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 June 28, 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 August 5, 2008
|
|
Common
stock, par value $.10
|
3,271,322
|
- 1
-
FORM
10-Q
FOR
THE QUARTER ENDED JUNE 28, 2008
INDEX
|
PART
I -FINANCIAL INFORMATION
|
PAGE
|
|
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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12
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17
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18
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18
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18
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18
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19
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19
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19
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19
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19
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19
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19
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- 2
-
Tech/Ops
Sevcon, Inc. and Subsidiaries
|
(in
thousands of dollars except per share data)
|
||||||||
|
June
28,
2008
|
September
30,
2007
|
|||||||
|
(unaudited)
|
(derived
from audited statements)
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash and cash
equivalents
|
$ | 1,250 | $ | 1,014 | ||||
|
Receivables, net of allowances
for doubtful accounts of $235 at June 28, 2008
and $180 at September 30,
2007
|
8,142 | 8,714 | ||||||
|
Inventories
|
5,420 | 5,422 | ||||||
|
Prepaid expenses and other
current assets
|
978 | 916 | ||||||
|
Total
current assets
|
15,790 | 16,066 | ||||||
|
Property,
plant and equipment:
|
||||||||
|
At cost
|
12,612 | 12,265 | ||||||
|
Less: accumulated depreciation
and amortization
|
8,753 | 8,497 | ||||||
|
Net
property, plant and equipment
|
3,859 | 3,768 | ||||||
|
Long-term
deferred tax asset
|
613 | 657 | ||||||
|
Goodwill
|
1,435 | 1,435 | ||||||
|
Total
assets
|
$ | 21,697 | $ | 21,926 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ INVESTMENT
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts payable
|
$ | 3,239 | $ | 3,398 | ||||
|
Dividend payable
|
98 | 97 | ||||||
|
Accrued expenses
|
3,238 | 3,162 | ||||||
|
Accrued and deferred taxes on
income
|
- | 530 | ||||||
|
Total
current liabilities
|
6,575 | 7,187 | ||||||
|
Liability
for pension benefits
|
2,179 | 2,244 | ||||||
|
Other
long term liabilities
|
60 | 61 | ||||||
|
Total
liabilities
|
8,814 | 9,492 | ||||||
|
Stockholder
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 3,271,322 shares at
June 28, 2008 and 3,238,702 shares at
September 30,
2007
|
327 | 324 | ||||||
|
Premium paid in on common
stock
|
4,810 | 4,623 | ||||||
|
Retained
earnings
|
8,142 | 7,961 | ||||||
|
Cumulative other comprehensive
loss
|
(396 | ) | (474 | ) | ||||
|
Total
stockholder equity
|
12,883 | 12,434 | ||||||
|
Total
liabilities and stockholder equity
|
$ | 21,697 | $ | 21,926 | ||||
|
The
accompanying notes are an integral part of these consolidated financial
statements
|
||||||||
- 3
-
(Unaudited)
Tech/Ops
Sevcon, Inc. and Subsidiaries
|
(in
thousands of dollars except per share data)
|
||||||||||||||||
|
Three
months ended
|
Nine
months ended
|
|||||||||||||||
|
June
28,
2008
|
June
30,
2007
|
June
28,
2008
|
June
30,
2007
|
|||||||||||||
|
Net
sales
|
$ | 10,015 | $ | 10,341 | $ | 30,818 | $ | 28,941 | ||||||||
|
Cost
of sales
|
6,799 | 6,550 | 20,006 | 18,138 | ||||||||||||
|
Gross
Profit
|
3,216 | 3,791 | 10,812 | 10,803 | ||||||||||||
|
Selling,
research and administrative expenses
|
2,907 | 3,009 | 9,283 | 8,919 | ||||||||||||
|
Restructuring
charge (Note 12)
|
700 | - | 700 | - | ||||||||||||
|
Operating
income (loss)
|
(391 | ) | 782 | 829 | 1,884 | |||||||||||
|
Interest
expense
|
(29 | ) | (10 | ) | (82 | ) | (17 | ) | ||||||||
|
Interest
income
|
3 | 3 | 7 | 7 | ||||||||||||
|
Foreign
currency loss
|
(27 | ) | (40 | ) | (7 | ) | (130 | ) | ||||||||
|
Income
(loss) before income taxes
|
(444 | ) | 735 | 747 | 1,744 | |||||||||||
|
Income
taxes
|
155 | (252 | ) | (262 | ) | (605 | ) | |||||||||
|
Net
income (loss)
|
$ | (289 | ) | $ | 483 | $ | 485 | $ | 1,139 | |||||||
|
Basic
income (loss) per share
|
$ | (.09 | ) | $ | .15 | $ | .15 | $ | .36 | |||||||
|
Fully
diluted income (loss) per share
|
$ | (.09 | ) | $ | .15 | $ | .15 | $ | .36 | |||||||
(Unaudited)
Tech/Ops
Sevcon, Inc. and Subsidiaries
|
(in
thousands of dollars)
|
||||||||||||||||
|
Three
months ended
|
Nine
months ended
|
|||||||||||||||
|
June
28,
2008
|
June
30,
2007
|
June
28,
2008
|
June
30,
2007
|
|||||||||||||
|
Net
income (loss)
|
$ | (289 | ) | $ | 483 | $ | 485 | $ | 1,139 | |||||||
|
Foreign
currency translation adjustment
|
(17 | ) | 193 | 126 | 528 | |||||||||||
|
Changes
in fair market value of cash flow hedges
|
115 | - | (79 | ) | - | |||||||||||
|
Amortization
of pension transition items to income
|
9 | 11 | 31 | 37 | ||||||||||||
|
Comprehensive
income (loss)
|
$ | (182 | ) | $ | 687 | $ | 563 | $ | 1,704 | |||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
- 4
-
(Unaudited)
Tech/Ops
Sevcon, Inc. and Subsidiaries
|
(in
thousands of dollars)
|
||||||||
|
Nine
months ended
|
||||||||
|
June
28,
2008
|
June
30,
2007
|
|||||||
|
Cash
flow from operating activities:
|
||||||||
|
Net
income
|
$ | 485 | $ | 1,139 | ||||
|
Adjustments
to reconcile net income to net cash from operating
activities:
|
||||||||
|
Depreciation and
amortization
|
518 | 555 | ||||||
|
Stock-based
compensation
|
163 | 142 | ||||||
|
Pension contributions greater than
(less than) pension expense
|
8 | (68 | ) | |||||
|
Deferred tax
provision
|
32 | - | ||||||
|
