Tech/Ops Sevcon Form 10-Q Third Quarter fiscal 2006
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 July 1, 2006
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
transition period from ________________________________ to
________________________________
Commission
File Number 1-9789
TECH/OPS
SEVCON, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
04-2985631
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification No.)
|
155
Northboro Road, Southborough, Massachusetts, 01772
(Address
of principal executive offices and zip code)
(508)
281 5510
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o Accelerated
Filer o Non
accelerated filer x
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 9, 2006
|
Common
stock, par value $.10
|
3,211,051
|
FORM
10-Q
FOR
THE QUARTER ENDED July 1, 2006
INDEX
PART
I -FINANCIAL INFORMATION
|
PAGE
|
|
3
|
|
3
|
|
4
|
|
4
|
|
5
|
|
6
|
|
12
|
|
20
|
|
21
|
|
22
|
|
22
|
|
22
|
|
22
|
|
22
|
Tech/Ops
Sevcon, Inc. and Subsidiaries
(in
thousands of dollars except per share data)
|
|
|
|
|
July
1,
2006
|
|
|
September
30,
2005
|
|
|
|
|
(unaudited)
|
|
|
(derived
from audited statements
|
)
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
330
|
|
$
|
1,130
|
|
Receivables,
net of allowances for doubtful accounts of $ 161 at July 1, 2006
and
$144 at September 30, 2005
|
|
|
6,819
|
|
|
6,193
|
|
Inventories
|
|
|
5,523
|
|
|
3,737
|
|
Prepaid
expenses and other current assets
|
|
|
1,195
|
|
|
915
|
|
Total
current assets
|
|
|
13,867
|
|
|
11,975
|
|
Property,
plant and equipment:
|
|
|
|
|
|
|
|
At
cost
|
|
|
10,308
|
|
|
9,593
|
|
Less:
accumulated depreciation and amortization
|
|
|
7,130
|
|
|
6,557
|
|
Net
property, plant and equipment
|
|
|
3,178
|
|
|
3,036
|
|
Goodwill
|
|
|
1,435
|
|
|
1,435
|
|
Total
assets
|
|
$
|
18,480
|
|
$
|
16,446
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ INVESTMENT
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Due
to banks
|
|
$
|
426
|
|
$
|
-
|
|
Accounts
payable
|
|
|
2,840
|
|
|
2,599
|
|
Dividend
payable
|
|
|
96
|
|
|
95
|
|
Accrued
expenses
|
|
|
2,924
|
|
|
2,685
|
|
Accrued
and deferred taxes on income
|
|
|
427
|
|
|
445
|
|
Total
current liabilities
|
|
|
6,713
|
|
|
5,824
|
|
Deferred
taxes on income
|
|
|
35
|
|
|
33
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Stockholder
equity
|
|
|
|
|
|
|
|
Preferred
stock, par value $.10 per share - authorized - 1,000,000
shares;
outstanding
- none
|
|
|
-
|
|
|
-
|
|
Common
stock, par value $.10 per share - authorized - 8,000,000
shares;
outstanding
3,211,051 shares at July 1, 2006 and 3,172,051 shares at
September
30, 2005
|
|
|
321
|
|
|
317
|
|
Premium
paid in on common stock
|
|
|
4,269
|
|
|
4,310
|
|
Retained
earnings
|
|
|
6,975
|
|
|
6,394
|
|
Unearned
compensation on restricted stock
|
|
|
-
|
|
|
(180
|
)
|
Cumulative
other comprehensive loss
|
|
|
167
|
|
|
(252
|
)
|
Total
stockholder equity
|
|
|
11,732
|
|
|
10,589
|
|
Total
liabilities and stockholder equity
|
|
$
|
18,480
|
|
$
|
16,446
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
|
(Unaudited)
Tech/Ops
Sevcon, Inc. and Subsidiaries
(in
thousands except per share data)
|
|
|
|
Three
months ended
|
Nine
months ended
|
|
|
|
July
1,
2006
|
|
|
July
2,
2005
|
|
|
July
1,
2006
|
|
|
July
2,
2005
|
|
Net
sales
|
|
$
|
9,313
|
|
$
|
8,453
|
|
$
|
25,696
|
|
$
|
24,089
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
5,761
|
|
|
5,293
|
|
|
15,780
|
|
|
14,961
|
|
Selling,
research and administrative
|
|
|
2,968
|
|
|
2,779
|
|
|
8,526
|
|
|
8,442
|
|
|
|
|
8,729
|
|
|
8,072
|
|
|
24,306
|
|
|
23,403
|
|
Operating
income
|
|
|
584
|
|
|
381
|
|
|
1,390
|
|
|
686
|
|
Interest
expense
|
|
|
(13
|
)
|
|
(13
|
)
|
|
(48
|
)
|
|
(41
|
)
|
Interest
income
|
|
|
1
|
|
|
1
|
|
|
3
|
|
|
3
|
|
Foreign
currency gain or (loss)
|
|
|
(8
|
)
|
|
(36
|
)
|
|
(10
|
)
|
|
(20
|
)
|
Income
before income taxes
|
|
|
564
|
|
|
333
|
|
|
1,335
|
|
|
628
|
|
Income
taxes
|
|
|
(195
|
)
|
|
(117
|
)
|
|
(464
|
)
|
|
(220
|
)
|
Net
income
|
|
$
|
369
|
|
$
|
216
|
|
$
|
871
|
|
$
|
408
|
|
Basic
income per share
|
|
$
|
.12
|
|
$
|
.07
|
|
$
|
.28
|
|
$
|
.13
|
|
Fully
diluted income per share
|
|
$
|
.12
|
|
$
|
.07
|
|
$
|
.28
|
|
$
|
.13
|
|
(Unaudited)
Tech/Ops
Sevcon, Inc. and Subsidiaries
|
|
(in
thousands of dollars)
|
|
|
|
Three
months ended
|
Nine
months ended
|
|
|
|
July
1,
2006
|
|
|
July
2,
2005
|
|
|
July
1,
2006
|
|
|
July
2,
2005
|
|
Net
income
|
|
$
|
369
|
|
$
|
216
|
|
$
|
871
|
|
$
|
408
|
|
Foreign
currency translation adjustment
|
|
|
529
|
|
|
(568
|
)
|
|
418
|
|
|
(228
|
)
|
Changes
in fair market value of cash flow hedges
|
|
|
14
|
|
|
(3
|
)
|
|
1
|
|
|
(18
|
)
|
Comprehensive
income (loss)
|
|
$
|
912
|
|
$
|
(355
|
)
|
$
|
1,290
|
|
$
|
162
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
(Unaudited)
Tech/Ops
Sevcon, Inc. and Subsidiaries
|
|
(in
thousands of dollars)
|
|
|
|
Nine
months ended
|
|
|
|
July
1,
2006
|
|
|
July
2,
2005
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
871
|
|
$
|
408
|
|
Adjustments
to reconcile net income to net cash from operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
469
|
|
|
503
|
|
Stock-based
compensation
|
|
|
143
|
|
|
56
|
|
Deferred
tax benefit
|
|
|
2
|
|
|
(1
|
)
|
Increase
(decrease) in cash resulting from changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
Receivables
|
|
|
(626
|
)
|
|
(171
|
)
|
Inventories
|
|
|
(1,786
|
)
|
|
371
|
|
Prepaid
expenses and other current assets
|
|
|
(281
|
)
|
|
(270
|
)
|
Accounts
payable
|
|
|
241
|
|
|
(468
|
)
|
Accrued
expenses
|
|
|
239
|
|
|
248
|
|
Accrued
and deferred taxes on income
|
|
|
(18
|
)
|
|
179
|
|
Net
cash generated from (used by) operating activities
|
|
|
(746
|
)
|
|
855
|
|
Cash
flow used by investing activities:
|
|
|
|
|
|
|
|
Acquisition
of property, plant and equipment
|
|
|
(462
|
)
|
|
(345
|
)
|
Net
cash used by investing activities
|
|
|
(462
|
)
|
|
(345
|
)
|
Cash
flow used by financing activities:
|
|
|
|
|
|
|
|
Dividends
paid
|
|
|
(287
|
)
|
|
(284
|
)
|
Exercise
of stock options
|
|
|
9
|
|
|
-
|
|
Short-term
bank borrowings
|
|
|
426
|
|
|
-
|
|
Net
cash generated from (used by) financing activities
|
|
|
148
|
|
|
(284
|
)
|
Effect
of exchange rate changes on cash
|
|
|
260
|
|
|
(257
|
)
|
Net
decrease in cash
|
|
|
(800
|
)
|
|
(31
|
)
|
Beginning
balance - cash and cash equivalents
|
|
|
1,130
|
|
|
905
|
|
Ending
balance - cash and cash equivalents
|
|
$
|
330
|
|
$
|
874
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
619
|
|
$
|
117
|
|
Cash
paid for interest
|
|
$
|
48
|
|
$
|
41
|
|
Supplemental
disclosure of non-cash financing activity:
|
|
|
|
|
|
|
|
Dividend
declared
|
|
$
|
96
|
|
$
|
95
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
Notes
to Consolidated Financial Statements - July 1, 2006
(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 as of July 1, 2006 and the results of operations and cash flows
for the nine months ended July 1, 2006.
