, it was, and may continue to be, offset slightly by pricing pressures in those markets as they continue to develop. Operating expenses increased as compared with the prior year similar periods, primarily caused by higher sales and marketing expenses related to the sales volume increases and costs associated with the planned introduction of Fashion Lifecycle Management. This new software product was launched in November 2006, and is a software fashion suite that complements the Company's existing WebPDM software, which is a product data management solution.

Ophthalmic Lens Processing

 

Quarter Ended    
            October 31,      

Six Months Ended 
       October 31,      

In thousands

2006

2005

2006

2005

Revenue

$ 20,430

$18,272

$ 38,216

$34,887

Segment operating profit

$381

$670

$641

$(12)

Segment revenue increased $2.2 million, or 11.8 percent, from the prior year comparable second quarter. Foreign currency translation contributed $0.3 million to the overall increase in segment revenue for the quarter. Segment revenue increased $3.3 million, or 9.5 percent, for the six months ended October 31, 2006 as compared with the six months ended October 31, 2005. Foreign currency translation contributed $0.5 million to the overall increase in segment revenue for the six months ended October 31, 2006. The higher revenue for both periods was primarily attributable to the introduction of new products and increased sales volume of aftermarket consumable materials.

- 21 -

 

Segment operating profit decreased $0.3 million and increased $0.7 million for the second quarter and first six months of fiscal 2007, respectively, as compared with the same periods in the prior year. Included in the results for the second quarter and first six months of fiscal 2006 was a $0.5 million elimination of a reserve related to the Muskogee, Oklahoma facility, as that facility was sold during fiscal 2006. Excluding the prior year impact of the elimination of that reserve, operating profit increased $0.2 million for the second quarter of fiscal 2007 and $1.1 million for the six months ended October 31, 2006. These improvements were attributable to the favorable gross profit impact of new products due to higher sales volume and overall lower operating expenses.

Corporate Expenses
 

  Quarter Ended   
      October 31,     

   Six Months Ended
        October 31,     

In thousands

2006

2005

2006

2005

Operating expense

$4,196

$4,254

$9,287

$8,315

Corporate operating expenses were flat in the second quarter of fiscal 2007 as compared with fiscal 2006, and increased $1.0 million for the six months ended October 31, 2006 as compared with the same period in fiscal 2006. Operating expenses in the second quarter of fiscal 2007 included lower incentive compensation of $1.2 million and lower pension costs of $0.4 million, which were offset by higher self-insurance costs of $0.5 million, stock compensation expense of $0.3 million, costs of $0.2 million associated with Gerber Business System "lean" initiatives and incremental employee severance costs of $0.2 million. Additionally, the second quarter of fiscal 2006 included a $0.3 million reversal of a restructuring accrual related to severance payable to a former employee of the Company.

The increase in Corporate expenses for the first six months of fiscal 2007 was related to year-to-date stock compensation expense of $0.6 million, costs of $0.5 million associated with Gerber Business System "lean" initiatives, higher self-insurance costs of $0.5 million, incremental employee severance costs of $0.5 million and higher professional fees associated with the fiscal 2006 year-end audit procedures of $0.4 million. Additionally, the second quarter of fiscal 2006 included a $0.3 million reversal of a restructuring accrual related to severance payable to a former employee of the Company. These higher costs were partially offset by lower incentive compensation of $1.2 million and lower pension costs of $0.8 million for the six months ended October 31, 2006.

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary ongoing cash requirements, both in the short- and long-term, will be to fund operating and capital expenditures, product development, acquisitions, expansion in China, pension plan funding and debt service. The primary sources of liquidity are internally generated cash flows and borrowings under the Company's credit facility. The sources of liquidity are subject to all of the risks of the Company's business and could be adversely affected by, among other factors, a decrease in demand for the Company's products, charges that may be required because of changes in market conditions or other costs of doing business, or delayed product introductions.

- 22 -

 

The Company believes that its cash on hand, cash flows from operations and borrowings expected to be available under the Company's revolving credit facility will enable the Company to meet its ongoing cash requirements. As of October 31, 2006, the Company had $9.1 million available for borrowing under its revolving credit facility based on its borrowing base. It is currently expected that the Company's future expenditures will be funded primarily from operations and revolving credit facility borrowings.

The following table provides information about the Company's capitalization as of the dates indicated:


In thousands except ratio amounts

October 31,
     2006      

April 30,
      2006    

Cash and cash equivalents

$   10,312

$   14,145

Working capital

$   80,677

$   65,661

Total debt

$   40,785

$   37,120

Net debt (total debt less cash and cash equivalents)

$   30,473

$   22,975

Shareholders' equity

$ 137,334

$ 125,616

Total capital (net debt plus shareholders' equity)

$ 167,807

$ 148,591

Current ratio

1.8%

1.6%

Net debt-to-total capital ratio

18.2%

15.5%

Cash Flows

Cash used for operating activities was $8.8 million for the six months ended October 31, 2006 compared with cash provided by operations of $13.6 million in the prior year comparable period. The $22.4 million decline in these cash flows was primarily attributable to increased accounts receivable and inventory purchases, as well as reductions in accounts payable and other accrued liabilities. The increase in accounts receivable had the largest impact on the decrease in operating cash flows and was as a result of increased revenue as compared with the same prior year periods. The increased accounts receivable balances were also attributable to a shift in revenue towards the end of the quarter, which was more pronounced than in the past.