Increase (decrease) in cash
resulting from changes in operating assets and
liabilities:
|
||||||||
|
Receivables
|
888 | (2,641 | ) | |||||
|
Inventories
|
(12 | ) | (1,159 | ) | ||||
|
Prepaid expenses and other
current assets
|
(92 | ) | (106 | ) | ||||
|
Accounts
payable
|
(95 | ) | 1,855 | |||||
|
Accrued
expenses
|
(51 | ) | 46 | |||||
|
Accrued and deferred taxes on
income
|
(527 | ) | 532 | |||||
|
Net
cash generated from operating activities
|
1,317 | 295 | ||||||
|
Cash
flow used by investing activities:
|
||||||||
|
Acquisition of property, plant and
equipment
|
(678 | ) | (783 | ) | ||||
|
Net
cash used by investing activities
|
(678 | ) | (783 | ) | ||||
|
Cash
flow used by financing activities:
|
||||||||
|
Dividends paid
|
(293 | ) | (289 | ) | ||||
|
Exercise of stock
options
|
20 | 4 | ||||||
|
Net cash used by financing
activities
|
(273 | ) | (285 | ) | ||||
|
Effect
of exchange rate changes on cash
|
(130 | ) | 390 | |||||
|
Net
increase (decrease) in cash
|
236 | (383 | ) | |||||
|
Beginning
balance - cash and cash equivalents
|
1,014 | 1,290 | ||||||
|
Ending
balance - cash and cash equivalents
|
$ | 1,250 | $ | 907 | ||||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash paid for income
taxes
|
$ | 618 | $ | 266 | ||||
|
Cash paid for
interest
|
$ | 82 | $ | 17 | ||||
|
Supplemental
disclosure of non-cash financing activity:
|
||||||||
|
Dividend declared
|
$ | 98 | $ | 97 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
- 5
-
Notes
to Consolidated Financial Statements – June 28, 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 June 28,
2008 and the results of operations and cash flows for the three months and nine
months ended June 28, 2008 and June 30, 2007. These unaudited interim financial
statements should be read in conjunction with the 2007 annual consolidated
financial statements and related notes included in the 2007 Tech/Ops Sevcon,
Inc. Annual Report filed on Form 10-K (the “2007 10-K”).
The significant accounting policies
followed by Tech/Ops Sevcon, Inc. are set forth in Note 1 to the financial
statements in the 2007 10-K. Other than as set forth below, there have been no
changes since the end of fiscal 2007 to the significant accounting policies
followed by Tech/Ops Sevcon, Inc.
The results of operations for the nine
month periods ended June 28, 2008 and June 30, 2007 are not necessarily
indicative of the results to be expected for the full year.
(2) New
Accounting Pronouncements
In June 2006 the Financial Accounting
Standards Board (FASB) issued Interpretation No. 48. “Accounting for Uncertainty
in Income Taxes” (“FIN 48”) which is effective for fiscal years beginning after
December 15, 2006. FIN 48 prescribes detailed guidance for the financial
statement recognition, measurement and disclosure of uncertain tax positions
recognized in an enterprise’s financial statements in accordance with Statement
of Financial Accounting Standard (SFAS) No. 109. Tax
positions must meet a more-likely-than-not recognition threshold at the
effective date to be recognized upon the adoption of FIN 48, and in subsequent
periods. The Company has evaluated the impact of adopting FIN 48 on its
consolidated results of operations and financial position and has concluded that
its adoption does not have a material impact on either the consolidated results
from operations or its financial position.
In September 2006, the FASB issued SFAS
No. 157, “Fair Value Measurements”, 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. This statement will be effective for the Company beginning
October 1, 2008. This is not expected to have a material impact on the Company’s
financial statements.
In February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS 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. SFAS No. 159 will be effective for the
Company on October 1, 2008. This is not expected to have a material impact on
the Company’s financial statements.
On December 4, 2007, the FASB issued
SFAS No.160,” Noncontrolling Interests in Consolidated Financial Statements”,
which amends Accounting Research Bulletin 51, “Consolidated Financial
Statements”, to require noncontrolling (equity) interests in a consolidated
subsidiary to be accounted for, and presented as, equity in the consolidated
financial statements. This statement is effective for fiscal years and interim
periods within those fiscal years, beginning on or after December 15, 2008. The
statement will be effective for the Company for the fiscal year beginning
October 1, 2008. This is not expected to have a material impact on the Company’s
financial statements.
- 6
-
On December 4, 2007, the FASB issued
SFAS No. 141 (revised 2007), Business Combinations (Statement 141R), which, when
effective, will replace existing Statement 141 in its entirety and provide new
measurement, recognition, and disclosure guidance for business combinations. 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. The statement will be effective
for the Company for the fiscal year beginning October 1, 2008. This is not
expected to have a material impact on the Company’s financial
statements.
(3) Stock-Based
Compensation Plans
Under the Company’s 1996 Equity
Incentive Plan (the “Plan”) there were 104,500 shares reserved and available for
grant at June 28, 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.
Since the beginning of fiscal 2006 the
Company has accounted 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 nine months of fiscal 2008 or in fiscal
2007 and therefore no assumptions were made as to risk-free interest rate,
expected dividend yield, expected life or expected volatility in fiscal 2008 or
fiscal 2007. When options are exercised the Company normally issues new
shares.
