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 27, 2009
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o 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 7, 2009
|
|
Common
stock, par value $.10
|
3,326,322
|
- 1
-
FORM
10-Q
FOR
THE QUARTER ENDED JUNE 27, 2009
INDEX
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PAGE
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24
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- 2
-
Item
1 Financial Statements
Tech/Ops
Sevcon, Inc. and Subsidiaries
|
(in
thousands of dollars except per share data)
|
||||||||
|
June
27,
2009
|
September
30,
2008
|
|||||||
|
(unaudited)
|
(derived
from
audited
statements)
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash and cash
equivalents
|
$ | 193 | $ | 1,630 | ||||
|
Receivables, net of allowances
for doubtful accounts of $87 at June 27, 2009
and $86 at September 30,
2008
|
3,529 | 7,087 | ||||||
|
Inventories
|
5,441 | 4,970 | ||||||
|
Prepaid expenses and other
current assets
|
1,046 | 862 | ||||||
|
Total
current assets
|
10,209 | 14,549 | ||||||
|
Property,
plant and equipment:
|
||||||||
|
At cost
|
11,023 | 11,600 | ||||||
|
Less: accumulated depreciation
and amortization
|
7,958 | 8,053 | ||||||
|
Net
property, plant and equipment
|
3,065 | 3,547 | ||||||
|
Long-term
deferred tax asset
|
749 | 202 | ||||||
|
Goodwill
|
1,435 | 1,435 | ||||||
|
Other
long-term assets
|
- | 22 | ||||||
|
Total
assets
|
$ | 15,458 | $ | 19,755 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ INVESTMENT
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts payable
|
$ | 1,516 | $ | 3,713 | ||||
|
Dividend payable
|
- | 98 | ||||||
|
Accrued expenses
|
1,676 | 2,410 | ||||||
|
Accrued and deferred taxes on
income
|
- | 56 | ||||||
|
Total
current liabilities
|
3,192 | 6,277 | ||||||
|
Liability
for pension benefits
|
283 | 378 | ||||||
|
Other
long term liabilities
|
50 | 54 | ||||||
|
Total
liabilities
|
3,525 | 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 3,326,322 shares at
June 27, 2009 and 3,276,322 shares at
September 30,
2008
|
333 | 328 | ||||||
|
Premium paid in on common
stock
|
5,001 | 4,881 | ||||||
|
Retained
earnings
|
7,630 | 8,364 | ||||||
|
Accumulated other comprehensive
loss
|
(1,031 | ) | (527 | ) | ||||
|
Total
stockholders’ equity
|
11,933 | 13,046 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 15,458 | $ | 19,755 | ||||
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
27,
2009
|
June
28,
2008
|
June
27,
2009
|
June
28,
2008
|
|||||||||||||
|
Net
sales
|
$ | 4,060 | $ | 10,015 | $ | 15,770 | $ | 30,818 | ||||||||
|
Cost
of sales
|
2,579 | 6,799 | 9,946 | 20,006 | ||||||||||||
|
Gross
Profit
|
1,481 | 3,216 | 5,824 | 10,812 | ||||||||||||
|
Selling,
research and administrative expenses
|
2,055 | 2,907 | 6,496 | 9,283 | ||||||||||||
|
Restructuring
charge
|
(5 | ) | 700 | 298 | 700 | |||||||||||
|
Operating
(loss) income
|
(569 | ) | (391 | ) | (970 | ) | 829 | |||||||||
|
Interest
expense
|
(6 | ) | (29 | ) | (21 | ) | (82 | ) | ||||||||
|
Interest
income
|
- | 3 | 4 | 7 | ||||||||||||
|
Foreign
currency gain (loss)
|
79 | (27 | ) | (137 | ) | (7 | ) | |||||||||
|
(Loss)
income before income taxes
|
(496 | ) | (444 | ) | (1,124 | ) | 747 | |||||||||
|
Income
taxes
|
196 | 155 | 390 | (262 | ) | |||||||||||
|
Net
(loss) income
|
$ | (300 | ) | $ | (289 | ) | $ | (734 | ) | $ | 485 | |||||
|
Basic
(loss) income per share
|
$ | (.09 | ) | $ | (.09 | ) | $ | (.23 | ) | $ | .15 | |||||
|
Fully
diluted (loss) income per share
|
$ | (.09 | ) | $ | (.09 | ) | $ | (.23 | ) | $ | .15 | |||||
(Unaudited)
Tech/Ops
Sevcon, Inc. and Subsidiaries
|
(in
thousands of dollars)
|
||||||||||||||||
|
Three
months ended
|
Nine
months ended
|
|||||||||||||||
|
June
27,
2009
|
June
28,
2008
|
June
27,
2009
|
June
28,
2008
|
|||||||||||||
|
Net
(loss) income
|
$ | (300 | ) | $ | (289 | ) | $ | (734 | ) | $ | 485 | |||||
|
Foreign
currency translation adjustment
|
934 | (17 | ) | (528 | ) | 126 | ||||||||||
|
Changes
in fair market value of cash flow hedges
|
- | 115 | - | (79 | ) | |||||||||||
|
Amortization
of pension transition items to income
|
8 | 9 | 24 | 31 | ||||||||||||
|
Comprehensive
income (loss)
|
$ | 642 | $ | (182 | ) | $ | (1,238 | ) | $ | 563 | ||||||
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
27,
2009
|
June
28,
2008
|
|||||||
|
Cash
flow from operating activities:
|
||||||||
|
Net
(loss) income
|
$ | (734 | ) | $ | 485 | |||
|
Adjustments
to reconcile net (loss) income to net cash from operating
activities:
|
||||||||
|
Depreciation and
amortization
|
412 | 518 | ||||||
|
Stock-based
compensation
|
124 | 163 | ||||||
|
Pension contributions (greater
than) less than pension expense
|
(6 | ) | 8 | |||||
|
Deferred tax
provision
|
19 | 32 | ||||||
|
Increase (decrease) in cash
resulting from changes in operating assets and
liabilities:
|
||||||||
|
Receivables
|
3,062 | 888 | ||||||
|
