| Item 1 | 1 | |||
| Item 1A | 6 | |||
| Item 1B | 12 | |||
| Item 2 | 13 | |||
| Item 3 | 14 | |||
| Item 4 | 14 | |||
| Part II | ||||
| Item 5 | 15 | |||
| Item 6 | 17 | |||
| Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
18 | ||
| Item 7A | 38 | |||
| Item 8 | 39 | |||
| Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures |
81 | ||
| Item 9A | 81 | |||
| Item 9B | 81 | |||
| Part III | ||||
| Item 10 | 82 | |||
| Item 11 | 82 | |||
| Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
82 | ||
| Item 13 | Certain Relationships and Related Transactions, and Director Independence |
82 | ||
| Item 14 | 82 | |||
| Part IV | ||||
| Item 15 | 83 | |||
| 84 | ||||
| 86 | ||||
X-Rite’s internet website is www.xrite.com. X-Rite’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after we electronically file with or furnish them to the Securities and Exchange Commission.
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| ITEM 1. | BUSINESS |
X-Rite, Incorporated (also referred to as “X-Rite,” “the Company,” “our,” “we,” or “us”) is a technology company that develops a full range of color management systems and solutions. The Company’s technologies assist manufacturers, retailers, and distributors in achieving precise color appearance throughout their global supply chain. X-Rite products also assist printing companies, graphic designers, and professional photographers in achieving precise color reproduction of images across a wide range of devices and from the first to the last print. The Company’s products also provide retailers color harmony solutions at point of purchase. The key markets served include Imaging and Media, Industrial, and Retail. A more detailed discussion of X-Rite products and markets appears below.
Products are sold worldwide through the Company’s own sales personnel and through independent sales representatives and dealers. The Company is headquartered in Grand Rapids, Michigan and has other domestic operations in New Jersey and Massachusetts. In addition, the Company has locations in Switzerland, Germany, England, France, Italy, Spain, the Czech Republic, Russia, China, Japan and India. Manufacturing facilities are located in the United States, Switzerland, Germany, and Italy.
X-Rite was organized in 1958 as a Michigan corporation and completed its initial public offering of common stock in April of 1986. We have grown through internal expansion and acquisitions, investing heavily over the past three years in our core color businesses.
| • | Pantone, Inc. Acquisition |
We completed the acquisition of Pantone, Inc. (Pantone) on October 24, 2007 for $176.1 million. Pantone is a leader in color inspiration, communication and specification standards in the creative design industries. Its flagship product, the PANTONE® MATCHING SYSTEM®, is a key color standard in the graphic arts, printing, publishing and advertising industries. Pantone also provides color standards and design tools for the fashion, home furnishings, architecture, paint, interior and industrial design industries.
| • | Amazys Holding AG Acquisition |
We completed the acquisition of Amazys Holding AG (Amazys) on July 5, 2006 for $306.7 million. Amazys is a color management solutions company, based in Switzerland that develops markets, and supports hardware, software, and services to measure and communicate color for the imaging and media, photography, digital imaging, paints, plastics, apparel, textiles, and automotive industries.
| • | Product Innovation |
In 2007, we introduced seven new products and three major product upgrades. We also devoted substantial resources to research and development, streamlining the development process, and achieving functional design excellence. In 2007, we spent approximately fourteen percent of our revenues on engineering, research, and development. Our focus continues to center on color management solutions that incorporate software, hardware, standards, and services.
| • | International Operations |
With offices in thirteen countries outside the U.S. and service centers across Europe, Asia, and the Americas, X-Rite continues to improve its ability to conduct business with customers around the world. In 2007, international sales represented 65.7 percent of total revenue. The Company began to accelerate its global presence in 1993 with the establishment of two foreign sales and service subsidiaries: X-Rite GmbH, Cologne, Germany and X-Rite Asia Pacific Limited, Hong Kong. In 1994, we established a U.K. subsidiary, X-Rite, Ltd., which acquired the outstanding stock of an X-Rite dealer located near Manchester, England. In 1998, a French subsidiary, X-Rite Méditerranée SARL, was established by
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acquiring a branch of an X-Rite dealer located near Paris. In 2002, we opened X-Rite, (Shanghai) International Trading Co. Ltd., a sales and service center incorporated in The Peoples Republic of China. This subsidiary coordinates activity with previously opened representative offices in Beijing, Tianjin and Guangzhou strengthening our ability to serve China’s growing markets. In 2003, we affirmed our commitment to Japan and the many multi-national companies that reside there by expanding our sales office and creating a new company, X-Rite, K.K. In 2006, we expanded our global presence even further through the acquisition of Amazys Holding AG, a color solutions company based in Switzerland. As a result of the Amazys acquisition the Company established its European headquarters in Regensdorf, Switzerland. As a result of the 2007 acquisition of Pantone the Company increased our global presence through the addition of a sales office in Mumbai, India.
