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 March 29, 2008
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from ________________________________ to
________________________________
Commission
File Number 1-9789
TECH/OPS
SEVCON, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
04-2985631
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
155
Northboro Road, Southborough, Massachusetts, 01772
(Address
of principal executive offices and zip code)
(508)
281 5510
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
|
|
(Do
not check if a smaller reporting company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in rule
12b-2 of the Exchange Act). Yes o No
x
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Class
|
Outstanding
at May 19, 2008
|
Common
stock, par value $.10
|
3,271,322
|
FORM
10-Q
FOR
THE QUARTER ENDED MARCH 29, 2008
INDEX
PART
I -FINANCIAL INFORMATION
|
PAGE
|
|
3
|
|
3
|
|
4
|
|
4
|
|
5
|
|
6
|
|
12
|
|
16
|
|
18
|
|
18
|
|
18
|
|
18
|
|
18
|
|
19
|
|
19
|
|
19
|
|
19
|
|
19
|
|
19
|
Tech/Ops
Sevcon, Inc. and Subsidiaries
(in
thousands of dollars except per share data)
|
|
|
|
March
29,
2008
|
|
|
September
30,
2007
|
|
|
|
(unaudited)
|
|
|
(derived
from audited statements)
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
832 |
|
|
$ |
1,014 |
|
Receivables, net of allowances
for doubtful accounts of $214 at March 29, 2008
and $180 at September 30,
2007
|
|
|
9,228 |
|
|
|
8,714 |
|
Inventories
|
|
|
5,371 |
|
|
|
5,422 |
|
Prepaid expenses and other
current assets
|
|
|
1,217 |
|
|
|
916 |
|
Total
current assets
|
|
|
16,648 |
|
|
|
16,066 |
|
Property,
plant and equipment:
|
|
|
|
|
|
|
|
|
At cost
|
|
|
12,313 |
|
|
|
12,265 |
|
Less: accumulated depreciation
and amortization
|
|
|
(8,578 |
) |
|
|
8,497 |
|
Net
property, plant and equipment
|
|
|
3,735 |
|
|
|
3,768 |
|
Long-term
deferred tax asset
|
|
|
625 |
|
|
|
657 |
|
Goodwill
|
|
|
1,435 |
|
|
|
1,435 |
|
Total
assets
|
|
$ |
22,443 |
|
|
$ |
21,926 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ INVESTMENT
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
4,047 |
|
|
$ |
3,398 |
|
Dividend payable
|
|
|
98 |
|
|
|
97 |
|
Accrued expenses
|
|
|
2,570 |
|
|
|
3,162 |
|
Accrued and deferred taxes on
income
|
|
|
361 |
|
|
|
530 |
|
Total
current liabilities
|
|
|
7,076 |
|
|
|
7,187 |
|
Liability
for pension benefits
|
|
|
2,188 |
|
|
|
2,244 |
|
Other
long term liabilities
|
|
|
60 |
|
|
|
61 |
|
Total
liabilities
|
|
|
9,324 |
|
|
|
9,492 |
|
Stockholder
equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $.10
per share - authorized - 1,000,000 shares;
outstanding –
none
|
|
|
- |
|
|
|
- |
|
Common stock, par value $.10 per
share - authorized - 8,000,000 shares;
Outstanding 3,271,322 shares at
March 29, 2008 and 3,238,702 shares at
September 30,
2007
|
|
|
327 |
|
|
|
324 |
|
Premium paid in on common
stock
|
|
|
4,765 |
|
|
|
4,623 |
|
Retained
earnings
|
|
|
8,530 |
|
|
|
7,961 |
|
Cumulative other comprehensive
loss
|
|
|
(503 |
) |
|
|
(474 |
) |
Total
stockholder equity
|
|
|
13,119 |
|
|
|
12,434 |
|
Total
liabilities and stockholder equity
|
|
$ |
22,443 |
|
|
$ |
21,926 |
|
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
|
|
|
|
March
29,
2008
|
|
|
March
31,
2007
|
|
|
March
29,
2008
|
|
|
March
31,
2007
|
|
Net
sales
|
|
$ |
10,560 |
|
|
$ |
10,374 |
|
|
$ |
20,803 |
|
|
$ |
18,600 |
|
Cost
of sales
|
|
|
6,846 |
|
|
|
6,360 |
|
|
|
13,207 |
|
|
|
11,588 |
|
Gross
Profit
|
|
|
3,714 |
|
|
|
4,014 |
|
|
|
7,596 |
|
|
|
7,012 |
|
Selling,
research and administrative expenses
|
|
|
3,079 |
|
|
|
3,116 |
|
|
|
6,376 |
|
|
|
5,910 |
|
Operating
income
|
|
|
635 |
|
|
|
898 |
|
|
|
1,220 |
|
|
|
1,102 |
|
Interest
expense
|
|
|
(23 |
) |
|
|
(2 |
) |
|
|
(53 |
) |
|
|
(7 |
) |
Interest
income
|
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
|
|
4 |
|
Foreign
currency gain (loss)
|
|
|
95 |
|
|
|
(23 |
) |
|
|
20 |
|
|
|
(90 |
) |
Income
before income taxes
|
|
|
709 |
|
|
|
875 |
|
|
|
1,191 |
|
|
|
1,009 |
|
Income
taxes
|
|
|
(248 |
) |
|
|
(307 |
) |
|
|
(417 |
) |
|
|
(353 |
) |
Net
income
|
|
$ |
461 |
|
|
$ |
568 |
|
|
$ |
774 |
|
|
$ |
656 |
|
Basic
income per share
|
|
$ |
.14 |
|
|
$ |
.18 |
|
|
$ |
.24 |
|
|
$ |
.21 |
|
Fully
diluted income per share
|
|
$ |
.14 |
|
|
$ |
.18 |
|
|
$ |
.24 |
|
|
$ |
.21 |
|
(Unaudited)
Tech/Ops
Sevcon, Inc. and Subsidiaries
|
|
|
(in
thousands of dollars)
|
|
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
March
29,
2008
|
|
|
March
31,
2007
|
|
|
March
29,
2008
|
|
|
March
31,
2007
|
|
Net
income
|
|
$ |
461 |
|
|
$ |
568 |
|
|
$ |
774 |
|
|
$ |
656 |
|
Foreign
currency translation adjustment
|
|
|
219 |
|
|
|
20 |
|
|
|
143 |
|
|
|
335 |
|
Changes
in fair market value of cash flow hedges
|
|
|
(137 |
) |
|
|
- |
|
|
|
(194 |
) |
|
|
- |
|
Amortization
of pension transition items to income
|
|
|
11 |
|
|
|
14 |
|
|
|
22 |
|
|
|
26 |
|
Comprehensive
income (loss)
|
|
$ |
554 |
|
|
$ |
602 |
|
|
$ |
745 |
|
|
$ |
1,017 |
|
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
|
|
|
|
March
29,
2008
|
|
|
March
31,
2007
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
774 |
|
|
$ |
656 |
|
Adjustments
to reconcile net income to net cash from operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
343 |
|
|
|
363 |
|
Stock-based
compensation
|
|
|
117 |
|
|
|
93 |
|
Pension contributions less than
pension expense
|
|
|
28 |
|
|
|
- |
|
Deferred tax
benefit
|
|
|
- |
|
|
|
(8 |
) |
Increase (decrease) in cash
resulting from changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(133 |
) |
|
|
(2,491 |
) |
Inventories
|
|
|
32 |
|
|
|
19 |
|
Prepaid expenses and other
current assets
|
|
|
(214 |
) |
|
|
(310 |
) |
Accounts
payable
|
|
|
731 |
|
|
|
1,071 |
|
Accrued
expenses
|
|
|
(840 |
) |
|
|
(308 |
) |
Accrued and deferred taxes on
income
|
|
|
(292 |
) |
|
|
345 |
|
Net
cash generated from (used by) operating activities
|
|
|
546 |
|
|
|
(570 |
) |
Cash
flow used by investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of property, plant and
equipment
|
|
|
(375 |
) |
|
|
(528 |
) |
Net
cash used by investing activities
|
|
|
(375 |
) |
|
|
(528 |
) |
Cash
flow used by financing activities:
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(196 |
) |
|
|
(192 |
) |
Exercise of stock
options
|
|
|
20 |
|
|
|
- |
|
Net cash used by financing
activities
|
|
|
(176 |
) |
|
|
(192 |
) |
Effect
of exchange rate changes on cash
|
|
|
(177 |
) |
|
|
234 |
|
Net
decrease in cash
|
|
|
(182 |
) |
|
|
(1,056 |
) |
Beginning
balance - cash and cash equivalents
|
|
|
1,014 |
|
|
|
1,290 |
|
Ending
balance - cash and cash equivalents
|
|
$ |
832 |
|
|
$ |
234 |
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for income
taxes
|
|
$ |
616 |
|
|
$ |
226 |
|
Cash paid for
interest
|
|
$ |
53 |
|
|
$ |
7 |
|
Supplemental
disclosure of non-cash financing activity:
|
|
|
|
|
|
|
|
|
Dividend declared
|
|
$ |
98 |
|
|
$ |
97 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Notes
to Consolidated Financial Statements – March 29, 2008
(Unaudited)
(1)
|
Basis
of Presentation
|
In the opinion of management, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments (consisting of only normally recurring accruals) necessary to
present fairly the financial position of Tech/Ops Sevcon, Inc. as of March 29,
2008 and the results of operations and cash flows for the three months and six
months ended March 29, 2008 and March 31, 2007. These unaudited interim
financial statements should be read in conjunction with the 2007 annual
consolidated financial statements and related notes included in the 2007
Tech/Ops Sevcon, Inc. Annual Report filed on Form 10-K.
The significant accounting policies
followed by Tech/Ops Sevcon, Inc. are set forth in Note 1 to the financial
statements in the 2007 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 2007 to the significant accounting policies followed by Tech/Ops Sevcon,
Inc.
The results of operations for the six
month periods ended March 29, 2008 and March 31, 2007 are not necessarily
indicative of the results to be expected for the full year.
(2) New
Accounting Pronouncements
In June 2006 the Financial Accounting
Standards Board (FASB) issued Interpretation No. 48 “Accounting for Uncertainty
in Income Taxes” (“FIN 48”) which is effective for fiscal years beginning after
December 15, 2006. FIN 48 prescribes detailed guidance for the financial
statement recognition, measurement and disclosure of uncertain tax positions
recognized in an enterprise’s financial statements in accordance with Statement
of Financial Accounting Standard (SFAS) No. 109. Tax
positions must meet a more-likely-than-not recognition threshold at the
effective date to be recognized upon the adoption of FIN 48, and in subsequent
periods. The Company has evaluated the impact of adopting FIN 48 on its
consolidated results of operations and financial position and has concluded that
its adoption does not have a material impact on either the consolidated results
from operations or its financial position.
In September 2006, the FASB issued SFAS
No. 157, “Fair Value Measurements”, which defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. SFAS No. 157 does not
require any new fair value measurements, but provides guidance on how to measure
fair value by providing a fair value hierarchy used to classify the source of
the information. This statement will be effective for the Company beginning
October 1, 2008. This is not expected to have a material impact on the Company’s
financial statements.
In February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS 159), which permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. SFAS No. 159 will be effective for the
Company on October 1, 2008. This is not expected to have a material impact on
the Company’s financial statements.
On December 4, 2007, the FASB issued
SFAS No.160,” Noncontrolling Interests in Consolidated Financial Statements”,
which amends Accounting Research Bulletin 51, “Consolidated Financial
Statements”, to require noncontrolling (equity) interests in a consolidated
subsidiary to be accounted for, and presented as, equity in the consolidated
financial statements. This statement is effective for fiscal years and interim
periods within those fiscal years, beginning on or after December 15, 2008. The
statement will be effective for the Company for the fiscal year beginning
October 1, 2008. This is not expected to have a material impact on the Company’s
financial statements.
On
December 4, 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (Statement 141R), which, when effective, will replace existing
Statement 141 in its entirety and provide new measurement, recognition, and
disclosure guidance for business combinations. The objective is to provide
consistency to the accounting and financial reporting of business combinations
by using only one method, the purchase method. This Statement is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The statement will be effective for the
Company for the fiscal year beginning October 1, 2008. This is not expected to
have a material impact on the Company’s financial statements.
(3) Stock-Based
Compensation Plans
Under the Company’s 1996 Equity
Incentive Plan (the “Plan”) there were 93,500 shares reserved and available for
grant at March 29, 2008. Recipients of grants or options must execute a standard
form of non-competition agreement. The plan provides for the grant of Restricted
Stock, Restricted Stock Units, Options, and Stock Appreciation Rights (SARs).
Stock Appreciation Rights may be awarded either separately, or in relation to
options granted, and for the grant of bonus shares. Options granted are
exercisable at a price not less than fair market value on the date of
grant.
Since the beginning of fiscal 2006 the
Company has accounted for stock based compensation under SFAS 123R
“Share-Based Payment,” which defines a fair value based method of accounting for
employee stock options or similar equity instruments.
The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model.
There were no option grants in the first half of fiscal 2008 or in fiscal 2007
and therefore no assumptions were made as to risk-free interest rate, expected
dividend yield, expected life or expected volatility in fiscal 2008 or fiscal
2007. When options are exercised the Company normally issues new
shares.