Inventories
|
(642 | ) | (12 | ) | ||||
|
Prepaid expenses and other
current assets
|
(139 | ) | (92 | ) | ||||
|
Accounts
payable
|
(1,766 | ) | (95 | ) | ||||
|
Accrued
expenses
|
(532 | ) | (51 | ) | ||||
|
Accrued and deferred taxes on
income
|
(615 | ) | (527 | ) | ||||
|
Net
cash (used by) generated from operating activities
|
(817 | ) | 1,317 | |||||
|
Cash
flow used by investing activities:
|
||||||||
|
Acquisition of property, plant and
equipment
|
(194 | ) | (678 | ) | ||||
|
Net
cash used by investing activities
|
(194 | ) | (678 | ) | ||||
|
Cash
flow used by financing activities:
|
||||||||
|
Dividends paid
|
(98 | ) | (293 | ) | ||||
|
Exercise of stock
options
|
- | 20 | ||||||
|
Net cash (used by) generated from
financing activities
|
(98 | ) | (273 | ) | ||||
|
Effect
of exchange rate changes on cash
|
(328 | ) | (130 | ) | ||||
|
Net
(decrease) increase in cash
|
(1,437 | ) | 236 | |||||
|
Beginning
balance - cash and cash equivalents
|
1,630 | 1,014 | ||||||
|
Ending
balance - cash and cash equivalents
|
$ | 193 | $ | 1,250 | ||||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash paid for income
taxes
|
$ | 235 | $ | 618 | ||||
|
Cash paid for
interest
|
$ | 21 | $ | 82 | ||||
|
Supplemental
disclosure of non-cash financing activity:
|
||||||||
|
Dividend declared
|
$ | - | $ | 98 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
- 5
-
Notes
to Consolidated Financial Statements – June 27, 2009
(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 27,
2009 and the results of operations and cash flows for the three months and nine
months ended June 27, 2009 and June 28, 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 2008 to the significant accounting policies followed
by Tech/Ops Sevcon, Inc.
The results of operations for the nine
month period ended June 27, 2009 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 June 27, 2009, the company did not
have any financial 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 its financial position.
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). FAS 157-2 becomes effective for the Company on
November 1, 2009. The Company does not expect that the adoption of FAS 157-2
will have a material impact on its financial statements.
- 6
-
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 any potential impact on the Company’s
financial position and results of operations will be dependent upon the terms
and conditions of any future noncontrolling interest.
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
currently have any derivative financial instruments; accordingly, any potential
impact of the adoption of SFAS No. 161 on the Company’s financial statements
will be dependent upon the future use of derivative financial
instruments.
In June 2009, the FASB issued SFAS No.
168, “The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“SFAS
No. 168”), “The Hierarchy of Generally Accepted Accounting Principles,” to
establish the FASB Accounting Standards Codification as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in preparation of financial statements in conformity
with U.S. GAAP. SFAS No. 168 is effective for interim and annual periods ending
after September 15, 2009. The Company does not expect that the adoption of this
standard will have an impact on our financial position, results of operations or
cash flows.
We adopted the provisions of FSP FAS
107-1 and Accounting Principles Board (“APB”) Opinion No. 28-1, “Interim
Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB
28-1”), on June 27, 2009. FSP FAS 107-1 and APB 28-1 amended SFAS No. 107,
“Disclosures about Fair Value of Financial Instruments,” and APB Opinion No. 28,
“Interim Financial Reporting,” to require disclosures about the fair value of
financial instruments in interim as well as in annual financial statements. The
adoption of this standard has resulted in additional disclosures only in our
interim financial statements, and therefore did not impact our financial
position, results of operations or cash flows.
- 7
-
We adopted the provisions of SFAS No.
165, “Subsequent Events” (“SFAS No. 165”), as of June 27, 2009. SFAS No. 165
provides guidance to establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. SFAS No. 165 also
requires entities to disclose the date through which subsequent events were
evaluated as well as the rationale for why that date was selected. This
disclosure should alert all users of financial statements that an entity has not
evaluated subsequent events after that date in the set of financial statements
being presented. SFAS No. 165 requires additional disclosures only, and
therefore did not have an impact on our financial position, results of
operations, or cash flows. We have evaluated subsequent events through August 7,
2009, the date we have issued this Quarterly Report on Form 10-Q. No material
recognized or non-recognizable subsequent events were identified.