A summary of option activity for all
plans for the nine months ended June 28, 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, 2007
|
129,000
|
$9.47
|
2.0
|
204,000
|
|
Granted
|
-
|
|||
|
Exercised
|
(7,000)
|
$4.37
|
||
|
Cancelled
|
(53,500)
|
$13.66
|
||
|
Outstanding
at June 28, 2008
|
68,500
|
$6.88
|
3.2
|
$130,000
|
|
Exercisable
at June 28, 2008
|
49,100
|
$7.08
|
3.6
|
$89,000
|
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 $7.75 market price of the Company’s
common stock at June 28, 2008. Options for 7,000 shares were exercised during
the nine month period ended June 28, 2008. The total intrinsic value of options
exercised in the nine month period ended June 28, 2008, was $27,000. Proceeds
received on the exercise of these options were $20,000. In connection with the
exercise of options in the first nine months of fiscal 2008, the Company issued
620 shares of common stock pursuant to a cashless exercise of options to
purchase 1,380 shares. The total intrinsic value of options exercised in the
nine month period ended June 30, 2007, was $46,000 and the proceeds received on
the exercise of these options was $4,000. In connection with the exercise of
options in the first nine months of fiscal 2007, the Company issued 3,404 shares
of common stock pursuant to a cashless exercise of options to purchase 4,596
shares. At June 28, 2008 there was $40,000 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 2.4
years.
- 7
-
In December 2007, the Company granted
15,000 shares of restricted stock to one employee which will vest in five equal
annual installments so long as the employee is then employed by the Company or
as determined by the Compensation Committee. The estimated fair value of the
stock on the date of grant was $117,000 based on the fair market value of the
Company’s stock on the date of issue. This compensation expense is being charged
to income on a straight line basis over five years. The charge to income for
this employee’s restricted stock grant is approximately $6,000 on a quarterly
basis.
In January 2008, the Company granted
12,000 shares of restricted stock to six non-employee directors which will vest
on the day before the 2009 annual meeting providing that the grantee remains a
director of the Company, or as determined by the Compensation Committee. The
estimated fair value of the stock on the date of grant was $79,000 based on the
fair market value of the Company’s stock on date of issue. This compensation
expense is being charged to income on a straight line basis over the twelve
month period during which the forfeiture conditions lapse. The charge to income
for these director restricted stock grants in the third quarter of fiscal 2008
was $20,000 and the charge for the first nine months of fiscal 2008 was $33,000;
the subsequent charge will be approximately $20,000 on a quarterly
basis.
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 nine
months ended June 28, 2008 was as follows:
|
Number
of shares of Restricted Stock
|
Weighted
Average Grant-Date Fair Value
|
|
|
Non-vested
balance as of September 30, 2007
|
55,000
|
$6.22
|
|
Granted
|
27,000
|
$7.82
|
|
Vested
|
(28,000)
|
$6.76
|
|
Forfeited
|
-
|
N/A
|
|
Non-vested
balance as of June 28, 2008
|
54,000
|
$6.74
|
As of June 28, 2008, there was $258,000
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
|
Nine
Months ended
|
|||||||||||||||
|
June
28,
2008
|
June
30,
2007
|
June
28,
2008
|
June
30,
2007
|
|||||||||||||
|
Stock
option expense under SFAS No. 123R
|
$ | 6 | $ | 6 | $ | 19 | $ | 27 | ||||||||
|
Restricted
stock grants:
|
||||||||||||||||
|
Employees
|
20 | 19 | 80 | 54 | ||||||||||||
|
Non-employee
directors
|
20 | 23 | 64 | 61 | ||||||||||||
|
Total
stock based compensation expense
|
$ | 46 | $ | 48 | $ | 163 | $ | 142 | ||||||||
(4) Cash
Dividends
On June 17, 2008, the Company declared
a quarterly dividend of $.03 per share for the third quarter of fiscal 2008,
which was paid on July 17, 2008 to stockholders of record on July 2, 2008. The
Company has paid regular quarterly cash dividends since the first quarter of
fiscal 1990.
- 8
-
(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
|
Nine
Months ended
|
|||||||||||||||
|
June
28,
2008
|
June
30,
2007
|
June
28,
2008
|
June
30,
2007
|
|||||||||||||
|
Net
income (loss)
|
$ | (289 | ) | $ | 483 | $ | 485 | $ | 1,139 | |||||||
|
Weighted
average shares outstanding - basic
|
3,217 | 3,172 | 3,206 | 3,162 | ||||||||||||
|
Basic
(loss) income per share
|
$ | (.09 | ) | $ | .15 | $ | .15 | $ | .36 | |||||||
|
Common
stock equivalents
|
- | 53 | 33 | 44 | ||||||||||||
|
Weighted
average shares outstanding - diluted
|
3,217 | 3,225 | 3,239 | 3,206 | ||||||||||||
|
Diluted
income (loss) per share
|
$ | (.09 | ) | $ | .15 | $ | .15 | $ | .36 | |||||||
|
No.
of options that are anti-dilutive excluded from calculation of common
stock equivalents
|
69 | 80 | 38 | 100 | ||||||||||||
|
No.
of shares of restricted stock that are anti-dilutive excluded from
calculation of common stock equivalents
|
54 | - | - | - | ||||||||||||
(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
capacitor segment produces electronic components for sale to electronic
equipment manufacturers. Each segment has its own management team and sales
force and the capacitor segment has its own manufacturing facility.
