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 December 27, 2008
o 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 1-9789
TECH/OPS
SEVCON, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
04-2985631
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
155
Northboro Road, Southborough, Massachusetts, 01772
(Address
of principal executive offices and zip code)
(508)
281 5510
(Registrant's
telephone number, including area code)
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
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
|
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
|
(Do
not check if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in rule
12b-2 of the Exchange Act). Yes o No
x
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
|
Class
|
Outstanding
at February 10, 2009
|
|
Common
stock, par value $.10
|
3,326,322
|
- 1
-
FORM
10-Q
FOR
THE QUARTER ENDED DECEMBER 27, 2008
INDEX
|
PAGE
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3
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3
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3
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4
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4
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5
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6
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11
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15
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16
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16
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16
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16
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17
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17
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17
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17
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17
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18
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18
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- 2
-
Item
1 Financial Statements
Tech/Ops
Sevcon, Inc. and Subsidiaries
|
(in
thousands of dollars except per share data)
|
||||||||
|
December
27,
2008
|
September
30,
2008
|
|||||||
|
(unaudited)
|
(derived
from audited statements)
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash and cash
equivalents
|
$ | 744 | $ | 1,630 | ||||
|
Receivables, net of allowances
for doubtful accounts of $80 at December 27, 2008
and $86 at September 30,
2008
|
5,901 | 7,087 | ||||||
|
Inventories
|
4,733 | 4,970 | ||||||
|
Prepaid expenses and other
current assets
|
796 | 862 | ||||||
|
Total
current assets
|
12,174 | 14,549 | ||||||
|
Property,
plant and equipment:
|
||||||||
|
At cost
|
9,795 | 11,600 | ||||||
|
Less: accumulated depreciation
and amortization
|
6,871 | 8,053 | ||||||
|
Net
property, plant and equipment
|
2,924 | 3,547 | ||||||
|
Long-term
deferred tax asset
|
363 | 202 | ||||||
|
Goodwill
|
1,435 | 1,435 | ||||||
|
Other
long-term assets
|
22 | 22 | ||||||
|
Total
assets
|
$ | 16,918 | $ | 19,755 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ INVESTMENT
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts payable
|
$ | 2,914 | $ | 3,713 | ||||
|
Dividend payable
|
- | 98 | ||||||
|
Accrued expenses
|
1,784 | 2,410 | ||||||
|
Accrued and deferred taxes on
income
|
37 | 56 | ||||||
|
Total
current liabilities
|
4,735 | 6,277 | ||||||
|
Liability
for pension benefits
|
290 | 378 | ||||||
|
Other
long term liabilities
|
44 | 54 | ||||||
|
Total
liabilities
|
5,069 | 6,709 | ||||||
|
Stockholders’
equity:
|
||||||||
|
Preferred stock, par value $.10
per share - authorized - 1,000,000 shares;
outstanding –
none
|
- | - | ||||||
|
Common stock, par value $.10 per
share - authorized - 8,000,000 shares;
Outstanding 3,276,322 shares at
December 27, 2008 and 3,276,322 shares at
September 30,
2008
|
328 | 328 | ||||||
|
Premium paid in on common
stock
|
4,927 | 4,881 | ||||||
|
Retained
earnings
|
8,238 | 8,364 | ||||||
|
Accumulated other comprehensive
loss
|
(1,644 | ) | (527 | ) | ||||
|
Total
stockholders’ equity
|
11,849 | 13,046 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 16,918 | $ | 19,755 | ||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
||||||||
(Unaudited)
Tech/Ops
Sevcon, Inc. and Subsidiaries
|
(in
thousands of dollars except per share data)
|
||||||||
|
Three
months ended
|
||||||||
|
December
27,
2008
|
December
29,
2007
|
|||||||
|
Net
sales
|
$ | 6,827 | $ | 10,243 | ||||
|
Cost
of sales
|
4,545 | 6,361 | ||||||
|
Gross
Profit
|
2,282 | 3,882 | ||||||
|
Selling,
research and administrative expenses
|
2,209 | 3,297 | ||||||
|
Operating
income
|
73 | 585 | ||||||
|
Interest
expense
|
(7 | ) | (30 | ) | ||||
|
Interest
income
|
5 | 2 | ||||||
|
Foreign
currency loss
|
(289 | ) | (75 | ) | ||||
|
(Loss)
income before income taxes
|
(218 | ) | 482 | |||||
|
Income
taxes
|
77 | (169 | ) | |||||
|
Net
(loss) income
|
$ | (141 | ) | $ | 313 | |||
|
Basic
(loss) income per share
|
$ | (.04 | ) | $ | .10 | |||
|
Fully
diluted (loss) income per share
|
$ | (.04 | ) | $ | .10 | |||
(Unaudited)
Tech/Ops
Sevcon, Inc. and Subsidiaries
|
(in
thousands of dollars)
|
||||||||
|
Three
months ended
|
||||||||
|
December
27,
2008
|
December
29,
2007
|
|||||||
|
Net
(loss) income
|
$ | (141 | ) | $ | 313 | |||
|
Foreign
currency translation adjustment
|
(1,133 | ) | (76 | ) | ||||
|
Changes
in fair market value of cash flow hedges
|
- | (57 | ) | |||||
|
Amortization
of pension transition items to income
|
11 | 11 | ||||||
|
Comprehensive
income
|
$ | (1,263 | ) | $ | 191 | |||
The
accompanying notes are an integral part of these consolidated financial
statements.