(3) Stock-Based
Compensation Plans
Under the Company’s 1996 Equity
Incentive Plan (the “Plan”) there were 54,500 shares reserved and available for
grant at June 27, 2009. 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 nine months of 2009 or in 2008 and
therefore no assumptions were made as to risk-free interest rate, expected
dividend yield, expected life or expected volatility in 2009 or 2008. When
options are exercised the Company normally issues new shares.
A summary of option activity for all
plans for the nine months ended June 27, 2009 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 June 27, 2009
|
63,500 | $ | 7.03 |
2.1
years
|
$ | - | ||||||||||
|
Exercisable
at June 27, 2009
|
48,800 | $ | 7.30 |
2.5
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 $2.70 closing market price of the
Company’s common stock at June 26, 2009. As the option price of all shares under
option is higher than the $2.70 closing market price of the Company’s common
stock at June 26, 2009, the aggregate intrinsic value of all outstanding share
options is nil. At June 27, 2009, there was $4,000 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 1 year.
In January 2009, the Company granted
12,000 shares of restricted stock to six non-employee directors, which will vest
on the day before the 2010 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 $28,000 based on the
fair market value of the stock on date of issue. This unearned compensation 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 first nine months of 2009 was $12,000
and is anticipated to be $8,000 in each of the fourth quarter of 2009 and the
first quarter of 2010.
- 8
-
In January 2009, the Company also
granted 40,000 shares of restricted stock to five employees, 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 $83,000 based on the fair market value of
stock on the date of issue. This unearned compensation is being charged to
income on a straight line basis over five years. The charge to income for these
employee restricted stock grants in the first nine months of 2009 was $7,000 and
is anticipated to be approximately $4,000 in the fourth quarter of 2009 and each
subsequent quarter thereafter until the first quarter of 2014.
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 27, 2009 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
|
52,000 | $ | 2.13 | |||||
|
Vested
|
(25,000 | ) | $ | 6.50 | ||||
|
Forfeited
|
(2,000 | ) | $ | 5.87 | ||||
|
Non-vested
balance as of June 27, 2009
|
79,000 | $ | 3.62 | |||||
As of June 27, 2009, there was $221,000
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 3.2 years.
The stock-based compensation expense
was as follows:
|
(in
thousands of dollars)
|
||||||||||||||||
|
Three
Months ended
|
Nine
Months ended
|
|||||||||||||||
|
June
27,
2009
|
June
28,
2008
|
June
27,
2009
|
June
28,
2008
|
|||||||||||||
|
Stock
option expense under SFAS No. 123R
|
$ | 6 | $ | 6 | $ | 19 | $ | 19 | ||||||||
|
Restricted
stock grants:
|
||||||||||||||||
|
Employees
|
7 | 20 | 38 | 80 | ||||||||||||
|
Non-employee
directors
|
23 | 20 | 67 | 64 | ||||||||||||
|
Total
stock based compensation expense
|
$ | 36 | $ | 46 | $ | 124 | $ | 163 | ||||||||
(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, second
and third quarters of 2009 and will consider whether to resume paying dividends
on a quarter by quarter basis.
- 9
-
(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
27,
2009
|
June
28,
2008
|
June
27,
2009
|
June
28,
2008
|
|||||||||||||
|
Net
(loss) income
|
$ | (300) | $ | (289) | $ | (734) | $ | 485 | ||||||||
|
Weighted
average shares outstanding - basic
|
3,247 | 3,217 | 3,239 | 3,206 | ||||||||||||
|
Basic
(loss) income per share
|
$ | (.09) | $ | (.09) | $ | (.23) | $ | .15 | ||||||||
|
Common
stock equivalents
|
- | - | - | 33 | ||||||||||||
|
Weighted
average shares outstanding - diluted
|
3,247 | 3,217 | 3,239 | 3,239 | ||||||||||||
|
Diluted
(loss) income per share
|
$ | (.09) | $ | (.09) | $ | .23 | $ | .15 | ||||||||
|
No.
of options that are anti-dilutive excluded from calculation of common
stock equivalents
|
64 | 69 | 64 | 38 | ||||||||||||
|
No.