MAJOR MARKETS
X-Rite operates in two reportable business segments: (1) Color Measurement and (2) Color Standards. The Color Measurement segment represented 96.4 percent of X-Rite’s total net sales in 2007. The Color Measurement segment provides end-to-end solutions that combine hardware, software, and services to customers. The Color Standards segment represented 3.6 percent of X-Rite’s total net sales in 2007. The Color Standards segment develops and markets products for the accurate communication and reproduction of color. Both reportable segments service the following major markets.
Further information relating to segments is provided in Note 2 to the Consolidated Financial Statements included in Item 8 of this report.
Imaging and Media
The Imaging and Media market consists of two major markets: Digital Imaging and Printing.
X-Rite’s Digital Imaging markets consist of solutions for graphic designers, photo processing, photography, graphic design, pre-press service bureaus, and a myriad of calibration tools for image setters, raster image processors, and other digital applications. Our product solutions work to create value at key stages of the workflow by reducing waste, increasing productivity and enhancing quality.
The primary Printing markets that we serve are in digital and traditional printing. X-Rite’s color-calibrated instruments, digital palettes, and output measurement devices support color communication for the entire printing and preprinting process reducing set up time and eliminating costly mistakes. Our handheld products are straightforward, self-contained solutions that keep color on-target in the pre-press process, ink lab and pressroom. X-Rite’s automated scanning systems support the need for faster and more frequent color data collection.
Industrial
Our Industrial market is concentrated in the quality and process control markets. We design, develop, and manufacture precision instrumentation, software, and systems for global manufacturers, fulfilling a need to measure color for formulation, quality, and process control for paint, plastics, and textiles. Accurate color reproduction and global supply chain management offer businesses a competitive advantage, and are important factors when products are assembled from parts made around the world. X-Rite industrial product solutions are designed to reduce waste, increase production uptime, improve process management, and enable global color communication.
Color Support Services
Our Color Support Services market provides customers access to color professional specialists, training, and technical support worldwide through color seminars, classroom workshops, on-site consulting, and interactive media development. Our Color Services business provides both major manufacturers and end users with
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comprehensive solutions for their color and workflow problems. Color Support Service additionally operates and manages the Company’s service repair operation with facilities around the world and specializing in repairing all X-Rite equipment. The products repaired by the service department include products currently covered by our warranty program as well as those products which are out of warranties.
Retail
X-Rite’s Retail market serves two major markets: paint matching and home décor. The paint matching market is conducted under the name of Match Rite. X-Rite is a leading supplier of retail paint matching systems for home centers, mass merchants, hardware stores and paint retailers in North America, and it has established a strong presence in Europe and other regions of the world. X-Rite’s Retail customers rely on its strength in color measurement instrumentation, database creation and management, custom software development, and large scale account servicing. These solution-based products reduce paint inventory for the retailer and provide a user-friendly environment promoting sophisticated shade matching capabilities for the consumer. We are leveraging our retail-based expertise to broaden this market and develop other shade matching applications for our retail customer base and other facets of the home décor industry.
Other
Medical and Dental—X-Rite serves the medical x-ray market’s imaging needs and provides instrumentation designed for use in controlling variables in the processing of x-ray film. Additionally, we manufacture restorative tooth shade matching instruments and complementary software packages that are designed for use in cosmetic dental practices. Our ShadeVision® System is a significant technological advance that improves patient care by replacing the subjective selection of tooth color with an accurate measurement. This product line is sold and marketed exclusively through our partner, Sullivan-Schein Dental, part of the Henry Schein Company.
Light Measurement—X-Rite develops and manufactures color and light measurement instrumentation and software. The light measurement product line precisely measures the light output of the most sophisticated high-intensity discharge (HID) lamps produced today. In addition, they have a line of laboratory products, including integrating sphere systems for light measurement. The Light product line also specializes in color viewing systems designed to increase productivity and reduce costs, while providing accurate simulation of natural daylight.
PRODUCTS
X-Rite’s color measurement and management solutions are comprised of hardware, software, and services. Here is a brief overview of the primary components that make up our product lines.
