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 April 3, 2010
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 May 11, 2010
|
|
Common
stock, par value $.10
|
3,338,322
|
TECH/OPS
SEVCON, INC.
FORM
10-Q
FOR
THE QUARTER ENDED APRIL 3, 2010
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- 2
-
Item
1 Financial Statements
Tech/Ops
Sevcon, Inc. and Subsidiaries
|
(in
thousands of dollars except per share data)
|
||||||||
|
April
3,
2010
|
September
30,
2009
|
|||||||
|
(unaudited)
|
(derived
from audited statements)
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash and cash
equivalents
|
$ | 1,312 | $ | 632 | ||||
|
Receivables, net of allowances
for doubtful accounts of $39 at April 3, 2010
and $92 at September 30,
2009
|
4,871 | 3,383 | ||||||
|
Inventories
|
4,541 | 4,723 | ||||||
|
Prepaid expenses and other
current assets
|
976 | 1,398 | ||||||
|
Total
current assets
|
11,700 | 10,136 | ||||||
|
Property,
plant and equipment:
|
||||||||
|
At cost
|
10,546 | 10,745 | ||||||
|
Less: accumulated depreciation
and amortization
|
7,815 | 7,874 | ||||||
|
Net
property, plant and equipment
|
2,731 | 2,871 | ||||||
|
Long-term
deferred tax asset
|
2,258 | 2,357 | ||||||
|
Goodwill
|
1,435 | 1,435 | ||||||
|
Other
long-term assets
|
14 | 11 | ||||||
|
Total
assets
|
$ | 18,138 | $ | 16,810 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ INVESTMENT
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts payable
|
$ | 3,260 | $ | 1,730 | ||||
|
Accrued expenses
|
1,431 | 1,611 | ||||||
|
Accrued and deferred taxes on
income
|
24 | - | ||||||
|
Total
current liabilities
|
4,715 | 3,341 | ||||||
|
Liability
for pension benefits
|
7,106 | 7,166 | ||||||
|
Other
long term liabilities
|
46 | 48 | ||||||
|
Total
liabilities
|
11,867 | 10,555 | ||||||
|
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 3,338,322 shares at
April 3, 2010 and 3,326,322 shares at
September 30,
2009
|
334 | 333 | ||||||
|
Premium paid in on common
stock
|
5,094 | 5,033 | ||||||
|
Retained
earnings
|
7,075 | 6,889 | ||||||
|
Accumulated other comprehensive
loss
|
(6,232 | ) | (6,000 | ) | ||||
|
Total
stockholders’ equity
|
6,271 | 6,255 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 18,138 | $ | 16,810 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
(Unaudited)
Tech/Ops
Sevcon, Inc. and Subsidiaries
|
(in
thousands of dollars except per share data)
|
||||||||||||||||
|
Three
months ended
|
Six
months ended
|
|||||||||||||||
|
|
April
3,
2010
|
March
28,
2009
|
April
3,
2010
|
March
28,
2009
|
||||||||||||
|
Net
sales
|
$ | 6,171 | $ | 4,883 | $ | 12,532 | $ | 11,710 | ||||||||
|
Cost
of sales
|
3,847 | 2,822 | 7,927 | 7,367 | ||||||||||||
|
Gross
profit
|
2,324 | 2,061 | 4,605 | 4,343 | ||||||||||||
|
Selling,
research and administrative expenses
|
2,261 | 2,232 | 4,381 | 4,441 | ||||||||||||
|
Restructuring
charge
|
- | 303 | - | 303 | ||||||||||||
|
Operating
income (loss)
|
63 | (474 | ) | 224 | (401 | ) | ||||||||||
|
Interest
expense
|
(8 | ) | (9 | ) | (10 | ) | (16 | ) | ||||||||
|
Interest
income
|
- | - | 26 | 5 | ||||||||||||
|
Foreign
currency gain (loss)
|
(14 | ) | 73 | 47 | (216 | ) | ||||||||||
|
Income
(loss) before income taxes
|
41 | (410 | ) | 287 | (628 | ) | ||||||||||
|
Income
taxes (provision) benefit
|
(14 | ) | 117 | (101 | ) | 194 | ||||||||||
|
Net
income (loss)
|
27 | (293 | ) | 186 | (434 | ) | ||||||||||
|
Basic
income (loss) per share
|
$ | .01 | $ | (.09 | ) | $ | .06 | $ | (.13 | ) | ||||||
|
Fully
diluted income (loss) per share
|
$ | .01 | $ | (.09 | ) | $ | .06 | $ | (.13 | ) | ||||||
(Unaudited)
Tech/Ops
Sevcon, Inc. and Subsidiaries
|
(in
thousands of dollars)
|
||||||||||||||||
|
Three
months ended
|
Six
months ended
|
|||||||||||||||
|
April
3,
2010
|
March
28,
2009
|
April
3,
2010
|
March
28,
2009
|
|||||||||||||
|
Net
income (loss)
|
27 | (293 | ) | 186 | (434 | ) | ||||||||||
|
Foreign
currency translation adjustment
|
(206 | ) | (329 | ) | (249 | ) | (1,462 | ) | ||||||||
|
Amortization
of pension transition items to income
|
8 | 5 | 17 | 16 | ||||||||||||
|
Comprehensive
loss
|
$ | (171 | ) | $ | (617 | ) | $ | (46 | ) | $ | (1,880 | ) | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
(Unaudited)
Tech/Ops
Sevcon, Inc. and Subsidiaries
|
(in
thousands of dollars)
|
||||||||
|
Six
months ended
|
||||||||
|
April
3,
2010
|
March
28,
2009
|
|||||||
|
Cash
flow from operating activities:
|
||||||||
|
Net
income (loss)
|
$ | 186 | $ | (434 | ) | |||
|
Adjustments
to reconcile net income (loss) to net cash from operating
activities:
|
||||||||
|
Depreciation
|
283 | 267 | ||||||
|
Stock-based
compensation
|
63 | 88 | ||||||
|
Pension contributions less than
(greater than) pension expense
|
258 | (2 | ) | |||||
|
Deferred tax
provision
|
23 | 16 | ||||||
|
Increase (decrease) in cash
resulting from changes in operating assets and
liabilities:
|
||||||||
|
Receivables
|
(1,644 | ) | 2,180 | |||||
|
Inventories
|
34 | (869 | ) | |||||
|
Prepaid expenses and other
current assets
|
(133 | ) | (154 | ) | ||||
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Accounts
payable
|
1,656 | (555 | ) | |||||
|
Accrued
expenses
|
(119 | ) | (324 | ) | ||||
|
Accrued and deferred taxes on
income
|
528 | (480 | ) | |||||
|
Net
cash generated from (used by) operating activities
|
1,135 | (267 | ) | |||||
|
Cash
flow used by investing activities:
|
||||||||
|
Acquisition of property, plant and