A summary of option activity for all
plans for the six months ended March 29, 2008 is as follows:
|
|
Options
No.
of shares
|
|
|
Weighted
average Exercise Price
|
|
|
Weighted
average remaining contractual life (years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at September 30, 2007
|
|
|
129,000 |
|
|
$ |
9.47 |
|
|
|
2.0 |
|
|
|
204,000 |
|
Granted
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(7,000 |
) |
|
$ |
4.37 |
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(42,500 |
) |
|
$ |
14.52 |
|
|
|
|
|
|
|
|
|
Outstanding
at March 29, 2008
|
|
|
79,500 |
|
|
$ |
7.36 |
|
|
|
3.1 |
|
|
$ |
104,000 |
|
Exercisable
at March 29, 2008
|
|
|
51,700 |
|
|
$ |
8.21 |
|
|
|
3.5 |
|
|
$ |
55,000 |
|
The aggregate intrinsic value included
in the table above represents the difference between the exercise price of the
options and the market price of the Company’s common stock for the options that
had exercise prices that were lower than the $7.05 market price of the Company’s
common stock at March 29, 2008. Options for 7,000 shares were exercised during
the six month period ended March 29, 2008. The total intrinsic value of options
exercised in the six month period ended March 29, 2008, was $27,000 and the
proceeds received on the exercise of these options was $31,000. In connection
with the exercise of options in the first half of fiscal 2007, the company
repurchased $1,380 shares at market for a total cost of $11,000. In the first
six months of the last fiscal year, no options were exercised. At March 29, 2008
there was $47,000 of total unrecognized compensation expense related to options
granted under all equity compensation plans. The Company expects to recognize
that cost over a weighted average period of 2.9 years.
In December 2007, the Company granted
15,000 shares of restricted stock to one employee which will vest in five equal
annual installments so long as the employee is then employed by the Company or
as determined by the Compensation Committee. The estimated fair value of the
stock on the date of grant was $117,000 based on the fair market value of stock
on the date of issue. This unearned compensation is being charged to income on a
straight line basis over five years. The charge to income for this employee’s
restricted stock grant is approximately $6,000 on a quarterly
basis.
In January 2008, the Company granted 12,000 shares of restricted stock to six
non-employee directors which will vest on the day before the 2009 annual meeting
providing that the grantee remains a director of the Company, or as determined
by the Compensation Committee. The estimated fair value of the stock on the date
of grant was $79,000 based on the fair market value of the stock on date of
issue. This amount was credited to common stock and paid in surplus and the
$79,000 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 second quarter and first six
months of fiscal 2008 was $13,000 and the subsequent charge will be
approximately $20,000 on a quarterly basis.
During the restriction period ownership
of unvested shares cannot be transferred. Restricted stock has the same cash
dividend and voting rights as other common stock and is considered to be
currently issued and outstanding. For the purposes of calculating average issued
shares for earnings per share these shares are only considered to be outstanding
when the forfeiture conditions lapse and the shares vest.
Restricted stock activity for the six
months ended March 29, 2008 was as follows:
|
|
Number
of shares of Restricted Stock
|
|
|
Weighted
Average Grant-Date Fair Value
|
|
Non-vested
balance as of September 30, 2007
|
|
|
55,000 |
|
|
$ |
6.22 |
|
Granted
|
|
|
27,000 |
|
|
$ |
7.82 |
|
Vested
|
|
|
(28,000 |
) |
|
$ |
6.76 |
|
Forfeited
|
|
|
- |
|
|
|
N/A |
|
Non-vested
balance as of March 29, 2008
|
|
|
54,000 |
|
|
$ |
6.74 |
|
As of March 29, 2008, there was
$298,000 of total restricted stock compensation expense related to non-vested
awards not yet recognized, which is expected to be recognized over a weighted
average period of 2.9 years.
The stock-based compensation expense
was as follows:
|
|
(in
thousands of dollars)
|
|
|
|
Three
Months ended
|
|
|
Six
Months ended
|
|
|
|
March
29,
2008
|
|
|
March
31,
2007
|
|
|
March
29,
2008
|
|
|
March
31,
2007
|
|
Stock
option expense under SFAS # 123R
|
|
$ |
7 |
|
|
$ |
9 |
|
|
$ |
13 |
|
|
$ |
20 |
|
Restricted
stock grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees
|
|
|
31 |
|
|
|
16 |
|
|
|
60 |
|
|
|
35 |
|
Non-employee
directors
|
|
|
21 |
|
|
|
21 |
|
|
|
44 |
|
|
|
38 |
|
Total
stock based compensation expense
|
|
$ |
59 |
|
|
$ |
46 |
|
|
$ |
117 |
|
|
$ |
93 |
|
(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
|
|
|
|
March
29,
2008
|
|
|
March
31,
2007
|
|
|
March
29,
2008
|
|
|
March
31,
2007
|
|
Net
income
|
|
$ |
461 |
|
|
$ |
568 |
|
|
$ |
774 |
|
|
$ |
656 |
|
Weighted
average shares outstanding - basic
|
|
|
3,212 |
|
|
|
3,167 |
|
|
|
3,200 |
|
|
|
3,158 |
|
Basic
income per share
|
|
$ |
.14 |
|
|
$ |
.18 |
|
|
$ |
.24 |
|
|
$ |
.21 |
|
Common
stock equivalents
|
|
|
22 |
|
|
|
28 |
|
|
|
35 |
|
|
|
37 |
|
Weighted
average shares outstanding - diluted
|
|
|
3,234 |
|
|
|
3,195 |
|
|
|
3,235 |
|
|
|
3,195 |
|
Diluted
income per share
|
|
$ |
.14 |
|
|
$ |
.18 |
|
|
$ |