Instrumentation
| • | Colorimeters measure light much like the human eye using red, green and blue receptors and are utilized to measure printed colors on packages, labels, textiles and other materials where a product’s appearance is critical for buyer acceptance. |
| • | Spectrophotometers are related to colorimeters; however, they measure light at many points over the entire visible spectrum. Spectrophotometers are used in color formulation for materials such as plastics, paints, inks, ceramics and metals. The Company’s multi-angle spectrophotometer, which is used to measure the color of metallic finishes, is useful for controlling the color consistency of automotive paints and other metallic and pearlescent coatings. In addition, the Company produces a spherical spectrophotometer, which measures the color of textured surfaces and is used in the textile, paint, and plastics industries. |
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| • | Densitometers are instruments that measure optical or photographic density, compare such measurement to a reference standard, and signal the result to the operator of the instrument. Some models are designed for use in controlling variables in the processing of x-ray film in medical and non-destructive testing applications. Other models are designed to be used to control process variables in the production of photo-transparencies, such as photographic film and microfilm, or measure the amount of light that is reflected from a surface, such as ink on paper. |
| • | Spectrodensitometers combine the function of a densitometer with the functions of a colorimeter and a spectrophotometer to provide measurements for monitoring color reproduction used for controlling the color of printed inks in graphic arts applications. |
| • | Sensitometers are used to expose various types of photographic film in a very precise manner for comparison to a reference standard. The exposed film is processed and then “read” with a densitometer to determine the extent of variation from the standard. |
Software and Databases
The Company provides software and databases that interface with its color measurement instruments and other process equipment. These software packages allow the user to collect and store color measurement data, compare that data to established standards and databases, communicate color results and formulate colors from a database.
Color Standards
The Color Standards segment includes the operations of the Pantone, Inc. business unit. Pantone, Inc. is a leading developer and marketer of products for the accurate communication and reproduction of color, servicing worldwide customers in a variety of industries including imaging and media, textiles, digital technology, plastics, and paint.
OTHER INFORMATION
Manufacturing, Sourcing and Service
We manufacture the majority of our products at our manufacturing facilities in Grand Rapids, Michigan and Regensdorf, Switzerland. We generally have multiple sources for raw materials, supplies and components. Product repair and service is provided at eleven locations throughout the world.
Competition
The Color Measurement and Color Standards businesses are competitive and subject to technological change, evolving customer requirements, and changing business models. We face strong competition in many areas of our current business activities. The rapid pace of technological change creates new opportunities for both our existing competitors as well as start-ups. Moreover, the rise of new industry alliances and new mergers and acquisitions can dramatically change our competitive landscape and can result in competitors with significant resources in research and development, marketing and sales. Customer requirements change quickly as a result from new and more cost efficient technologies. We face direct competition from approximately three firms which are producing competing products in the Imaging and Media category, approximately six manufacturers of competing products in the retail and industrial markets, and approximately five distributors in the Color Standards industry; some of whom have significant resources and sales. The primary basis of competition for all the Company’s products is technology and IP, design, service, and price. Our competitive position may be adversely affected in the future by one or more of the factors described in this section.
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Employees
As of December 29, 2007, the Company employed 1,018 people on a full time basis, of which 650 were in the United States. We believe generally we have good relationships with our employees.
Patents
As of December 29, 2007, X-Rite owned 154 patents and had 197 patent applications on file. While the Company follows a policy of obtaining patent protection for its products where appropriate, it does not believe that the loss of any existing patent, or failure to obtain any new patents, would have a material adverse impact on its current operations. We expect to protect our products and technology by asserting our intellectual property rights where appropriate and prudent.
Distribution Networks
X-Rite’s products are sold by its own sales personnel and through independent manufacturer’s representatives. Certain products not sold directly to end-users are distributed through a network of independent dealers throughout Europe, Asia Pacific and the Americas.
Seasonality
The Company’s business is generally not subject to seasonal variations that significantly impact sales, production, or net income.
Working Capital Practices
The Company does not believe that it, or the industry in general, has any special practices or special conditions affecting working capital items that are significant for an understanding of the Company’s business.
Significant Customers
In 2007 the Color Measurement segment had one significant customer which accounted for $28.3 million or 11.4 percent, of total net sales in 2007. No single customer accounted for more than 10 percent of total net sales in 2006 or 2005.
Backlog
The Company’s backlog of scheduled but unshipped orders was $27.7 million as of January 26, 2008, and $16.8 million as of January 27, 2007. This backlog is expected to be filled during the current fiscal year.
Research, Development and Engineering
During 2007, 2006, and 2005 the Company expensed $34.7, $25.3, and $15.0 million, respectively, on research, development, and engineering.
In addition to the research, development, and engineering costs reported as operating expenses, certain costs to develop new software products were capitalized in each of the last three years. Software development costs capitalized totaled $3.7, $3.0, and $3.8 million in 2007, 2006, and 2005, respectively. The related amortization expense was included in cost of sales (see Note 1 to the Consolidated Financial Statements).