equipment
|
(267 | ) | (162 | ) | ||||
|
Net
cash used by investing activities
|
(267 | ) | (162 | ) | ||||
|
Cash
flow used by financing activities:
|
||||||||
|
Dividends paid
|
- | (98 | ) | |||||
|
Net cash used by financing
activities
|
- | (98 | ) | |||||
|
Effect
of exchange rate changes on cash
|
(188 | ) | (349 | ) | ||||
|
Net
increase (decrease) in cash
|
680 | (876 | ) | |||||
|
Beginning
balance - cash and cash equivalents
|
632 | 1,630 | ||||||
|
Ending
balance - cash and cash equivalents
|
$ | 1,312 | $ | 754 | ||||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash paid for income
taxes
|
$ | - | $ | 238 | ||||
|
Cash paid for
interest
|
$ | 10 | $ | 16 | ||||
|
Supplemental
disclosure of non-cash financing activity:
|
||||||||
|
Dividend declared
|
$ | - | $ | - | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
Notes to Consolidated Financial Statements – April 3,
2010
(Unaudited)
|
(1)
|
Basis
of presentation
|
Tech/Ops Sevcon, Inc. (“Tech/Ops”) is a
Delaware corporation organized on December 22, 1987 to carry on the electronic
controls business previously performed by Tech/Ops, Inc. Through wholly-owned
subsidiaries located in the United States, the United Kingdom, France, South
Korea and Japan, the Company designs and sells, under the Sevcon name,
microprocessor based controls for zero emission and hybrid electric vehicles.
The controls are used to vary the speed and movement of vehicles, to integrate
specialized functions and to prolong the shift life of vehicles’ power source.
The Company’s customers are manufacturers of on-road, off-road and industrial
vehicles including automobiles, buses, fork lift trucks, aerial lifts, mining
vehicles, airport ground support vehicles, utility vehicles, sweepers and other
battery powered vehicles
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 as of April 3, 2010 and the
results of operations and cash flows for the six months ended April 3, 2010.
These unaudited interim financial statements should be read in conjunction with
the 2009 annual consolidated financial statements and related notes included in
the 2009 Tech/Ops Annual Report filed on Form 10-K (the “2009 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 are set forth in Note 1 to the financial statements in the
2009 10-K. Other than as set forth in Item 2, there have been no changes since
the end of fiscal 2009 to the significant accounting policies followed by
Tech/Ops.
The results of operations for the six
month period ended April 3, 2010 are not necessarily indicative of the results
to be expected for the full year.
(2) New
accounting pronouncements
In December 2008 the Financial
Accounting Standards Board (“FASB”) issued authoritative guidance regarding
disclosures about postretirement benefit plan assets. The new guidance requires
employers of public and nonpublic companies to disclose more information about
how investment allocation decisions are made, more information about major
categories of plan assets, including concentration of risk and fair-value
measurements, and the fair-value techniques and inputs used to measure plan
assets. The disclosure requirements are effective for annual financial
statements for years ending after December 15, 2009. The disclosure requirements
will be adopted for our annual financial statements for the year ended September
30, 2010, on a prospective basis.
(3) Stock-based
compensation plans
Under the Company’s 1996 Equity
Incentive Plan (the “Plan”) there were 260,000 shares reserved and available for
grant at April 3, 2010. Recipients of grants 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”). SARs
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 fair value of each grant is
measured on the date of grant and is recognized over the period during which the
recipient is required to provide service in connection with the grant. The fair
value of stock grants is determined using the market price of our common stock
on the date of grant, while the value of option grants is estimated using the
Black-Scholes option pricing model. There were no option grants in the first six
months of 2010 or in fiscal 2009 and therefore no assumptions were made as to
risk-free interest rate, expected dividend yield, expected life or expected
volatility in 2010 or 2009. When options are exercised the Company normally
issues new shares.
A summary of option activity for all
plans for the six months ended April 3, 2010 is as follows:
|
Options
No.
of shares
|
Weighted
average
Exercise
Price
|
Weighted
average
remaining
contractual
life
(years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
Outstanding
at September 30, 2009
|
63,500 | $ | 7.03 |
2.0
years
|
$ | - | ||||||||||
|
Granted
|
- | - | - | - | ||||||||||||
|
Exercised
|
- | - | - | - | ||||||||||||
|
Cancelled
|
(17,500 | ) | 10.75 | - | - | |||||||||||
|
Outstanding
at April 3, 2010
|
46,000 | $ | 5.62 |
2.5
years
|
$ | 20,800 | ||||||||||
|
Exercisable
at April 3, 2010
|
34,000 | $ | 5.69 |
2.7
years
|
$ | 15,400 | ||||||||||
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 $5.04 closing market price of the
Company’s common stock at April 3, 2010. At April 3, 2010, there was $168,000 of
unrecognized compensation expense related to share options and restricted stock
granted under the Plan. The Company expects to recognize that cost over a
weighted average period of 2.7 years.
