10-Q 1 a.txt TECH/OPS SEVCON 10Q Q2 FY2002 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 31, 2002 -------------- / / 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 (I.R.S. Employer incorporation or organization) Identification No.) 40 North Avenue, Burlington, Massachusetts, 01803-3391 ------------------------------------------------------ (Address of principal executive offices and zip code) (781) 229-7896 --------------------------------------------------- (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 --- --- 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 154, 2002 ---------------------------- --------------------------- Common stock, par value $.10 3,118,387 TECH/OPS SEVCON, INC. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets ASSETS (in thousands) Mar 31, Sept 30, 2002 2001 --------- ------------ (unaudited) (derived from audited statements) Current assets: Cash and cash equivalents $ 816 $ 812 Accounts receivable, less allowances of $806,000 at 3/31/2002 and $809,000 at 9/30/2001 4,123 5,145 Inventories: Raw materials 2,172 2,508 Work-in-process 544 1,194 Finished goods 1,424 1,140 ------- ------- 4,140 4,842 ------- ------- Prepaid expenses and other current assets 409 658 ------- ------- Total current assets 9,488 11,457 ------- ------- Property, plant and equipment, at cost 7,003 7,201 Less: Accumulated depreciation and amortization 4,471 4,343 ------- ------- Net property, plant and equipment 2,532 2,858 ------- ------- Cost of purchased businesses in excess of net assets acquired 1,435 1,435 ------- ------- $13,455 $15,750 ======= ======= The accompanying notes are an integral part of these financial statements. TECH/OPS SEVCON, INC. Consolidated Balance Sheets LIABILITIES AND STOCKHOLDERS' INVESTMENT (in thousands) Mar 31, Sept 30, 2002 2001 --------- ------------ (unaudited) (derived from audited statements) Current liabilities: Accounts payable $ 1,587 $ 2,611 Dividend payable 281 560 Accrued expenses 1,800 2,072 Accrued taxes on income 401 438 ------- ------- Total current liabilities 4,069 5,681 ------- ------- Deferred taxes on income 105 110 ------- ------- Stockholders' investment Preferred stock - - Common stock 312 311 Treasury stock (49) (49) Premium paid in on common stock 3,997 3,925 Retained earnings 6,860 7,237 Cumulative other comprehensive income (loss) (1,839) (1,465) ------- ------- Total stockholders' investment $ 9,281 $ 9,959 ------- ------- $13,455 $15,750 ======= ======= The accompanying notes are an integral part of these financial statements. TECH/OPS SEVCON, INC. Consolidated Statements of Income (Unaudited) (in thousands except per share data) Three Months Ended Six Months Ended ------------------ ------------------ Mar 31, Mar 31, Mar 31, Mar 31, 2002 2001 2002 2001 ------- ------- ------- ------- Net sales $ 5,575 $ 7,658 $10,977 $13,426 Costs and expenses: Cost of sales 3,428 4,632 6,849 8,907 Selling, research and administrative 1,846 2,141 3,735 4,157 ------- ------- ------- ------- 5,274 6,773 10,584 13,064 ------- ------- ------- ------- Operating income 301 885 393 362 Other income (expense), net (7) - (20) 45 ------- ------- ------- ------- Income before income taxes 294 885 373 407 Income taxes (102) (310) (130) (142) ------- ------- ------- ------- Net income $ 192 $ 575 243 265 ======= ======= ======= ======= Basic income per share $ .06 $ .18 $ .08 $ .09 ======= ======= ======= ======= Fully diluted income per share $ .06 $ .18 $ .08 $ .08 ======= ======= ======= ======= Consolidated Statement of Comprehensive Income (Unaudited) (in thousands) Three Months Ended Six Months Ended ------------------ ------------------ Mar 31, Mar 31, Mar 31, Mar 31, 2002 2001 2002 2001 ------- ------- ------- ------- Net income $ 192 $ 575 $ 243 $ 265 Foreign currency translation adjustment (134) (314) (260) (250) Change in fair market value of cash flow hedge (61) (140) (114) (192) ------- ------- ------- ------- Comprehensive income (loss) $ (3) $ 121 $ (131) $ (177) ======= ======= ======= ======= The accompanying notes are an integral part of these financial statements. TECH/OPS SEVCON, INC. Consolidated Statement of Cash Flows (Unaudited) (in thousands) Six Months Ended ------------------ Mar 31, Mar 31, 2002 2001 ------- ------- Net cash flow from operating activities: Net income $ 243 $ 265 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 270 269 Deferred tax provision (5) (6) Increase (decrease) in cash resulting from changes in operating assets & liabilities: Receivables 1,022 (136) Inventories 702 (386) Pre-paid expenses and other current assets 135 350 Accounts payable (1,024) 511 Accrued compensation and expenses (272) 353 Accrued and deferred taxes on income (37) (222) ------- ------- Net cash generated from operating activities 1,034 998 Cash flow used by investing activities: Acquisition of property, plant, and equipment, net (52) (242) Disposal of short-term investments - 591 ------- ------- Net cash generated from (used by) investing activities (52) 349 ------- ------- Cash flow (used by) financing activities: Dividends paid (840) (1,120) Exercise and repurchase of stock options 14 - Purchase of common stock - (49) ------- ------- Net cash used by financing activities (826) (1,169) Effect of exchange rate changes on cash (152) (340) ------- ------- Net increase (decrease) in cash 4 (162) Opening balance - cash and cash equivalents 812 1,542 ------- ------- Ending balance - cash and cash equivalents $ 816 $ 1,380 ======= ======= Supplemental disclosure of cash flow information Cash paid for income taxes $ 31 $ 126 Cash paid for interest 14 4 ------- ------- Supplemental disclosure of non-cash financing activity: Dividend declared $ 281 $ 560 ======= ======= The accompanying notes are an integral part of these financial statements. TECH/OPS SEVCON, INC. Notes to Consolidated Financial Statements - March 31, 2002 (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 March 31, 2002, the results of operations and cash flows for the three months and six months ended March 31, 2002. The accounting policies followed by Tech/Ops Sevcon are set forth in Note 1 to the financial statements in the 2001 Tech/Ops Sevcon, Inc. Annual Report filed on Form 10-K. The results of operations for the three-month and six-month periods ended March 31, 2002 are not necessarily indicative of the results to be expected for the full year. (2) Cash Dividends On March 8, 2002, the Company declared a quarterly dividend of $.09 per share for the second quarter of fiscal 2002, which was paid on April 11, 2002 to stockholders of record on March 27, 2002. The Company has paid regular quarterly cash dividends since the first quarter of fiscal 1990. (3) Calculation of Earnings Per Share and Weighted Average Shares Outstanding Basic and fully diluted earnings per share were calculated as follows: (in thousands, except for per share amounts) Three Months Ended Six Months Ended ------------------ ---------------- Mar 31 Mar 31 Mar 31 Mar 31 2002 2001 2002 2001 ------ ------ ------ ------ Net income $ 192 $ 575 $ 243 $ 265 Basic income per share $ .06 $ .18 $ .08 $ .09 Average shares outstanding 3,115 3,110 3,112 3,111 Options outstanding - common stock equivalents 3 16 9 16 Average common and common equivalent shares outstanding 3,118 3,126 3,121 3,127 Fully diluted income per share $ .06 $ .18 $ .08 $ .08 ====== ====== ====== ====== (4) Segment information The Company has two reportable segments: electronic controls and capacitors. The electronic controls segment produces control systems 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 accounting policies of the segments are the same as those described in note 1 to the 2001 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) --------------------------------------------------------------------- Three months ended March 31, 2002 --------------------------------------------------------------------- Controls Capacitors Corporate Total --------------------------------------------------------------------- Sales to external customers $ 5,195 $ 380 - $ 5,575 Inter-segment revenues - 156 - 156 Operating income 305 33 (37) 301 Identifiable assets 12,004 1,358 93 13,455 --------------------------------------------------------------------- --------------------------------------------------------------------- Three months ended March 31, 2001 --------------------------------------------------------------------- Controls Capacitors Corporate Total --------------------------------------------------------------------- Sales to external customers $ 7,081 $ 577 - $ 7,658 Inter-segment revenues - 92 - 92 Operating income 760 183 (58) 885 Identifiable assets 15,032 1,323 154 16,499 --------------------------------------------------------------------- --------------------------------------------------------------------- Six months ended March 31, 2002 --------------------------------------------------------------------- Controls Capacitors Corporate Total --------------------------------------------------------------------- Sales to external customers $10,127 $ 850 - $10,977 Inter-segment revenues - 299 - 299 Operating income 400 122 (129) 393 --------------------------------------------------------------------- --------------------------------------------------------------------- Six months ended March 31, 2001 --------------------------------------------------------------------- Controls Capacitors Corporate Total --------------------------------------------------------------------- Sales to external customers $12,358 $ 1,068 - $13,426 Inter-segment revenues - 177 - 177 Operating income 193 288 (119) 362 --------------------------------------------------------------------- TECH/OPS SEVCON, INC. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward looking statements This discussion and analysis contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected, including the following: ability of outsource sub-contractors to meet the Company's cost and quality targets and to deliver products in a timely manner; ability to produce products meeting technical requirements of customers and acceptance of those products by customers; level of demand for controls; impact of the variability of foreign exchange rates on sales and earnings; availability of electronic components at reasonable prices; ability of the Company to meet customers quality objectives; availability of earnings and capital resources to permit continuation of dividend payments; the outcome of litigation as well as other factors that may be described from time to time in the Company's filings with the Securities and Exchange Commission, including on Form 10-K. Critical Accounting Policies Financial Reporting Release No. 60, which was recently published by the SEC, recommends that all companies include a discussion of critical accounting policies used in the preparation