.24 |
|
|
$ |
.21 |
|
No
of options that are anti-dilutive excluded from calculation of common
stock equivalents
|
|
|
38 |
|
|
|
80 |
|
|
|
58 |
|
|
|
100 |
|
(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 (1) to the 2007 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 March 29, 2008
|
|
|
|
Controls
|
|
|
Capacitors
|
|
|
Corporate
|
|
|
Total
|
|
Sales
to external customers
|
|
$ |
10,067 |
|
|
$ |
493 |
|
|
$ |
- |
|
|
$ |
10,560 |
|
Inter-segment
revenues
|
|
|
- |
|
|
|
10 |
|
|
|
- |
|
|
|
10 |
|
Operating
income
|
|
|
856 |
|
|
|
(58 |
) |
|
|
(163 |
) |
|
|
635 |
|
Identifiable
assets
|
|
|
21,007 |
|
|
|
877 |
|
|
|
559 |
|
|
|
22,443 |
|
|
|
Three
months ended March 31, 2007
|
|
|
|
Controls
|
|
|
Capacitors
|
|
|
Corporate
|
|
|
Total
|
|
Sales
to external customers
|
|
$ |
9,881 |
|
|
$ |
493 |
|
|
$ |
- |
|
|
$ |
10,374 |
|
Inter-segment
revenues
|
|
|
- |
|
|
|
16 |
|
|
|
- |
|
|
|
16 |
|
Operating
income
|
|
|
929 |
|
|
|
42 |
|
|
|
(73 |
) |
|
|
898 |
|
Identifiable
assets
|
|
|
19,252 |
|
|
|
968 |
|
|
|
489 |
|
|
|
20,709 |
|
|
|
Six
months ended March 29, 2008
|
|
|
|
Controls
|
|
|
Capacitors
|
|
|
Corporate
|
|
|
Total
|
|
Sales
to external customers
|
|
$ |
19,774 |
|
|
$ |
1,029 |
|
|
$ |
- |
|
|
$ |
20,803 |
|
Inter-segment
revenues
|
|
|
- |
|
|
|
22 |
|
|
|
- |
|
|
|
22 |
|
Operating
income
|
|
|
1,507 |
|
|
|
(92 |
) |
|
|
(195 |
) |
|
|
1,220 |
|
Depreciation
and amortization
|
|
|
315 |
|
|
|
26 |
|
|
|
2 |
|
|
|
343 |
|
Identifiable
assets
|
|
|
21,007 |
|
|
|
877 |
|
|
|
559 |
|
|
|
22,443 |
|
Capital
expenditures
|
|
|
340 |
|
|
|
35 |
|
|
|
- |
|
|
|
375 |
|
|
|
Six
months ended March 31, 2007
|
|
|
|
Controls
|
|
|
Capacitors
|
|
|
Corporate
|
|
|
Total
|
|
Sales
to external customers
|
|
$ |
17,684 |
|
|
$ |
916 |
|
|
$ |
- |
|
|
$ |
18,600 |
|
Inter-segment
revenues
|
|
|
- |
|
|
|
31 |
|
|
|
- |
|
|
|
31 |
|
Operating
income
|
|
|
1,248 |
|
|
|
(33 |
) |
|
|
(113 |
) |
|
|
1,102 |
|
Depreciation
and amortization
|
|
|
331 |
|
|
|
28 |
|
|
|
4 |
|
|
|
363 |
|
Identifiable
assets
|
|
|
19,252 |
|
|
|
968 |
|
|
|
489 |
|
|
|
20,709 |
|
Capital
expenditures
|
|
|
452 |
|
|
|
72 |
|
|
|
4 |
|
|
|
528 |
|
In the controls business segment the
revenues were derived from the following products and services:
|
|
(in
thousands of dollars)
|
|
|
|
Three
Months ended
|
|
|
Six
Months ended
|
|
|
|
March
29,
2008
|
|
|
March
31,
2007
|
|
|
March
29,
2008
|
|
|
March
31,
2007
|
|
Electronic
controllers for battery driven vehicles
|
|
$ |
7,156 |
|
|
$ |
7,297 |
|
|
$ |
13,849 |
|
|
$ |
12,473 |
|
Accessory
and aftermarket products and services
|
|
|
2,911 |
|
|
|
2,584 |
|
|
|
5,925 |
|
|
|
5,211 |
|
Total
controls segment revenues
|
|
$ |
10,067 |
|
|
$ |
9,881 |
|
|
$ |
19,774 |
|
|
$ |
17,684 |
|
(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
|
|
|
|
March
29,
2008
|
|
|
March
31,
2007
|
|
|
March
29,
2008
|
|
|
March
31,
2007
|
|
Research
and Development expense
|
|
$ |
918 |
|
|
$ |
1,004 |
|
|
$ |
1,996 |
|
|
$ |
1,899 |
|
Percentage
of sales
|
|
|
8.7% |
|
|
|
9.7% |
|
|
|
9.6% |
|
|
|
10.2% |
|
(8) Employee
Benefit Plans
Tech/Ops Sevcon has defined benefit
plans covering the majority of its US and UK employees. There is also a small
defined contribution plan. The following table sets forth the components of the
net pension cost as defined by SFAS No. 158:
|
|
(in
thousands of dollars)
|
|
|
|
Three
Months ended
|
|
|
Six
Months ended
|
|
|
|
March
29,
2008
|
|
|
March
31,
2007
|
|
|
March
29,
2008
|
|
|
March
31,
2007
|
|
Service
cost
|
|
$ |
154 |
|
|
$ |
147 |
|
|
$ |
307 |
|
|
$ |
292 |
|
Interest
cost
|
|
|
354 |
|
|
|
287 |
|
|
|
704 |
|
|
|
570 |
|
Expected
return on plan assets
|
|
|
(351 |
) |
|
|
(284 |
) |
|
|
(698 |
) |
|
|
(564 |
) |
Amortization
of prior service cost
|
|
|
15 |
|
|
|
15 |
|
|
|
30 |
|
|
|
29 |
|
Recognized
net actuarial gain (loss)
|
|
|
- |
|
|
|
3 |
|
|
|
- |
|
|
|
6 |
|
Net
periodic benefit cost
|
|
|
172 |
|
|
|
168 |
|
|
|
343 |
|
|
|
333 |
|
Net
cost of defined contribution plans
|
|
$ |
11 |
|
|
$ |
11 |
|
|
$ |
22 |
|
|
$ |
22 |
|
The following table sets forth the
movement in the liability for pension benefits in accordance with SFAS No. 158
in the six months ended March 29, 2008:
|
|
(in
thousands of dollars)
|
|
|
|
Three
Months ended
|
|
|
Six
Months ended
|
|
|
|
March
29,
2008
|
|
|
March
31,
2007
|
|
|
March
29,
2008
|
|
|
March
31,
2007
|
|
Service
cost
|
|
$ |
154 |
|
|
$ |
147 |
|
|
$ |
307 |
|
|
$ |
292 |
|
Interest
cost
|
|
|
354 |
|
|
|
287 |
|
|
|
704 |
|
|
|
570 |
|
Expected
return on plan assets
|
|
|
(351 |
) |
|
|
(284 |
) |
|
|
(698 |
) |
|
|
(564 |
) |
Amortization
of prior service cost
|
|
|
15 |
|
|
|
15 |
|
|
|
30 |
|
|
|
29 |
|
Recognized
net actuarial gain (loss)
|
|
|
- |
|
|
|
3 |
|
|
|
- |
|
|
|
6 |
|
Net
periodic benefit cost
|
|
|
172 |
|
|
|
168 |
|
|
|
343 |
|
|
|
333 |
|
Net
cost of defined contribution plans
|
|
$ |
11 |
|
|
$ |
11 |
|
|
$ |
22 |
|
|
$ |
22 |
|
Tech/Ops Sevcon did not contribute to
its US pension plan in the six months ended March 29, 2008; it presently
anticipates contributing $129,000 to fund its US plan in the remainder of fiscal
2008. In addition, employer contributions to the UK plan were $328,000 in the
first six months and are estimated to total $644,000 in fiscal
2008.