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| ITEM 1A. | RISK FACTORS |
There are many risk factors that may adversely affect the Company’s operating results including the following:
Our future results could be harmed by economic, political, geographic, regulatory and other specific risks associated with international operations.
The acquisitions of Amazys in July of 2006 and Pantone in October 2007 significantly expanded our international operations. During fiscal 2007, we derived approximately 65.7 percent of our total revenues from sales of our products outside of the United States, compared with 60.7 percent during fiscal 2006 and 48.4 percent during fiscal 2005. We intend to continue to pursue growth opportunities in sales internationally, which could expose us to greater risks associated with international sales and operations. There can be no assurance that we will maintain or expand our international sales. If the revenues generated from international activities, especially in emerging markets, are inadequate to offset the expense of maintaining such international operations, our business, financial condition and results of operations could be materially and adversely affected. The increasingly international reach of our businesses could also subject us and our results of operations to unexpected, uncontrollable and rapidly changing economic and political conditions. Specifically, international sales and operations are subject to inherent risks, including:
| • | lack of experience in a particular geographic market; |
| • | tariffs and other barriers, including import and export requirements and taxes on subsidiary operations; |
| • | different and changing regulatory requirements in various countries and regions; |
| • | fluctuating exchange rates and currency controls; |
| • | difficulties in staffing and managing foreign sales and support operations; |
| • | longer accounts receivable payment cycles; |
| • | potentially adverse tax consequences, including repatriation of earnings; |
| • | diminished protection of intellectual property in some countries outside the U.S.; |
| • | development and support of localized and translated products; |
| • | lack of acceptance of localized products or X-Rite in foreign countries; |
| • | differing local product preferences and product requirements; |
| • | labor force instability, including possible shortages of skilled personnel required for local operations; and |
| • | political and/or economic instability, such as perceived or actual public health (e.g. SARS) or terrorist risks which impact a geographic region and business operations therein. |
As we expand our international operations, we may encounter new risks. For example, as we focus on building our international sales and distribution networks in new geographic regions, we must continue to develop relationships with qualified local distributors and trading companies. If we are not successful in developing these relationships, we may not be able to grow sales in these geographic regions.
If we fail to attract, hire and retain qualified personnel, we may not be able to design, develop, market or sell our products or successfully manage our business.
Our ability to attract new customers, retain existing customers and pursue our strategic objectives depends on the continued services of our current management, sales, product development and technical personnel and our ability to identify, attract, train and retain similar personnel. Competition for top management personnel is intense and we may not be able to recruit and retain the personnel we need if we are unable to offer competitive
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compensation and benefits. The loss of any one of our management personnel, or our inability to identify, attract, train, retain and integrate additional qualified management personnel, could make it difficult for us to manage our business successfully and pursue our strategic objectives. We do not carry key person life insurance on any of our employees. Similarly, competition for skilled sales, product development and technical personnel is intense and we may not be able to recruit and retain the personnel we need. The loss of the services of key sales, product development and technical personnel, or our inability to hire new personnel with the requisite skills, could restrict our ability to develop new products or enhance existing products in a timely manner, sell products to our customers or manage our business effectively.
Our indebtedness following our offer will be higher than our existing indebtedness.
On October 24, 2007, the Company entered into new secured senior credit facilities which provide for aggregate principal borrowings of up to $415 million and replace the Company’s previous credit facilities established with the Amazys acquisition. The new credit facilities consist of a $310 million first lien loan, which is comprised of a $270 million five-year term loan and a $40 million five-year revolving line of credit, and a $105 million six-year term second lien loan. Obligations under these credit facilities are secured by essentially all of the tangible and intangible assets of the Company. Both facilities provide variable indices from which the Company may select for interest calculations. Interest payments on LIBOR based loans are payable on the last day of each interest period, not to exceed three months. A small portion of the credit facilities are tied to the prime rate and require interest payments on a scheduled quarterly basis. We have entered into certain interest rate swaps to, in effect; convert the interest rates of the floating-rates based on LIBOR into a fixed interest rate. Higher interest rates would accordingly result in increased interest expense. While we presently mitigate the risk of higher interest rates through interest rate swaps, there can be no assurance that we will maintain a matched portfolio in the future
After the completion of the offer we will have a substantial amount of debt which will require significant interest and principal payments. Our level of debt and the limitations imposed on us by our credit agreements could adversely affect our operating flexibility and put us at a competitive disadvantage. Our substantial debt level may adversely affect our future performance, because, among other things:
| • | we may be placed at a competitive disadvantage relative to our competitors, some of which have lower debt service obligations and greater financial resources than we do; |
| • | our ability to complete future acquisitions may be limited; |
| • | we will have to use a portion of our cash flow for debt service rather than for investment in research and development and capital expenditures |
| • | we may not be able to obtain further debt financing and/or we may have to pay more for such additional financing as we are able to obtain; |
| • | we may not be able to take advantage of business opportunities; and |
| • | we will be more vulnerable to adverse economic conditions. |
The senior credit facilities contain certain covenants applicable to us and our subsidiaries that may adversely affect our ability to incur certain liens or engage in certain types of transactions
Our ability to make scheduled payments of principal of, to pay interest on, or to refinance our indebtedness will depend upon our future operating performance, which may be affected by factors beyond our control. In addition, there can be no assurance that future borrowings or equity financing will be available to us on favorable terms or at all for the payment or refinancing of our indebtedness. If we are unable to service our indebtedness, our business, financial condition and results of operations would be materially adversely affected.