(Unaudited)
Tech/Ops
Sevcon, Inc. and Subsidiaries
|
(in
thousands of dollars)
|
||||||||
|
Three
months ended
|
||||||||
|
December
27,
2008
|
December
29,
2007
|
|||||||
|
Cash
flow from operating activities:
|
||||||||
|
Net
(loss) income
|
$ | (141 | ) | $ | 313 | |||
|
Adjustments
to reconcile net income to net cash from operating
activities:
|
||||||||
|
Depreciation and
amortization
|
100 | 179 | ||||||
|
Stock-based
compensation
|
46 | 58 | ||||||
|
Pension contributions (greater
than) less than pension expense
|
(43 | ) | 23 | |||||
|
Deferred tax
provision
|
15 | - | ||||||
|
Increase (decrease) in cash
resulting from changes in operating assets and
liabilities:
|
||||||||
|
Receivables
|
558 | 211 | ||||||
|
Inventories
|
(322 | ) | (376 | ) | ||||
|
Prepaid expenses and other
current assets
|
48 | 6 | ||||||
|
Accounts
payable
|
(220 | ) | 120 | |||||
|
Accrued
expenses
|
(321 | ) | (331 | ) | ||||
|
Accrued and deferred taxes on
income
|
(201 | ) | 123 | |||||
|
Net
cash (used by) generated from operating activities
|
(481 | ) | 326 | |||||
|
Cash
flow used by investing activities:
|
||||||||
|
Acquisition of property, plant and
equipment
|
(59 | ) | (287 | ) | ||||
|
Net
cash used by investing activities
|
(59 | ) | (287 | ) | ||||
|
Cash
flow used by financing activities:
|
||||||||
|
Dividends paid
|
(98 | ) | (97 | ) | ||||
|
Exercise of stock
options
|
- | 18 | ||||||
|
Net cash used by financing
activities
|
(98 | ) | (79 | ) | ||||
|
Effect
of exchange rate changes on cash
|
(248 | ) | (101 | ) | ||||
|
Net
decrease in cash
|
(886 | ) | (141 | ) | ||||
|
Beginning
balance - cash and cash equivalents
|
1,630 | 1,014 | ||||||
|
Ending
balance - cash and cash equivalents
|
$ | 744 | $ | 873 | ||||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash paid for income
taxes
|
$ | 97 | $ | 80 | ||||
|
Cash paid for
interest
|
$ | 7 | $ | 29 | ||||
|
Supplemental
disclosure of non-cash financing activity:
|
||||||||
|
Dividend declared
|
$ | - | $ | 98 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
Notes
to Consolidated Financial Statements – December 27, 2008
(Unaudited)
|
(1)
|
Basis
of Presentation
|
In the opinion of management, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments (consisting of only normally recurring accruals) necessary to
present fairly the financial position of Tech/Ops Sevcon, Inc. as of December
27, 2008 and the results of operations and cash flows for the three months ended
December 27, 2008. These unaudited interim financial statements should be read
in conjunction with the 2008 annual consolidated financial statements and
related notes included in the 2008 Tech/Ops Sevcon, Inc. Annual Report filed on
Form 10-K (the “2008 10-K”). Unless otherwise indicated, each reference to a
year means the Company’s fiscal year, which ends on September 30.
The significant accounting policies
followed by Tech/Ops Sevcon, Inc. are set forth in Note 1 to the financial
statements in the 2008 10-K. Other than as set forth in Item 2, there have been
no changes since the end of fiscal 2008 to the significant accounting policies
followed by Tech/Ops Sevcon, Inc.
The results of operations for the three
month period ended December 27, 2008 are not necessarily indicative of the
results to be expected for the full year.
(2) New
Accounting Pronouncements
In September 2006, the FASB issued SFAS
No. 157, “Fair Value Measurements” (SFAS No. 157), which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS No. 157 does not require any new fair value measurements, but provides
guidance on how to measure fair value by providing a fair value hierarchy used
to classify the source of the information. In accordance with SFAS No. 157, we
have categorized our financial assets and liabilities, based on the priority of
the inputs to the valuation technique, into a three-level fair value hierarchy
as set forth below. If the inputs used to measure the financial instruments fall
within different levels of the hierarchy, the categorization is based on the
lowest level input that is significant to the fair value measurement of the
instrument. The three levels of the hierarchy are defined as
follows:
Level 1 -
Unadjusted quoted prices in active markets for identical assets or liabilities.
We currently do not have any Level 1 financial assets or
liabilities.
Level 2 -
Observable inputs other than quoted prices included in Level 1. Level 2 inputs
include quoted prices for identical assets or liabilities in non-active markets,
quoted prices for similar assets or liabilities in active markets and inputs
other than quoted prices that are observable for substantially the full term of
the asset or liability. We currently do not have any Level 2 financial assets or
liabilities.
Level 3 -
Unobservable inputs reflecting management’s own assumptions about the input used
in pricing the asset or liability. We currently do not have any Level 3
financial assets or liabilities.
At December 27, 2008, the company did
not have any financial or nonfinancial assets or liabilities that were measured
at fair value by level within the above fair value hierarchy; the adoption of
SFAS No. 157 did not have a material impact on either the Company’s consolidated
results from operations or it’s financial position.
In February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS No. 159), which permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. This statement was effective for the
Company beginning October 1, 2008; the adoption of SFAS No. 159 did not have a
material impact on either the Company’s consolidated results from operations or
its financial position.
In December 2007, the FASB issued SFAS
No. 141R, Business Combinations (SFAS No. 141R). SFAS No. 141R addresses
financial accounting and reporting for business combinations, and supersedes APB
Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises. The objective is to
provide consistency to the accounting and financial reporting of business
combinations by using only one method, the purchase method. This statement is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Any potential impact on the Company’s
financial position and results of operations will be dependent upon the terms
and conditions of any acquisition.
In December 2007, the FASB issued SFAS
No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS No.