of shares of non-vested restricted stock that are anti-dilutive excluded
from calculation of common stock equivalents
|
79 | 54 | 79 | - | ||||||||||||
(6) Segment
information
The Company has two reportable segments: electronic controls and capacitors. The
electronic controls segment produces microprocessor based controls and
accessories for zero emission electric 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 June 27, 2009
|
||||||||||||||||
|
Controls
|
Capacitors
|
Corporate
|
Total
|
|||||||||||||
|
Sales
to external customers
|
$ | 3,665 | $ | 395 | $ | - | $ | 4,060 | ||||||||
|
Inter-segment
revenues
|
- | 6 | - | 6 | ||||||||||||
|
Operating
(loss) income
|
(461 | ) | 7 | (115 | ) | (569 | ) | |||||||||
|
Identifiable
assets
|
14,056 | 791 | 611 | 15,458 | ||||||||||||
|
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 | ||||||||||||
- 10
-
|
Nine
months ended June 27, 2009
|
||||||||||||||||
|
Controls
|
Capacitors
|
Corporate
|
Total
|
|||||||||||||
|
Sales
to external customers
|
$ | 14,531 | $ | 1,239 | $ | - | $ | 15,770 | ||||||||
|
Inter-segment
revenues
|
- | 31 | - | 31 | ||||||||||||
|
Operating
(loss) income
|
(773 | ) | 77 | (274 | ) | (970 | ) | |||||||||
|
Depreciation
and amortization
|
386 | 24 | 2 | 412 | ||||||||||||
|
Identifiable
assets
|
14,056 | 791 | 611 | 15,458 | ||||||||||||
|
Capital
expenditures
|
187 | 7 | - | 194 | ||||||||||||
|
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 | ||||||||||||
In the electronic controls segment, the
revenues were derived from the following products and services:
|
(in
thousands of dollars)
|
||||||||||||||||
|
Three
Months ended
|
Nine
Months ended
|
|||||||||||||||
|
June
27,
2009
|
June
28,
2008
|
June
27,
2009
|
June
28,
2008
|
|||||||||||||
|
Electronic
controls for zero emission electric vehicles
|
$ | 1,811 | $ | 6,580 | $ | 8,259 | $ | 20,429 | ||||||||
|
Accessory
and aftermarket products and services
|
1,854 | 2,919 | 6,272 | 8,844 | ||||||||||||
|
Total
controls segment revenues
|
$ | 3,665 | $ | 9,499 | $ | 14,531 | $ | 29,273 | ||||||||
(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
27,
2009
|
June
28,
2008
|
June
28,
2009
|
June
28,
2008
|
|||||||||||||
|
Research
and Development expense
|
$ | 621 | $ | 899 | $ | 2,057 | $ | 2,895 | ||||||||
|
Percentage
of sales
|
15.3% | 9.0% | 13.0% | 9.4% | ||||||||||||
(8) Employee
Benefit Plans
Tech/Ops Sevcon, Inc. 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
27,
2009
|
June
28,
2008
|
June
27,
2009
|
June
28,
2008
|
|||||||||||||
|
Service
cost
|
$ | 88 | $ | 152 | $ | 254 | $ | 459 | ||||||||
|
Interest
cost
|
288 | 350 | 830 | 1,054 | ||||||||||||
|
Expected
return on plan assets
|
(277 | ) | (346 | ) | (797 | ) | (1,044 | ) | ||||||||
|
Amortization
of prior service cost
|
12 | 15 | 34 | 45 | ||||||||||||
|
Net
periodic benefit cost
|
111 | 171 | 321 | 514 | ||||||||||||
|
Net
cost of defined contribution plans
|
$ | 6 | $ | 12 | $ | 23 | $ | 34 | ||||||||
- 11
-
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 27, 2009:
|
(in
thousands of dollars)
|
||||||||
|
Nine
Months ended
|
||||||||
|
June
27,
2009
|
June
28,
2008
|
|||||||
|
Liability
for pension benefits at beginning of period
|
$ | 378 | $ | 2,244 | ||||
|
Net
periodic benefit cost
|
321 | 514 | ||||||
|
Plan
contributions
|
(305 | ) | (495 | ) | ||||
|
Effect
of exchange rate changes
|
(111 | ) | (84 | ) | ||||
|
Balance
at end of period
|
$ | 283 | $ | 2,179 | ||||
Tech/Ops Sevcon, Inc. did not
contribute to its US pension plan in the nine months ended June 27, 2009; it
presently anticipates contributing $94,000 to fund its US plan in the remainder
of 2009. In addition, employer contributions to the UK defined benefit plan were
$305,000 in the first nine months and are estimated to total $422,000 in
2009.
(9) Inventories
Inventories were comprised
of:
|
(in
thousands of dollars)
|
||||||||
|
June
27,
2009
|
September
30,
2008
|
|||||||
|
Raw
materials
|
$ | 1,036 | $ | 930 | ||||
|
Work-in-process
|
63 | 96 | ||||||
|
Finished
goods
|
4,342 | 3,944 | ||||||
| $ | 5,441 | $ | 4,970 | |||||
(10) Fair
value of financial instruments
The Company's financial instruments
consist mainly of cash and cash equivalents, short-term investments, accounts
receivable and accounts payable. The carrying amount of these financial
instruments as of June 27, 2009 and September 30, 2008, approximates fair value
due to the short-term nature of these instruments.