The significant accounting policies of
the segments are the same as those described in Note (1) to the 2007
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 June 28, 2008
|
||||||||||||||||
|
Controls
|
Capacitors
|
Corporate
|
Total
|
|||||||||||||
|
Sales
to external customers
|
$ | 9,499 | $ | 516 | $ | - | $ | 10,015 | ||||||||
|
Inter-segment
revenues
|
- | 6 | - | 6 | ||||||||||||
|
Operating
loss
|
(242 | ) | (82 | ) | (67 | ) | (391 | ) | ||||||||
|
Identifiable
assets
|
20,320 | 824 | 553 | 21,697 | ||||||||||||
|
Three
months ended June 30, 2007
|
||||||||||||||||
|
Controls
|
Capacitors
|
Corporate
|
Total
|
|||||||||||||
|
Sales
to external customers
|
$ | 9,753 | $ | 588 | $ | - | $ | 10,341 | ||||||||
|
Inter-segment
revenues
|
- | 8 | - | 8 | ||||||||||||
|
Operating
income
|
963 | 8 | (189 | ) | 782 | |||||||||||
|
Identifiable
assets
|
21,141 | 1,109 | 470 | 22,720 | ||||||||||||
|
Nine
months ended June 28, 2008
|
||||||||||||||||
|
Controls
|
Capacitors
|
Corporate
|
Total
|
|||||||||||||
|
Sales
to external customers
|
$ | 29,273 | $ | 1,545 | $ | - | $ | 30,818 | ||||||||
|
Inter-segment
revenues
|
- | 28 | - | 28 | ||||||||||||
|
Operating
income (loss)
|
1,265 | (174 | ) | (262 | ) | 829 | ||||||||||
|
Depreciation
and amortization
|
477 | 38 | 3 | 518 | ||||||||||||
|
Identifiable
assets
|
20,320 | 824 | 553 | 21,697 | ||||||||||||
|
Capital
expenditures
|
635 | 43 | - | 678 | ||||||||||||
|
Nine
months ended June 30, 2007
|
||||||||||||||||
|
Controls
|
Capacitors
|
Corporate
|
Total
|
|||||||||||||
|
Sales
to external customers
|
$ | 27,437 | $ | 1,504 | $ | - | $ | 28,941 | ||||||||
|
Inter-segment
revenues
|
- | 39 | - | 39 | ||||||||||||
|
Operating
income (loss)
|
2,211 | (25 | ) | (302 | ) | 1,884 | ||||||||||
|
Depreciation
and amortization
|
507 | 44 | 4 | 555 | ||||||||||||
|
Identifiable
assets
|
21,141 | 1,109 | 470 | 22,720 | ||||||||||||
|
Capital
expenditures
|
704 | 75 | 4 | 783 | ||||||||||||
- 9
-
In the controls business segment the
revenues were derived from the following products and services:
|
(in
thousands of dollars)
|
||||||||||||||||
|
Three
Months ended
|
Nine
Months ended
|
|||||||||||||||
|
June
28,
2008
|
June
30,
2007
|
June
28,
2008
|
June
30,
2007
|
|||||||||||||
|
Electronic
controllers for battery driven vehicles
|
$ | 6,580 | $ | 6,710 | $ | 20,429 | $ | 19,183 | ||||||||
|
Accessory
and aftermarket products and services
|
2,919 | 3,043 | 8,844 | 8,254 | ||||||||||||
|
Total
controls segment revenues
|
$ | 9,499 | $ | 9,753 | $ | 29,273 | $ | 27,437 | ||||||||
(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
|
Nine
Months ended
|
|||||||||||||||
|
June
28,
2008
|
June
30,
2007
|
June
28,
2008
|
June
30,
2007
|
|||||||||||||
|
Research
and Development expense
|
$ | 899 | $ | 946 | $ | 2,895 | $ | 2,845 | ||||||||
|
Percentage
of sales
|
9.0 | % | 9.1 | % | 9.4 | % | 9.8 | % | ||||||||
(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
|
Nine
Months ended
|
|||||||||||||||
|
June
28,
2008
|
June
30,
2007
|
June
28,
2008
|
June
30,
2007
|
|||||||||||||
|
Service
cost
|
$ | 152 | $ | 149 | $ | 459 | $ | 441 | ||||||||
|
Interest
cost
|
350 | 293 | 1054 | 863 | ||||||||||||
|
Expected
return on plan assets
|
(346 | ) | (290 | ) | (1,044 | ) | (854 | ) | ||||||||
|
Amortization
of prior service cost
|
15 | 15 | 45 | 44 | ||||||||||||
|
Recognized
net actuarial gain
|
- | 3 | - | 9 | ||||||||||||
|
Net
periodic benefit cost
|
171 | 170 | 514 | 503 | ||||||||||||
|
Net
cost of defined contribution plans
|
$ | 12 | $ | 11 | $ | 34 | $ | 33 | ||||||||
The following table sets forth the
movement in the liability for pension benefits in accordance with SFAS No. 158
in the nine months ended June 28, 2008:
|
(in
thousands of dollars)
|
||||||||
|
Nine
Months ended
|
||||||||
|
June
28,
2009
|
June
30,
2007
|
|||||||
|
Liability
for pension benefits at beginning of period
|
$ | 2,244 | $ | 2,886 | ||||
|
Net
periodic benefit cost
|
514 | 503 | ||||||
|
Plan
contributions
|
(495 | ) | (572 | ) | ||||
|
Effect
of exchange rate changes
|
(84 | ) | 147 | |||||
|
Balance
at end of period
|
$ | 2,179 | $ | 2,964 | ||||
Tech/Ops Sevcon did not contribute to
its US pension plan in the nine months ended June 28, 2008; it presently
anticipates contributing $144,000 to fund its US plan in the remainder of fiscal
2008. In addition, employer contributions to the UK plan were $495,000 in the
first nine months and are estimated to total $643,000 in fiscal
2008.