160). SFAS No. 160 addresses consolidation rules for noncontrolling
interests. The objective is to improve the relevance, comparability, and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements by establishing accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. This statement is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after December
15, 2008. The Company does not have any noncontrolling interests and accordingly
does not expect the adoption of SFAS No. 160 to have a material impact on its
financial position and results of operations.
In February 2008, the FASB issued FASB
Staff Position (“FSP”) FAS 157-2. This FSP defers the effective date in FASB
Statement No. 157, Fair Value Measurements, for one year for certain
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The Company does not expect that the
adoption of FAS 157-2 will have a material impact on its financial
statements.
In March 2008, the FASB issued SFAS No.
161, Disclosures about Derivative Instruments and Hedging Activities (SFAS No.
161). SFAS No. 161 enhances the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, and its
related interpretations, and (c) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance and cash
flows. This statement is effective for fiscal years, and interim periods within
those fiscal years, beginning after November 15, 2008. The Company does not
expect that the adoption of SFAS No. 161 will have a material impact on its
financial statements.
In May 2008 the FASB issued FASB
Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles
(FASB No. 162). FASB No. 162 is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles for
nongovernmental entities. The Company does not expect that the adoption of SFAS
No. 162 will have a material impact on its financial statements.
(3) Stock-Based
Compensation Plans
Under the Company’s 1996 Equity
Incentive Plan (the “Plan”) there were 106,500 shares reserved and available for
grant at December 27, 2008. Recipients of grants or options must execute a
standard form of non-competition agreement. The plan provides for the grant of
Restricted Stock, Restricted Stock Units, Options, and Stock Appreciation Rights
(SARs). Stock Appreciation Rights may be awarded either separately, or in
relation to options granted, and for the grant of bonus shares. Options granted
are exercisable at a price not less than fair market value on the date of
grant.
The Company accounts for stock based
compensation under SFAS 123R, “Share-Based Payment,” which defines a fair value
based method of accounting for employee stock options or similar equity
instruments.
The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model.
There were no option grants in the first three months of fiscal 2009 or in
fiscal 2008 and therefore no assumptions were made as to risk-free interest
rate, expected dividend yield, expected life or expected volatility in fiscal
2009 or fiscal 2008. When options are exercised the Company normally issues new
shares.
A summary of option activity for all
plans for the three months ended December 27, 2008 is as follows:
|
Options
No.
of shares
|
Weighted
average
Exercise
Price
|
Weighted
average
remaining
contractual
life
(years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
Outstanding
at September 30, 2008
|
63,500 | $ | 7.03 |
3
years
|
$ | - | ||||||||||
|
Granted
|
- | - | - | - | ||||||||||||
|
Exercised
|
- | $ | - | - | - | |||||||||||
|
Cancelled
|
- | $ | - | - | - | |||||||||||
|
Outstanding
at December 27, 2008
|
63,500 | $ | 7.03 |
3
years
|
$ | - | ||||||||||
|
Exercisable
at December 27, 2008
|
46,600 | $ | 7.41 |
3
years
|
$ | - | ||||||||||
The aggregate intrinsic value included
in the table above represents the difference between the exercise price of the
options and the market price of the Company’s common stock for the options that
had exercise prices that were lower than the $2.17 closing market price of the
Company’s common stock at December 26, 2008. As the option price of all shares
under option is higher than the $2.17 closing market price of the Company’s
common stock at December 26, 2008, the aggregate intrinsic value of all
outstanding share options is nil. At December 27, 2008, there was $28,000 of
total unrecognized compensation expense related to options granted under all
equity compensation plans. The Company expects to recognize that cost over a
weighted average period of 2 years.
During the restriction period ownership
of unvested shares cannot be transferred. Restricted stock has the same cash
dividend and voting rights as other common stock and is considered to be
currently issued and outstanding. For the purposes of calculating average issued
shares for earnings per share these shares are only considered to be outstanding
when the forfeiture conditions lapse and the shares vest.
Restricted stock activity for the three
months ended December 27, 2008 was as follows:
|
Number
of shares of Restricted Stock
|
Weighted
Average
Grant-Date
Fair
Value
|
|||||||
|
Non-vested
balance as of September 30, 2008
|
54,000 | $ | 6.47 | |||||
|
Granted
|
- | $ | - | |||||
|
Vested
|
(13,000 | ) | $ | 6.41 | ||||
|
Forfeited
|
(2,000 | ) | $ | 5.87 | ||||
|
Non-vested
balance as of December 27, 2008
|
39,000 | $ | 6.52 | |||||
As of December 27, 2008, there was
$179,000 of total restricted stock compensation expense related to non-vested
awards not yet recognized, which is expected to be recognized over a weighted
average period of 2.8 years.
The stock-based compensation expense
was as follows:
|
(in
thousands of dollars)
|
||||||||
|
Three
months ended
|
||||||||
|
December
27,
2008
|
December
29,
2007
|
|||||||
|
Stock
option expense under SFAS No. 123R
|
$ | 6 | $ | 6 | ||||
|
Restricted
stock grants:
|
||||||||
|
Employees
|
20 | 29 | ||||||
|
Non-employee
directors
|
20 | 23 | ||||||
|
Total
stock based compensation expense
|
$ | 46 | $ | 58 | ||||
(4) Cash
Dividends
While the Company has paid regular
quarterly dividends in the past, due to the current uncertain economic outlook,
the Board of Directors suspended the payment of dividends for the first quarter
of fiscal 2009 and will consider whether to resume paying dividends on a quarter
by quarter basis.