The
significant accounting policies followed by Tech/Ops Sevcon are set forth in
Note 1 to the financial statements in the 2005 Tech/Ops Sevcon, Inc. Annual
Report filed on Form 10-K. Other than as set forth below, there have been no
changes since the end of fiscal 2005 to the significant accounting policies
followed by Tech/Ops Sevcon.
The
results of operations for the nine month periods ended July 1, 2006 and July
2,
2005 are not necessarily indicative of the results to be expected for the full
year.
(2) New
Accounting Pronouncements
The
Company adopted the provisions of SFAS #123R “Share-Based Payment” effective at
the beginning of fiscal 2006 using the modified prospective application
transition method. Under this method the Company incurred expense relating
to
previously issued stock options of approximately $35,000 in the first nine
months of fiscal 2006. There was no similar expense recorded in the first half
of 2005 as, during that period, the Company accounted for options under APB
#25.
The accounting for restricted stock issued in fiscal 2005 was substantially
unchanged by the application of SFAS #123R
In
July
2006 the Financial Accounting Standards Board (FASB) issued Interpretation
#48
“Accounting for Uncertain Tax Positions” which will be effective for fiscal
years beginning after December 15, 2006. The Company is currently evaluating
the
impact of this interpretation on its financial statements.
(3) Stock-Based
Compensation Plans
Under
the
Company’s 1996 Equity Incentive Plan there were 71,000 shares reserved and
available for grant at July 1, 2006. Recipients of grants or options must
execute a standard form of non-competition agreement. This 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.
SFAS
#123
“Accounting for Stock-Based Compensation”, as amended by SFAS #148 “Accounting
for Stock-Based Compensation - Transition and Disclosure” and replaced by SFAS
123R “Share-Based Payment” defined a fair value based method of accounting for
employee stock options or similar equity instruments and encouraged all entities
to adopt that method of accounting. However, it also allowed an entity to
continue to measure compensation costs using the method of accounting prescribed
by APB #25 “Accounting for Stock Issued to Employees”, until SFAS #123R became
effective in fiscal 2006. Prior to fiscal 2006, the Company accounted for its
stock-based compensation plans under APB #25, under which no compensation cost
was recognized. The Company has not restated prior periods to reflect this
change in accounting. Had compensation cost for these plans been determined
consistent with SFAS #123, the Company’s net income and earnings per share would
have equaled the following pro forma amounts for the respective 2005
periods:
(in
thousands of dollars except per share data)
|
|
|
|
|
Three
months ended
|
|
|
Nine
months
ended
|
|
|
|
|
July
2,
2005
|
|
|
July
2,
2005
|
|
Net
income - As reported
|
|
$
|
216
|
|
$
|
408
|
|
Stock-based
compensation expense determined under fair value method for all option
awards (net of tax)
|
|
|
(11
|
)
|
|
(39
|
)
|
Net
income - Pro forma
|
|
$
|
205
|
|
$
|
369
|
|
Basic
net income per share - As reported
|
|
$
|
.07
|
|
$
|
.13
|
|
Basic
net income per share - Pro forma
|
|
$
|
.07
|
|
$
|
.12
|
|
Diluted
net income per share - As reported
|
|
$
|
.07
|
|
$
|
.13
|
|
Diluted
net income per share - Pro forma
|
|
$
|
.07
|
|
$
|
.12
|
|
The
effects of applying SFAS #123R in this pro forma disclosure are not indicative
of future amounts. SFAS #123R does not apply to awards prior to fiscal 1996
and
additional awards in future years are anticipated.
The
adoption of SFAS #123R reduced net income in the first nine months of fiscal
2006 by $35,000 ($.01 per basic and diluted share). The adoption of this
statement had no effect on the statement of cash flows for the nine months
ended
July 1, 2006.
The
fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions.
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
Risk-free
interest rate
|
|
|
N/A
|
|
|
N/A
|
|
Expected
dividend yield
|
|
|
N/A
|
|
|
N/A
|
|
Expected
life (years)
|
|
|
N/A
|
|
|
N/A
|
|
Expected
volatility
|
|
|
N/A
|
|
|
N/A
|
|
No
options were granted in the first nine months of fiscal 2006 or in fiscal 2005.
When options are exercised the Company normally issues new shares.
A
summary
of option activity for all plans for the nine months ended July 1, 2006 is
as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
#
of shares
|
|
|
Weighted
average
Exercise
Price
|
|
|
Weighted
average
remaining
contractual
life
(years
|
)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at September 30, 2005
|
|
|
182,000
|
|
$
|
9.26
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,000
|
)
|
$
|
4.37
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(8,000
|
)
|
$
|
8.46
|
|
|
|
|
|
|
|
Outstanding
at July 1, 2006
|
|
|
172,000
|
|
$
|
9.35
|
|
|
3
years
|
|
$
|
132,000
|
|
Exercisable
at July 1, 2006
|
|
|
118,400
|
|
$
|
10.41
|
|
|
3
years
|
|
$
|
66,000
|
|
The
aggregate intrinsic value included in the table above represents the difference
between the exercise price of the options and the market price of the Company’s
common stock for the options that had exercise prices that were lower than
the
$6.32 market price of the Company’s common stock at July 1, 2006. Options for
2,000 shares were exercised during the nine months ended July 1, 2006. The
total
intrinsic value of options exercised in fiscal 2006 was $3,000 and the proceeds
received on the exercise of these options was $9,000. No options were exercised
in the first nine months of last fiscal year. At July 1, 2006 there was $75,000
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 3.3 years.
In
December 2005, the Company granted 25,000 shares of restricted stock to three
employees which will vest in five equal annual installments providing that
the
grantee remains an employee of the Company, or as determined by the Compensation
Committee. The estimated fair value of the stock on the date of grant was
$138,000 based on the fair market value of the stock on date of issue and
estimated forfeitures of 4% per year. The estimated forfeitures are based on
the
historical rate of turnover of the relevant group of employees. This amount
was
credited to common stock and paid in surplus and the $138,000 was netted off
paid in surplus in stockholders equity. This unearned compensation is being
charged to income on a straight line basis over the five year period during
which the forfeiture conditions lapse. The charge to income for these employee
restricted stock grants in the third quarter and first nine months of fiscal
2006 was $7,000 and $14,000 respectively, and the subsequent charge will be
approximately $7,000 on a quarterly basis.