In
January 2010, the Company granted 12,000 shares of restricted stock to six
non-employee directors, which will vest on the day before the 2011 annual
meeting providing that the grantee remains a director of the Company, or as
otherwise determined by the Compensation Committee. The fair value of the stock
measured on the date of grant was $27,000 based on the fair market value of the
stock on date of grant. 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 restricted stock grants in the
first six months of fiscal 2010 was $4,000 and the subsequent charge will be
approximately $7,000 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. However, 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 six
months ended April 3, 2010 was as follows:
|
Number
of shares of
Restricted
Stock
|
Weighted
Average
Grant-Date
Fair
Value
|
|||||||
|
Non-vested
balance as of September 30, 2009
|
79,000 | $ | 3.62 | |||||
|
Granted
|
12,000 | $ | 2.21 | |||||
|
Vested
|
(33,000 | ) | $ | 3.94 | ||||
|
Forfeited
|
- | $ | - | |||||
|
Non-vested
balance as of April 3, 2010
|
58,000 | $ | 3.14 | |||||
Total stock based compensation
recognized on stock options and restricted stock for the three and six month
periods ended April 3, 2010 was $24,000 and $63,000, respectively, and for the
three and six month periods ended March 28, 2009 was $42,000 and $88,000,
respectively.
(4) Cash
dividends
While the Company has paid regular
quarterly dividends in the past, due to the continuing uncertain economic
outlook, the Board of Directors continues to suspend the payment of dividends
and will consider whether to resume paying dividends on a quarter by quarter
basis.
(5) Calculation
of earnings per share and weighted average shares outstanding
Basic and fully diluted earnings per
share were calculated as follows:
|
(in
thousands except per share data)
|
||||||||||||||||
|
Three
Months ended
|
Six
Months ended
|
|||||||||||||||
|
April
3,
2010
|
March
28,
2009
|
April
3,
2010
|
March
28,
2009
|
|||||||||||||
|
Net
income (loss)
|
$ | 27 | $ | (293 | ) | $ | 186 | $ | (434 | ) | ||||||
|
Weighted
average shares outstanding - basic
|
3,277 | 3,243 | 3,265 | 3,235 | ||||||||||||
|
Basic
income (loss) per share
|
$ | .01 | $ | (.09 | ) | $ | .06 | $ | (.13 | ) | ||||||
|
Common
stock equivalents
|
9 | - | 12 | - | ||||||||||||
|
Weighted
average shares outstanding - diluted
|
3,286 | 3,243 | 3,277 | 3,235 | ||||||||||||
|
Diluted
income (loss) per share
|
$ | .01 | $ | (.09 | ) | $ | .06 | $ | (.13 | ) | ||||||
|
No.
of options that are anti-dilutive excluded from calculation of common
stock equivalents
|
46 | 64 | 46 | 64 | ||||||||||||
|
No.
of shares of non-vested restricted stock that are anti-dilutive excluded
from calculation of common stock equivalents
|
- | 79 | - | 79 | ||||||||||||
(6) Segment information
The Company has two reportable
segments: electronic controls and capacitors. The electronic controls segment
produces microprocessor based control systems for zero emission and hybrid
electric vehicles. The capacitors segment produces metalized film capacitors 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 2009 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 April 3, 2010
|
||||||||||||||||
|
Controls
|
Capacitors
|
Corporate
|
Total
|
|||||||||||||
|
Sales
to external customers
|
$ | 5,802 | $ | 369 | $ | - | $ | 6,171 | ||||||||
|
Inter-segment
revenues
|
- | 7 | - | 7 | ||||||||||||
|
Operating
income (loss)
|
105 | 16 | (58 | ) | 63 | |||||||||||
|
Identifiable
assets
|
17,032 | 846 | 260 | 18,138 | ||||||||||||
|
Three
months ended March 28, 2009
|
||||||||||||||||
|
Controls
|
Capacitors
|
Corporate
|
Total
|
|||||||||||||
|
Sales
to external customers
|
$ | 4,486 | $ | 397 | $ | - | $ | 4,883 | ||||||||
|
Inter-segment
revenues
|
- | 20 | - | 20 | ||||||||||||
|
Operating
income (loss)
|
(391 | ) | 18 | (101 | ) | (474 | ) | |||||||||
|
Identifiable
assets
|
14,676 | 652 | 557 | 15,885 | ||||||||||||
|
Six
months ended April 3, 2010
|
||||||||||||||||
|
Controls
|
Capacitors
|
Corporate
|
Total
|
|||||||||||||
|
Sales
to external customers
|
$ | 11,767 | $ | 765 | $ | - | $ | 12,532 | ||||||||
|
Inter-segment
revenues
|
- | 14 | - | 14 | ||||||||||||
|
Operating
income (loss)
|
320 | 37 | (133 | ) | 224 | |||||||||||
|
Depreciation
|
264 | 18 | 1 | 283 | ||||||||||||
|
Identifiable
assets
|
17,032 | 846 | 260 | 18,138 | ||||||||||||
|
Capital
expenditures
|
200 | 67 | - | 267 | ||||||||||||
|
Six
months ended March 28, 2009
|
||||||||||||||||
|
Controls
|
Capacitors
|
Corporate
|
Total
|
|||||||||||||
|
Sales
to external customers
|
$ | 10,866 | $ | 844 | $ | - | $ | 11,710 | ||||||||
|
Inter-segment
revenues
|
- | 25 | - | 25 | ||||||||||||
|
Operating
income (loss)
|
(312 | ) | 70 | (159 | ) | (401 | ) | |||||||||
|
Depreciation
|
250 | 15 | 2 | 267 | ||||||||||||
|
Identifiable
assets
|
14,676 | 652 | 557 | 15,885 | ||||||||||||
|
Capital
expenditures
|
155 | 7 | - | 162 | ||||||||||||
In the electronic controls segment, the
revenues were derived from the following products and services:
|
(in
thousands of dollars)
|
||||||||||||||||
|
Three
Months ended
|
Six
Months ended
|
|||||||||||||||
|
April
3,
2010
|
March
28,
2009
|
April
3,
2010
|
March
28,
2009
|
|||||||||||||
|
Electronic
controls for zero emission and hybrid electric vehicles
|
$ | 3,315 | $ | 2,456 | $ | 7,182 | $ | 6,448 | ||||||||
|
Accessory
and aftermarket products and services
|
2,487 | 2,030 | 4,585 | 4,418 | ||||||||||||
|
Total
electronic controls segment revenues
|
$ | 5,802 | $ | 4,486 | $ | 11,767 | $ | 10,866 | ||||||||
(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
|
Six
Months ended
|
|||||||||||||||
|
April
3,
2010
|
March
28,
2009
|
April
3,
2010
|
March
28,
2009
|
|||||||||||||
|
Research
and Development expense
|
$ | 819 | $ | 674 | $ | 1,495 | $ | 1,436 | ||||||||
|
Percentage
of sales
|
13.3% | 13.8% | 11.9% | 12.3% | ||||||||||||
(8) Employee
benefit plans
Tech/Ops has defined benefit plans
covering the majority of its U.S. and U.K. employees. There is also a small
defined contribution plan. The following table sets forth the components of the
net pension cost:
|
(in
thousands of dollars)
|
||||||||||||||||
|
Three
Months ended
|
Six
Months ended
|
|||||||||||||||
|
April
3,
2010
|
March
28,
2009
|
April
3,
2010
|
March
28,
2009
|
|||||||||||||
|
Service
cost
|
$ | 80 | $ | 74 | $ | 164 | $ | 166 | ||||||||
|
Interest
cost
|
295 | 266 | 605 | 542 | ||||||||||||
|
Expected
return on plan assets
|
(228 | ) | (252 | ) | (465 | ) | (520 | ) | ||||||||
|
Amortization
of net loss
|
50 | - | 118 | - | ||||||||||||
|
Amortization
of prior service cost
|
12 | 11 | 24 | 22 | ||||||||||||
|
Net
periodic benefit cost
|
209 | 99 | 446 | 210 | ||||||||||||
|
Net
cost of defined contribution plans
|
$ | 6 | $ | 8 | $ | 13 | $ | 17 | ||||||||
The following table sets forth the
movement in the liability for pension benefits in the six months ended April 3,
2010:
|
(in
thousands of dollars)
|
||||||||
|
Six
Months ended
|
||||||||
|
April
3,
2010
|
March
28,
2009
|
|||||||
|
Liability
for pension benefits at beginning of period
|
$ | 7,166 | $ | 378 | ||||
|
Net
periodic benefit cost
|
446 | 210 | ||||||
|
Plan
contributions
|
(188 | ) | (201 | ) | ||||
|
Amortization
of prior service cost
|
(24 | ) | - | |||||
|
Effect
of exchange rate changes
|
(294 | ) | (80 | ) | ||||
|
Balance
at end of period
|
$ | 7,106 | $ | 307 | ||||
Tech/Ops did not contribute to its U.S.
pension plan in the six months ended April 3, 2010; it presently anticipates
contributing $240,000 to fund its U.S. plan in the remainder of 2010. In
addition, employer contributions to the U.K. defined benefit plan were $188,000
in the first six months and are estimated to total $380,000 in
2010.
(9) Inventories
Inventories were comprised
of:
|
(in
thousands of dollars)
|
||||||||
|
April
3,
2010
|
September
30,
2009
|
|||||||
|
Raw
materials
|
$ | 697 | $ | 676 | ||||
|
Work-in-process
|
53 | 141 | ||||||
|
Finished
goods
|
3,791 | 3,906 | ||||||
| $ | 4,541 | $ | 4,723 | |||||
(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 April 3, 2010 and September 30, 2009 approximates fair value
due to the short-term nature of these instruments. At April 3, 2010 the Company
had no financial assets or liabilities that are measured at fair value on a
recurring basis.
(11) Accrued
expenses
Set out below is an analysis of other
accrued expenses at April 3, 2010 and September 30, 2009, which shows separately
any items in excess of 5% of total current liabilities:
|
(in
thousands of dollars)
|
||||||||
|
April
3,
2010
|
September
30,
2009
|
|||||||
|
Accrued
compensation and related costs
|
$ | 757 | $ | 497 | ||||
|
Warranty
reserves
|
211 | 217 | ||||||
|
Other
accrued expenses
|
463 | 897 | ||||||
| $ | 1,431 | $ | 1,611 | |||||
(12) Warranty
reserves
The movement in warranty reserves was
as follows:
|
(in
thousands of dollars)
|
||||||||||||||||
|
Three
Months ended
|
Six
Months ended
|
|||||||||||||||
|
April
3,
2010
|
March
28,
2009
|
April
3
2010
|
March
28,
2009
|
|||||||||||||
|
Warranty
reserves at beginning of period
|
$ | 237 | $ | 306 | $ | 217 | $ | 362 | ||||||||
|
Decrease
in beginning balance for warranty obligations settled during the
period
|
(50 | ) | (209 | ) | (56 | ) | (236 | ) | ||||||||
|
Other
changes to pre-existing warranties
|
16 | 93 | 16 | 93 | ||||||||||||
|
Foreign
currency translation adjustment
|
(8 | ) | (6 | ) | (7 | ) | (49 | ) | ||||||||
|
Net
increase in warranty reserves for products sold during the
period
|
16 | 9 | 41 | 23 | ||||||||||||
|
Warranty
reserves at end of period
|
$ | 211 | $ | 193 | $ | 211 | $ | 193 | ||||||||
(13) Subsequent
events
In preparing these interim consolidated
financial statements, the Company has evaluated, for the potential recognition
or disclosure, events or transactions subsequent to the end of the most recent
quarterly period and through the date these financial statements were available
to be issued. No material subsequent events were identified that require
recognition or disclosure in these financial statements.