(5) Calculation
of Earnings per Share and Weighted Average Shares Outstanding
Basic and fully diluted earnings per
share were calculated as follows:
|
(in
thousands except per share data)
|
||||||||
|
Three
months ended
|
||||||||
|
December
27,
2008
|
December
29,
2007
|
|||||||
|
Net
(loss) income
|
$ | (141 | ) | $ | 313 | |||
|
Weighted
average shares outstanding - basic
|
3,226 | 3,188 | ||||||
|
Basic
(loss) income per share
|
$ | (.04 | ) | $ | .10 | |||
|
Common
stock equivalents
|
- | 47 | ||||||
|
Weighted
average shares outstanding - diluted
|
3,226 | 3,235 | ||||||
|
Diluted
(loss) income per share
|
$ | (.04 | ) | $ | .10 | |||
|
No.
of options that are anti-dilutive excluded from calculation of common
stock equivalents
|
64 | 80 | ||||||
|
No.
of shares of restricted stock that are anti-dilutive excluded from
calculation of common stock equivalents
|
39 | - | ||||||
(6) Segment
information
The Company has two reportable
segments: electronic controls and capacitors. The electronic controls segment
produces control systems and accessories for battery powered vehicles. The
capacitors segment produces electronic components for sale to electronic
equipment manufacturers. Each segment has its own management team and sales
force and the capacitors segment has its own manufacturing
facility.
The significant accounting policies of
the segments are the same as those described in Note (1) to the 2008 10-K.
Inter-segment revenues are accounted for at current market prices. The Company
evaluates the performance of each segment principally based on operating income.
The Company does not allocate income taxes, interest income and expense or
foreign currency translation gains and losses to segments. Information
concerning operations of these businesses is as follows:
|
(in
thousands of dollars)
|
||||||||||||||||
|
Three
months ended December 27, 2008
|
||||||||||||||||
|
Controls
|
Capacitors
|
Corporate
|
Total
|
|||||||||||||
|
Sales
to external customers
|
$ | 6,380 | $ | 447 | $ | - | $ | 6,827 | ||||||||
|
Inter-segment
revenues
|
- | 5 | - | 5 | ||||||||||||
|
Operating
income
|
79 | 52 | (58 | ) | 73 | |||||||||||
|
Identifiable
assets
|
15,747 | 695 | 476 | 16,918 | ||||||||||||
|
Three
months ended December 29, 2007
|
||||||||||||||||
|
Controls
|
Capacitors
|
Corporate
|
Total
|
|||||||||||||
|
Sales
to external customers
|
$ | 9,707 | $ | 536 | $ | - | $ | 10,243 | ||||||||
|
Inter-segment
revenues
|
- | 12 | - | 12 | ||||||||||||
|
Operating
income
|
651 | (34 | ) | (32 | ) | 585 | ||||||||||
|
Identifiable
assets
|
20,504 | 917 | 491 | 21,912 | ||||||||||||
In the electronic controls segment, the
revenues were derived from the following products and services:
|
(in
thousands of dollars)
|
||||||||
|
Three
months ended
|
||||||||
|
December
27,
2008
|
December
29,
2007
|
|||||||
|
Electronic
controllers for battery driven vehicles
|
$ | 3,992 | $ | 6,693 | ||||
|
Accessory
and aftermarket products and services
|
2,388 | 3,014 | ||||||
|
Total
controls segment revenues
|
$ | 6,380 | $ | 9,707 | ||||
(7) Research
and Development
The cost of research and development
programs is charged against income as incurred and was as follows:
|
(in
thousands of dollars)
|
||||||||
|
Three
months ended
|
||||||||
|
December
27,
2008
|
December
29,
2007
|
|||||||
|
Research
and Development expense
|
$ | 762 | $ | 1,078 | ||||
|
Percentage
of sales
|
11.2 | 10.5 | ||||||
(8) Employee
Benefit Plans
Tech/Ops Sevcon has defined benefit
plans covering the majority of its US and UK employees. There is also a small
defined contribution plan. The following table sets forth the components of the
net pension cost as defined by SFAS No. 158:
|
(in
thousands of dollars)
|
||||||||
|
Three
months ended
|
||||||||
|
December
27,
2008
|
December
29,
2007
|
|||||||
|
Service
cost
|
$ | 92 | $ | 153 | ||||
|
Interest
cost
|
276 | 350 | ||||||
|
Expected
return on plan assets
|
(268 | ) | (347 | ) | ||||
|
Amortization
of prior service cost
|
11 | 15 | ||||||
|
Net
periodic benefit cost
|
111 | 171 | ||||||
|
Net
cost of defined contribution plans
|
$ | 9 | $ | 11 | ||||
The following table sets forth the
movement in the liability for pension benefits in accordance with SFAS No. 158
in the three months ended December 27, 2008:
|
(in
thousands of dollars)
|
||||||||
|
Three
months ended
|
||||||||
|
December
27,
2008
|
December
29,
2007
|
|||||||
|
Liability
for pension benefits at beginning of period
|
$ | 378 | $ | 2,244 | ||||
|
Net
periodic benefit cost
|
111 | 174 | ||||||
|
Plan
contributions
|
(154 | ) | (155 | ) | ||||
|
Effect
of exchange rate changes
|
(45 | ) | (55 | ) | ||||
|
Balance
at end of period
|
$ | 290 | $ | 2,208 | ||||
Tech/Ops Sevcon did not contribute to
its US pension plan in the three months ended December 27, 2008; it presently
anticipates contributing $111,000 to fund its US plan in the remainder of fiscal
2009. In addition, employer contributions to the UK plan were $157,000 in the
first three months and are estimated to total $406,000 in fiscal
2009.