In
January 2006, the Company granted 12,000 shares of restricted stock to six
non-employee directors which will vest on the day before the 2007 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 $69,000 based on the fair market value of the stock on date of
issue. This amount was credited to common stock and paid in surplus and the
$69,000 was netted off paid in surplus in stockholders equity. 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 third quarter and first nine
months of fiscal 2006 was $17,000 and $29,000 respectively, and the subsequent
charge will be approximately $17,000 on a quarterly basis.
In
fiscal
2005 the Company granted 35,000 shares of restricted stock to five employees
which will vest in five equal annual installments and 12,000 shares of
restricted stock to six non-employee directors which vested on the day before
the 2006 annual meeting.
During
the restriction period, five years for employees and one year for non-employee
directors, 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 July 1, 2006 was as
follows:
|
|
|
|
|
|
|
|
Number
of shares of Restricted Stock
|
|
Weighted
Average Grant-Date Fair Value
|
|
Non-vested
balance as of September 30, 2005
|
|
|
47,000
|
|
$
|
6.18
|
|
Granted
|
|
|
37,000
|
|
$
|
5.58
|
|
Vested
|
|
|
(19,000
|
)
|
$
|
6.64
|
|
Forfeited
|
|
|
-
|
|
|
N/A
|
|
Non-vested
balance as of July 1, 2006
|
|
|
65,000
|
|
$
|
5.70
|
|
As
of
July 1, 2006, there was $288,000 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 3.5 years.
The
stock-based compensation expense was as follows.
|
|
(in
thousands of dollars)
|
|
|
|
Three
Months ended
|
Nine
Months ended
|
|
|
|
July
1,
2006
|
|
|
July
2,
2005
|
|
|
July
1,
2006
|
|
|
July
2,
2005
|
|
Stock
option expense under SFAS # 123R *
|
|
$
|
13
|
|
$
|
-
|
|
$
|
36
|
|
$
|
-
|
|
Restricted
stock grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees
|
|
|
14
|
|
|
9
|
|
|
41
|
|
|
21
|
|
Non-employee
directors
|
|
|
17
|
|
|
14
|
|
|
57
|
|
|
35
|
|
Total
stock based compensation expense
|
|
$
|
44
|
|
$
|
23
|
|
$
|
134
|
|
$
|
56
|
|
*
Pro-forma expense disclosed for options accounted for under
APB#25
|
|
$
|
N/A
|
|
$
|
11
|
|
$
|
N/A
|
|
$
|
39
|
|
Upon
adoption of SFAS 123R on October 1, 2005, Unearned Compensation on Restricted
Stock, which amounted to $180,000 at September 30, 2005, was deducted from
Premium Paid in on Common stock.
(4) Cash
Dividends
On
June
13, 2006, the Company declared a quarterly dividend of $.03 per share for the
third quarter of fiscal 2006, which was paid on July 13, 2006 to stockholders
of
record on June 28, 2006. The Company has paid regular quarterly cash dividends
since the first quarter of fiscal 1990.
(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
|
|
|
|
July
1,
2006
|
|
|
July
2,
2005
|
|
|
July
1,
2006
|
|
|
July
2,
2005
|
|
Net
income
|
|
$
|
369
|
|
$
|
216
|
|
$
|
871
|
|
$
|
408
|
|
Weighted
average shares outstanding - basic
|
|
|
3,144
|
|
|
3,125
|
|
|
3,134
|
|
|
3,125
|
|
Basic
income per share
|
|
$
|
.12
|
|
$
|
.07
|
|
$
|
.28
|
|
$
|
.13
|
|
Common
stock equivalents
|
|
|
30
|
|
|
24
|
|
|
22
|
|
|
26
|
|
Weighted
average shares outstanding - diluted
|
|
|
3,174
|
|
|
3,149
|
|
|
3,156
|
|
|
3,151
|
|
Diluted
income per share
|
|
$
|
.12
|
|
$
|
.07
|
|
$
|
.28
|
|
$
|
.13
|
|
No
of options that are anti-dilutive excluded from calculation of common
stock equivalents
|
|
|
105
|
|
|
106
|
|
|
105
|
|
|
109
|
|
(6) Segment
information
The
Company has two reportable segments: electronic controls and capacitors. The
electronic controls segment produces control systems and accessories for battery
powered vehicles. The capacitor segment produces electronic components for
sale
to electronic equipment manufacturers. Each segment has its own management
team,
manufacturing facilities and sales force.
The
significant accounting policies of the segments are the same as those described
in note (8) to the 2005 Annual Report filed on Form 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 July 1, 2006
|
|
|
|
Controls
|
|
|
Capacitors
|
|
|
Corporate
|
|
|
Total
|
|
Sales
to external customers
|
|
$
|
8,901
|
|
$
|
412
|
|
$
|
-
|
|
$
|
9,313
|
|
Inter-segment
revenues
|
|
|
-
|
|
|
18
|
|
|
-
|
|
|
18
|
|
Operating
income
|
|
|
726
|
|
|
(25
|
)
|
|
(117
|
)
|
|
584
|
|
Identifiable
assets
|
|
|
16,992
|
|
|
906
|
|
|
582
|
|
|
18,480
|
|
|
|
Three
months ended July 2, 2005
|
|
|
|
|
Controls
|
|
|
Capacitors
|
|
|
Corporate
|
|
|
Total
|
|
Sales
to external customers
|
|
$
|
8,005
|
|
$
|
448
|
|
$
|
-
|
|
$
|
8,453
|
|
Inter-segment
revenues
|
|
|
-
|
|
|
40
|
|
|
-
|
|
|
40
|
|
Operating
income
|
|
|
427
|
|
|
56
|
|
|
(102
|
)
|
|
381
|
|
Identifiable
assets
|
|
|
14,796
|
|
|
1,010
|
|
|
694
|
|
|
16,500
|
|
|
|
Nine
months ended July 1, 2006
|
|
|
|
|
Controls
|
|
|
Capacitors
|
|
|
Corporate
|
|
|
Total
|
|
Sales
to external customers
|
|
$
|
24,503
|
|
$
|
1,193
|
|
$
|
-
|
|
$
|
25,696
|
|
Inter-segment
revenues
|
|
|
-
|
|
|
53
|
|
|
-
|
|
|
53
|
|
Operating
income (loss)
|
|
|
1,679
|
|
|
(43
|
)
|
|
(246
|
)
|
|
1,390
|
|
Depreciation
and amortization
|
|
|
427
|
|
|
42
|
|
|
-
|
|
|
469
|
|
Identifiable
assets
|
|
|
16,992
|
|
|
906
|
|
|
582
|
|
|
18,480
|
|
Capital
expenditures
|
|
|
396
|
|
|
24
|
|
|
-
|
|
|
420
|
|
|
|
Nine
months ended July 2, 2005
|
|
|
|
|
Controls
|
|
|
Capacitors
|
|
|
Corporate
|
|
|
Total
|
|
Sales
to external customers
|
|
$
|
22,865
|
|
$
|
1,224
|
|
$
|
-
|
|
$
|
24,089
|
|
Inter-segment
revenues
|
|
|
-
|
|
|
189
|
|
|
-
|
|
|
189
|
|
Operating
income (loss)
|
|
|
920
|
|
|
36
|
|
|
(270
|
)
|
|
686
|
|
Depreciation
and amortization
|
|
|
463
|
|
|
40
|
|
|
-
|
|
|
503
|
|
Identifiable
assets
|
|
|
14,796
|
|
|
1,010
|
|
|
694
|
|
|
16,500
|
|
Capital
expenditures
|
|
|
263
|
|
|
82
|
|
|
-
|
|
|
345
|
|
In
the
controls business segment the revenues were derived from the following products
and services.