(11) Accrued
expenses
Set out below is an analysis of other
accrued expenses at June 27, 2009 and September 30, 2008, which shows separately
any items in excess of 5% of total current liabilities:
|
(in
thousands of dollars)
|
||||||||
|
June
27,
2009
|
September
30,
2008
|
|||||||
|
Accrued
compensation and related costs
|
$ | 689 | $ | 603 | ||||
|
Warranty
reserves
|
207 | 362 | ||||||
|
Other
accrued expenses
|
780 | 1,445 | ||||||
| $ | 1,676 | $ | 2,410 | |||||
- 12
-
(12) Warranty
reserves
The movement in warranty reserves was
as follows:
|
(in
thousands of dollars)
|
||||||||||||||||
|
Three
Months ended
|
Nine
Months ended
|
|||||||||||||||
|
June
27,
2009
|
June
28,
2008
|
June
27,
2009
|
June
28,
2008
|
|||||||||||||
|
Warranty
reserves at beginning of period
|
$ | 193 | $ | 398 | $ | 362 | $ | 458 | ||||||||
|
Decrease
in beginning balance for warranty obligations settled during the
period
|
(7 | ) | (65 | ) | (243 | ) | (363 | ) | ||||||||
|
Other
changes to pre-existing warranties
|
(7 | ) | - | 86 | - | |||||||||||
|
Foreign
currency translation adjustment
|
20 | - | (29 | ) | - | |||||||||||
|
Net
increase in warranty reserves for products sold during the
period
|
8 | 48 | 31 | 286 | ||||||||||||
|
Warranty
reserves at end of period
|
$ | 207 | $ | 381 | $ | 207 | $ | 381 | ||||||||
(13) Restructuring
charge
In March 2009, the Company announced a
limited restructuring program in the controls business segment to reduce
operating expense in response to the current economic downturn and the resultant
lower demand for the Company’s products. The program, which was completed in
April 2009, resulted in the termination of 21 employees across the Company’s
operations in the US, the UK, France and Japan. There was a restructuring charge
in the nine months ended June 27, 2009 of $298,000, which comprised one-time
employee severance costs, associated professional fees and other costs relating
to this program.
The following table summarizes the
components of the restructuring charge for the period ended June 27,
2009:
|
(in
thousands of dollars)
|
||||
|
Severance and other related
costs
|
$ | 249 | ||
|
Professional
fees and other costs
|
49 | |||
|
Total
restructuring charge
|
$ | 298 | ||
The following table summarizes the
liabilities related to the 2009 restructuring program:
|
(in
thousands of dollars)
|
||||||||||||||||
|
Balance
at
October
1,
2008
|
Charges
|
Payments
|
Balance
at
June
27,
2009
|
|||||||||||||
|
Severance
and other related costs
|
- | 249 | 249 | - | ||||||||||||
|
Professional
fees and other costs
|
- | 49 | 49 | - | ||||||||||||
|
Total
|
- | 298 | 298 | - | ||||||||||||
- 13
-
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 others discussed in this report.
CRITICAL
ACCOUNTING ESTIMATES
As of June 27, 2009, 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, estimates used in future periods may
vary materially from those included in the Company’s previous
disclosures.
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 at that date ($15,458,000 at June 27, 2009). 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 compared to 117% of the
Company’s total assets at June 27, 2009. 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 $283,000 at June 27, 2009, 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 June
27, 2009 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 June 27, 2009 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% | |||||||||
- 14
-
Goodwill
Impairment
As discussed in our 2008 10-K, the
Company carries out an annual assessment of the realizability of goodwill.
Despite the current uncertain economic outlook, management believes the goodwill
of $1,435,000 at June 27, 2009 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 THIRD QUARTER AND FIRST NINE MONTHS
Results
of Operations
Three
months ended June 27, 2009 and June 28, 2008
Due to the continuing economic
recession our customers have experienced substantially lower demand for their
products in construction, transportation, shipping and other economic activity.
This situation has resulted in a materially adverse demand for our products from
our customers. The following table compares results by segment for the third
quarter of 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
|
||||||||||||||||||||
|
(in
thousands of dollars)
|
%
change due to:
|
|||||||||||||||||||
|
June
27,
2009
|
June
28,
2008
|
Total
|
Currency
|
Volume
/ other
|
||||||||||||||||
|
Sales:
|
||||||||||||||||||||
|
Controls - to external
customers
|
$ | 3,665 | $ | 9,499 | -61 | -3 | -59 | |||||||||||||
|
Capacitors - to external
customers
|
395 | 516 | -23 | -20 | -3 | |||||||||||||||
|
Capacitors -
inter-segment
|
6 | 6 | 0 | -32 | 32 | |||||||||||||||
|
Capacitors - total
|
401 | 522 | -23 | -20 | -3 | |||||||||||||||
|
Total sales to external
customers
|
4,060 | 10,015 | -59 | -3 | -56 | |||||||||||||||
|
Gross
Profit:
|
||||||||||||||||||||
|
Controls
|
1,306 | 3,027 | -57 | 5 | -62 | |||||||||||||||
|
Capacitors
|
175 | 189 | -7 | -25 | 18 | |||||||||||||||
|
Total
|
1,481 | 3,216 | -54 | 4 | -58 | |||||||||||||||
|
Selling
research and administrative expenses and restructuring
charge:
|
||||||||||||||||||||
|
Controls
|
1,767 | 3,269 | -46 | -8 | -38 | |||||||||||||||
|
Capacitors
|
168 | 271 | -38 | -16 | -22 | |||||||||||||||
|
Unallocated corporate
expense
|
115 | 67 | 72 | 0 | 72 | |||||||||||||||
|
Total
|
2,050 | 3,607 | -43 | -9 | -34 | |||||||||||||||
|
Operating
(loss) income:
|
||||||||||||||||||||
|
Controls
|
(461 | ) | (242 | ) | -90 | 180 | -270 | |||||||||||||
|
Capacitors
|
7 | (82 | ) | 109 | -6 | 114 | ||||||||||||||
|
Unallocated corporate
expense
|
(115 | ) | (67 | ) | -72 | 0 | -72 | |||||||||||||
|
Total
|
(569 | ) | (391 | ) | -46 | 110 | -156 | |||||||||||||
|
Other
income and expense
|
73 | (53 | ) | 238 | 200 | 38 | ||||||||||||||
|
Loss
before income taxes
|
(496 | ) | (444 | ) | -12 | 121 | -133 | |||||||||||||
|
Income
taxes
|
196 | 155 | 26 | -117 | 143 | |||||||||||||||
|
Net
loss
|
$ | (300 | ) | $ | (289 | ) | -4 | 123 | -127 | |||||||||||
- 15
-
Sales in the third quarter ended June
27, 2009 declined by $5,955,000, or 59%, to $4,060,000 compared to $10,015,000
in the same quarter last year, as customers continue to reduce existing
inventory. Volumes shipped were 56% lower. Foreign currency fluctuations, mainly
the strengthening of the US dollar against the British Pound and the Euro
reduced reported sales by $366,000, or 3%, compared to the third quarter of
2008. In the controls business, volumes shipped were lower in all geographic
areas in which the Company operates, except for China. The most significant
reduction was in the global demand for industrial vehicles. The Company has seen
some stabilization in its markets, which has led to a modest recent recovery in
order intake. In addition, new product introduction has led to
customer gains in on- road vehicle applications since the beginning of the third
quarter; however, there cannot yet be any assurance that these gains will
translate into increased sales. In the capacitor business, volumes shipped were
3% lower than during the third quarter last year, which was largely due to lower
demand from customers in the industrial sector. Currency changes, mainly the
strengthening of the US Dollar against the British Pound, reduced reported total
sales in the capacitor business by $105,000, or 20%, from the third quarter of
2008.