The table below sets out the movement
in the amounts included in accumulated other comprehensive income that have not
yet been recognized as pension costs in the income statement:
|
|
Unrecognized
transition obligation
|
|
|
Unrecognized
prior service cost
|
|
|
Unrecognized
net actuarial gain (loss)
|
|
|
Deferred
Tax
|
|
|
Total
|
|
Balance
at September 30, 2007
|
|
$ |
1 |
|
|
$ |
510 |
|
|
$ |
1,514 |
|
|
$ |
(610 |
) |
|
$ |
1,415 |
|
Amounts
recognized in accumulated other comprehensive income in the first half of
fiscal 2008
|
|
|
- |
|
|
|
(30 |
) |
|
|
- |
|
|
|
8 |
|
|
|
(22 |
) |
Balance
at March 29, 2008
|
|
$ |
1 |
|
|
$ |
480 |
|
|
$ |
1,514 |
|
|
$ |
(602 |
) |
|
$ |
1,393 |
|
Amounts
expected to be recognized in the remainder of fiscal 2008
|
|
|
- |
|
|
|
(30 |
) |
|
|
- |
|
|
|
8 |
|
|
|
(22 |
) |
(9) Inventories
Inventories were comprised
of:
|
|
(in
thousands of dollars)
|
|
|
|
March
29,
2008
|
|
|
September
30,
2007
|
|
Raw
materials
|
|
$ |
2,876 |
|
|
$ |
2,517 |
|
Work-in-process
|
|
|
213 |
|
|
|
134 |
|
Finished
goods
|
|
|
2,282 |
|
|
|
2,771 |
|
|
|
$ |
5,371 |
|
|
$ |
5,422 |
|
(10) Accrued
expenses
Set out below is an analysis of other
accrued expenses at March 29, 2008 and September 30, 2007 which shows separately
any items in excess of 5% of total current liabilities:
|
|
(in
thousands of dollars)
|
|
|
|
March
29,
2008
|
|
|
September
30,
2007
|
|
Accrued
compensation and related costs
|
|
$ |
590 |
|
|
$ |
1,118 |
|
Warranty
reserves
|
|
|
398 |
|
|
|
458 |
|
Other
accrued expenses
|
|
|
1,582 |
|
|
|
1,586 |
|
|
|
$ |
2,570 |
|
|
$ |
3,162 |
|
(11) Warranty
reserves
The movement in warranty reserves was
as follows:
|
|
(in
thousands of dollars)
|
|
|
|
Three
Months ended
|
|
|
Six
Months ended
|
|
|
|
March
29,
2008
|
|
|
March
31,
2007
|
|
|
March
29,
2008
|
|
|
March
31,
2007
|
|
Warranty
reserves at beginning of period
|
|
$ |
443 |
|
|
$ |
390 |
|
|
$ |
458 |
|
|
$ |
364 |
|
Decrease
in beginning balance for warranty obligations settled during the
period
|
|
|
(152 |
) |
|
|
(73 |
) |
|
|
(298 |
) |
|
|
(182 |
) |
Other
changes to pre-existing warranties
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10 |
|
Net
increase in warranty reserves for products sold during the
period
|
|
|
107 |
|
|
|
101 |
|
|
|
238 |
|
|
|
226 |
|
Warranty
reserves at end of period
|
|
$ |
398 |
|
|
$ |
418 |
|
|
$ |
398 |
|
|
$ |
418 |
|
FORWARD
LOOKING STATEMENTS
Statements in this discussion and
analysis about the Company’s anticipated financial results and growth, as well
as those about the development of its products and markets, are forward-looking
statements that involve risks and uncertainties that could cause actual results
to differ materially from those projected. These include the risks discussed
under ‘Risk Factors’ below and throughout this Item 2.
CRITICAL
ACCOUNTING ESTIMATES
As of March 29, 2008 there have been no
material changes to the critical accounting estimates described in the Company’s
Form 10-K for the year ended September 30, 2007, except as follows:
Pension
Plan Assumptions
The Company’s pension plans are
significant relative to the size of the Company. Pension plan assets were
$22,280,000 at September 30, 2007 and the total assets of the Company were
$21,926,000. Although the plan assets are not included in the assets of the
Company, they were equal to 102% of the Company’s total assets at September 30,
2008. In accordance with SFAS No. 158 the funded status of the pension plans
(plan assets less the accumulated benefit obligation) is recognized in the
Company’s balance sheet as “Liability for pension benefits” which amounted to
$2,188,000 at March 29, 2008 compared to $2,244,000 at September 30,
2007.
The Company makes a number of
assumptions relating to its pension plans in order to measure the financial
position of the plans and the net periodic benefit cost. The most significant
assumptions relate to the discount rate, the expected long term return on plan
assets and the rate of future compensation increase. If these assumptions prove
to be incorrect then the Company may need to record additional expense relating
to the pension plans which could have a material effect on the Company’s results
of operations.
The table below sets out the
approximate impact on the funded status of the Company’s pension plans at
September 30, 2007 that the Company estimates would arise from the following
respective changes in significant plan assumptions:
Plan
Assumption
|
Change
in Assumption
|
Impact
on Funded Status (in thousands of dollars)
|
Change
in funded status
|
Assumptions
impacting accumulated benefit obligation:
|
|
|
|
Discount
rate
|
0.1%
|
$550
|
22%
|
Inflation
rate
|
0.1%
|
330
|
13%
|
Salary
Increase
|
0.1%
|
770
|
31%
|
Mortality
rate
|
1
year
|
550
|
22%
|
Assumption
impacting plan assets:
|
|
|
|
Return
on plan assets
|
0.1%
per year
|
$20
per year
|
1%
per year
|
OVERVIEW
OF SECOND QUARTER AND FIRST SIX MONTHS
Sales in the second quarter ended March
29, 2008 increased by 2% to $10,560,000 compared to $10,374,000 in the second
quarter last year. Volumes shipped were down by 3% but were more than offset by
a gain of 5% due to the weakness of the US dollar compared to European
currencies. The Company achieved sales increases in North America and Europe due
to increased volumes shipped; in the Far East there was a reduction in sales due
to lower volumes shipped.
Gross profit was 35.2% in the second
quarter compared to 38.7% in the same quarter last year. A combination of
currency fluctuations, lower sales volumes and sales mix reduced gross margins.
Operating expenses decreased by $119,000 due to lower selling and engineering
expense offset by adverse currency fluctuations. Operating income was $635,000
compared with $898,000 in the second quarter last year, a reduction of
29%.
Net
income for the quarter was 19% lower than last year at $461,000. Foreign
currency changes increased net income by $233,000; before the impact of foreign
currency, net income was down by $340,000 or 60%. Diluted net income per share
was $.14 compared to $.18 last year.
Cash
balances reduced by $182,000 in the first six months of fiscal 2008 to $832,000.
Operating activities generated cash of $546,000. Capital expenditures used cash
of $375,000 and dividend payments amounted to $196,000. Exchange rates reduced
cash by $177,000.