Item 2 Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
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 referred to
and described under “Risk Factors” below and others discussed in this
report.
CRITICAL
ACCOUNTING ESTIMATES
As of April 3, 2010, there have been no
material changes to the critical accounting estimates described in the Company’s
2009 10-K. However, the relatively slow worldwide recovery from the economic
troubles experienced in 2008 and 2009 may continue to have a negative effect on
our business and 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 declines or does not recover as previously projected,
inventory write-downs may be
required;
|
|
(iii)
|
as
a consequence of the worldwide recession, some suppliers of
certain key components significantly reduced their
manufacturing capacity; should the future manufacture and availability of
these components not increase in line with actual demand for the Company’s
products from customers, this could have a material adverse effect on our
future income and cash flows; or
|
|
(iv)
|
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.
OVERVIEW
OF SECOND QUARTER AND FIRST SIX MONTHS
Results
of Operations
Three
months ended April 3, 2010 and March 28, 2009
Due to the global recession of 2008 and
2009, some of our customers continue to experience substantially lower demand
for their products in construction, distribution and mining. This situation has
resulted in a materially lower demand for our products from these traditional
customers, partially offset by increased demand from customers in
transportation, compared with the equivalent period in 2009. The following table
compares results by segment for the second quarter of 2010 with the prior year
period and shows the percentage changes in total and split between the currency
impact and volume changes:
|
Three
months ended
|
%
change due to:
|
|||||||||||||||||||
|
April
3,
2010
|
March
28,
2009
|
Total
|
Currency
|
Volume
|
||||||||||||||||
|
Sales:
|
||||||||||||||||||||
|
Controls - to external
customers
|
$ | 5,802 | $ | 4,486 | 29 | % | 4 | % | 25 | % | ||||||||||
|
Capacitors - to external
customers
|
369 | 397 | -7 | % | 9 | % | -16 | % | ||||||||||||
|
Capacitors -
inter-segment
|
7 | 20 | -65 | % | -1 | % | -64 | % | ||||||||||||
|
Capacitors – total
|
376 | 417 | -10 | % | 8 | % | -18 | % | ||||||||||||
|
Total sales to external
customers
|
6,171 | 4,883 | 26 | % | 4 | % | 22 | % | ||||||||||||
|
Gross
Profit:
|
||||||||||||||||||||
|
Controls
|
2,153 | 1,880 | 15 | % | -7 | % | 22 | % | ||||||||||||
|
Capacitors
|
171 | 181 | -6 | % | 9 | % | -15 | % | ||||||||||||
|
Total
|
2,324 | 2,061 | 13 | % | -5 | % | 18 | % | ||||||||||||
|
Selling
research and administrative expenses and restructuring
charge:
|
||||||||||||||||||||
|
Controls
|
2,048 | 2,271 | -10 | % | 5 | % | -15 | % | ||||||||||||
|
Capacitors
|
155 | 163 | -5 | % | 8 | % | -13 | % | ||||||||||||
|
Unallocated corporate
expense
|
58 | 101 | -43 | % | 0 | % | -43 | % | ||||||||||||
|
Total
|
2,261 | 2,535 | -11 | % | 5 | % | -16 | % | ||||||||||||
|
Operating
income (loss):
|
||||||||||||||||||||
|
Controls
|
105 | (391 | ) | 127 | % | -63 | % | 190 | % | |||||||||||
|
Capacitors
|
16 | 18 | -11 | % | 20 | % | -31 | % | ||||||||||||
|
Unallocated corporate
expense
|
(58 | ) | (101 | ) | 43 | % | 0 | % | 43 | % | ||||||||||
|
Total
|
63 | (474 | ) | 113 | % | -51 | % | 164 | % | |||||||||||
|
Other
income and expense
|
(22 | ) | 64 | -134 | % | -133 | % | -1 | % | |||||||||||
|
Income
(loss) before income taxes
|
41 | (410 | ) | 110 | % | -80 | % | 190 | % | |||||||||||
|
Income
taxes
|
(14 | ) | 117 | -112 | % | 22 | % | -134 | % | |||||||||||
|
Net
income (loss)
|
$ | 27 | $ | (293 | ) | 109 | % | -103 | % | 212 | % | |||||||||
Sales in the second quarter of 2010
increased by $1,288,000, or 26%, to $6,171,000 compared to $4,883,000 in the
same quarter last year. This increase was due to increased shipment volumes,
which were $1,062,000 or 22% higher than last year, caused by some improvement
in demand for the Company’s products in its traditional markets and sales of new
products to new customers and for new applications. Foreign currency
fluctuations increased reported sales in the second fiscal quarter by $226,000,
or 4%, mainly due to a stronger U.S. Dollar compared to both the British Pound
and the Euro in the prior year period.
In the controls business segment,
volumes shipped were higher in the Far East and in North America by 51% and 50%
respectively, but were flat in Europe, compared to the second quarter last year.
The Company believes its traditional markets have stabilized at the lower sales
levels seen during the worldwide recession of late 2008 and calendar 2009. The
improvement in demand for the Company’s products compared to the same period
last year has been driven by new markets for the Company’s new and existing
products. Continued new product introduction has led to customer gains in both
on-road and off-road
vehicle applications since the beginning of the third quarter of fiscal 2009;
however, there cannot yet be any assurance that these gains will continue to
translate into increased sales. In the capacitor business, reported sales to
external customers were 7% lower than in the second quarter last year. The lower
recorded sales to external customers was due to a reduction in demand from
customers of 16%, mainly in the project-based railway signaling sector. Currency
changes, mainly the stronger U.S. Dollar compared to the British Pound in the
prior year period, increased reported sales to external customers in the
capacitor business by $34,000, or 9%, compared with the second quarter of
2009.