(9) Inventories
Inventories were comprised
of:
|
(in
thousands of dollars)
|
||||||||
|
December
27,
2008
|
September
30,
2008
|
|||||||
|
Raw
materials
|
$ | 853 | $ | 930 | ||||
|
Work-in-process
|
76 | 96 | ||||||
|
Finished
goods
|
3,804 | 3,944 | ||||||
| $ | 4,733 | $ | 4,970 | |||||
(10) Accrued
expenses
Set out below is an analysis of other
accrued expenses at December 27, 2008 and September 30, 2008 which shows
separately any items in excess of 5% of total current liabilities:
|
(in
thousands of dollars)
|
||||||||
|
December
27,
2008
|
September
30,
2008
|
|||||||
|
Accrued
compensation and related costs
|
$ | 675 | $ | 603 | ||||
|
Warranty
reserves
|
306 | 362 | ||||||
|
Other
accrued expenses
|
803 | 1,445 | ||||||
| $ | 1,784 | $ | 2,410 | |||||
(11) Warranty
reserves
The movement in warranty reserves was
as follows:
|
(in
thousands of dollars)
|
||||||||
|
Three
months ended
|
||||||||
|
December
27,
2008
|
December
29,
2007
|
|||||||
|
Warranty
reserves at beginning of period
|
$ | 362 | $ | 458 | ||||
|
Decrease
in beginning balance for warranty obligations settled during the
period
|
(27 | ) | (146 | ) | ||||
|
Other
changes to pre-existing warranties
|
- | - | ||||||
|
Foreign
currency translation adjustment
|
(43 | ) | - | |||||
|
Net
increase in warranty reserves for products sold during the
period
|
14 | 131 | ||||||
|
Warranty
reserves at end of period
|
$ | 306 | $ | 443 | ||||
FORWARD
LOOKING STATEMENTS
Statements in this discussion and
analysis about the Company’s anticipated financial results and growth, as well
as those about the development of its products and markets, are forward-looking
statements that involve risks and uncertainties that could cause actual results
to differ materially from those projected. These include the risks discussed
under ‘Risk Factors’ below and throughout this Item 2.
CRITICAL
ACCOUNTING ESTIMATES
As of December 27, 2008 there have been
no material changes to the critical accounting estimates described in the
Company’s 2008 10-K. However, if the continuing worldwide economic troubles
continue to have a negative effect on our business, actual conditions in future
periods may vary materially from those the Company previously
estimated.
For
example:
|
(i)
|
if
the financial condition of any of the Company's customers deteriorates as
a result of continuing business declines, the Company may be required to
increase its estimated allowance for bad
debts;
|
|
(ii)
|
if
actual future demand continues to decline more than previously projected,
inventory write-downs may be required;
or
|
|
(iii)
|
significant
negative industry or economic trends that adversely affect our future
revenues and profits, or a reduction of our market capitalization relative
to net book value, among other factors, may change the estimated future
cash flows or other factors that we use to determine whether or not
goodwill has been impaired and lead us to conclude that an impairment
charge is required.
|
All of these factors, and others
resulting from the current economic situation, may have a material adverse
impact on the Company’s results.
Pension
Plan Assumptions
The Company’s pension plans are
significant relative to the size of the Company. Pension plan assets were
$18,162,000 at September 30, 2008 and the total assets of the Company were
$19,755,000. Although the plan assets are not included in the assets of the
Company, they were equal to 92% of the Company’s total assets at September 30,
2008. In accordance with SFAS No. 158 the funded status of the pension plans
(plan assets less the accumulated benefit obligation) is recognized in the
Company’s balance sheet as “Liability for pension benefits”, which amounted to
$290,000 at December 27, 2008, compared to $378,000 at September 30,
2008.
The Company makes a number of
assumptions relating to its pension plans in order to measure the financial
position of the plans and the net periodic benefit cost. The most significant
assumptions relate to the discount rate, the expected long term return on plan
assets and the rate of future compensation increase. If these assumptions prove
to be incorrect then the Company may need to record additional expense relating
to the pension plans which could have a material effect on the Company’s results
of operations.
The table below sets out the approximate impact on the funded status of the
Company’s pension plans at December 27, 2008 that the Company estimates would
arise from the respective changes in significant plan assumptions. The data used
to calculate the estimated impact on the funded status at December 27, 2008 is
derived from the most recently available actuarial review of the pension plans
with an effective date of September 30, 2008:
|
Plan
Assumption
|
Change
in Assumption
(increase)
|
Impact
on Funded Status (in thousands of dollars)
(decrease)
|
Change
in funded status
|
|
Assumptions
impacting accumulated benefit obligation:
|
|||
|
Discount
rate
|
0.1%
|
$
450
|
155%
|
|
Inflation
rate
|
0.1%
|
300
|
103%
|
|
Salary
Increase
|
0.5%
|
775
|
267%
|
|
Mortality
rate
|
1
year
|
375
|
129%
|
Goodwill
Impairment
As discussed in our 2008 10-K, the
Company carries out an annual assessment of the realizability of goodwill.
Despite the uncertain economic outlook, management believes the goodwill of
$1,435,000 at December 27, 2008 is not impaired. However, if in future periods,
the Company’s results of operations, cash flows or the market price of the
Company’s stock continue to decline significantly, then it may be necessary to
record an impairment charge relating to goodwill of up to
$1,435,000.