- 10
-
The table below sets out the movement
in the amounts included in accumulated other comprehensive income that have not
yet been recognized as pension costs in the income statement:
|
Unrecognized
transition obligation
|
Unrecognized
prior service cost
|
Unrecognized
net actuarial gain (loss)
|
Deferred
Tax
|
Total
|
|
|
Balance
at September 30, 2007
|
$ 1
|
$510
|
$1,514
|
$(610)
|
$1,415
|
|
Amounts
recognized in accumulated other comprehensive income in the first nine
months of fiscal 2008
|
-
|
(45)
|
-
|
14
|
(31)
|
|
Balance
at June 28, 2008
|
$ 1
|
$465
|
$1,514
|
$(596)
|
$1,384
|
|
Amounts
expected to be recognized in the remainder
of
fiscal 2008
|
-
|
(15)
|
-
|
4
|
(11)
|
(9) Inventories
Inventories were comprised
of:
|
(in
thousands of dollars)
|
||||||||
|
June
28,
2008
|
September
30,
2007
|
|||||||
|
Raw
materials
|
$ | 2,922 | $ | 2,517 | ||||
|
Work-in-process
|
227 | 134 | ||||||
|
Finished
goods
|
2,271 | 2,771 | ||||||
| $ | 5,420 | $ | 5,422 | |||||
(10) Accrued
expenses
Set out below is an analysis of other
accrued expenses at June 28, 2008 and September 30, 2007 which shows separately
any items in excess of 5% of total current liabilities:
|
(in
thousands of dollars)
|
||||||||
|
June
28,
2008
|
September
30,
2007
|
|||||||
|
Accrued
compensation and related costs
|
$ | 1,471 | $ | 1,118 | ||||
|
Warranty
reserves
|
381 | 458 | ||||||
|
Other
accrued expenses
|
1,386 | 1,586 | ||||||
| $ | 3,238 | $ | 3,162 | |||||
(11) Warranty
reserves
The movement in warranty reserves was
as follows:
|
(in
thousands of dollars)
|
||||||||||||||||
|
Three
Months ended
|
Nine
Months ended
|
|||||||||||||||
|
June
28,
2008
|
June
30,
2007
|
June
28,
2008
|
June
30,
2007
|
|||||||||||||
|
Warranty
reserves at beginning of period
|
$ | 398 | $ | 418 | $ | 458 | $ | 364 | ||||||||
|
Decrease
in beginning balance for warranty obligations settled during the
period
|
(65 | ) | (76 | ) | (363 | ) | (258 | ) | ||||||||
|
Other
changes to pre-existing warranties
|
- | 3 | - | 13 | ||||||||||||
|
Net
increase in warranty reserves for products sold during the
period
|
48 | 125 | 286 | 351 | ||||||||||||
|
Warranty
reserves at end of period
|
$ | 381 | $ | 470 | $ | 381 | $ | 470 | ||||||||
- 11
-
(12) Restructuring
charge
In May 2008, the Company announced a
limited restructuring program associated with the closure of the residual
manufacturing operations in the UK controls business and a reduction in staff in
the capacitor business segment. These plans followed a review of the controls
business segment which identified an opportunity to significantly reduce ongoing
manufacturing costs through further reliance on subcontractors to manufacture
the Company’s products. The program, which was completed in June 2008, resulted
in the termination of 36 employees in the controls business and 5 employees in
the capacitor business. There was a restructuring charge in the third quarter of
fiscal 2008 of $700,000 which comprised one-time employee severance costs and
associated professional fees relating to this program.
The
following table summarizes the components of the restructuring charge for the
period ended June 28, 2008:
|
(in
thousands of dollars)
|
|
|
Severance
and other related costs
|
$ 685
|
|
Professional
fees
|
15
|
|
Total
restructuring charge
|
$ 700
|
Of the
total restructuring charge of $700,000 in the quarter ended June 28, 2008,
severance costs and professional fees in the controls business segment amounted
to $673,000 and severance costs of $27,000 were incurred in the capacitor
business segment.
The Company expects to incur a further
restructuring charge of $20,000 in the fourth quarter of fiscal 2008 relating to
severance costs in the controls business segment for 5 employees.
The following table summarizes the
liability related to the 2008 restructuring program:
|
(in
thousands of dollars)
|
||||||||||||||||
|
Balance
at October 1, 2007
|
Charges
|
Payments
|
Balance
at June 28, 2008
|
|||||||||||||
|
Severance
and other related costs
|
$ | - | $ | 685 | $ | 105 | $ | 580 | ||||||||
|
Professional
fees
|
- | 15 | 15 | - | ||||||||||||
|
Total
|
$ | - | $ | 700 | $ | 120 | $ | 580 | ||||||||
The Company also accelerated
depreciation expense on plant and equipment in the controls business segment in
the amount of $4,000 relating to this program.
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 June 28, 2008 there have been no
material changes to the critical accounting estimates described in the Company’s
2007 10-K, except as follows:
Pension
Plan Assumptions
The Company’s pension plans are
significant relative to the size of the Company. Pension plan assets were
$22,280,000 at September 30, 2007 and the total assets of the Company were
$21,926,000. Although the plan assets are not included in the assets of the
Company, they were equal to 102% of the Company’s total assets at September 30,
2007. 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
$2,179,000 at June 28, 2008 compared to $2,244,000 at September 30,
2007.
- 12
-
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 June
28, 2008 that the Company estimates would arise from the following respective
changes in significant plan assumptions:
|
Plan
Assumption
|
Change
in Assumption
|
Impact
on Funded Status (in thousands of dollars)
|
Change
in funded status
|
|
Assumptions
impacting accumulated benefit obligation:
|
|||
|
Discount
rate
|
0.1%
|
$650
|
30%
|
|
Inflation
rate
|
0.1%
|
400
|
18%
|
|
Salary
Increase
|
0.5%
|
900
|
41%
|
|
Mortality
rate
|
1
year
|
650
|
30%
|
|
Assumption
impacting plan assets:
|
|||
|
Return
on plan assets
|
0.1%
per year
|
$20
per year
|
1%
per year
|
OVERVIEW
OF THIRD QUARTER AND FIRST NINE MONTHS
Results
of Operations
Three
months ended June 28, 2008
The following table compares results by
segment for the third quarter of fiscal 2008 with the prior year period and
shows the percentage changes in total and split between the currency impact and
volume / other changes:
|
%
change due to:
|
||||||||||||||||||||
|
2008
|
2007
|
Total
|
Currency
|
Volume
/ other
|
||||||||||||||||
|
Sales:
|
||||||||||||||||||||
|
Controls - to external
customers
|
$ | 9,499 | $ | 9,753 | -3 | % | 5 | % | -8 | % | ||||||||||
|
Capacitors - to external
customers
|
516 | 588 | -12 | % | 0 | % | -12 | % | ||||||||||||
|