Gross profit of $2,324,000 was 37.7% of
sales in the second quarter compared to $2,061,000 or 42.2% of sales in the same
quarter last year. Higher volumes shipped increased reported gross profit
although this was partially offset by deterioration in the gross margin compared
to the same period last year caused substantially by the adverse effect of a
stronger US dollar in fiscal 2009 compared to the same quarter in fiscal 2010.
The net increase in reported gross profit from higher shipment volume offset by
the lower gross profit margin was $373,000. Foreign currency fluctuations
decreased the reported gross profit by $110,000 which further reduced the
reported gross profit margin by 1.8% compared to the same period last
year.
Selling, research and administrative
expenses in the second quarter of 2010 were $2,261,000, a reduction of $274,000,
or 11%, compared to the same period last year when the Company took a
restructuring charge of $303,000. Foreign currency fluctuations increased
operating expense by $134,000 or 5%, compared with the same quarter last year.
Excluding the restructuring charge and the adverse effect of foreign currency
fluctuations, selling, research and administrative expenses were $105,000, or
5%, lower in the second quarter compared to the same period last year due
largely to cost savings achieved as a result of the restructuring exercise in
the second quarter of fiscal 2009.
There was an operating profit in the
second quarter of $63,000, which was an improvement of $537,000 compared with
the reported operating loss of $474,000 in the same period last year. This
improvement was despite overall adverse foreign currency fluctuations of
$244,000 compared to the second quarter last year. The increase in operating
income was due to a combination of higher demand for the Company’s products and
lower operating expenses offset by the impact of adverse foreign currency
fluctuations. In the capacitor business segment, there was an operating profit
of $16,000 compared to a profit of $18,000 in the second quarter last
year.
In the second quarter of fiscal 2010
there was a foreign currency loss of $14,000 compared to a gain of $73,000 in
the same period last year. The foreign currency loss in the second quarter of
2010 was due to the stronger U.S. Dollar compared to the British Pound and the
Euro in the prior year period.
The Company recorded a profit before
income taxes of $41,000 in the second quarter of 2010 compared to a loss before
income taxes of $410,000 in the same period last year. There was a net profit
for the quarter of $27,000 or $.01 per share compared to a net loss of $293,000
and a loss of $.09 per share in the second quarter of fiscal 2009.
Six
months ended April 3, 2010 and March 28, 2009
The following table compares first half
year results by segment for the six months ended April 3, 2010 with the same
period in the prior year, and shows the percentage changes in total and split
between the currency impact and volume changes:
|
Six
months ended
|
%
change due to:
|
|||||||||||||||||||
|
April
3,
2009
|
March
28,
2009
|
Total
|
Currency
|
Volume
|
||||||||||||||||
|
Sales:
|
||||||||||||||||||||
|
Controls - to external
customers
|
$ | 11,767 | $ | 10,866 | 8 | % | 4 | % | 4 | % | ||||||||||
|
Capacitors - to external
customers
|
765 | 844 | -9 | % | 8 | % | -17 | % | ||||||||||||
|
Capacitors -
inter-segment
|
14 | 25 | -44 | % | 3 | % | -47 | % | ||||||||||||
|
Capacitors - total
|
779 | 869 | -10 | % | 8 | % | -18 | % | ||||||||||||
|
Total sales to external
customers
|
12,532 | 11,710 | 7 | % | 4 | % | 3 | % | ||||||||||||
|
Gross
Profit:
|
||||||||||||||||||||
|
Controls
|
4,258 | 3,956 | 8 | % | 1 | % | 7 | % | ||||||||||||
|
Capacitors
|
347 | 387 | -10 | % | 8 | % | -18 | % | ||||||||||||
|
Total
|
4,605 | 4,343 | 6 | % | 1 | % | 5 | % | ||||||||||||
|
Selling
research and administrative expenses and restructuring
charge:
|
||||||||||||||||||||
|
Controls
|
3,938 | 4,268 | -8 | % | 5 | % | -13 | % | ||||||||||||
|
Capacitors
|
310 | 317 | -2 | % | 8 | % | -10 | % | ||||||||||||
|
Unallocated corporate
expense
|
133 | 159 | -16 | % | 0 | % | -16 | % | ||||||||||||
|
Total
|
4,381 | 4,744 | -8 | % | 5 | % | -13 | % | ||||||||||||
|
Operating
income (loss):
|
||||||||||||||||||||
|
Controls
|
320 | (312 | ) | 203 | % | -67 | % | 270 | % | |||||||||||
|
Capacitors
|
37 | 70 | -47 | % | 7 | % | -54 | % | ||||||||||||
|
Unallocated corporate
expense
|
(133 | ) | (159 | ) | 16 | % | 0 | % | 16 | % | ||||||||||
|
Total
|
224 | (401 | ) | 156 | % | -51 | % | 207 | % | |||||||||||
|
Other
income and expense
|
63 | (227 | ) | 128 | % | 117 | % | 11 | % | |||||||||||
|
Income
(loss) before income taxes
|
287 | (628 | ) | 146 | % | 10 | % | 136 | % | |||||||||||
|
Income
taxes
|
(101 | ) | 194 | -152 | % | -12 | % | -140 | % | |||||||||||
|
Net
income (loss)
|
$ | 186 | $ | (434 | ) | 143 | % | 9 | % | 134 | % | |||||||||
Sales in the six months ended April 3,
2009 were $12,532,000, an increase of $822,000, or 7%, compared to the same
period last year when sales were $11,710,000. Foreign currency fluctuations
accounted for an increase in reported sales of $495,000, or 4%. Excluding the
currency impact, the increase was due to increased volumes shipped, which were
3% higher than in the same period last year. The higher shipment volumes were
due to a modest improvement in the Company’s traditional markets and sales of
new products to new customers and for new applications. Volume shipped in the
controls business was overall 4% higher than in the same period last year, with
significant sales increases in North America and Asia offset by lower sales in
Europe. In the capacitor business, recorded sales to external customers
decreased by $79,000, or 9%, compared to the same period last year largely due
to lower demand from the railway signaling sector. Capacitor volumes shipped in
the first six months were lower by $143,000, or 17%. Foreign currency
fluctuations accounted for a $64,000, or 8%, increase in the reported sales of
capacitors.