OVERVIEW
OF FIRST QUARTER
Results
of Operations
Three
months ended December 27, 2008
Results of operations were materially
adversely affected by the continuing general business decline, as well as
adverse movements in exchange rates. The following table compares results by
segment for the first quarter of fiscal 2009 with the prior year period and
shows the percentage changes in total and split between the currency impact and
volume / other changes:
|
Three
months ended
|
%
change due to:
|
|||||||||||||||||||
|
December
27,
2008
|
December
29,
2007
|
Total
|
|
Currency
|
Volume
/ other
|
|||||||||||||||
|
Sales:
|
||||||||||||||||||||
|
Controls - to external
customers
|
$ | 6,380 | $ | 9,707 | -34% | -7% | -27% | |||||||||||||
|
Capacitors - to external
customers
|
447 | 536 | -17% | -29% | 12% | |||||||||||||||
|
Capacitors -
inter-segment
|
5 | 12 | -58% | -8% | -50% | |||||||||||||||
|
Capacitors – total
|
452 | 548 | -18% | -29% | 11% | |||||||||||||||
|
Total sales to external
customers
|
6,827 | 10,243 | -33% | -9% | -24% | |||||||||||||||
|
Gross
Profit:
|
||||||||||||||||||||
|
Controls
|
2,076 | 3,686 | -44% | -12% | -32% | |||||||||||||||
|
Capacitors
|
206 | 196 | 5% | -37% | 42% | |||||||||||||||
|
Total
|
2,282 | 3,882 | -41% | -13% | -28% | |||||||||||||||
|
Selling
research and administrative expenses:
|
||||||||||||||||||||
|
Controls
|
1,997 | 3,035 | -34% | -13% | -21% | |||||||||||||||
|
Capacitors
|
154 | 230 | -33% | -23% | -10% | |||||||||||||||
|
Unallocated corporate
expense
|
58 | 32 | 81% | 0% | 81% | |||||||||||||||
|
Total
|
2,209 | 3,297 | -33% | -14% | -19% | |||||||||||||||
|
Operating
income:
|
||||||||||||||||||||
|
Controls
|
79 | 651 | -88% | -3% | -85% | |||||||||||||||
|
Capacitors
|
52 | (34 | ) | 253% | -56% | 309% | ||||||||||||||
|
Unallocated corporate
expense
|
(58 | ) | (32 | ) | -81% | 0% | 81% | |||||||||||||
|
Total
|
73 | 585 | -88% | -7% | -81% | |||||||||||||||
|
Other
income and expense
|
(291 | ) | (103 | ) | -183% | -205% | 22% | |||||||||||||
|
(Loss)
income before income taxes
|
(218 | ) | 482 | -145% | -51% | -94% | ||||||||||||||
|
Income
taxes
|
77 | (169 | ) | 146% | 52% | 94% | ||||||||||||||
|
Net
(loss) income
|
$ | (141 | ) | $ | 313 | -145% | -51% | -94% | ||||||||||||
Sales in the first quarter ended
December 27, 2008 declined by $3,416,000, or 33%, to $6,827,000 compared to
$10,243,000 in the first fiscal quarter last year. Volumes shipped were 25%
lower than last year. In addition, the strengthening of the US dollar by 26% and
10% against the British Pound and the Euro, respectively, reduced reported total
sales by $898,000 or 9% compared to the first fiscal quarter of 2008. In the
controls business, volumes shipped were lower in all geographic areas in which
the Company operates. The most significant reduction was in the European demand
for aerial work platforms.
In the capacitor business, shipments
were 12% higher than during the first quarter last year due to higher demand
from the industrial sector of its business. Currency changes, mainly the
strengthening of the US Dollar against the British Pound, reduced reported total
sales by $154,000 or 29% from the first fiscal quarter of 2008.
The Company has begun selectively
instituting price increases; however, these did not have a material impact on
the quarter’s results and it is too early to predict their impact in the
future.
Gross profit of $2,282,000 was 33.4% of
sales in the first quarter compared to $3,882,000 or 37.9% of sales in the same
quarter last year. The reduction in gross profit of $1,600,000 was due mainly to
the lower volume of sales. Foreign currency fluctuations reduced reported gross
profit by $496,000 or 13%.
Selling, research and administrative
expenses were $2,209,000, a reduction of $1,088,000, or 33% compared to the same
period last year. Foreign currency fluctuations reduced selling, research and
administrative expense by $460,000, or 14%, compared with the prior year.
Excluding the currency impact, operating expense was $628,000, or 20% lower,
principally due to the effect of the business restructuring the Company
implemented in the third quarter of last fiscal year.
The operating profit for the first
quarter was $73,000, compared with $585,000 in the same period last year, a
reduction of $512,000. Foreign currency fluctuations had an adverse impact of
$36,000 in the quarter. Excluding the currency impact, operating income for the
controller business reduced by $555,000 due to the lower volumes shipped, which
was offset by the reduction in operating expense. The capacitor business segment
reported an operating profit of $52,000 compared with an operating loss of
$34,000 in the first quarter last year. The increase in operating income in the
capacitor business was due to higher sales volume, improved gross margins and
lower operating expense compared to the same quarter last year.
In the first quarter interest expense
was $7,000, a reduction of $23,000 compared to the prior year. There was a
foreign currency loss of $288,000 in the first quarter of fiscal 2009 compared
to a loss of $75,000 in the same period last year.
The Company recorded a loss before
income taxes of $218,000 compared to an income before income taxes of $482,000
in the same period last year, a reduction of $700,000. Adverse foreign currency
fluctuations decreased pretax income by $248,000. Lower shipment volumes,
partially offset by operating expense savings reduced pretax income by $452,000.
Net loss for the quarter was $141,000 or $0.04 per share compared to a net
income of $313,000 and $0.10 per share in fiscal 2008.
Financial
Condition
While the Company has paid regular
quarterly dividends in the past, due to the current uncertain economic outlook,
the Board of Directors suspended payment of dividends for the first fiscal
quarter of 2009 and will consider whether to resume paying dividends on a
quarter by quarter basis. In the first fiscal quarter, the Company paid a
dividend declared for the fourth fiscal quarter of 2008 of $.03 per share, which
amounted to $98,000. Cash balances at the end of the first quarter of fiscal
2009 were $744,000, compared to $1,630,000 on September 30, 2008, a decrease in
cash of $886,000 in the first three months of fiscal 2009.