Results
of Operations
Three
months ended March 29, 2008
The following table compares results by
segment for the second quarter of fiscal 2008 with the prior year period and
shows the percentage changes in total and split between the currency impact and
volume / other changes:
|
|
|
|
|
%
change due to:
|
|
|
|
2008
|
|
|
2007
|
|
|
Total
|
|
|
Currency
|
|
|
Volume
/ other
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls - to external
customers
|
|
$ |
10,067 |
|
|
$ |
9,881 |
|
|
|
2 |
% |
|
|
6 |
% |
|
|
-4 |
% |
Capacitors- to external
customers
|
|
|
493 |
|
|
|
493 |
|
|
|
0 |
% |
|
|
1 |
% |
|
|
-1 |
% |
Capacitors -
inter-segment
|
|
|
10 |
|
|
|
16 |
|
|
|
-38 |
% |
|
|
1 |
% |
|
|
-39 |
% |
Capacitors – total
|
|
|
503 |
|
|
|
509 |
|
|
|
-1 |
% |
|
|
1 |
% |
|
|
-2 |
% |
Total sales to external
customers
|
|
|
10,560 |
|
|
|
10,374 |
|
|
|
2 |
% |
|
|
5 |
% |
|
|
-3 |
% |
Gross
Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
3,574 |
|
|
|
3,791 |
|
|
|
-6 |
% |
|
|
8 |
% |
|
|
-14 |
% |
Capacitors
|
|
|
140 |
|
|
|
223 |
|
|
|
-37 |
% |
|
|
1 |
% |
|
|
-38 |
% |
Total
|
|
|
3,714 |
|
|
|
4,014 |
|
|
|
-7 |
% |
|
|
8 |
% |
|
|
-15 |
% |
Selling
research and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
2,718 |
|
|
|
2,862 |
|
|
|
-5 |
% |
|
|
3 |
% |
|
|
-8 |
% |
Capacitors
|
|
|
198 |
|
|
|
181 |
|
|
|
9 |
% |
|
|
1 |
% |
|
|
8 |
% |
Unallocated corporate
expense
|
|
|
163 |
|
|
|
73 |
|
|
|
123 |
% |
|
|
0 |
% |
|
|
123 |
% |
Total
|
|
|
3,079 |
|
|
|
3,116 |
|
|
|
-1 |
% |
|
|
3 |
% |
|
|
-4 |
% |
Operating
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
856 |
|
|
|
929 |
|
|
|
-8 |
% |
|
|
26 |
% |
|
|
-34 |
% |
Capacitors
|
|
|
(58 |
) |
|
|
42 |
|
|
|
-238 |
% |
|
|
1 |
% |
|
|
-239 |
% |
Unallocated corporate
expense
|
|
|
(163 |
) |
|
|
(73 |
) |
|
|
123 |
% |
|
|
0 |
% |
|
|
123 |
% |
Total
|
|
|
635 |
|
|
|
898 |
|
|
|
-29 |
% |
|
|
27 |
% |
|
|
-56 |
% |
Other
income and expense
|
|
|
74 |
|
|
|
(23 |
) |
|
|
-422 |
% |
|
|
-513 |
% |
|
|
91 |
% |
Income
before income taxes
|
|
|
709 |
|
|
|
875 |
|
|
|
-19 |
% |
|
|
41 |
% |
|
|
-60 |
% |
Income
taxes
|
|
|
(248 |
) |
|
|
(307 |
) |
|
|
-19 |
% |
|
|
41 |
% |
|
|
-60 |
% |
Net
Income
|
|
$ |
461 |
|
|
$ |
568 |
|
|
|
-19 |
% |
|
|
41 |
% |
|
|
-60 |
% |
Sales in the second fiscal quarter
ended March 29, 2008 were $10,560,000 compared to $10,374,000 in the same period
last year, an increase of $186,000, or 2%. In the second fiscal quarter the US
dollar weakened by 3% and 13% against the British Pound and the Euro,
respectively, compared to the second fiscal quarter of 2007. These foreign
currency fluctuations accounted for a 5% increase in reported sales while
volumes were 3% lower than last year. Sales volumes in the controller business
were 4% lower than the same period last year as sales volume increases in North
America and Europe were offset by decreases in the Far East. In the capacitor
business, sales volumes were the same as during the second quarter last year.
Management expects that the continued strength of the Euro will reduce sales
growth in Europe, while Far East growth will also continue to slow, but customer
actions in response to the currency situation, as well as the Company’s
diversification of manufacturing sources, should mean that North American
markets will not be materially adversely affected in the near term.
The gross profit percentage was 35.2%
of sales in this period compared with 38.7% in the comparable period in fiscal
2007. Gross profit reduced by $300,000 compared to the second quarter of last
year. Foreign currency fluctuations increased reported gross profit by $321,000.
Net of the currency impact, gross profit was $621,000 lower than last year. The
reduction in gross profit was mainly due to lower sales volumes and sales
mix.
Selling, research and administrative
expenses were $3,079,000, a reduction of $37,000 compared to the same period
last year. Foreign currency fluctuations increased reported operating expenses
by $82,000, or 3%. Excluding the impact of currency fluctuations, operating
expenses for the second quarter were $119,000, or 4% lower than the same period
last year. Operating expenses were lower than last year due to lower selling and
engineering expense. The Company plans to cease its residual manufacturing
operations in the UK which have been reducing for several years. The costs of
doing this are expected to be up to $900,000 in the second half of fiscal 2008.
The anticipated savings and expense are subject to a variety of factors such as
the cost of one-time termination costs and associated costs that may cause
actual results to vary from those anticipated.
Operating income for the second quarter
was $635,000, a reduction of $263,000, or 29%, compared to the same period last
year. Foreign currency fluctuations had an overall positive impact of $239,000
on reported operating income. Excluding the currency impact, operating income
for the controller business reduced by $312,000, mainly due to lower volumes. In
the capacitor business segment changes in sales mix impacted gross profit
margins which caused an operating loss of $58,000 compared to an operating
profit of $42,000 in the second quarter of fiscal 2007.
In the second quarter interest expense
was $23,000, an increase of $21,000 compared to the prior year. There was a
foreign currency gain of $95,000 in the second quarter of fiscal 2008 compared
to a loss of $23,000 in the same period last year.
Income before income taxes was $709,000
compared to $875,000 in the same period last year, a reduction of $166,000, or
19%. Income taxes were 35% of pre-tax income, in line with the same period last
year. Net income for the second quarter was $461,000, a reduction of $107,000
compared to the same period last year. Basic and fully diluted income per share
was $.14 compared to $.18 per share in the second quarter of fiscal
2007.
Six
months ended March 29, 2008
The following table compares first half
year results by segment for the six months ended March 29, 2008 with the same
period in the prior year, and shows the percentage changes in total and split
between the currency impact and volume / other changes.