|
|
(in
thousands of dollars)
|
|
|
|
Three
Months ended
|
Nine
Months ended
|
|
|
|
July
1,
2006
|
|
|
July
2,
2005
|
|
|
July
1,
2006
|
|
|
July
2,
2005
|
|
Electronic
controllers for battery driven vehicles
|
|
$
|
6,260
|
|
$
|
5,348
|
|
$
|
17,291
|
|
$
|
15,906
|
|
Accessory
and aftermarket products and services
|
|
|
2,641
|
|
|
2,657
|
|
|
7,212
|
|
|
6,959
|
|
Total
controls segment revenues
|
|
$
|
8,901
|
|
$
|
8,005
|
|
$
|
24,503
|
|
$
|
22,865
|
|
(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
|
|
|
|
July
1,
2006
|
|
|
July
2,
2005
|
|
|
July
1,
2006
|
|
|
July
2,
2005
|
|
Research
and Development expense
|
|
$
|
919
|
|
$
|
879
|
|
$
|
2,701
|
|
$
|
2,659
|
|
Percentage
of sales
|
|
|
9.9
|
%
|
|
10.4
|
%
|
|
10.5
|
%
|
|
11.0
|
%
|
Research
and development expense increased by $42,000 compared to the first nine months
of last fiscal year and was 5% higher than last year in the third quarter.
Excluding the impact of currency fluctuations, engineering expense increased
by
16 % compared to the first nine months of last year. This increase was
principally due to increased internal engineering resources devoted to advanced
new product development.
(8) Employee
Benefit Plans
Tech/Ops
Sevcon has defined benefit plans covering the majority of its US and UK
employees. There is also a small defined contribution plan. The following table
sets forth the components of the net pension cost as defined by SFAS
#132R.
|
|
(in
thousands of dollars)
|
|
|
|
Three
Months ended
|
Nine
Months ended
|
|
|
|
July
1,
2006
|
|
|
July
2,
2005
|
|
|
July
1,
2006
|
|
|
July
2,
2005
|
|
Service
cost
|
|
$
|
98
|
|
$
|
108
|
|
$
|
284
|
|
$
|
329
|
|
Interest
cost
|
|
|
241
|
|
|
223
|
|
|
698
|
|
|
684
|
|
Expected
return on plan assets
|
|
|
(227
|
)
|
|
(209
|
)
|
|
(656
|
)
|
|
(640
|
)
|
Amortization
of transition obligation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Amortization
of prior service cost
|
|
|
14
|
|
|
13
|
|
|
40
|
|
|
39
|
|
Recognized
net actuarial gain (loss)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
periodic benefit cost
|
|
|
126
|
|
|
135
|
|
|
366
|
|
|
412
|
|
Net
cost of defined contribution plans
|
|
$
|
9
|
|
$
|
7
|
|
$
|
25
|
|
$
|
21
|
|
Tech/Ops
Sevcon contributed $609,000 to its pension plans in the nine months ended July
1, 2006 and presently anticipates contributing a further $175,000 to fund its
plans in the remainder of fiscal 2006, for a total contribution of $784,000.
In
addition employee contributions to the UK plan were $199,000 in the first nine
months and are estimated to total $269,000 in fiscal 2006.
(9) Inventories
Inventories
were comprised of:
|
|
(in
thousands of dollars)
|
|
|
|
|
July
1,
2006
|
|
|
September
30,
2005
|
|
Raw
materials
|
|
$
|
2,666
|
|
$
|
1,596
|
|
Work-in-process
|
|
|
315
|
|
|
174
|
|
Finished
goods
|
|
|
2,542
|
|
|
1,967
|
|
|
|
$
|
5,523
|
|
$
|
3,737
|
|
(10) Accrued
expenses
Set
out
below is an analysis of other accrued expenses at July 1, 2006 and September
30,
2005 which shows separately any items in excess of 5% of total current
liabilities.
|
|
(in
thousands of dollars)
|
|
|
|
|
July
1,
2006
|
|
|
September
30,
2005
|
|
Accrued
compensation and related costs
|
|
$
|
1,119
|
|
$
|
1,101
|
|
Warranty
reserves
|
|
|
522
|
|
|
364
|
|
Other
accrued expenses
|
|
|
1,283
|
|
|
1,220
|
|
|
|
$
|
2,924
|
|
$
|
2,685
|
|
(11) Warranty
reserves
The
movement in warranty reserves was as follows:
|
(in
thousands of dollars)
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
July
1,
2006
|
|
July
2,
2005
|
|
July
1,
2006
|
|
July
2,
2005
|
|
Warranty
reserves at beginning of period
|
$
|
450
|
|
$
|
404
|
|
$
|
364
|
|
$
|
386
|
|
Decrease
in beginning balance for warranty obligations settled during the
period
|
|
(81
|
)
|
|
(64
|
)
|
|
(299
|
)
|
|
(290
|
)
|
Other
changes to pre-existing warranties
|
|
8
|
|
|
(7
|
)
|
|
55
|
|
|
5
|
|
Net
increase in warranty reserves for products sold during the
period
|
|
145
|
|
|
88
|
|
|
402
|
|
|
320
|
|
Warranty
reserves at end of period
|
$
|
522
|
|
$
|
421
|
|
$
|
522
|
|
$
|
421
|
|
FORWARD
LOOKING STATEMENTS
Statements
in this discussion and analysis about the Company’s anticipated financial
results and growth, as well as those about the development of its products
and
markets, are forward-looking statements that involve risks and uncertainties
that could cause actual results to differ materially from those projected.
These
include the risks discussed under ‘Risk Factors’ below and throughout this Item
2.
NEW
ACCOUNTING PRONOUNCEMENTS
The
Company adopted SFAS #123R on October 1, 2006. See Note 2 to Consolidated
Financial Statements for a more detailed description of this new accounting
pronouncement.
CRITICAL
ACCOUNTING ESTIMATES
The
Company's significant accounting policies are summarized in Note 1 of its
Consolidated Financial Statements in this Quarterly Report on Form 10-Q. While
all these significant accounting policies impact its financial condition and
results of operations, certain of these policies require management to use
a
significant degree of judgement and/or make estimates, consistent with generally
accepted accounting principles, that affect the reported amounts of assets
and
liabilities and disclosures of contingent assets and liabilities as of the
date
of the financial statements and the reported amounts of income and expenses
during the reporting periods. Since these are judgements and estimates, they
are
sensitive to changes in business and economic realities, and events may cause
actual operating results to differ materially from the amounts derived from
management’s estimates and judgements.
The
Company believes the following represent the most critical accounting judgments
and estimates affecting its reported financial condition and results of
operations:
Bad
Debts
The
Company estimates an allowance for doubtful accounts based on known factors
related to the credit risk of each customer and management’s judgment about the
customer’s business. Ten customers account for approximately 63% of the
Company’s sales in the current fiscal year to date. At July 1, 2006, the
allowance for bad debts amounted to $161,000, which represented 2.4% of
receivables.
Because
of the Company’s long term relationships with the majority of its customers, in
most cases, the principal bad debt risk to the Company arises from the
insolvency of a customer rather than its unwillingness to pay. In addition,
in
certain cases the Company maintains credit insurance covering up to 90% of
the
amount outstanding from specific customers. The Company also carries out some
of
its foreign trade, particularly in the Far East, using letters of
credit.