In the first three months of fiscal
2009, there was a net loss of $141,000, and operating activities used $481,000
of cash. Receivables decreased by $558,000, which generated cash during the
quarter and the number of days sales in receivables reduced in the first three
months of fiscal 2009 from 65 days at September 30, 2008 to 63 days at December
27, 2008. Adjusted for the effects of currency, an increase in inventories of
$322,000 and reductions in both accounts payable and accrued expenses of
$220,000 and $321,000 respectively, reduced cash balances during the first
fiscal quarter. The payment of the dividend declared for the fourth fiscal
quarter of fiscal 2008 amounted to $98,000. Capital expenditures in the first
three months were $59,000. Exchange rate changes decreased reported cash by
$248,000 in the first three months of fiscal 2009.
The Company has no long-term debt but
has overdraft facilities of approximately $1.5 million in the UK and of $130,000
in France. At the end of the first quarter of fiscal 2009, the Company had no
borrowings against these overdraft facilities. The UK overdraft facilities are
secured by a long leasehold property owned by the Company and the French
overdraft facilities are unsecured. In line with normal practice in Europe, both
facilities can be withdrawn on demand by the bank. Accordingly, management does
not rely on their availability in projecting the adequacy of the Company’s
capital resources.
Tech/Ops Sevcon Inc's capital resources
and projected cash flows from operations, in the opinion of management, are
adequate for projected operations and capital spending programs over the next
twelve months. Capital spending programs are not expected to be significantly
higher than depreciation over the next twelve months and projected volume is not
expected to require significant additional cash resources. However, as discussed
above, current economic conditions and the global decline in business activity
are having a negative effect on the Company’s business. If these conditions
continue, that may materially reduce the cash the Company is able to generate
from operations, which may cause it to reduce the amounts it is able or willing
to use for the foregoing purposes. If the Company is unable to generate
sufficient cash from operations and if the bank overdraft facilities are
withdrawn, the Company would need to raise additional debt or equity capital
from other sources to avoid significantly curtailing its business and materially
adversely affecting its results.
The Company’s operations are sensitive
to a number of market factors, any one of which could materially adversely
affect its results of operations in any given year. Other risks dealing with
contingencies are described in Note 6 to the Company’s Consolidated Financial
Statements included under Item 8 of the Company’s 2008 10-K and other risks are
described under the caption Risk Factors in Part II, Item 1A below.
Foreign
currency risk
The Company sells to customers
throughout the industrialized world. The majority of the Company’s products are
manufactured in, or sourced from, the United Kingdom. In the first three months
of fiscal 2009, approximately 51% of the Company’s sales were made in US
Dollars, 24% were made in British Pounds and 25% were made in Euros. Over 75% of
the Company’s cost of sales was incurred in British Pounds and Euros. This
resulted in the Company’s sales and margins being exposed to fluctuations due to
the change in the exchange rates of the US Dollar, the British Pound and the
Euro. The Company has trade accounts receivable and accounts payable denominated
in both British Pounds and Euros that are exposed to exchange
fluctuations.
In addition, the translation of the
sales and income of foreign subsidiaries into US Dollars is also subject to
fluctuations in foreign currency exchange rates.
Where appropriate, the Company
previously engaged in hedging activities to manage the foreign exchange
exposures related to forecast purchases and sales in foreign currency and the
associated foreign currency denominated receivables and payables. The Company
changed its policy during fiscal 2008 and ceased using such hedges. The Company
had no foreign currency derivative financial instruments outstanding as of
December 27, 2008.
The following table provides
information about the Company’s foreign currency accounts receivable, accounts
payable and firmly committed sales contracts outstanding as of December 27,
2008. The information is provided in US Dollar amounts, as presented in the
Company’s consolidated financial statements. The table presents the amounts at
which the Company’s foreign currency accounts receivable, accounts payable and
firmly committed sales contracts as of December 27, 2008 are expected to mature
based on the exchange rate of the relevant foreign currency to US Dollars at
December 27, 2008:
|
(in
thousands of dollars, except average contract rates)
|
||||||||||||||||
|
Expected maturity or transaction date
|
||||||||||||||||
|
FY2009
|
FY2010
|
Total
|
Fair
Value
|
|||||||||||||
|
On
balance sheet financial instruments:
|
||||||||||||||||
|
In $ US Functional
Currency
|
||||||||||||||||
|
Accounts receivable in British
Pounds
|
985 | - | 985 | 985 | ||||||||||||
|
Accounts receivable in
Euros
|
2,022 | - | 2,022 | 2,022 | ||||||||||||
|
Accounts payable in British
Pounds
|
758 | - | 758 | 758 | ||||||||||||
|
Accounts payable in
Euros
|
1,675 | - | 1,675 | 1,675 | ||||||||||||
|
Anticipated
Transactions
|
||||||||||||||||
|
In $ US Functional
Currency
|
||||||||||||||||
|
Firmly committed sales
contracts
|
||||||||||||||||
|
In British Pounds
|
776 | - | 776 | 776 | ||||||||||||
|
In Euros
|
667 | - | 667 | 667 | ||||||||||||
Interest
Rate Risk
The Company does not currently have any
interest bearing debt. The Company’s policy is to invest surplus funds in
instruments with maturities of less than 12 months at both fixed and floating
interest rates. This investment portfolio is generally subject to general
credit, liquidity, counterparty, market and interest rate risks that may be
exacerbated by the recent global financial crisis. If the banking system or the
fixed income or credit continue to deteriorate or remain volatile, the values
and liquidity of these investments could be adversely affected. The Company did
not have any surplus funds invested as of December 27, 2008.