|
|
Six
months ended
|
|
|
%
change due to:
|
|
|
|
March
29, 2008
|
|
|
March
31, 2007
|
|
|
Total
|
|
|
Currency
|
|
|
Volume
/ other
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls - to external
customers
|
|
$ |
19,774 |
|
|
$ |
17,684 |
|
|
|
12 |
% |
|
|
6 |
% |
|
|
6 |
% |
Capacitors- to external
customers
|
|
|
1,029 |
|
|
|
916 |
|
|
|
12 |
% |
|
|
3 |
% |
|
|
9 |
% |
Capacitors -
inter-segment
|
|
|
22 |
|
|
|
31 |
|
|
|
-29 |
% |
|
|
2 |
% |
|
|
-31 |
% |
Capacitors – total
|
|
|
1,051 |
|
|
|
947 |
|
|
|
11 |
% |
|
|
3 |
% |
|
|
8 |
% |
Total sales to external
customers
|
|
|
20,803 |
|
|
|
18,600 |
|
|
|
12 |
% |
|
|
6 |
% |
|
|
6 |
% |
Gross
Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
7,260 |
|
|
|
6,657 |
|
|
|
9 |
% |
|
|
8 |
% |
|
|
1 |
% |
Capacitors
|
|
|
336 |
|
|
|
355 |
|
|
|
-5 |
% |
|
|
3 |
% |
|
|
-8 |
% |
Total
|
|
|
7,596 |
|
|
|
7,012 |
|
|
|
8 |
% |
|
|
8 |
% |
|
|
0 |
% |
Selling
research and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
5,753 |
|
|
|
5,409 |
|
|
|
6 |
% |
|
|
4 |
% |
|
|
2 |
% |
Capacitors
|
|
|
428 |
|
|
|
388 |
|
|
|
10 |
% |
|
|
4 |
% |
|
|
6 |
% |
Unallocated corporate
expense
|
|
|
195 |
|
|
|
113 |
|
|
|
73 |
% |
|
|
0 |
% |
|
|
73 |
% |
Total
|
|
|
6,376 |
|
|
|
5,910 |
|
|
|
8 |
% |
|
|
4 |
% |
|
|
4 |
% |
Operating
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
1,507 |
|
|
|
1,248 |
|
|
|
21 |
% |
|
|
26 |
% |
|
|
-5 |
% |
Capacitors
|
|
|
(92 |
) |
|
|
(33 |
) |
|
|
179 |
% |
|
|
8 |
% |
|
|
171 |
% |
Unallocated corporate
expense
|
|
|
(195 |
) |
|
|
(113 |
) |
|
|
73 |
% |
|
|
0 |
% |
|
|
73 |
% |
Total
|
|
|
1,220 |
|
|
|
1,102 |
|
|
|
11 |
% |
|
|
29 |
% |
|
|
-18 |
% |
Other
income and expense
|
|
|
(29 |
) |
|
|
(93 |
) |
|
|
-69 |
% |
|
|
-116 |
% |
|
|
47 |
% |
Income
before income taxes
|
|
|
1,191 |
|
|
|
1,009 |
|
|
|
18 |
% |
|
|
42 |
% |
|
|
-24 |
% |
Income
taxes
|
|
|
(417 |
) |
|
|
(353 |
) |
|
|
18 |
% |
|
|
42 |
% |
|
|
-24 |
% |
Net
Income
|
|
$ |
774 |
|
|
$ |
656 |
|
|
|
18 |
% |
|
|
42 |
% |
|
|
-24 |
% |
Sales in the six months ended March 29,
2008 were $20,803,000, an increase of $2,203,000, or 12%, compared to the same
period last year when sales were $18,600,000. Foreign currency fluctuations
accounted for an increase in reported sales of $1,069,000 or 6%; in addition,
volumes were also 6% ahead of the same period last year. The increased volumes
were mainly due to broadly-based higher levels of demand across most of the
Company’s customer base; there were no significant “one-off” or “exceptional”
sales revenues in the first six months of fiscal 2008. Volumes in the controller
business were 6% better than in the same period last year, with gains in Europe
and North America partially offset by lower volumes in the Far East. In the
capacitor business, sales to external customers increased by $113,000 compared
to the same period last year. Capacitor volumes in the first six months were
higher by $82,000, or 9%. Foreign currency fluctuations accounted for a $31,000,
or 3%, increase in the reported sales of capacitors.
Revenues in the US controller business
increased by 17% compared to the first half of last fiscal year. This was mainly
due to strong demand in the aerial lift market.
Gross profit was 36.5% of sales in this
period compared to 37.7% in the comparable period in fiscal 2007. Gross profit
increased by $584,000 compared to the first half of last year. Marginally higher
volumes were augmented by favorable foreign currency fluctuations which
increased reported gross profit by $554,000. In the controller business, gross
profit increased by $603,000 compared to the second quarter of fiscal 2007 and,
in the capacitor business, gross profit of $336,000 was marginally behind last
year.
Selling, research and administrative
expenses were $6,376,000, an increase of $466,000 compared to the same period
last year. Foreign currency fluctuations increased reported operating expenses
by $237,000, or 4%. Excluding the impact of currency fluctuations, operating
expenses in the first half year were $229,000, or 4%, higher than the same
period last year, due to increased administrative expenses arising from
personnel changes.
Operating income for the first half of
fiscal 2008 was $1,220,000, an increase of $118,000, or 11%, compared to the
same period last year. Foreign currency fluctuations resulted in a $317,000
increase in reported operating income. Excluding the currency impact, operating
income for the controller business decreased by 5% compared to last year. The
main cause of this decrease in operating income was lower gross margins due to
sales mix, together with higher operating expense. In the capacitor business
segment there was an operating loss of $92,000 compared to a $33,000 operating
loss in the first six months of fiscal 2007.
In the first half of fiscal 2008
interest expense was $53,000 compared to $7,000 in the same period last year.
There was a foreign currency gain of $20,000 in fiscal 2008 compared to a loss
of $90,000 in the same period last year, mainly due to the strength of the Euro
compared to the British Pound and US Dollar.
Income before income taxes was
$1,191,000 compared to $1,009,000 in the same period last year, an increase of
$182,000, or 18%. Income taxes were 35% of pre-tax income, in line with the same
period last year. Net income for the first half year was $774,000, an increase
of $118,000, or 18%, compared to the same period last year. Basic and fully
diluted income per share increased by $.03 per share to $.24 per share compared
to $.21 per share in the first half of fiscal 2007.
Financial
Condition
The Company has, since January 1990,
maintained a program of regular cash dividends. The dividend for the second
quarter of fiscal 2008 was paid on April 17, 2008, and amounted to $98,000. Cash
balances at the end of the second quarter of 2008 were $832,000, compared to
$1,014,000 on September 30, 2007, a decrease in cash of $182,000 in the first
six months of fiscal 2008.
In the first half of fiscal 2008, net
income was $774,000, and operating activities generated $546,000 of cash.
Inventories decreased by $32,000 to $5,371,000. The number of days sales in
receivables remained constant in the first six months of fiscal 2008 at 70 days.
Prepaid expense and other current assets increased by $214,000 to $1,217,000,
largely due to the payment of annual insurance premiums. Accounts payable were
$4,047,000 compared with $3,398,000 at September 30, 2007. Accrued expenses of
$2,570,000 were lower by $592,000 than the balance at September 30, 2007.
Accrued income taxes decreased by $169,000, due to the payment of foreign income
taxes. Dividends paid in the first six months of fiscal 2008 amounted to
$196,000. Capital expenditures in the first six months were $375,000. Exchange
rate changes decreased reported cash by $177,000 in the first six months of
fiscal 2008.
The Company has no long-term debt but
has overdraft facilities in the UK of approximately $2 million and of $200,000
in France. At the end of the second quarter the Company had no borrowings
against these overdraft facilities. The UK overdraft facilities are secured by
all of the Company’s assets in the UK and the French overdraft facilities are
unsecured.
Tech/Ops Sevcon's capital resources, in
the opinion of management, are adequate for projected operations and capital
spending programs. Capital spending programs are not expected to be
significantly higher than depreciation over the next twelve months and projected
volume growth is not expected to require significant additional cash
resources.
Item
3 Quantitative
and Qualitative Disclosures about Market Risk.