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Moreover, if one or more rating agencies downgrades our credit rating, we may have difficulty obtaining additional financing and/or our cost of obtaining additional financing or refinancing existing debt may be increased significantly.
Uncertainties exist in integrating the business operations of X-Rite and Pantone.
We intend, to the extent reasonably practicable, to integrate our operations with those of Pantone. Our goal in integrating these operations is to increase earnings and achieve cost savings by taking advantage of the anticipated synergies of consolidation and enhanced growth opportunities. Actual costs to complete the synergies may exceed the our preliminary estimates. There can be no assurance that we will not encounter difficulties integrating our operations with Pantone’s operations, resulting in a delay or the failure to achieve the anticipated synergies and, therefore, the expected increases in earnings and cost savings. The potential difficulties of combining the operations of the companies may include, among other things:
| • | possible inconsistencies in standards, controls, procedures and policies, business cultures and compensation structures between X-Rite and Pantone; |
| • | coordinating and consolidating ongoing and future research and development efforts; |
| • | consolidating sales and marketing operations; |
| • | retaining existing customers and attracting new customers; |
| • | retaining strategic partners and attracting new strategic partners; |
| • | retaining key employees; |
| • | retaining and integrating distributors and key sales representatives; |
| • | consolidating corporate and administrative infrastructures, including consolidating and integrating computer information and financial systems; |
| • | aligning and managing the technologies and products of the two companies; |
| • | identifying and eliminating redundant and underperforming operations and assets; |
| • | using capital assets efficiently to develop the business of the combined company; |
| • | minimizing the diversion of management’s attention from ongoing business concerns; |
| • | coordinating geographically separate organizations; |
| • | possible tax costs or inefficiencies associated with integrating the operations of the combined company; |
| • | possible modification of operating control standards in order to comply with the Sarbanes-Oxley Act and the rules and regulations promulgated thereunder; and |
| • | retaining and attracting new engineers and research and development personnel to support new products and new technology development. |
For these reasons, we may fail to complete successfully the anticipated integration of X-Rite and Pantone, or to realize any of the anticipated benefits of the integration of the two companies. Actual cost savings and synergies may be lower than we currently expect and may take a longer time to achieve than we currently anticipate.
We are subject to risks arising from currency exchange rate fluctuations, which could increase our costs and may cause our profitability to decline.
In fiscal 2007, we derived approximately $163.4 million, or 65.7 percent of our total revenues, from sales of our products outside of the United States. Measured in local currency, a substantial portion of our business’
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foreign generated revenues were generated in Swiss Francs, Euros and British Pound Sterling. The United States dollar value of our foreign-generated revenues varies with currency exchange rate fluctuations. Significant increases in the value of the United States dollar relative to other currencies could have a material adverse effect on our results of operations. We address currency risk management through regular operating and financing activities. We currently have no hedging or similar foreign currency contracts to mitigate the risk of exchange rate fluctuations. Fluctuations in the value of foreign currencies could adversely impact the profitability of our foreign operations.
If we are unable to protect our intellectual property rights, our business and prospects may be harmed.
We have made significant expenditures to develop and acquire technology and intellectual property rights. We actively patent and trademark these properties when deemed appropriate and will vigorously defend them against infringement. Our failure to protect our intellectual property could seriously harm our business and prospects because developing new products and technologies is critical to our success. We will incur substantial costs in obtaining patents and, if necessary, defending our intellectual propriety rights. We do not know whether we will obtain the patent protection we seek, or that the protection we do obtain will be found valid and enforceable if challenged. Our efforts to protect our intellectual property through patents, trademarks, service marks, domain names, trade secrets, copyrights, confidentiality and nondisclosure agreements and other measures may not be adequate to protect our proprietary rights. Patent filings by third parties could render our intellectual property less valuable. Disputes may arise as to ownership of our intellectual property or as to whether products designed by our competitors infringe our intellectual property rights. Employees, consultants and others who participate in developing our products may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for the breach. In addition, intellectual property rights may be unavailable or limited in some foreign countries, which could make it easier for competitors to capture market position. Competitors may also capture market share from us by designing products that mirror the capabilities of our products or technology without infringing on our intellectual property rights. In addition, as sales of our products continue to grow internationally, our exposure to intellectual property infringements in countries where intellectual property rights protections are less stringent will increase. If we do not obtain sufficient international protection for our intellectual property, our competitiveness in international markets could be impaired, which would limit our growth and future revenue.