Gross profit of $1,481,000 was 36.5% of
sales in the third quarter compared to $3,216,000 or 32.1% of sales in the same
quarter last year. In June of 2008 the Company took action to close its
remaining controls manufacturing activities in the UK and reduce associated
overheads. A combination of the savings realized from this action, negotiated
material cost reductions and foreign currency fluctuations improved the gross
margin percentage. The reduction in gross profit of $1,735,000 was largely due
to the lower volume of products shipped, partially offset by the savings
achieved in production-related overheads and lower material costs. Foreign
currency fluctuations increased reported gross profit by $113,000.
Selling, research and administrative
expenses and restructuring charges in the third quarter of 2009 were $2,050,000,
a reduction of $1,557,000, or 43%, compared to the same period last year when
the Company incurred a restructuring charge of $700,000. Foreign currency
fluctuations reduced operating expense by $318,000 or 9%, compared with the same
quarter last year. Excluding the impact of currency fluctuations, selling,
research and administrative expenses were $539,000, or 15%, lower in the third
quarter compared to the same period last year due largely to restructuring
actions taken in the third quarter of 2008 and the second quarter of
2009.
There was an operating loss in the
third quarter of $569,000, compared with an operating loss of $391,000 in the
same period last year when the Company incurred a restructuring charge of
$700,000. Lower shipment volumes reduced operating profit by $2,299,000. Foreign
currency fluctuations had an overall positive impact of $430,000 in the quarter.
Lower overhead costs in cost of sales and lower selling, research and
administrative expenses and restructuring charges improved operating
profit by $1,691,000 compared to the same quarter last year. In the capacitor
business segment, there was an operating profit of $7,000 compared with an
operating loss of $82,000 in the third quarter last year.
In the third quarter, interest expense
was $5,000, a reduction of $24,000 compared to the prior year. There was a
foreign currency gain of $79,000 in the third quarter of 2009 compared to a loss
of $27,000 in the same period last year. The foreign currency gain in the third
quarter of 2009 was due to the weakening of the US Dollar compared to the
British Pound and the Euro during the quarter.
The Company recorded a loss before
income taxes of $496,000 in the third quarter of 2009 compared to a loss before
income taxes of $444,000 in the same period last year. The main reasons for the
higher losses were the reduction in shipments due to the global economic
slowdown, partially offset by the actions taken by the Company to reduce
overheads and material costs and by favorable currency movements in the
quarter.
There was a net loss for the quarter of
$300,000 or $0.09 per share compared to a net loss of $289,000 and $0.09 per
share in the third quarter of 2008.