The
Company reviews all accounts receivable balances on a regular basis,
concentrating on any balances that are more than 30 days overdue, or where
there
is an identified credit risk with a specific customer. A decision is taken
on a
customer-by-customer basis as to whether a bad debt reserve is considered
necessary based on the specific facts and circumstances of each account. In
general, the Company would reserve 100% of the receivable, net of any
recoverable value added taxes or insurance overages, for a customer that becomes
insolvent or files for bankruptcy, and lesser amounts for less imminent
defaults. To a lesser degree, the Company maintains a small bad debt reserve
to
cover the remaining balances based on historical default percentages.
If
the
financial condition of any of the Company's customers is worse than estimated
or
were to deteriorate, resulting in an impairment of its ability to make payments,
the Company’s results may be adversely affected and additional allowances may be
required. With the exception of a significant loss of $562,000 in fiscal 2001
relating to one US customer, credit losses have not been significant in the
past
ten years.
Inventories
Inventories
are valued at the lower of cost or market. Inventory costs include materials,
direct labor and manufacturing overhead, and are relieved from inventory on
a
first-in, first-out basis. The Company carries out a significant amount of
customization of standard products and also designs and manufactures special
products to meet the unique requirements of its customers. This results in
a
significant proportion of the Company’s inventory being customer specific. The
Company’s reported financial condition includes a provision for estimated
slow-moving and obsolete inventory that is based on a comparison of inventory
levels with forecast future demand. Such demand is estimated based on many
factors, including management judgments, relating to each customer’s business
and to economic conditions. The Company reviews in detail all significant
inventory items with holdings in excess of estimated normal requirements. It
also considers the likely impact of changing technology. It makes an estimate
of
the provision for slow moving and obsolete stock on an item-by-item basis based
on a combination of likely usage based on forecast customer demand, potential
sale or scrap value and possible alternative use. This provision represents
the
difference between original cost and market value at the end of the financial
period. In cases where there is no estimated future use for the inventory item
and there is no estimated scrap or resale value, a 100% provision is recorded.
Where the Company estimates that only part of the total holding of an inventory
item will not be used, or there is an estimated scrap, resale or alternate
use
value, then a proportionate provision is recorded. Once an item has been written
down, it is not subsequently revalued upwards. The provision for slow moving
and
obsolete inventories at July 1, 2006 was $924,000, or 14% of the original cost
of gross inventory. At September 30, 2005 the provision was $803,000, or 18%
of
gross inventory. If actual future demand or market conditions are less favorable
than those projected by management, or if product designs change more quickly
than forecast, additional inventory write-downs may be required, which may
have
a material adverse impact on reported results.
Warranty
Costs
The
Company provides for the estimated cost of product warranties at the time
revenue is recognized. While the Company engages in product quality programs
and
processes, the Company's warranty obligation is affected by product failure
rates and repair or replacement costs incurred in correcting a product failure.
Accordingly, the provision for warranty costs is based upon anticipated
in-warranty failure rates and estimated costs of repair or replacement.
Anticipating product failure rates involves making difficult judgments about
the
likelihood of defects in materials, design and manufacturing errors, and other
factors that are based in part on historical failure rates and trends, but
also
on management’s expertise in engineering and manufacturing. Estimated repair and
replacement costs are affected by varying component and labor costs. Should
actual product failure rates and repair or replacement costs differ from
estimates, revisions to the estimated warranty liability may be required and
the
Company’s results may be materially adversely affected. In the event that the
Company discovers a product defect that impacts the safety of its products,
then
a product recall may be necessary, which could involve the Company in
substantial unanticipated expense significantly in excess of the reserve. There
were no significant safety related product recalls during the past three fiscal
years.
Goodwill
Impairment
The
Company carries out an annual assessment to determine if the goodwill relating
to the controls business amounting to $1,435,000 has been impaired, in
accordance with the requirements of SFAS #142 “Goodwill and Other Intangible
Assets”. In fiscal 2004, the Company retained an investment banking firm
specializing in valuations to assist the Company in performing this impairment
assessment. The assessment was based on three separate methods of valuing the
controls business based on expected free cash flows, the market price of the
Company’s stock and an analysis of precedent transactions. These methods require
estimates of future revenues, profits, capital expenditures and working capital
requirements which are based on evaluation of historical trends, current
budgets, operating plans and industry data. Based on all of these valuation
methods the conclusion was that the goodwill had not been impaired. Management
updated the analysis in 2005 using similar methodologies and again concluded
that goodwill had not been impaired. If, in future periods, the Company’s
results of operations, cash flows or the market price of the Company’s stock
were to decrease significantly then it may be necessary to record an impairment
charge relating to goodwill of up to $1,435,000.
Pension
Plan Assumptions
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 Company’s pension plans are significant relative to the size
of the Company. Pension plan assets were $14,210,000 at September 30, 2005
and
the total assets of the Company were $16,446,000. Although the plan assets
are
not included in the assets of the Company they are 86% of size of the Company’s
total assets. If, as a result of changes in assumptions, the accumulated benefit
obligation of either of the plans were to exceed the fair value of assets of
that plan, then an adjustment to record this additional liability and a
corresponding decrease to stockholders’ equity would be necessary, which could
have a material effect on the Company’s financial position. At September 30,
2005, a decrease in the assumed discount rate of 0.25% would result in the
Company recording a minimum liability of approximately $725,000 relating to
its
UK plan, but no additional liability would be recognized in the smaller US
plan.
Based on current market conditions, it is likely that a decrease in the discount
rate relating to the UK plan of between 0.25% and 0.75% may be required when
the
plan is next measured at September 30, 2006.
In
March
2006, the Financial Accounting Standards Board issued an exposure draft on
pension accounting. If this is adopted, then the Company would be required
to
recognize on its balance sheet the funded status of its pension plans. If
adopted, it is proposed that this would become effective for the Company for
the
year commencing October 1, 2007.
RISK
FACTORS
In
addition to the market risk factors relating to foreign currency and interest
rate risk set out below, the Company believes that the following represent
the
most significant risk factors for the Company:
Capital
goods markets are cyclical
The
Company’s customers are mainly manufacturers of capital goods such as fork lift
trucks, aerial lifts and railway signaling equipment. These markets are cyclical
and are currently showing modest growth, but demand in these markets could
decrease or customers could decide to purchase alternative products. In this
event the Company’s sales could decrease below its current break even point and
there is no certainty that the Company would be able to decrease overhead
expenses to enable it to operate profitably.
Single
source materials and sub-contractors may not meet the Company’s
needs.
The
Company relies on certain suppliers and sub-contractors for all of its
requirements for certain components, sub-assemblies and finished products.
In
the event that such suppliers and sub-contractors are unable or unwilling to
continue supplying the Company, or to meet the Company’s cost and quality
targets or needs for timely delivery, there is no certainty that the Company
would be able to establish alternative sources of supply in time to meet
customer demand.
Damage
to the Company’s or sub-contractor’s buildings would hurt
results.
In
the
controller business the majority of product is produced in a single plant in
England and uses sub-assemblies sourced from a sub-contractor with two plants
in
Poland. 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.
OVERVIEW
OF THIRD QUARTER AND FIRST NINE MONTHS
The
Company reported net income of $369,000, or $.12 per share, for the third fiscal
quarter ended July 1, 2006. Net income increased by $153,000, or 71% from
$216,000 in the comparable period last year. Basic and fully diluted net income
was $.12 per share, an increase of $.05 per share compared with the third
quarter of last year. Sales in the third quarter were 10% ahead at $9,313,000,
the highest quarterly revenues recorded by the Company. Volumes shipped were
10%
ahead of the prior year period, and foreign currency fluctuations had a small
positive impact on reported revenues.