We may be subject to intellectual property litigation and infringement claims, which could cause us to incur significant expenses or prevent us from selling our products.
A successful claim of patent or other intellectual property infringement against us could adversely affect our growth and profitability, in some cases materially. We cannot assure you that others will not claim that our proprietary or licensed products are infringing on their intellectual property rights or that we do not in fact infringe on those intellectual property rights. From time to time, we receive notices from third parties of potential infringement and receive claims of potential infringement. We may be unaware of intellectual property rights of others that may cover some of our technology. If someone claims that our products infringed on their intellectual property rights, any resulting litigation could be costly and time consuming and would divert the attention of management and key personnel from other business issues. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Claims of intellectual property infringement also might require us to enter into costly royalty or license agreements or to modify our products. We also may be subject to significant damages or an injunction preventing us from manufacturing, selling or using some of our products in the event of a successful claim of patent or other intellectual property infringement. Any of these adverse consequences could have a material adverse effect on our business, financial condition and results of operations.
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We may not have financing for future technology and capital requirements, which may prevent us from addressing gaps in our product offerings, improving our technology or increasing our manufacturing capacity.
If we cannot incur additional debt or issue equity or are limited with respect to incurring additional debt or issuing equity, we may be unable to address gaps in our product offerings, improve our technology or increase our manufacturing capacity, particularly through strategic acquisitions or investments. Although historically our cash flow from operations has been sufficient to satisfy working capital, capital expenditures and research and development requirements, in the future we may need to incur additional debt or issue equity in order to fund these requirements as well as to make acquisitions and other investments. We cannot assure you that debt or equity financing will be available to us on acceptable terms or at all. If we raise funds through the issuance of debt or equity, any debt securities or preferred stock issued will have rights and preferences and privileges senior to those of holders of our common stock in the event of a liquidation. The terms of the debt securities may impose restrictions on our operations. If we raised funds through the issuance of equity, this issuance would dilute your ownership of us.
Our ability to make payments on and to refinance our indebtedness and to fund working capital, capital expenditures and strategic acquisitions and investments, will depend on our ability to generate cash in the future. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
The markets for our products and services are highly competitive. If we are unable to compete effectively with existing or new competitors, our business could be negatively impacted.
The businesses in which we compete are very competitive and subject to technological change, evolving standards, frequent product enhancements and introductions and changing customer requirements. Many of our current and potential competitors have (1) longer operating histories, (2) significantly greater financial, technical and marketing resources, (3) greater name recognition, and/or (4) a larger installed customer base than X-Rite. A number of companies offer products and services that are similar to those offered by us and that target the same markets. In addition, any of these competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, and to devote greater resources to the development, promotion and sale of their products than us. Our competitors may develop products and services that compete with those offered by us or may acquire companies, businesses and product lines that compete with us. It also is possible that competitors may create alliances and rapidly acquire significant market share, including in new and emerging markets. If we are not able to differentiate our products and services in the market then competitive pressures may potentially impact our sales volumes, pricing structure, gross margin, operating expenses an operating income.
Accordingly, there can be no assurance that current or potential competitors of X-Rite will not develop or acquire products or services comparable or superior to those that we develop, combine or merge to form significant competitors, or adapt more quickly than us to new technologies, evolving industry trends and changing customer requirements. Competition could cause price reductions, reduced margins or loss of market share for our products and services, any of which could materially and adversely affect our business, operating results and financial condition. There can be no assurance that we will be able to compete successfully against current and future competitors of X-Rite or that the competitive pressures that the company may face will not materially adversely affect our business, operating results, cash flows and financial condition.
We may be affected by environmental laws and regulations.
We are subject to a variety of laws, rules and regulations relating to discharges of substances in the air, water and land, the handling, storage and disposal of wastes and the cleanup of properties necessitated by pollutants. Any of those regulations could require us to acquire expensive equipment or to incur substantial other
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expenses to comply with them. If we incur substantial additional expenses, product costs could significantly increase. Also, if we fail to comply with present or future environmental laws, rules and regulations, such failure could result in fines, suspension of production or cessation of operations.
We are vertically integrated and, therefore, must manage costs efficiently.