of their financial statements. The Company's significant accounting policies are summarized in Note 1 of its financial statements on Form 10-K. While all these significant accounting policies impact its financial condition and results of operations, the Company views certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on the Company's financial statements and require management to use a greater degree of judgement and/or estimates. Actual results may differ from those estimates. The Company believes the following represent its critical accounting policies: Revenue Recognition The Company recognizes revenue when title transfers in accordance with its normal trading terms, which is usually upon shipment of its products. Over 98% of the Company's revenues are derived from product shipments. The Company's only post shipment obligation relates to warranty in the normal course of business for which adequate ongoing reserves are maintained. Foreign Currencies and Hedging Tech/Ops Sevcon translates the assets and liabilities of its foreign subsidiaries at the current rate of exchange, and income statement accounts at the average exchange rates in effect during the period. Gains or losses from foreign currency translation are credited or charged to cumulative translation adjustment included in the statement of comprehensive income and as a component of cumulative other comprehensive income in stockholders' investment in the balance sheet. Foreign currency transaction gains and losses are included in costs and expenses. In the current fiscal year approximately 58% of the Company's revenues and 70% of its assets were denominated in foreign currencies. The majority of the Company's products are manufactured in the United Kingdom and have costs denominated in British pounds. Forward foreign exchange contracts are used primarily by the Company to hedge the operational ("cash-flow" hedges) and balance sheet ("fair value" hedges) exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts are entered into to hedge anticipated intercompany product purchases and third party sales and the associated accounts payable and receivable made in the normal course of business. Accordingly, these forward foreign exchange contracts are not speculative in nature. As part of its overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, the Company hedges a portion of its foreign currency exposures anticipated over the ensuing 9-month period Bad Debt The Company estimates an allowance for doubtful accounts based on factors related to the credit risk of each customer. With the exception of a significant loss of in fiscal 2001 relating to one US customer, credit losses have not been significant in the past ten years. Ten customers account for approximately 55% of the Company's sales. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventories Inventories are priced 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 specific to one customer. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Warranty Costs The Company provides for the estimated cost of product warranties at the time revenue is recognized based upon estimated costs and anticipated in-warranty failure rates. 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. Should actual product failure rates and repair or replacement costs differ from estimates, revisions to the estimated warranty liability may be required. Results of Operations Three months ended March 31, 2002 Sales in the second fiscal quarter ended March 31, 2002 were $5,575,000 compared to $7,658,000 in the same quarter of the previous year, a decrease of $2,083,000, or 27%. Revenues in the U.S. Controller business decreased by 34% mainly due to lower demand in the aerial lift, fork lift truck and mining markets. Volumes in the European controller markets were 19% lower than last year, mainly due to weakness in the aerial lift and fork lift truck markets. Capacitor sales were 34% lower than last year due to difficult conditions in the European markets for railway signaling and audio capacitors. Second quarter gross profit was 38.5% of sales, a decrease from 39.5% in the second quarter of fiscal 2001. Gross profit of $2,147,000 was $879,000 lower than last year. The decrease in gross profit percentage was mainly due to lower volumes. In the second quarter of fiscal 2002 inventory reserves relating to unique materials for UpRight Inc., a customer in Chapter 11 reorganization , were reduced by $60,000, reflecting materials sold during the quarter, which reduced cost of sales by a like amount. Selling, research and administrative expenses for the quarter decreased by $295,000, or 14%, compared to fiscal 2001. In the second quarter of the current year the Company incurred consulting costs of $93,000 relating to a plan to improve product quality. During the second quarter of last year the company incurred costs relating to workforce reductions of $390,000. Operating income was $301,000, a decrease of $584,000 compared to the second quarter of last year. Operating income in the capacitor business segment decreased by $150,000 to $33,000, mainly due to lower volumes. Operating income in the controller business of $305,000 was $455,000 lower than in fiscal 2001. The decrease in controller business operating income was mainly due to lower volumes, partially offset by the cost of workforce reductions incurred last year of $390,000. Income before income taxes was $294,000, compared