The Company used $1.7 million for investing activities, primarily to fund capital expenditures of $1.5 million and intangible asset additions of $0.3 million. Capital expenditures are expected to be approximately $4.0 million to $6.0 million for the full fiscal year.

The Company generated $7.2 million from financing activities during the six months ended October 31, 2006 as compared with a use of cash of $0.5 million for the six months ended October 31, 2005. This increase was the result of additional borrowings of $3.5 million and proceeds from the issuance of stock, and related tax benefits, associated with option exercises of $3.2 million. Additionally, in fiscal 2006, the Company refinanced its credit facility and incurred $1.1 million of debt issuance costs.

Financial Condition

The United States dollar weakened against the Euro, the British pound and the Australian dollar and strengthened against the Canadian dollar as compared with April 30, 2006. The net impact of these currency movements resulted in higher translated Euro, British pound and Australian dollar-denominated assets and liabilities and lower translated Canadian dollar-denominated assets and liabilities compared with balances as of April 30, 2006. The most significant portion of the Company's international assets and liabilities are denominated in the Euro.

- 23 -

 

Net accounts receivable increased to $100.2 million as of October 31, 2006 from $92.4 million as of April 30, 2006. This increase was primarily attributable to a shift in revenue towards the end of the quarter, which was more pronounced than in the past, as well as the impact of foreign currency translation. This increased the Company's days sales outstanding ("DSO") to 62 days as of October 31, 2006 compared with 58 days as of April 30, 2006.

Inventories increased to $59.2 million as of October 31, 2006 from $53.8 million as of April 30, 2006. The increase was caused by anticipated increases in sales volumes and the effect of foreign currency translation. Inventory turnover decreased to 6.8 times annually as of October 31, 2006 from 7.4 times annually as of April 30, 2006.

Accounts payable and other accrued liabilities, excluding the current portion of long-term debt, decreased to $104.2 million as of October 31, 2006 from $111.1 million as of April 30, 2006, primarily due to the timing of payments to the Company's vendors and year-end employee bonus payments. Days purchases outstanding in accounts payable decreased to 42 days as of October 31, 2006 from 49 days as of April 30, 2006.

Long-term Borrowing Arrangements

The Company's primary source of borrowing is a $50.0 million asset-based revolving line of credit with a group of banking institutions, which matures in 2008. The Company also has a term loan that is payable in monthly installments through 2010 and industrial development bonds that mature in 2014.

The Company was in compliance with the financial covenants under its revolving credit facility as of October 31, 2006. The following table summarizes the Company's compliance with its financial covenants as of October 31, 2006:


Covenants

Actual at
October 31, 2006


Requirement

Maximum Leverage Ratio

2.52 to 1.00

< 3.75 to 1.00

Minimum Debt Service Coverage Ratio

6.01 to 1.00

> 1.25 to 1.00

The Company's ability to continue to comply with these covenants will depend primarily on its success in growing the business and generating operating cash flows. Future compliance with the covenants may be adversely affected by various economic, financial and industry factors. Noncompliance with the covenants would constitute an event of default under the credit facility, allowing the lenders to accelerate repayment of any outstanding borrowings. In the event of any potential failure by the Company to continue to be in compliance with any covenants, the Company would seek to negotiate amendments to the applicable covenants or to obtain compliance waivers from its lenders.

- 24 -

 

OBLIGATIONS, COMMITMENTS AND CONTINGENCIES

There were no material changes to the Company's cash obligations or commercial commitments from those disclosed in the Company's Annual Report on Form 10-K for the year ended April 30, 2006.

RECENTLY ISSUED ACCOUNTING STANDARDS

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("SFAS 157"), which is effective for the Company beginning in fiscal 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands related disclosure requirements. The Company is evaluating the potential impact of SFAS 157 on its consolidated financial position, results of operations and cash flows.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"). SFAS 158 requires balance sheet recognition of the overfunded or underfunded status of pension plans. Under SFAS 158, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic benefit cost. SFAS 158 is required to be adopted as of April 30, 2007. Based on the Company's unfunded obligation as of April 30, 2006, the adoption of SFAS 158 would decrease total assets by approximately $1.4 million, increase total liabilities by approximately $13.5 million and reduce total shareholders' equity by approximately $14.9 million. The adoption of SFAS 158 will not affect the Company's results of operations. At the time of adoption on April 30, 2007, plan performance and actuarial assumptions used could have a significant impact on the actual amounts recorded.