- 16
-
Nine
months ended June 27, 2009 and June 28, 2008
The following table compares the
results by segment for the nine months ended June 27, 2009 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
|
||||||||||||||||||||
|
(in
thousands of dollars)
|
%
change due to:
|
|||||||||||||||||||
|
June
27,
2009
|
June
28,
2008
|
Total
|
Currency
|
Volume
/ other
|
||||||||||||||||
|
Sales:
|
||||||||||||||||||||
|
Controls - to external
customers
|
$ | 14,531 | $ | 29,273 | -50 | -5 | -45 | |||||||||||||
|
Capacitors - to external
customers
|
1,239 | 1,545 | -20 | -27 | 7 | |||||||||||||||
|
Capacitors -
inter-segment
|
31 | 28 | 11 | -39 | 50 | |||||||||||||||
|
Capacitors – total
|
1,270 | 1,573 | -19 | -27 | 8 | |||||||||||||||
|
Total sales to external
customers
|
15,770 | 30,818 | -49 | -6 | -43 | |||||||||||||||
|
Gross
Profit:
|
||||||||||||||||||||
|
Controls
|
5,262 | 10,287 | -49 | -6 | -43 | |||||||||||||||
|
Capacitors
|
562 | 525 | 7 | -36 | 43 | |||||||||||||||
|
Total
|
5,824 | 10,812 | -46 | -7 | -39 | |||||||||||||||
|
Selling
research and administrative expenses and restructuring
charge:
|
||||||||||||||||||||
|
Controls
|
6,035 | 9,022 | -33 | -13 | -20 | |||||||||||||||
|
Capacitors
|
485 | 699 | -31 | -23 | -8 | |||||||||||||||
|
Unallocated corporate
expense
|
274 | 262 | 5 | 0 | 5 | |||||||||||||||
|
Total
|
6,794 | 9,983 | -32 | -13 | -19 | |||||||||||||||
|
Operating
(loss) income:
|
||||||||||||||||||||
|
Controls
|
(773 | ) | 1,265 | -161 | 44 | -205 | ||||||||||||||
|
Capacitors
|
77 | (174 | ) | -144 | 17 | -161 | ||||||||||||||
|
Unallocated corporate
expense
|
(274 | ) | (262 | ) | 5 | 0 | 5 | |||||||||||||
|
Total
|
(970 | ) | 829 | -217 | 64 | -281 | ||||||||||||||
|
Other
income and expense
|
(154 | ) | (82 | ) | -88 | -154 | 66 | |||||||||||||
|
(Loss)
income before income taxes
|
(1,124 | ) | 747 | -250 | 54 | -304 | ||||||||||||||
|
Income
taxes
|
390 | (262 | ) | -249 | 54 | -303 | ||||||||||||||
|
Net
(loss) income
|
$ | (734 | ) | $ | 485 | -251 | 55 | -306 | ||||||||||||
Sales in the nine months ended June 27,
2009 were $15,770,000, a decrease of $15,048,000, or 49%, compared to the same
period last year when sales were $30,818,000. Foreign currency fluctuations
accounted for a decrease in reported sales of $1,948,000, or 6%. Excluding the
currency impact, volumes shipped were 43% lower than the same period last year.
The reduced shipment volumes were due to significantly lower levels of demand
across most of the Company’s customer base due to the present challenging
economic climate for our customer’s products. Volumes in the controller business
were 45% lower than in the same period last year, with volumes shipped lower in
all geographic areas in which the Company operates. In the capacitor business,
recorded sales to external customers decreased by $306,000 compared to the same
period last year. Capacitor volumes in the first nine months were higher by
$112,000, or 7%. Foreign currency fluctuations accounted for a $418,000, or 27%,
decrease in the reported sales of capacitors.
Gross profit was 36.9% of sales in this
period compared to 35.1% in the comparable period in 2008. Reported gross profit
reduced by $4,988,000, or 46%, compared to the first nine months of last year.
The reduction in gross profit was largely due to the reduction in volumes
shipped so far this year, partially offset by the savings from the Company’s
actions to reduce overhead costs in the third quarter of 2008 and in the second
quarter of 2009. In the controller business, gross profit of $5,262,000 was
$5,025,000, or 49% lower than in the first nine months of 2008. In the capacitor
business, gross profit of $562,000 was $37,000, or 7% ahead of last
year.
- 17
-
Selling, research and administrative
expenses and restructuring charges were $6,794,000, a decrease of $3,189,000, or
32%, compared to the same period last year. Foreign currency fluctuations
decreased reported operating expenses by $1,326,000, or 13%. Excluding the
impact of the favorable currency fluctuations, selling, research and
administrative expenses and restructuring charges in the first nine months of
2009 were $1,863,000, or 19% lower than the same period last year, with lower
spending in all areas. Restructuring charges were $298,000 in the first nine
months of 2009 compared to a charge of $700,000 in the same period last
year.
There was
an operating loss for the first nine months of 2009 of $970,000 compared with
operating income of $829,000 last year, a decrease of $1,799,000. Lower
shipments in the first nine months of 2009 compared to the same period in 2008
reduced operating income by $4,789,000. Foreign currency fluctuations improved
the reported operating loss for the Company by $531,000. Lower overhead costs in
cost of sales and lower selling, research and administrative expenses and
restructuring charges improved operating profit by $2,459,000 compared to the
same period last year. In the first nine months of 2009 the Company incurred a
charge of $298,000 to reduce costs due to the decline in the global economic
outlook for its customer’s products. In the capacitor business segment, there
was an operating profit of $77,000 compared with an operating loss of $174,000
in the same period last year; this was primarily due to an improvement in the
mix of capacitor sales as well as the impact of the restructuring action taken
in 2008.
In the first nine months of 2009,
interest expense was $21,000 compared to $82,000 in the same period last year.
There was a foreign currency loss of $137,000 in 2009 compared to a loss of
$7,000 in the same period last year, mainly due to the strength of the Euro
compared to the British Pound and the US Dollar.
The Company recorded a loss before
income taxes of $1,124,000 compared to income before income taxes of $747,000 in
the same period last year, a reduction of $1,871,000. Foreign currency
fluctuations reduced the pretax loss by $405,000. The main reason for this was
the reduction in shipments experienced in 2009.