Operating
income for the third quarter was $584,000, an increase of $203,000, or 53%,
compared to the third quarter of last year. Gross profit increased by $392,000
compared to last year and was 38.1% of sales compared to 37.4% in the third
quarter of last year. The increase in gross profit was mainly due to increased
volumes and, to a lesser extent, due to the positive impact of foreign currency
fluctuations. Operating expense for the third quarter was $189,000 higher than
the same period last year.
For
the
nine month period, net income was 113% higher at $871,000, or $.28 per diluted
share, compared to $408,000, or $.13 per diluted share last year. Revenues
in
the first nine months of fiscal 2006 were $25,696,000, an increase of
$1,607,000, or 7%, compared to last year. Foreign currency fluctuations resulted
in a $780,000 decrease in reported sales. Volumes were 10% ahead of the prior
year. Gross profit increased by $788,000 due to increased volumes, partially
offset by the adverse impact of foreign currency fluctuations. Operating
expenses were $84,000 higher than last year, with higher spend on sales and
engineering partially offset by the impact of foreign currency fluctuations.
Operating income for the nine month period was $1,390,000, an increase of
$704,000, or 103%, compared to $686,000, in the first nine months of the prior
year. Foreign currency fluctuations increased year-to-date reported operating
income by $85,000 compared to the same period last year.
Cash
balances
decreased by $800,000 in the first nine months of fiscal 2006 to $330,000.
Furthermore, the Company had bank borrowings in Europe of $426,000 at July
1
2006, compared to no borrowings at the beginning of fiscal 2006. Operating
activities used cash of $746,000, principally due to increases in receivables
and inventories partially offset by net income and higher payables. Capital
expenditures used cash of $462,000 and dividend payments amounted to $287,000.
Exchange rate changes increased cash by $260,000.
Results
of Operations
Three
months ended July 1, 2006
The
following table compares third quarter results by segment for the third quarter
of fiscal 2006 with the prior year period and shows the percentage changes
in
total and split between the currency impact and volume / other
changes.
|
|
|
|
|
|
|
|
|
|
%
change due to:
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Total
|
|
|
Currency
|
|
|
Volume
/ other
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
- to external customers
|
|
$
|
8,901
|
|
$
|
8,005
|
|
|
11
|
%
|
|
-
|
%
|
|
11
|
%
|
Capacitors-
to external customers
|
|
|
412
|
|
|
448
|
|
|
-8
|
%
|
|
1
|
%
|
|
-9
|
%
|
Capacitors
- inter-segment
|
|
|
18
|
|
|
40
|
|
|
-55
|
%
|
|
1
|
%
|
|
-56
|
%
|
Capacitors
- total
|
|
|
430
|
|
|
488
|
|
|
-12
|
%
|
|
1
|
%
|
|
-13
|
%
|
Total
sales to external customers
|
|
|
9,313
|
|
|
8,453
|
|
|
10
|
%
|
|
-
|
%
|
|
10
|
%
|
Gross
Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
3,372
|
|
|
2,913
|
|
|
16
|
%
|
|
5
|
%
|
|
11
|
%
|
Capacitors
|
|
|
180
|
|
|
247
|
|
|
-27
|
%
|
|
1
|
%
|
|
-28
|
%
|
Total
|
|
|
3,552
|
|
|
3,160
|
|
|
12
|
%
|
|
4
|
%
|
|
8
|
%
|
Selling
research and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
2,646
|
|
|
2,486
|
|
|
6
|
%
|
|
1
|
%
|
|
5
|
%
|
Capacitors
|
|
|
205
|
|
|
191
|
|
|
7
|
%
|
|
-2
|
%
|
|
9
|
%
|
Unallocated
corporate expense
|
|
|
117
|
|
|
102
|
|
|
15
|
%
|
|
0
|
%
|
|
15
|
%
|
Total
|
|
|
2,968
|
|
|
2,779
|
|
|
7
|
%
|
|
1
|
%
|
|
6
|
%
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
726
|
|
|
427
|
|
|
70
|
%
|
|
28
|
%
|
|
42
|
%
|
Capacitors
|
|
|
(25
|
)
|
|
56
|
|
|
-145
|
%
|
|
10
|
%
|
|
-155
|
%
|
Unallocated
corporate expense
|
|
|
(117
|
)
|
|
(102
|
)
|
|
15
|
%
|
|
0
|
%
|
|
15
|
%
|
Total
|
|
|
584
|
|
|
381
|
|
|
53
|
%
|
|
33
|
%
|
|
20
|
%
|
Other
income and expense
|
|
|
(20
|
)
|
|
(48
|
)
|
|
-58
|
%
|
|
-23
|
%
|
|
-35
|
%
|
Income
before income taxes
|
|
|
564
|
|
|
333
|
|
|
69
|
%
|
|
41
|
%
|
|
28
|
%
|
Income
taxes
|
|
|
(195
|
)
|
|
(117
|
)
|
|
67
|
%
|
|
40
|
%
|
|
27
|
%
|
Net
Income
|
|
$
|
369
|
|
$
|
216
|
|
|
71
|
%
|
|
41
|
%
|
|
30
|
%
|
Sales
in
the third fiscal quarter ended July 1, 2006 were $9,313,000 compared to
$8,453,000 in the same period last year, an increase of $860,000, or 10%.
Foreign currency fluctuations accounted for an increase in reported sales of
$45,000 and volumes were 10% ahead of last year. Volumes in the controller
business were 11% better than in the same period last year, mainly due to strong
performance in the aerial lift, mining, other electric vehicle markets and
airport ground support. Revenues in the fork lift truck market were down
compared to the same quarter last year. In the capacitor business, sales to
external customers decreased by $36,000, or 8 %, compared to the same period
last year. Capacitor volumes were lower by 9%, compared to the same period
last
year due to slow conditions in most markets. Foreign currency fluctuations
accounted for a $6,000 increase in reported sales of capacitors.
Revenues
in the US controller business increased by 14% compared to the third quarter
of
fiscal 2005. This was mainly due to increased demand in the mining and other
electric vehicle markets. Controller volumes in foreign markets were ahead
of
last year’s third quarter by 8%, mainly due to higher demand in the European
aerial lift and other electric vehicle markets, partially offset by lower demand
in the fork lift truck market.
Gross
profit was 38.1% of sales in this period compared to 37.4% in the comparable
period in fiscal 2005. Gross profit increased by $392,000 compared to the third
quarter of last year. Foreign currency fluctuations increased reported gross
profit by $145,000, or 1.6 % of sales. The positive impact of higher volumes
was
partially offset by lower margins in the aerial lift market and increased
warranty expense relating to a product rectification issue at a single customer.
In the controller business, gross profit increased by $459,000 compared to
the
third quarter of fiscal 2005 and, in the capacitor business, gross profit was
lower than the prior year by $67,000.
Selling,
research and administrative expenses were $2,968,000, an increase of $189,000
compared to the same period last year. Foreign currency fluctuations increased
reported operating expenses by $20,000, or 1%. Therefore, excluding the impact
of currency fluctuations, operating expenses were 6%, higher than the same
period last year. This was mainly due to increased sales & marketing expense
relating to the Company’s new product range.
Operating
income for the third quarter was $584,000, an increase of $203,000, or 53 %,
compared to the same period last year. Foreign currency fluctuations resulted
in
a $125,000 increase in reported operating income. Excluding the currency impact,
operating income for the controller business increased by $180,000, or 42%.
The
main cause of this increase in operating income was higher volumes. In the
capacitor business segment there was an operating loss of $25,000 compared
to
operating income of $56,000 in the third quarter of fiscal 2005. The decreased
profits in the capacitor business were mainly due to lower volumes.
In
the
third quarter net interest expense was $12,000 was in line with the prior year.
There was a foreign currency loss of $8,000 in fiscal 2006 compared to a loss of
$36,000 in the same period last year.