to $855,000 last year, a decrease of $561,000. Income taxes were 34.7% of pre-tax income compared to 35.0% in the same quarter last year. Net income was $192,000 compared to $575,000 last year, a decrease of 67%. Basic and fully diluted income per share decreased by 67%, from $.18 in the second quarter of fiscal 2001, to $.06 in the current year. Six months ended March 31, 2002 Sales in the first six months of fiscal 2002 were $10,977,000, compared to $13,426,000 in the same period last year, a decrease of $2,449,000, or 18%. Volumes in the controller business were 18% lower than last year. In the capacitor business revenues were down by $218,000, or 20%, compared to the first six months of last year. In the first quarter of fiscal 2001 there was a technical problem with a major product line which resulted in production of this major product line being suspended during December 2000. This resulted in lower first quarter 2001 sales, however this was partially recovered in the second quarter of last year. Revenues in the US controller business decreased by 24%. This was mainly due to decreased demand in the aerial lift and fork lift truck markets, partially offset by increased sales into the neighborhood electric vehicle market. Controller volumes in foreign markets decreased by 12%, mainly due to lower demand in the European aerial lift and fork lift truck markets. Capacitor volumes decreased by $218,000, or 20% compared to the first half of last year. Gross profit was 37.6% of sales in the first half of fiscal 2002 compared to 33.7% in 2001. Gross profit decreased by $391,000 compared to the first six months of last year. Lower volumes accounted for $1,250,000 of the decrease in gross profit. In the first quarter of last year the company incurred a charge of $450,000 relating to product rectification costs in connection with a technical problem with a major product line. The remaining improvement in gross profit was mainly due to lower material and labor costs arising from the Company's outsourcing program. Inventory reserves relating to an aerial lift customer in Chapter 11 reorganization decreased by $60,000 in fiscal 2002. Operating expenses for the six-month period were $3,735,000 compared to $4,157,000 last year, a decrease of 10%. The most significant reason for this decrease was a charge of $390,000 relating to workforce reductions in the second quarter of fiscal 2001. Operating income for the first half year was $393,000, an increase of $31,000 compared to last year. Operating income for the controller business increased by $207,000 to $400,000. The main causes of this increase was expense reductions relating to charges last year of $450,000 for product rectification and $390,000 for the cost of workforce reduction in fiscal 2001, partially offset by lower volumes. In the capacitor business segment operating income decreased by $166,000, or 58%, to $122,000, mainly due to decreased volumes. Income before income taxes was $373,000, compared to $407,000 last year, a decrease of $34,000. Other expense was $20,000 compared to other income of $45,000 in the first half of fiscal 2001. The year-to-year swing was mainly due to foreign currency losses in 2002 compared to gains last year. Income taxes were 34.9% of pre-tax income, in line with last year. Net income was $243,000, a decrease of $22,000 compared to the same period last year. Basic income per share was $.08 per share compared to $.09 per share in the first half of fiscal 2001. Fully diluted net income was $.08 per share, in line with the first half of 2001. Financial Condition The Company has, since January 1990, maintained a program of regular cash dividends, which, for the most recent quarter, amounted to $281,000. Cash balances at the end of March 2002 were $816,000 compared to $812,000 at September 30, 2001. In the first six months net income was $243,000, and operating activities generated $1,034,000 and dividend payments amounted to $840,000. In the last 4 fiscal quarters net income amounted to $1,079,000, or $.35 per share. Following the decrease in the regular quarterly dividend in December 2001 to $.09 per share, the current annual cash requirement for dividends is $1,122,000, or 104% of the net income over the last 12 months. The Company has no long-term debt and has overdraft facilities in Europe amounting to $1,450,000. These overdraft facilities are due for renewal in September 2002, but can be withdrawn on demand by the bank. Tech/Ops Sevcon's resources, in the opinion of management, are adequate for projected operations and capital spending programs, as well as payment of cash dividends. TECH/OPS SEVCON, INC. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders At the Company's Annual Meeting held on January 22, 2002, the shareholders voted to re-elect as directors for three year terms the following persons: Matthew Boyle and C Vincent Vappi. Mr. Boyle received 2,658,240 votes for and 110,033 withheld, and Mr. Vappi received 2,702,240 votes for and 66,033 withheld. There were no abstentions or broker non-votes. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits filed with this report. None (b) Reports on Form 8-K - There were no reports on Form 8-K during the quarter for which this report is filed. SIGNATURES 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 15, 2002 By: /s/ Paul A. McPartlin --------------------- Paul A. McPartlin Chief Financial and Accounting Officer