There was a net loss for the first nine
months of the year of $734,000 or $0.23 per share compared to a net income of
$485,000 and income per share of $0.15 in the same period in 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 in the first, second and third quarters of 2009 and will consider
whether to resume paying dividends on a quarter by quarter basis. In the first
quarter, the Company paid a dividend declared for the fourth quarter of 2008 of
$.03 per share, which amounted to $98,000. Cash balances at the end of the third
quarter of 2009 were $193,000, compared to $1,630,000 on September 30, 2008, a
decrease in cash of $1,437,000 in the first nine months of 2009.
In the first nine months of 2009, there
was a net loss of $734,000 and operating activities used $817,000 of cash.
Excluding the impact of currency fluctuations, receivables decreased by
$3,062,000, which generated cash during the period. The number of days sales in
receivables increased in the first nine months of 2009 from 65 days at September
30, 2008 to 73 days at June 27, 2009. The present economic situation has meant
that some customers have been conserving cash and paying later than normal.
Management continually reviews reserves for doubtful accounts and has
receivables insurance covering much of the Company’s outstanding receivables.
Adjusted for the effects of currency, there was an increase in inventories of
$642,000 in the first nine months of 2009. The main reason for the increase in
inventories was that the Company had existing commitments upon its suppliers
when, at the end of the first quarter, there was an extremely sharp decline in
orders from its customers. When adjusted for currency, inventories came down by
$300,000 in the third quarter. The Company reviews its inventories for
obsolescence on a quarterly basis and sees no need to provide further reserves
at this time. There was also a reduction in accounts payable and accrued
expenses of $1,766,000 and $532,000, respectively, which reduced cash balances
during first nine months of 2009. The reduction in accounts payable and accrued
expenses was due to the significant reduction in the Company’s business activity
during the nine month period to June 27, 2009. Capital expenditures in the first
nine months were $194,000. Exchange rate changes decreased reported cash by
$328,000 in the first nine months of 2009.
- 18
-
The Company has no long-term debt but
has overdraft facilities of approximately $1.8 million in the UK and $140,000 in
France. At the end of the third quarter of 2009, the Company had no borrowings
against these overdraft facilities. The UK overdraft facilities are secured by
UK real estate 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 continue to have 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. In addition, to
the extent the Company’s increasing development of new products, such as on road
vehicle applications, that are not yet in inventory results in sales, additional
resources will be needed to manufacture these products for sale. 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 owns real estate
property in the UK that could be used as collateral for raising additional
borrowings, if appropriate.
- 19
-
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. Risks dealing with other
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
relating to the Company’s business 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 2009, approximately 54% of the Company’s sales were made in US Dollars, 22%
were made in British Pounds and 24% 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.
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 2008
and ceased using such hedges. The Company had no foreign currency derivative
financial instruments outstanding as of June 27, 2009.
The following table provides
information about the Company’s foreign currency accounts receivable, accounts
payable and firmly committed sales contracts outstanding as of June 27, 2009.
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 June 27, 2009 are expected to mature based on
the exchange rate of the relevant foreign currency to US Dollars at June 27,
2009:
|
(in
thousands of dollars)
|
||||||||||||||||
|
Expected maturity or
transaction date
|
||||||||||||||||
|
FY2009
|
FY2010
|
Total
|
Fair
Value
|
|||||||||||||
|
On
balance sheet financial instruments:
|
||||||||||||||||
|
In $ US Functional
Currency
|
||||||||||||||||
|
Accounts receivable in British
Pounds
|
484 | - | 484 | 484 | ||||||||||||
|
Accounts receivable in
Euros
|
567 | - | 567 | 567 | ||||||||||||
|
Accounts payable in British
Pounds
|
545 | - | 545 | 545 | ||||||||||||
|
Accounts payable in
Euros
|
500 | - | 500 | 500 | ||||||||||||
|
Anticipated
Transactions
|
||||||||||||||||
|
In $ US Functional
Currency
|
||||||||||||||||
|
Firmly committed sales
contracts
|
||||||||||||||||
|
In British Pounds
|
669 | 48 | 717 | 717 | ||||||||||||
|
In Euros
|
284 | 52 | 336 | 336 | ||||||||||||
Interest
Rate Risk
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 current global financial crisis. If the
banking system or the fixed income or credit markets 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
June 27, 2009.
- 20
-
The Company does not currently have any
long-term interest-bearing debt. The Company incurs short-term borrowings from
time-to-time on its overdraft facilities in Europe at variable interest
rates.
(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 27, 2009,
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
set forth in Part 1A of our 2008 10-K and those 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 significant 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 and other principal economies 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 54% of the
Company’s revenues in the third quarter of 2009 and the largest customer
accounted for 23% 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.
- 21
-
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 its requirements for most 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-contractors’ 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.
- 22
-
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 7, 2009
|
By:
/s/ Paul N. Farquhar
|
|
Paul
N. Farquhar
|
|
|
Chief
Financial Officer (Principal Financial Officer)
|
|
|
Exhibit
|
Description
|
|
3.1
|
Certificate
of Incorporation of the registrant (incorporated by reference to Exhibit
(3) (a) to the Company’s Quarterly Report on Form 10-Q for the quarter
ended July 3, 2004).
|
|
3.2
|
By-laws
of the registrant (incorporated by reference to Exhibit 3.2 to the
Company’s Current Report on Form 8-K filed on September 19,
2008).
|
|
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 (filed
herewith).
|
- 23
-