Income
before income taxes was $564,000 compared to $333,000 in the same period last
year, an increase of $231,000, or 69%. Income taxes were 35% of pre-tax income,
in line with the same period last year. Net income for the third quarter was
$369,000, an increase of $153,000, or 71%, compared to the same period last
year. Basic and fully diluted income per share was $.12 per share compared
to
$.07 per share in the third quarter of fiscal 2005.
Nine
months ended July 1, 2006
The
following table compares third quarter results by segment for the nine months
ended July 1, 2006 with the same period in the prior year, and shows the
percentage changes in total and split between the currency impact and volume
/
other changes.
|
|
|
|
|
|
|
|
Nine
months ended
|
|
%
change due to:
|
|
|
|
|
July
1,
2006
|
|
|
July
2,
2005
|
|
|
Total
|
|
|
Currency
|
|
|
Volume
/ other
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
- to external customers
|
|
$
|
24,503
|
|
$
|
22,865
|
|
|
7
|
%
|
|
-3
|
%
|
|
10
|
%
|
Capacitors-
to external customers
|
|
|
1,193
|
|
|
1,224
|
|
|
-3
|
%
|
|
-5
|
%
|
|
2
|
%
|
Capacitors
- inter-segment
|
|
|
53
|
|
|
189
|
|
|
-72
|
%
|
|
-2
|
%
|
|
-70
|
%
|
Capacitors
- total
|
|
|
1,246
|
|
|
1,413
|
|
|
-12
|
%
|
|
-5
|
%
|
|
-7
|
%
|
Total
sales to external customers
|
|
|
25,696
|
|
|
24,089
|
|
|
7
|
%
|
|
-3
|
%
|
|
10
|
%
|
Gross
Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
9,385
|
|
|
8,530
|
|
|
10
|
%
|
|
-3
|
%
|
|
13
|
%
|
Capacitors
|
|
|
531
|
|
|
598
|
|
|
-11
|
%
|
|
-4
|
%
|
|
-7
|
%
|
Total
|
|
|
9,916
|
|
|
9,128
|
|
|
9
|
%
|
|
-3
|
%
|
|
12
|
%
|
Selling
research and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
7,706
|
|
|
7,610
|
|
|
1
|
%
|
|
-4
|
%
|
|
5
|
%
|
Capacitors
|
|
|
574
|
|
|
562
|
|
|
2
|
%
|
|
-5
|
%
|
|
7
|
%
|
Unallocated
corporate expense
|
|
|
246
|
|
|
270
|
|
|
-9
|
%
|
|
0
|
%
|
|
-9
|
%
|
Total
|
|
|
8,526
|
|
|
8,442
|
|
|
1
|
%
|
|
-4
|
%
|
|
5
|
%
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
1,679
|
|
|
920
|
|
|
83
|
%
|
|
9
|
%
|
|
74
|
%
|
Capacitors
|
|
|
(43
|
)
|
|
36
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Unallocated
corporate expense
|
|
|
(246
|
)
|
|
(270
|
)
|
|
-9
|
%
|
|
0
|
%
|
|
-9
|
%
|
Total
|
|
|
1,390
|
|
|
686
|
|
|
103
|
%
|
|
12
|
%
|
|
91
|
%
|
Other
income and expense
|
|
|
(55
|
)
|
|
(58
|
)
|
|
-5
|
%
|
|
12
|
%
|
|
-17
|
%
|
Income
before income taxes
|
|
|
1,335
|
|
|
628
|
|
|
113
|
%
|
|
12
|
%
|
|
101
|
%
|
Income
taxes
|
|
|
(464
|
)
|
|
(220
|
)
|
|
111
|
%
|
|
12
|
%
|
|
99
|
%
|
Net
Income
|
|
$
|
871
|
|
$
|
408
|
|
|
113
|
%
|
|
12
|
%
|
|
101
|
%
|
Sales
in
the first nine months ended July 1, 2006 were $25,696,000, an increase of
$1,607,000, or 7%, compared the same period last year, when sales were
$24,089,000. Foreign currency fluctuations accounted for a decrease in reported
sales of $780,000, or 3%; volumes were 10 % ahead of last year. Volumes in
the
controller business were 10% better than in the same period last year, mainly
due to strong performance in the aerial lift, other electric vehicle and mining
markets. Volumes in the fork lift truck market were down compared to the first
nine months of fiscal 2005. In the capacitor business, sales to external
customers decreased by $31,000 compared to the same period last year. Capacitor
volumes in the first nine months were higher by $30,000, or 2%, mainly due
to
improved conditions in the railway signaling market. Foreign currency
fluctuations accounted for a $61,000, or 5 %, decrease in reported sales of
capacitors.
Revenues
in the US controller business increased by 17% compared to the first nine months
of last fiscal year. This was mainly due to strong demand in the aerial lift,
mining and other electric vehicle markets. Controller volumes in foreign markets
were ahead of last year’s first nine months by 6%, mainly due to higher demand
in the European aerial lift market, partially offset by decreased demand in
the
European fork lift truck market.
Gross
profit was 38.6% of sales in this period compared to 37.9% in the comparable
period in fiscal 2005. Gross profit increased by $788,000 compared to the same
period last year. The positive impacts of higher volumes and improved margins
were partially offset by foreign currency fluctuations which decreased reported
gross profit by $255,000, or 1.0 % of sales. In the controller business warranty
expense was $216,000 higher than last year mainly due to higher volumes and
to
increases in the warranty reserve relating to a product rectification issue
at a
single customer. In the controller business, gross profit increased by $855,000
compared to the first nine months of fiscal 2005 and, in the capacitor business,
gross profit of $531,000 was $67,000 below the prior year. In the controller
business segment, the positive impact of volumes increases was partially offset
by adverse foreign currency fluctuations and higher warranty expense. In the
capacitor business segment the main reasons for the decrease in gross profit
were lower volumes of products shipped and adverse foreign currency
fluctuations.
Selling,
research and administrative expenses were $8,526,000, an increase of $84,000,
or
1%, compared to the same period last year. Foreign currency fluctuations
decreased reported operating expenses by $340,000, or 4%. Therefore, excluding
the impact of currency fluctuations, operating expenses were $424,000, or 5%,
higher than the same period last year. This was mainly due to increased sales,
marketing, engineering and R&D expenses relating to the Company’s new
product range.
Operating
income for the first nine months of fiscal 2006 was $1,390,000, an increase
of
$704,000, or 103%, compared to the same period last year. Foreign currency
fluctuations resulted in an $85,000 increase in reported operating income.
Excluding the currency impact, operating income for the controller business
increased by $673,000, or 73%, compared to last year. The main cause of this
increase in operating income was higher volumes. In the capacitor business
segment there was an operating loss of $43,000 compared to an operating profit
of $36,000 in the comparable period of fiscal 2005.
In
the
first nine months of fiscal 2006 interest expense was $48,000 compared to
$41,000 in the same period last year. There was a foreign currency exchange
loss
of $10,000 in fiscal 2006 compared to a loss of $20,000 in the same period
last
year. Interest income was in line with last year.
Income
before income taxes was $1,335,000 compared to $628,000 in the same period
last
year, an increase of $707,000, or 113%. Income taxes were 35% of pre-tax income,
in line with the same period last year. Net income for the third quarter was
$871,000, an increase of $463,000, or 113%, compared to the same period last
year. Basic and fully diluted income per share increased by $.15 per share
to
$.28 per share compared to $.13 per share in the first nine months of fiscal
2005.
Financial
Condition
The
Company has, since January 1990, maintained a program of regular cash dividends.