In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return (including a decision whether to file or not file a return in a particular jurisdiction). Under FIN 48, the financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities' full knowledge of the position and all relevant facts, but without considering time values. FIN 48 substantially changes the applicable accounting model and is likely to cause greater volatility in income statements as more items are recognized discretely within income tax expense. The Interpretation also revises disclosure requirements and introduces a prescriptive, annual tabular rollforward of the unrecognized tax benefits. FIN 48 is effective for the Company beginning May 1, 2007. The Company is evaluating the potential impact of adopting FIN 48 on its consolidated financial position and results of operations.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported. Actual results could differ from management's estimates. The Company described the critical accounting estimates that require management's most difficult, subjective, or complex judgments in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2006. There were no significant changes to the Company's critical accounting estimates during the quarter or six months ended October 31, 2006 from those previously disclosed in the Company's Annual Report on Form 10-K.

- 25 -

 

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

No material changes have occurred in the quantitative and qualitative market risk disclosures for the Company during the quarter or six months ended October 31, 2006 from those disclosed under Item 7A. "Quantitative and Qualitative Disclosures about Market Risk," presented in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2006.

ITEM 4.     CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company's management, including its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures as of October 31, 2006. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of October 31, 2006.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company's internal control over financial reporting during the fiscal quarter ended October 31, 2006 that materially affected, or that are reasonably likely to materially affect, its internal control over financial reporting.

- 26 -

 

PART II -  OTHER INFORMATION

ITEM 1A.  RISK FACTORS

Gerber Scientific's business, financial condition, operating results and cash flows can be impacted by a number of factors, any one of which could cause its actual results to vary materially from recent results or from anticipated future results. No material changes have occurred in the Company's risk factors during the quarter or six months ended October 31, 2006 from those disclosed under Item 1A. "Risk Factors," presented in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2006.

For a discussion identifying risk factors and other important factors that could cause actual results to differ materially from those anticipated, readers are referred to the Company's filings with the Securities and Exchange Commission, including but not limited to, the information included in Gerber Scientific's Annual Report on Form 10-K for the fiscal year ended April 30, 2006 under the headings "Business," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Note Concerning Factors that May Influence Future Results" and within this Quarterly Report on Form 10-Q.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)  Gerber Scientific held its fiscal 2006 annual meeting of stockholders on September 21, 2006.

(c)  The following sets forth information regarding each matter voted upon at the 2006 annual meeting. There were 22,717,796 shares of common stock outstanding and entitled to vote as of the record date for the 2006 annual meeting.

Proposal 1.   The stockholders approved a proposal to elect each of the eight nominees to the board of directors. The tabulation of votes on this proposal was as follows:

Nominees

Votes For

Votes Withheld

Donald P. Aiken

20,639,347

159,747

Marc T. Giles

20,035,008

764,086

Edward G. Jepsen

19,301,124

1,497,970

Randall D. Ledford, Ph.D.

19,323,530

1,475,564

John R. Lord

19,322,249

1,476,845

Carole F. St. Mark

20,606,284

192,810

A. Robert Towbin

19,323,524

1,475,570

W. Jerome Vereen

19,244,218

1,554,876

Proposal 2.   The stockholders approved a proposal to approve the Gerber Scientific, Inc. 2006 Omnibus Incentive Plan. The tabulation of votes on this proposal was as follows:

 

Votes For

Votes Against

Votes Abstained

Broker Non-Votes

Approve the Gerber Scientific,
Inc. 2006 Omnibus Incentive Plan


16,905,894


1,866,297


68,053


1,958,850

- 27 -

 

ITEM 6.     EXHIBITS

Exhibit Number

  


Description                                                                                                                    

10.1

Gerber Scientific, Inc. Non-Employee Director's Stock Grant Plan, as amended and restated on September 21, 2006, filed herewith.

10.2

Gerber Scientific, Inc. 2006 Omnibus Incentive Plan, filed herewith.

31.1

  

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, filed herewith.
     

31.2

  

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, filed herewith.
     

32

  

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) or 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. 1350, filed herewith.
     

99

  

Supplemental Segment Information, filed herewith.

- 28 -

 

SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

GERBER SCIENTIFIC, INC.

December 8, 2006

By:

      /s/    John J. Krawczynski      

 

 

John J. Krawczynski
Vice President, Chief Accounting Officer and Corporate Controller
(On behalf of the Registrant and as
Principal Accounting Officer)

- 29 -

 

 

GERBER SCIENTIFIC, INC.

Exhibit Index

Exhibit Number

  


Description                                                                                                                    

10.1

Gerber Scientific, Inc. Non-Employee Director's Stock Grant Plan, as amended and restated on September 21, 2006, filed herewith.

10.2

Gerber Scientific, Inc. 2006 Omnibus Incentive Plan, filed herewith.

31.1

  

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, filed herewith.
     

31.2

  

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, filed herewith.
     

32

  

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) or 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. 1350, filed herewith.
     

99

  

Supplemental Segment Information, filed herewith.

- 30 -