A significant portion of our manufacturing processes are vertically integrated. Therefore, it is critical to efficiently manage the cost structure for capital expenditures, materials and overhead, as well as operating expenses such as wages and benefits.
Our reliance on outsourced manufacturing presents risks to our fulfillment process.
We rely on a number of strategic supply chain partners that produce key components or sub-assemblies that support our final assembly, calibration, and test process. Some of these suppliers are single sourced and therefore present risks to our fulfillment process.
We depend on new product development to compete effectively.
We have made large investments in new products and services. There are no assurances as to when future revenues from these products will be received, or that the ultimate profit margins received will be adequate to justify the investment.
Continual development of new products and technologies as well as enhancements to existing products is a core component of our long-term growth plans. Our future business, financial condition and results of operations will depend to a significant extent on our ability to develop new products that address these market opportunities. As a result, we believe that significant expenditures for research and development will continue to be required in the future. Product development requires a time-consuming and costly research and development process. Unexpected delays in this process may significantly affect the timing of future revenues and increase costs. We must anticipate the features and functionality that customers will demand, incorporate those features and functionality into products, price our products competitively and introduce new products to the market on a timely basis. We cannot assure you that the products we expect to introduce will incorporate the features and functionality demanded by our customers, will be successfully developed, or will be introduced within the appropriate window of market demand. If there are delays in production of current or new products, our potential future business, financial condition, and results of operations could be adversely affected. In addition, the time required for competitors to develop and introduce competing products may be shorter, their manufacturing yields may be better, and their production costs may be lower than those experienced by us.
Any general economic slowdown could adversely affect our revenues and profitability.
Many of our products are used for quality control purposes within a larger manufacturing or production process. As such, our sales in some instances are linked to capital goods spending. Should there be a prolonged slowdown in capital goods spending or changes in global economic conditions, our revenues and profitability could be noticeably impacted.
We may face potential tax liabilities.
We are subject to taxation in many jurisdictions in the United States, Europe, Asia and elsewhere. In the ordinary course of business, there are transactions and calculations where the ultimate tax liability cannot be determined with certainty at the time the transaction is entered into. Preparation of our income tax provision requires the use of judgments as to how these transactions will ultimately be taxed. We believe our tax accruals are accurate though the ultimate determination of these issues may be different from that which is reflected in our historical provision and accruals. Should these determinations be different from what is previously recorded and additional tax is assessed, those assessments would be recorded in the period in which they occur.
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The Company’s reliance on a primary manufacturing center may affect timely product production and profitability.
Manufacturing and service of much of our core color products are performed at our headquarters facility in Grand Rapids, Michigan, and in our European headquarters facility in Regensdorf, Switzerland. Should a catastrophic event occur at either of these facilities, our ability to manufacture products, complete existing orders, and provide other services would be severely impacted for an undetermined period of time. We have purchased business interruption insurance to cover the costs of certain catastrophic events . Our inability to conduct normal business operations for a period of time may have an adverse impact on long-term operating results.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS—None |
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| ITEM 2. | PROPERTIES |
The Company and its subsidiaries own or lease properties throughout the world. Listed below are the principal properties owned or leased as of March 1, 2008:
| Location |
Principal Uses |
Owned/Leased | ||
| Grand Rapids, MI | Company headquarters, manufacturing, RD&E, sales, customer service, warehouse and administration | Owned | ||
| Grandville, MI | Previous headquarters, currently for sale | Owned | ||
| Tewksbury, MA | RD&E, sales, customer service, and administration | Leased | ||
| Greensboro, NC | Sales, customer service | Leased | ||
| Regensdorf, Switzerland | Manufacturing, RD&E, sales, customer service, warehouse and administration | Leased | ||
| Carlstadt, NJ | Manufacturing, RD&E, sales, customer service, warehouse and administration | Leased | ||
| Mumbai, India | Sales and customer service | Leased | ||
| Poynton, England | Sales, customer service, and administration. | Leased | ||
| Berlin, Germany | Manufacturing, RD&E, sales, customer service, warehouse, and administration | Leased | ||
| Neu-Isenburg, Germany | Sales, customer service | Leased | ||
| Martinsried, Germany | Manufacturing, RD&E, sales, customer service, training | Leased | ||
| Massy, France | Sales, customer service, and administration | Leased | ||
| Prato, Italy | Sales and customer service | Leased | ||
| Brixen-Bressanone, Italy | Manufacturing, RD&E sales, customer service | Owned | ||
| Vyskov, Czech Republic | Sales | Leased | ||
| Moscow, Russia | Sales | Leased | ||
| Quarry Bay, Hong Kong | Sales, customer service, and administration | Leased | ||
| Tokyo, Japan | Sales, customer service, and administration | Leased | ||
| Shanghai, China | Sales, customer service, and administration (3 sites) | Leased | ||
| Beijing , China | Sales and customer service | Leased | ||
| Guangzhou, China | Sales and customer service | Leased | ||
As of March 1, 2008, X-Rite and its subsidiaries collectively own approximately 699,000 square feet of space and lease approximately 272,000 square feet. Included in these figures are 311,000 square feet owned and approximately 41,000 square feet leased related to facilities that have been closed or that are in the process of being closed as of March 1, 2008 as part of the Company’s restructuring plans. The Company is currently in the process of selling, subleasing, or negotiating lease break-fees for all of the closed facilities.