Capacitors -
inter-segment
|
6 | 8 | -25 | % | 0 | % | -25 | % | ||||||||||||
|
Capacitors – total
|
522 | 596 | -12 | % | 0 | % | -12 | % | ||||||||||||
|
Total sales to external
customers
|
10,015 | 10,341 | -3 | % | 4 | % | -7 | % | ||||||||||||
|
Gross
Profit:
|
||||||||||||||||||||
|
Controls
|
3,027 | 3,566 | -15 | % | 6 | % | -21 | % | ||||||||||||
|
Capacitors
|
189 | 225 | -16 | % | -1 | % | -15 | % | ||||||||||||
|
Total
|
3,216 | 3,791 | -15 | % | 6 | % | -21 | % | ||||||||||||
|
Selling
research and administrative expenses and restructuring
charge:
|
||||||||||||||||||||
|
Controls
|
3,269 | 2,603 | 26 | % | 2 | % | 24 | % | ||||||||||||
|
Capacitors
|
271 | 217 | 25 | % | 0 | % | 25 | % | ||||||||||||
|
Unallocated corporate
expense
|
67 | 189 | -65 | % | 0 | % | -65 | % | ||||||||||||
|
Total
|
3,607 | 3,009 | 20 | % | 2 | % | 18 | % | ||||||||||||
|
Operating
income:
|
||||||||||||||||||||
|
Controls
|
(242 | ) | 963 | -125 | % | 16 | % | -141 | % | |||||||||||
|
Capacitors
|
(82 | ) | 8 | -1,125 | % | -9 | % | -1,116 | % | |||||||||||
|
Unallocated corporate
expense
|
(67 | ) | (189 | ) | -65 | % | 0 | % | -65 | % | ||||||||||
|
Total
|
(391 | ) | 782 | -150 | % | 20 | % | -170 | % | |||||||||||
|
Other
income and expense
|
(53 | ) | (47 | ) | 13 | % | -30 | % | 43 | % | ||||||||||
|
Income
(loss) before income taxes
|
(444 | ) | 735 | -160 | % | 23 | % | -183 | % | |||||||||||
|
Income
taxes
|
155 | (252 | ) | -162 | % | 23 | % | -185 | % | |||||||||||
|
Net
Income (loss)
|
$ | (289 | ) | $ | 483 | -160 | % | 23 | % | -183 | % | |||||||||
- 13
-
Sales in the third quarter ended June 28, 2008 declined by $326,000, or
3%, to $10,015,000 compared to $10,341,000 in the third fiscal quarter last
year. Volumes were 7% lower than last year. However, in the third fiscal quarter the
US dollar weakened by 2% and 14% against the British Pound and the Euro,
respectively, compared to the third fiscal quarter of 2007, and these foreign
currency fluctuations offset by $453,000, or 4%, the reported decline in sales
caused by lower volume shipped. The Company achieved sales increases in North
America and the Far East due to increases in volume shipped; in Europe there was
a reduction in sales due to lower demand from aerial lift
customers.<?xml:namespace
prefix = o ns =
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In the capacitor business, sales volume
was 12% lower than during the third quarter last year. Sales in the capacitor
business were adversely affected by lower demand from the signaling and audio
sectors of its business.
Gross profit was 32.1 % in the third
quarter compared to 36.7% in the same quarter last year. Gross profit reduced by
$575,000 from $3,791,000 in the third quarter last year to $3,216,000 in fiscal
2008. Foreign currency fluctuations increased reported gross profit by $210,000
or 6%. Net of the currency impact, gross profit was $785,000 lower than last
year. The reduction in gross profit was due to several non-recurring items
including start up costs at a subcontractor, component obsolescence in the UK
and warranty costs at one customer.
Selling, research and administrative
expenses were $2,907,000, a reduction of $102,000, or 3.5% compared to the same
period last year. Foreign currency fluctuations increased selling, research and
administrative expense by $45,000, or 1.5%, compared with the prior year;
excluding the currency impact, operating expense was $147,000,
5%, lower principally due to reduced administrative and engineering
spend. A restructuring charge of $700,000 was incurred in the third quarter
relating principally to the closure of the residual manufacturing operation in
the UK in the controls business segment. This followed a strategic review of the
controls business which identified an opportunity to significantly reduce
ongoing manufacturing costs through further reliance on subcontractors to
manufacture the Company’s products. The restructuring cost comprised severance
costs for 36 employees and associated professional fees in the controls business
segment and severance costs for a further 5 employees in the capacitor business
segment. The closure of the UK manufacturing facility in the controls business
segment is anticipated to immediately remove $2 million of operating costs on an
annualized basis. The Company expects to incur an additional $20,000 in costs
for the restructuring in the fourth quarter of fiscal 2008. The anticipated
savings and expense are subject to a variety of factors such as the cost of
employee severance costs and associated costs that may cause actual results
to vary from those anticipated.
There was an operating loss for the
third quarter of $391,000, compared with an operating income of $782,000 in the
same period last year, a reduction of $1,173,000. Foreign currency fluctuations
had an overall positive impact of $155,000 in the quarter; excluding the
currency impact, operating income for the controller business reduced by
$1,205,000, due principally to the restructuring charge and certain
non-recurring items which impacted gross profit. The non-recurring items
included start up costs at a subcontractor, component obsolescence in the UK and
warranty costs at one customer. In the capacitor business segment, there was an
operating loss of $82,000 compared with an operating income of $8,000 in the
third quarter last year. The reduction in operating income in the capacitor
business was due to lower sales volume and changes in sales mix which reduced
the gross profit margin from 37.8% in the third quarter of fiscal 2007 to 36.2%
in the third quarter of fiscal 2008.
In the third quarter interest expense
was $29,000, an increase of $19,000 compared to the prior year. There was a
foreign currency loss of $27,000 in the third quarter of fiscal 2008 compared to
a loss of $40,000 in the same period last year.
There was a loss before income taxes of
$444,000 compared to an income before income taxes of $735,000 in the same
period last year, a reduction of $1,179,000. There was a net loss for the
quarter after income taxes of $289,000 compared with a net income for the third
quarter last year of $483,000, a reduction of $772,000; the loss per share for
the quarter was $0.09 compared to an income per share in the third quarter of
fiscal 2007 of $0.15.