Gross profit of $4,605,000 was 36.7% of
sales in this period compared to $4,343,000 or 37.1% in the comparable period in
fiscal 2009. Foreign currency fluctuations increased reported gross profit by
$48,000 as compared with the prior year period; excluding the impact of foreign
currency fluctuations, gross profit increased by $214,000, or 5%, compared to
the first half of last year due to the increase in volumes shipped in the
period. Excluding the impact of foreign currency fluctuations, in the controller
business, gross profit increased by $284,000, or 7%, compared to the first six
months of fiscal 2009 due to increased volumes shipped; however, in the
capacitor business, gross profit decreased by $70,000, or 18%, due to the lower
demand in the first half year compared to the prior year.
Selling, research and administrative
expenses were $4,381,000, a decrease of $363,000, or 8%, compared to the last
year when the Company took a $303,000 restructuring charge. Foreign currency
fluctuations increased reported selling, research and administrative expenses by
$252,000, or 5%, due to the stronger U.S. Dollar compared to both the British
Pound and the Euro in the prior year period. Excluding the restructuring charge
and the adverse effect of currency fluctuations, selling, research and
administrative expenses in the first six months of the year were $312,000, or 7%
lower than the same period last year due largely to cost savings achieved as a
result of the restructuring exercise in the second quarter of fiscal
2009.
Operating income in the first half of
fiscal 2010 was $224,000 compared with an operating loss of $401,000 last year,
an increase of $625,000. Foreign currency fluctuations resulted in a $204,000
decrease in reported operating income for the Company. Excluding the adverse
currency impact, operating income was $829,000 higher than last year due to
higher demand for the Company’s products and lower operating expense compared to
the same period last year.
In the first half of fiscal 2010 there
was a foreign currency gain of $47,000 compared to a loss of $216,000 in the
same period last year, mainly due to a stronger U.S. Dollar compared to both the
British Pound and the Euro in the prior year period.
The Company recorded a profit before
income taxes of $287,000 compared to a loss before income taxes of $628,000 in
the same period last year, an increase of $915,000. Foreign currency
fluctuations increased the pretax loss by $61,000.
There was a net profit for the
first half of fiscal 2010 of $186,000 or $.06 per share compared to a net loss
of $434,000 and $.13 per share in the same period in fiscal 2009.
Financial Condition
While the Company has paid regular
quarterly dividends in the past, due to the continuing uncertain economic
outlook, the Board of Directors continues to suspend the payment of dividends
and will consider whether to resume paying dividends on a quarter by quarter
basis.
Cash balances at the end of the second
quarter of fiscal 2010 were $1,312,000, compared to $632,000 on September 30,
2009, an increase in cash of $680,000 in the first six months of fiscal
2010.
In the first six months of fiscal 2010,
there was a net profit of $186,000 and operating activities generated $1,135,000
of cash. Excluding the impact of currency fluctuations, receivables increased by
$1,644,000, which reduced cash during the period; however, payables increased by
$1,656,000, which generated cash during the period. The number of days sales in
receivables decreased in the first six months of 2010 from 67 days at September
30, 2009 to 63 days at April 3, 2010. Adjusted for the effects of currency,
there was an increase in cash of $34,000 in the period due to the impact of a
reduction in inventories in the first six months of fiscal 2010 as compared with
the prior year period. Capital expenditures in the first six months were
$267,000. Exchange rate changes decreased reported cash by $188,000 in the first
six months of fiscal 2010 as compared with the prior year period due to the
strengthening of the U.S. Dollar compared to both the British Pound and the Euro
during the period.
The Company has received a governmental
grant of $375,000, payable over the next year, that it will use to help defray
new product development costs.
The reserve for doubtful accounts
reduced from $92,000 at September 30, 2009 to $39,000 at April 3, 2010 due to
the write off of an uncollectable account of $51,000 in the Company’s French
subsidiary which had previously been fully reserved.
The Company has no long-term debt but
has overdraft facilities of approximately $460,000 in the U.K. and $135,000 in
France. At the end of the second quarter of 2010, the Company had no borrowings
against these overdraft facilities. The U.K. overdraft facilities are secured by
U.K. 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.
There were no significant capital
expenditure commitments at April 3, 2010. It is estimated that the Company will
make contributions to its U.K. and U.S. defined benefit pension plans of
approximately $620,000 in fiscal 2010; should the Company suffer a material
reduction in revenues in 2010 this commitment could adversely impact the
Company’s financial position. In the opinion of management, the Company’s
requirements for working capital to meet projected operational and capital
spending in both the short and long term can be met by a combination of existing
cash resources, future earnings and existing borrowing facilities in Europe.
However, the outlook remains uncertain, given the slow worldwide recovery from
the recession experienced in late 2008 and in 2009. Any material reduction in
revenues will have a materially adverse impact on the Company’s financial
position, which would be exacerbated if any of the Company’s lenders withdraws
or reduces available credit. If the Company is unable to generate sufficient
cash from operations or 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, which would materially adversely
affect its results.
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 six months of
2010, approximately 59% of the Company’s sales were made in U.S. Dollars, 21%
were made in British Pounds and 20% were made in Euros. Over 65% 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 U.S. 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 U.S. Dollars is also subject to
fluctuations in foreign currency exchange rates.
The following table provides
information about the Company’s foreign currency accounts receivable, accounts
payable and firmly committed sales contracts outstanding as of April 3, 2010.