The Company’s operations are sensitive
to a number of market factors, any one of which could materially adversely
affect its results of operations in any given year. Other risks dealing with
contingencies are described in Note 6 to the Company’s Consolidated Financial
Statements included under Item 8 of the Company’s Form 10-K for the year ended
September 30, 2007 and other risks are described under the caption Risk Factors
in Part II, Item 1A below.
Foreign
currency risk
The Company sells to customers
throughout the industrialized world. The majority of the Company’s products are
manufactured in, or sourced from, the United Kingdom. In the first six months of
fiscal 2008, approximately 39% of the Company’s sales were made in US Dollars,
25% were made in British Pounds and 36% were made in Euros. Over 70% of the
Company’s cost of sales was incurred in British Pounds. This resulted in the
Company’s sales and margins being exposed to fluctuations due to the change in
the exchange rates of the US Dollar, the British Pound and the Euro. The Company
has trade accounts receivable and accounts payable denominated in both British
pounds and Euros which are exposed to exchange fluctuations.
In addition, the translation of the
sales and income of foreign subsidiaries into US Dollars is also subject to
fluctuations in foreign currency exchange rates.
The Company undertakes hedging
activities from time-to-time to manage the foreign exchange exposures related to
forecasted purchases and sales in foreign currency and the associated foreign
currency denominated receivables and payables. The Company does not engage in
speculative foreign exchange transactions. Details of this hedging activity and
the underlying exposures are set out below.
The following table provides
information about the Company’s foreign currency accounts receivable, accounts
payable, firmly committed sales contracts and derivative financial instruments
outstanding as of March 29, 2008. The information is provided in US Dollar
amounts, as presented in the Company’s consolidated financial statements. The
table presents the notional amount (at contract exchange rates) and the weighted
average contractual foreign currency exchange rates.
|
|
(in
thousands of dollars, except average contract rates)
|
|
|
|
Expected maturity or
transaction date
|
|
|
|
|
|
|
FY2008
|
|
|
FY2009
|
|
|
Total
|
|
|
Fair
Value
|
|
On
balance sheet financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
In $ US Functional
Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable in British
Pounds
|
|
|
1,110 |
|
|
|
- |
|
|
|
1,110 |
|
|
|
1,110 |
|
Accounts receivable in
Euros
|
|
|
4,870 |
|
|
|
- |
|
|
|
4,870 |
|
|
|
4,870 |
|
Accounts payable in British
Pounds
|
|
|
3,383 |
|
|
|
- |
|
|
|
3,383 |
|
|
|
3,383 |
|
Accounts payable in
Euros
|
|
|
445 |
|
|
|
- |
|
|
|
445 |
|
|
|
445 |
|
Anticipated
Transactions and related derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In $ US Functional
Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firmly committed sales
contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In British Pounds
|
|
|
958 |
|
|
|
- |
|
|
|
958 |
|
|
|
958 |
|
In Euros
|
|
|
1,390 |
|
|
|
- |
|
|
|
1,390 |
|
|
|
1,390 |
|
Forward exchange
agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sell US Dollars for British
Pounds
|
|
|
1,650 |
|
|
|
- |
|
|
|
1,650 |
|
|
|
1,650 |
|
Sell Euros for British
Pounds
|
|
|
3,516 |
|
|
|
- |
|
|
|
3,516 |
|
|
|
3,516 |
|
Average contractual exchange
rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Dollars = British
Pound
|
|
|
2.01 |
|
|
|
- |
|
|
|
2.01 |
|
|
|
- |
|
Euro = British
Pound
|
|
|
1.37 |
|
|
|
- |
|
|
|
1.37 |
|
|
|
- |
|
Amount recorded as
other comprehensive
income
|
|
$ |
191 |
|
|
$ |
- |
|
|
$ |
191 |
|
|
$ |
191 |
|
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 March 29, 2008, the risk arising from changes in
interest rates was not material.
(a) Evaluation
of disclosure controls and procedures. The Company’s principal executive officer
and principal financial officer, after evaluating the effectiveness of the
Company’s “disclosure controls and procedures” (as defined in the Securities
Exchange Act of 1934 Rule 13a-15(e)) have concluded that, as of March 29, 2008,
these disclosure controls and procedures were effective.
(b) Changes
in internal control over financial reporting. Our principal executive officer
and principal financial officer have identified no change in the Company’s
“internal control over financial reporting” (as defined in Securities Exchange
Act of 1934 Rule 13a-15(f)) that occurred during the period covered by this
Quarterly Report on Form 10-Q that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
PART
II. OTHER INFORMATION
None.
Item 1A
Risk Factors
In addition to the market risk factors
relating to foreign currency and interest rate risk set out in PART 1 Item 3
above, the Company believes that the following represent the most significant
risk factors for the Company:
Capital
goods markets are cyclical
The Company’s customers are mainly
manufacturers of capital goods such as fork lift trucks, aerial lifts and
railway signaling equipment. These markets are cyclical and are currently
showing modest growth, but demand in these markets could decrease or customers
could decide to purchase alternative products. In this event the Company’s sales
could decrease below its current break even point and there is no certainty that
the Company would be able to decrease overhead expenses to enable it to operate
profitably.
Single
source materials and sub-contractors may not meet the Company’s
needs.
The Company relies on certain suppliers
and sub-contractors for all of its requirements for certain components,
sub-assemblies and finished products. In the event that such suppliers and
sub-contractors are unable or unwilling to continue supplying the Company, or to
meet the Company’s cost and quality targets or needs for timely delivery, there
is no certainty that the Company would be able to establish alternative sources
of supply in time to meet customer demand.
Damage
to the Company’s or sub-contractor’s buildings would hurt results.
In the controller business the majority
of 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.
None.
None.
At the
Annual Meeting of Stockholders held on January 22, 2008, the stockholders
elected Matthew Boyle and Paul O. Stump as directors of the Company to hold
office until the 2011 Annual Meeting (subject to the election and qualification
of their successors and to their earlier resignation, removal or
death):
Name
|
|
Votes
For
|
|
Votes
Withheld
|
Matthew
Boyle
|
|
3,005,225
|
|
9,704
|
Paul
O. Stump
|
|
2,999,205
|
|
15,724
|
On May 14, 2008 the Company announced
plans to cease its residual manufacturing operations in the UK which have been
reducing for several years. These plans followed a review of the business which
identified an opportunity to significantly reduce ongoing manufacturing costs
through further reliance on subcontractors to manufacture the Company’s
products. It is anticipated that the process leading to the cessation of
manufacturing in the Company’s UK facility will be completed by the end of the
2008 fiscal year. The costs of doing this are anticipated to be up to $900,000
in the second half of fiscal 2008. The anticipated savings and expense are
subject to a variety of factors such as the cost of one-time termination costs
and associated costs that may cause actual results to vary from those
anticipated.
Item
6 Exhibits
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 19, 2008
|
By:
/s/ Paul N. Farquhar
|
|
Paul
N. Farquhar
|
|
Chief
Financial Officer (Principal Financial 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.
|