The dividend for the third quarter of fiscal 2006 was paid on July 13, 2006,
and
amounted to $96,000. Cash balances at the end of the third quarter of 2006
were
$330,000 compared to $1,130,000 on September 30, 2005, a decrease in cash of
$800,000. Furthermore, there were bank borrowings at the end of the third
quarter of fiscal 2006 of $426,000 compared to no borrowings on September 30,
2005. Taking into account both cash and borrowings the net cash position
decreased by $1,226,000 in the first nine months of fiscal 2006.
In
the
first nine months of fiscal 2006 net income was $871,000, but operating
activities used $746,000 of cash. There was an increase of $626,000 in
receivables due to higher volumes and foreign currency fluctuations, partially
offset by better collections. The number of days sales in receivables decreased
in the first nine months of fiscal 2006 from 68 days to 66 days.
Inventories
increased by $1,786,000 mainly due to increased volumes and to a focus in the
third quarter on improving on-time delivery to customers. Prepaid expense and
other current assets increased by $281,000. Accounts payable increased by
$241,000 due to both higher volumes and a decrease in the outstanding credit
period to certain vendors. Accrued expenses increased by $239,000. Accrued
income taxes decreased by $18,000, mainly due to tax payments in the first
nine
months of fiscal 2006. Dividends for the fourth quarter of fiscal 2005 and
the
first two quarters of 2006, which were paid during the first half year of fiscal
2006, amounted to $287,000. Capital expenditures in the first nine months were
$462,000. Exchange rate changes increased cash by $260,000 in the first nine
months of fiscal 2006.
The
Company has no long-term debt and has overdraft facilities in the UK of
approximately $1.9 million and of $200,000 in France. At the end of the third
quarter the Company was using $426,000 of the UK overdraft facility. The UK
overdraft facilities are secured by all of the Company’s assets in the UK and
the French overdraft facilities are unsecured.
Tech/Ops
Sevcon's capital resources, in the opinion of management, are adequate for
projected operations and capital spending programs. Capital spending programs
are not expected to be significantly higher than depreciation over the next
two
years and projected volume growth is not expected to require significant
additional cash resources.
The
Company’s operations are sensitive to a number of market factors, any one of
which could materially adversely affect its results of operations in any given
year. Other risks dealing with contingencies are described in Note 5 to the
Company’s Consolidated Financial Statements included under Item 8 of the
Company’s Form 10-K for the year ended September 30, 2005 and other risks are
described under the caption Risk Factors in Management’s discussion and analysis
of financial condition and results of operations above.
Foreign
currency risk
The
Company sells to customers throughout the industrialized world. The majority
of
the Company’s products are manufactured in the United Kingdom. In the first nine
months of fiscal 2006, approximately 43% of the Company’s sales were made in US
Dollars, 26% were made in British Pounds and 31% were made in Euros. Over 75%
of
the Company’s cost of sales was incurred in British Pounds. This resulted in the
Company’s sales and margins being exposed to fluctuations due to the change in
the exchange rates of the US Dollar, the British Pound and the Euro. The Company
has trade accounts receivable and accounts payable denominated in both British
pounds and Euros which are exposed to exchange fluctuations.
In
addition, the translation of the sales and income of foreign subsidiaries into
US Dollars is also subject to fluctuations in foreign currency exchange
rates.
The
Company undertakes hedging activities to manage the foreign exchange exposures
related to forecasted purchases and sales in foreign currency and the associated
foreign currency denominated receivables and payables. The Company does not
engage in speculative foreign exchange transactions. Details of this hedging
activity and the underlying exposures are set out below.
The
following table provides information about the Company’s foreign currency
accounts receivable, accounts payable, firmly committed sales contracts and
derivative financial instruments outstanding as of July 1, 2006. The information
is provided in US Dollar amounts, as presented in the Company’s consolidated
financial statements. The table presents the notional amount (at contract
exchange rates) and the weighted average contractual foreign currency exchange
rates. The contracts mature at varying dates from July 2006 to October
2006.
|
|
(in
thousands, except average contract rates)
|
|
|
|
Expected
maturity or transaction date
|
|
|
|
|
|
|
FY2006
|
|
|
FY2007
|
|
|
Total
|
|
|
Fair
Value
|
|
On
balance sheet financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
$ US Functional Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable in pounds
|
|
|
1,604
|
|
|
-
|
|
|
1,604
|
|
|
1,604
|
|
Accounts
receivable in euros
|
|
|
3,097
|
|
|
33
|
|
|
3,130
|
|
|
3,130
|
|
Accounts
payable in pounds
|
|
|
2,035
|
|
|
-
|
|
|
2,035
|
|
|
2,035
|
|
Accounts
payable in euros
|
|
|
359
|
|
|
-
|
|
|
359
|
|
|
359
|
|
Anticipated
Transactions and related derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
$ US Functional Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firmly
committed sales contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
pounds
|
|
|
1,414
|
|
|
-
|
|
|
1,153
|
|
|
-
|
|
In
Euros
|
|
|
1,622
|
|
|
-
|
|
|
1,531
|
|
|
-
|
|
Forward
exchange agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sell
US Dollars for British Pounds
|
|
|
850
|
|
|
250
|
|
|
1,100
|
|
|
76*
|
|
Sell
Euros for British Pounds
|
|
|
382
|
|
|
-
|
|
|
382
|
|
|
2*
|
|
Average
contractual exchange rate
|
|
|
|
|
|
$
1.73-£1
|
|
|
$
1.73-£1
|
|
|
|
|
Amount
recorded as other comprehensive income
|
|
$
|
1
|
|
$
|
-
|
|
$
|
1
|
|
$
|
1
|
|
*The
estimated fair value is based on the estimated amount at which the contracts
could be settled based on forward exchange rates.
Because
the difference between the spot and hedged foreign exchange rates at July 1,
2006 was less than 7%, and amounted to $78,000, the risk of default by
counterparties is not material to the Company.
Interest
Rate Risk
The
Company does not currently have any interest bearing debt. The Company does
invest surplus funds in instruments with maturities of less than 12 months
at
both fixed and floating interest rates. The Company incurs short-term borrowings
from time-to-time on its overdraft facilities in Europe at variable interest
rates. Due to the short-term nature of the Company’s investments at July 1, 2006
the risk arising from changes in interest rates was not material.
(a) Evaluation
of disclosure controls and procedures. Our management, with the participation
of
our principal executive officer and principal financial officer, has evaluated
the effectiveness of our “disclosure controls and procedures” (as defined in the
Securities Exchange Act of 1934 Rule 13a-15(e)) as of April 1, 2006. Based
on
this evaluation, our principal executive officer and principal financial officer
have concluded that, as of July 1, 2006, these disclosure controls and
procedures were effective and designed to ensure that the information required
to be disclosed in the reports filed or submitted by the Company under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the requisite time periods.
(b)
Changes
in internal control over financial reporting. Our principal executive officer
and principal financial officer have identified no change in our “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, our internal control over financial reporting.
None
See
Exhibit Index immediately preceding the exhibits.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
TECH/OPS
SEVCON, INC
|
|
|
|
|
Date:
August 9, 2006
|
By:
/s/ Paul A. McPartlin
|
|
Paul
A. McPartlin
|
|
Chief
Financial Officer (Principal financial and chief accounting
officer)
|
|
|
|
|
|
Exhibit
|
Description
|
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to section 302 of the
Sarbanes-Oxley Act of 2002. Filed herewith.
|
|
|
31.2
|
Certification
of Principal Financial Officer pursuant to section 302 of the
Sarbanes-Oxley Act of 2002. Filed herewith.
|
|
|
32.1
|
Certification
of Principal Executive Officer and Principal Financial Officer pursuant
to
section 906 of the Sarbanes-Oxley Act of 2002. Furnished
herewith.
|