The information is provided in U.S. 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 April 3, 2010 are expected to mature
based on the exchange rate of the relevant foreign currency to U.S. Dollars at
April 3, 2010:
|
(in
thousands of dollars)
|
||||||||
|
Expected
maturity or
transaction
date
|
||||||||
|
FY2010
|
Fair
Value
|
|||||||
|
On
balance sheet financial instruments:
|
||||||||
|
In $ U.S. Functional
Currency
|
||||||||
|
Accounts receivable in British
Pounds
|
1,095 | 1,095 | ||||||
|
Accounts receivable in
Euros
|
1,160 | 1,160 | ||||||
|
Accounts payable in British
Pounds
|
434 | 434 | ||||||
|
Accounts payable in
Euros
|
1,670 | 1,670 | ||||||
|
Anticipated
Transactions
|
||||||||
|
In $ U.S. Functional
Currency
|
||||||||
|
Firmly committed sales
contracts
|
||||||||
|
In British Pounds
|
785 | 785 | ||||||
|
In Euros
|
301 | 301 | ||||||
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 economic instability. 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
April 3, 2010.
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 April 3, 2010,
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 2009 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 traditional 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 experienced
a significant decline in demand during the recent global recession. Further, as
our business has expanded globally, we have become increasingly subject to the
risks arising from adverse changes in global economic conditions. The
recent recession caused 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 worldwide. While market conditions
appear to be improving generally, economic instability remains. As a
result:
|
·
|
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.
|
|
·
|
The
effect of continuing economic uncertainty on the Company’s and other banks
may cause the Company to lose its current overdraft facilities and be
unable otherwise to obtain financing for operations as
needed.
|
|
·
|
Due
to the recent global recession, some of our suppliers of key components
suspended manufacturing operations due to reduced demand. As economic
conditions improve, we will depend on these manufacturers’ ability to
resume production at levels that will allow us to meet our customers’
demands for our products. If these manufacturers are unable to increase
their production to meet our demands for key components, and if we are
unable to identify alternative suppliers, we may be unable to meet our
customers’ demands for our
products.
|
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.
The
Company relies on a small number of key customers for a substantial portion of
its revenues.
Ten customers accounted for 52% of the
Company’s revenues in the first half of 2010 and the largest customer accounted
for 8% of revenues. Although we have had business relationships with these
customers for many years, there are no long-term contractual supply agreements
in place. Accordingly our performance could be adversely affected by the loss of
one or more of these key customers.
The
Company has substantial sales and operations outside the United States that
could be adversely affected by changes in international markets.
A significant portion of our operations
is located, and a significant portion of our business comes from, outside the
United States. Accordingly, our performance could be adversely affected by
economic downturns in Europe or the Far East as well as in the United States. A
consequence of significant international business is that a large percentage of
our revenues and expenses are denominated in foreign currencies that fluctuate
in value versus the U.S. Dollar. Significant fluctuations in foreign exchange
rates can and do have a material impact on our financial results, which are
reported in U.S. 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 key
component suppliers and sub-contractors for its requirements for most
components, sub-assemblies and finished products. In the event that such
component suppliers and sub-contractors are unable or unwilling to continue
supplying the Company, or to meet the Company’s volume, 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.
Demand
for on-road electric vehicles incorporating our products may not
materialize.
In fiscal 2009, we became increasingly
involved in developing products for the on-road electric vehicle (“EV”) market.
We have relationships with several customers who incorporate our products into
their EV products. Our competitors and others are also developing products for
the EV market, with similar and competing technologies. If our customers’
products or technology are not successful commercially, or if widespread demand
for EVs fails to materialize, the demand for our products in the EV market may
diminish, which may have a material adverse effect on our results of
operations.
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.
On March
29, 2010 the Company received, and has accepted, an offer of grant assistance
from One North East, the Regional Development Agency responsible for the support
of business in the North East of England. The grant of £250,000 ($375,000) was
awarded to assist the Company in the acceleration of the availability of its new
Integra product. Integra is a product specifically designed for use in Hybrid
vehicles to improve fuel efficiency and reduce the load on the internal
combustion engine. The grant is payable quarterly in arrears and will defray
part of the engineering cost associated with the acceleration of the product’s
development up to April 1, 2011.
At the
Annual Meeting of Stockholders held on January 26, 2010, the stockholders
elected Maarten D. Hemsley, Dr. Marvin G. Schorr and David R. A. Steadman as
directors of the Company, each to hold office until the 2013 Annual Meeting
(subject to the election and qualification of his successor and to his earlier
resignation, removal or death). In addition, the stockholders (i)
voted on the amendment of the Company’s 1996 Equity Incentive Plan and (ii)
ratified the selection of Caturano and Company, P.C. as the Company’s
independent registered public accounting firm for the fiscal year ending
September 30, 2010.
The results of voting at the Company’s
Annual Meeting were as follows:
Proposal
1: Election of Directors
|
Nominees
|
Votes For
|
Votes Withheld
|
|
Maarten
D. Hemsley
|
1,936,008
|
11,750
|
|
Dr.
Marvin G. Schorr
|
1,935,008
|
12,750
|
|
David
R. A. Steadman
|
1,938,108
|
9,650
|
Proposal
2: Amendment of the Company’s 1996 Equity Incentive
Plan
|
Votes For
|
Votes Against
|
Votes Abstained
|
|
1,507,234
|
437,611
|
2,913
|
|
Proposal
3:
|
Ratification
of Caturano and Company, P.C. as the Company’s Independent Registered
Public Accounting Firm
|
|
Votes For
|
Votes Against
|
Votes Abstained
|
|
3,028,855
|
20,268
|
8,847
|
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:
May 11, 2010
|
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).
|
|
10.1
|
Amendment
to Amended and Restated 1996 Equity Incentive Plan (filed
herewith).
|
|
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).
|
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