The Company incurs short-term
borrowings from time-to-time on its overdraft facilities in Europe at variable
interest rates. Due to the short-term nature of the Company’s investments at
December 27, 2008, the risk arising from changes in interest rates was not
material.
(a) Evaluation
of disclosure controls and procedures. The Company’s principal executive officer
and principal financial officer, after evaluating the effectiveness of the
Company’s “disclosure controls and procedures” (as defined in the Securities
Exchange Act of 1934 Rule 13a-15(e)) have concluded that, as of December 27,
2008, these disclosure controls and procedures were effective.
(b) Changes
in internal control over financial reporting. Our principal executive officer
and principal financial officer have identified no change in the Company’s
“internal control over financial reporting” (as defined in Securities Exchange
Act of 1934 Rule 13a-15(f)) that occurred during the period covered by this
Quarterly Report on Form 10-Q that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
None.
In addition to the market risk factors
relating to foreign currency and interest rate risk set out in Part I Item 3
above, the Company believes that the following represent the most significant
risk factors for the Company:
Capital
markets are cyclical and weakness in the United States and international
economies may harm our business
The Company’s customers are mainly
manufacturers of capital goods such as fork lift trucks, aerial lifts and
railway signaling equipment. These markets are cyclical and depend heavily on
worldwide transportation, shipping and other economic activity. They are
currently experiencing a decline in demand. Further, as our business has
expanded globally, we have become increasingly subject to the risks arising from
adverse changes in global economic conditions. Economic growth in the United
States has slowed and macroeconomic conditions have deteriorated worldwide,
causing a general tightening in the credit markets, lower levels of liquidity,
increases in the rates of default and bankruptcy, and extreme volatility in
credit and equity markets. These developments have already had an adverse impact
on the Company’s business and may materially negatively affect the Company’s
business, operating results or financial condition in a number of additional
ways. For example, current or potential customers may be unable to fund
purchases or manufacturing of products, which could cause them to delay,
decrease or cancel purchases of our products or not to pay the Company or to
delay paying for previously purchased products. In addition, the effect of the
crisis on the Company’s banks and other banks may cause the Company to lose its
current overdraft facilities and be unable otherwise to obtain financing for
operations as needed.
The
Company relies on a small number of key customers for a substantial portion of
its revenues.
Ten customers accounted for 50% of the
Company’s revenues in the first quarter of fiscal 2009 and the largest customer
accounted for 13% of revenues. Although we have had business relationships with
these customers for many years, there are no long-term contractual supply
agreements in place. Accordingly our performance could be adversely affected by
the loss of one or more of these key customers.
The
Company has substantial sales and operations outside the United States that
could be adversely affected by changes in international markets.
A significant portion of our operations
is located, and a significant portion of our business comes from, outside the
United States. Accordingly, our performance could be adversely affected by
economic downturns in Europe or the Far East as well as in the United States. A
consequence of significant international business is that a large percentage of
our revenues and expenses are denominated in foreign currencies that fluctuate
in value versus the US Dollar. Significant fluctuations in foreign exchange
rates can and do have a material impact on our financial results, which are
reported in US Dollars. Other risks associated with international business
include: changing regulatory practices and tariffs; staffing and managing
international operations, including complying with local employment laws; longer
collection cycles in certain areas; and changes in tax and other
laws.
Single
source materials and sub-contractors may not meet the Company’s
needs.
The Company relies on certain suppliers
and sub-contractors for all of its requirements for certain components,
sub-assemblies and finished products. In the event that such suppliers and
sub-contractors are unable or unwilling to continue supplying the Company, or to
meet the Company’s cost and quality targets or needs for timely delivery, there
is no certainty that the Company would be able to establish alternative sources
of supply in time to meet customer demand.
Damage
to the Company’s or sub-contractor’s buildings would hurt results.
In the electronic controls segment, the
majority of the Company’s finished product is produced in three separate plants
in Poland, Mexico and China; these plants are owned by sub-contractors. The
capacitor business is located in a single plant in Wales. In the event that any
of these plants was to be damaged or destroyed, there is no certainty that the
Company would be able to establish alternative facilities in time to meet
customer demand. The Company does carry property damage and business
interruption insurance but this may not cover certain lost business due to the
long-term nature of the relationships with many customers.
Product
liability claims may have a material adverse effect
The Company’s products are technically
complex and are installed and used by third parties. Defects in their design,
installation, use or manufacturing may result in product liability claims
against the Company. Such claims may result in significant damage awards, and
the cost of any such litigation could be material.
None.
None.
None.
None.
See
Exhibit Index immediately preceding the exhibits.
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.
|
TECH/OPS
SEVCON, INC
|
|
|
Date:
February 10, 2009
|
By:
/s/ Paul N. Farquhar
|
|
Paul
N. Farquhar
|
|
|
Chief
Financial Officer (Principal Financial Officer)
|
|
|
Exhibit
|
Description
|
|
(3)(a)
|
Certificate
of Incorporation of the registrant (incorporated by reference to Exhibit
(3)(a) to Quarterly Report on Form 10-Q for the quarter ended July 3,
2004).
|
|
(3)(b)
|
By-laws
of the registrant (incorporated by reference to Exhibit 3.2 to Current
Report on form 8-K filed on September 19, 2008).
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4
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Specimen
common stock certificate of the registrant (incorporated by reference to
Exhibit 4(a) to Annual Report on Form 10-K for the fiscal year ended
September 30, 2008).
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31.1
|
Certification
of Principal Executive Officer pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
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31.2
|
Certification
of Principal Financial Officer pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
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32.1
|
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
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