On February 14, 2006, the Company purchased a new corporate headquarters and manufacturing facility in Grand Rapids, Michigan for $13.4 million. The new facility is approximately 375,000 square feet and is located ten miles from the Company’s former headquarters. In December 2007, the Company entered into a definitive purchase agreement to sell the Company’s former headquarters, located in Grandville, Michigan, for $13.1 million plus reimbursement of certain property tax assessment payments made prior to closing of the transaction. The purchase agreement provides for a 120 day due diligence period for the buyer to evaluate the property. The
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buyer has deposited an initial earnest money deposit of $125,000 with an escrow agent to be applied as a credit to the purchase price at closing. Final closing on the sale will be based on completion of the Buyer’s inspection and due diligence process as well as the granting of governmental approvals related to the future planned usage of the property.
Management considers all the Company’s properties and equipment to be suitable and adequate for its current and reasonably anticipated development, production, distribution, and selling requirements.
| ITEM 3. | LEGAL PROCEEDINGS |
The Company is periodically involved in legal proceedings, legal actions, and claims arising in the normal course of business, including proceedings related to product, labor, and other matters. Such matters are subject to many uncertainties, and outcomes are not predictable. The Company records amounts for losses that are deemed probable and subject to reasonable estimate. The Company does not believe that the ultimate resolution of any of these matters will have a material adverse effect on our financial statements.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 29, 2007.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the names, ages, and positions of all of the Company’s executive officers as of March 3, 2008.
| Name |
Age | Position |
Position Held Since |
||||
| Thomas J. Vacchiano Jr. | 55 | President, Chief Executive Officer | 2006 | (1) | |||
| Lynn J. Lyall | 54 | Executive Vice President, Chief Financial Officer | 2008 | (2) | |||
| Francis Lamy | 49 | Executive Vice President, Chief Technology Officer | 2006 | (3) |
| (1) | Mr. Vacchiano joined X-Rite as its President in July 2006 as part of the Amazys acquisition, and was appointed CEO upon the retirement of Michael C. Ferrara from that position in October 2006. Prior to joining X-Rite, Mr. Vacchiano served as President and Chief Executive Officer of Amazys, a color technology company headquartered in Switzerland, which was acquired by X-Rite on July 2006. He held that position for five years. |
| (2) | Mr. Lyall joined X-Rite on March 3, 2008 as Executive Vice President and Chief Financial Officer. Prior to joining X-Rite, Mr. Lyall served as Chief Financial Officer of Alticor, Inc., a $7 billion global consumer products business from 1999 to 2007. Prior to Alticor, he held the position of Chief Financial Officer at Blockbuster Entertainment Group from 1997 to 1999. |
| (3) | Mr. Lamy joined X-Rite as part of the Amazys acquisition in July 2006. Prior to joining X-Rite, Mr. Lamy served as the Executive Vice President and Chief Technology Officer for GretagMacbeth AG, the primary subsidiary of Amazys. He held that position for more than five years. |
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock is quoted in the NASDAQ—National Market System under the symbol “XRIT”. As of March 1, 2008, there were approximately 906 shareholders of record. Ranges of high and low sales prices reported by The NASDAQ National Market System for the past two fiscal years appear in the following table.
| High | Low | Dividends Per Share | |||||||
| Year Ended December 29, 2007: |
|||||||||
| Fourth Quarter |
$ | 16.22 | $ | 11.05 | $ | .000 | |||
| Third Quarter |
16.42 | 12.70 | .000 | ||||||
| Second Quarter |
15.49 | 12.32 | .000 | ||||||
| First Quarter |
13.36 | 10.90 | .000 | ||||||
| Year Ended December 30, 2006: |
|||||||||
| Fourth Quarter |
$ | 12.55 | $ | 10.26 | $ | .025 | |||
| Third Quarter |
11.59 | 7.50 | .025 | ||||||
| Second Quarter |
13.53 | 10.50 | .025 | ||||||
| First Quarter |
13.32 | 10.00 | .025 | ||||||