- 14
-
Nine
months ended June 28, 2008
The following table compares the
results by segment for the nine months ended June 28, 2008 with the same period
in the prior year, and shows the percentage changes in total and split between
the currency impact and volume / other changes.
|
Nine
months ended
|
%
change due to:
|
|||||||||||||||||||
|
June
28,
2008
|
June
30,
2007
|
Total
|
Currency
|
Volume
/ other
|
||||||||||||||||
|
Sales:
|
||||||||||||||||||||
|
Controls - to external
customers
|
$ | 29,273 | $ | 27,437 | 7 | % | 6 | % | 1 | % | ||||||||||
|
Capacitors - to external
customers
|
1,545 | 1,504 | 3 | % | 2 | % | 1 | % | ||||||||||||
|
Capacitors -
inter-segment
|
28 | 39 | -28 | % | 0 | % | -28 | % | ||||||||||||
|
Capacitors – total
|
1,573 | 1,543 | 2 | % | 2 | % | 0 | % | ||||||||||||
|
Total sales to external
customers
|
30,818 | 28,941 | 6 | % | 5 | % | 1 | % | ||||||||||||
|
Gross
Profit:
|
||||||||||||||||||||
|
Controls
|
10,287 | 10,223 | 1 | % | 8 | % | -7 | % | ||||||||||||
|
Capacitors
|
525 | 580 | 9 | % | 2 | % | -11 | % | ||||||||||||
|
Total
|
10,812 | 10,803 | 0 | % | 7 | % | -7 | % | ||||||||||||
|
Selling
research and administrative expenses and restructuring
charge:
|
||||||||||||||||||||
|
Controls
|
9,022 | 8,012 | 13 | % | 4 | % | 9 | % | ||||||||||||
|
Capacitors
|
699 | 605 | 16 | % | 2 | % | 14 | % | ||||||||||||
|
Unallocated corporate
expense
|
262 | 302 | -13 | % | 0 | % | -13 | % | ||||||||||||
|
Total
|
9,983 | 8,919 | 12 | % | 3 | % | 9 | % | ||||||||||||
|
Operating
income:
|
||||||||||||||||||||
|
Controls
|
1,265 | 2,211 | -43 | % | 21 | % | -64 | % | ||||||||||||
|
Capacitors
|
(174 | ) | (25 | ) | 596 | % | 13 | % | 583 | % | ||||||||||
|
Unallocated corporate
expense
|
(262 | ) | (302 | ) | -13 | % | 0 | % | -13 | % | ||||||||||
|
Total
|
829 | 1,884 | -56 | % | 25 | % | -81 | % | ||||||||||||
|
Other
income and expense
|
(82 | ) | (140 | ) | -41 | % | -87 | % | 46 | % | ||||||||||
|
Income
before income taxes
|
747 | 1,744 | -57 | % | 34 | % | -91 | % | ||||||||||||
|
Income
taxes
|
(262 | ) | (605 | ) | -57 | % | 34 | % | -91 | % | ||||||||||
|
Net
Income
|
$ | 485 | $ | 1,139 | -57 | % | 34 | % | -91 | % | ||||||||||
Sales in the nine months ended June 28,
2008 were $30,818,000, an increase of $1,877,000, or 6%, compared to the same
period last year when sales were $28,941,000. Foreign currency fluctuations
accounted for an increase in reported sales of $1,522,000 or 5%; in addition,
volumes were also 1% ahead of the same period last year. The increased volumes
were mainly due to broadly-based higher levels of demand across most of the
Company’s customer base; there were no significant “one-off” or “exceptional”
sales revenues in the first nine months of fiscal 2008. Volumes in the
controller business were 1% better than in the same period last year, with gains
in the Far East and North America partially offset by lower sales volume in
Europe. In the capacitor business, sales to external customers also increased by
1% compared to the same period last year; foreign currency fluctuations
accounted for a 2%, increase in the reported sales of capacitors.
Revenues in the US controller business
increased by $1,629,000, or 15% compared to the first nine months of last fiscal
year. This was mainly due to strong demand in the aerial lift market and to the
introduction of new products.
Gross profit was $10,812,000, or 35.1%,
of sales in this period compared to $10,803,000, or 37.3%, in the comparable
period in fiscal 2007. Volume was lower by $756,000, or 7%, offset by favorable
foreign currency fluctuations which increased reported gross profit by $765,000,
also 7%. In the controller business, gross profit increased marginally by
$64,000 from $10,223,000 in fiscal 2007 to $10,287,000 in the third quarter of
fiscal 2008; in the capacitor business, gross profit of $525,000 was 9% behind
last year.
- 15
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Selling, research and administrative
expenses were $9,283,000, an increase of $364,000, or 4%, compared to the same
period last year. Foreign currency fluctuations increased reported selling,
research and administrative expenses by $281,000, or 3%. Excluding the impact of
the adverse currency fluctuations, selling, research and administrative expenses
in the first nine months of fiscal 2008 were $83,000, or 1%, higher than the
same period last year, primarily due to higher administrative expense partly
offset by lower selling and research and development expense. Total operating
expenses included a charge of $700,000 relating to a restructuring program which
was incurred in the third fiscal quarter of 2008 (see Note 12).
Operating income for the first nine
months of fiscal 2008 was $829,000, a reduction of $1,055,000, or 56%, compared
to the same period last year. Foreign currency fluctuations resulted in a
$472,000 increase in reported operating income. Excluding the currency impact,
operating income for the controller business decreased by $1,421,000, or 64%
compared to last year. The main cause of this decrease in operating income in
the controller business was the restructuring charge of $700,000 in the third
quarter and several non-recurring items which impacted gross margin, also in the
third quarter, including start up costs at a subcontractor, component
obsolescence in the UK and warranty costs at one customer. In the capacitor
business segment there was an operating loss of $174,000 compared to a $25,000
operating loss in the first nine months of fiscal 2007. The increase in the
operating loss in the capacitor business was due to lower sales volume and
reduced gross profit margins arising from changes in sales mix.
In the first nine months of fiscal
2008, interest expense was $82,000 compared to $17,000 in the same period last
year. There was a foreign currency loss of $7,000 in fiscal 2008 compared to a
loss of $130,000 in the same period last year; the reduction in the foreign
currency loss mainly due to the strength of the Euro compared to the British
Pound and US Dollar in fiscal 2008 compared with the first nine months of fiscal
2007.
Income before income taxes was $747,000
compared to $1,744,000 in the same period last year, a reduction of $997,000, or
57%. Income taxes were 35% of pre-tax income, in line with the same period last
year. Net income for the first nine months of fiscal 2008 was $485,000, a
reduction of $654,000, or 57%, compared to the same period last year. Basic and
fully diluted income per share decreased by $0.21 per share to $0.15 per share
compared to $0.36 per share in the first nine months of fiscal
2007.
Financial
Condition
The Company has, since January 1990,
maintained a program of regular cash dividends. The dividend for the third
quarter of fiscal 2008 was paid on July 17, 2008, and amounted to $98,000. Cash
balances at the end of the third quarter of 2008 were $1,250,000, compared to
$1,014,000 on September 30, 2007, an increase in cash of $236,000 in the first
nine months of fiscal 2008.
In the first nine months of fiscal
2008, net income was $485,000, and operating activities generated $1,317,000 of
cash. Receivables decreased by $572,000 to $8,142,000. The number of days sales
in receivables reduced in the first nine months of fiscal 2008 from 70 days at
September 30, 2007 to 67 days at June 28, 2008. Inventories and prepaid expense
and other current assets remained relatively constant at $5,420,000 and $978,000
respectively at June 30, 2008 compared with $5,422,000 and $916,000 respectively
at September 30, 2007. Accrued income taxes decreased by $530,000, due to the
payment of foreign income taxes. Dividends paid in the first nine months of
fiscal 2008 amounted to $293,000. Capital expenditures in the first nine months
were $678,000. Exchange rate changes decreased reported cash by $130,000 in the
first nine months of fiscal 2008.
The Company has no long-term debt but
has overdraft facilities in the UK of approximately $2 million and of $200,000
in France. At the end of the third quarter of fiscal 2008, the Company had no
borrowings against these overdraft facilities. The UK overdraft facilities are
secured by all of the Company’s assets in the UK and the French overdraft
facilities are unsecured.
Tech/Ops Sevcon Inc's capital
resources, in the opinion of management, are adequate for projected operations
and capital spending programs. Capital spending programs are not expected to be
significantly higher than depreciation over the next twelve months and projected
volume growth is not expected to require significant additional cash
resources.
- 16
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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 2007 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 nine months
of fiscal 2008, approximately 40% of the Company’s sales were made in US
Dollars, 24% were made in British Pounds and 36% were made in Euros. Over 70% of
the Company’s cost of sales was incurred in British Pounds. 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 which 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.
The Company undertakes hedging
activities from time-to-time to manage the foreign exchange exposures related to
forecasted purchases and sales in foreign currency and the associated foreign
currency denominated receivables and payables. The Company does not engage in
speculative foreign exchange transactions. Details of this hedging activity and
the underlying exposures are set out below.
The following table provides
information about the Company’s foreign currency accounts receivable, accounts
payable, firmly committed sales contracts and derivative financial instruments
outstanding as of June 28, 2008. The information is provided in US Dollar
amounts, as presented in the Company’s consolidated financial statements. The
table presents the notional amount (at contract exchange rates) and the weighted
average contractual foreign currency exchange rates.
|
(in
thousands of dollars, except average contract rates)
|
||||||||||||||||
|
Expected maturity or
transaction date
|
||||||||||||||||
|
FY2008
|
FY2009
|
Total
|
Fair
Value
|
|||||||||||||
|
On
balance sheet financial instruments:
|
||||||||||||||||
|
In $ US Functional
Currency
|
||||||||||||||||
|
Accounts receivable in British
Pounds
|
2,108 | - | 2,108 | 2,108 | ||||||||||||
|
Accounts receivable in
Euros
|
3,764 | - | 3,764 | 3,764 | ||||||||||||
|
Accounts payable in British
Pounds
|
4,852 | - | 4,852 | 4,852 | ||||||||||||
|
Accounts payable in
Euros
|
346 | - | 346 | 346 | ||||||||||||
|
Anticipated
Transactions and related derivatives
|
||||||||||||||||
|
In $ US Functional
Currency
|
||||||||||||||||
|
Firmly committed sales
contracts
|
||||||||||||||||
|
In British Pounds
|
2,044 | 7 | 2,051 | 2,051 | ||||||||||||
|
In Euros
|
854 | 74 | 928 | 928 | ||||||||||||
|
Forward exchange
agreements
|
||||||||||||||||
|
Sell US Dollars for British
Pounds
|
450 | - | 450 | 450 | ||||||||||||
|
Sell Euros for British
Pounds
|
1,383 | - | 1,383 | 1,383 | ||||||||||||
|
Average contractual exchange
rate
|
||||||||||||||||
|
US Dollars = British
Pound
|
1.95 | - | 1.95 | - | ||||||||||||
|
Euro = British
Pound
|
1.36 | - | 1.36 | - | ||||||||||||
|
Amount recorded as
other comprehensive loss
|
$ | 76 | $ | - | $ | 76 | $ | 76 | ||||||||
- 17
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Interest
Rate Risk
The Company does not currently have any
interest bearing debt. The Company does invest surplus funds in instruments with
maturities of less than 12 months at both fixed and floating interest rates. 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 June 28, 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 June 28, 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 1 Item 3
above, the Company believes that the following represent the most significant
risk factors for the Company:
Capital
goods markets are cyclical
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 are currently
showing modest growth, but demand in these markets could decrease or customers
could decide to purchase alternative products. In this event the Company’s sales
could decrease below its current break even point and there is no certainty that
the Company would be able to decrease overhead expenses to enable it to operate
profitably.
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 controller business, the
majority of the Company’s 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.
- 18
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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:
August 5, 2008
|
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) (b) to
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000).
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to section 302 of the
Sarbanes-Oxley Act of 2002. Filed herewith.
|
|
31.2
|
Certification
of Principal Financial Officer pursuant to section 302 of the
Sarbanes-Oxley Act of 2002. Filed herewith.
|
|
32.1
|
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
section 906 of the Sarbanes-Oxley Act of 2002. Furnished
herewith.
|
- 19
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