-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GNaSJp2lBWB01L/fZR26JajdCKl0wegGswoyMk82JRyKX+GaDMx7s/75WZ86rU9O x6t6Nk5xGb0YXzHvTXBbTw== 0000825411-03-000005.txt : 20030514 0000825411-03-000005.hdr.sgml : 20030514 20030514144518 ACCESSION NUMBER: 0000825411-03-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TECH OPS SEVCON INC CENTRAL INDEX KEY: 0000825411 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRICAL INDUSTRIAL APPARATUS [3620] IRS NUMBER: 042985631 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09789 FILM NUMBER: 03698505 BUSINESS ADDRESS: STREET 1: 155 NORTHBORO ROAD CITY: SOUTHBOROUGH STATE: MA ZIP: 01772 BUSINESS PHONE: 5082815510 MAIL ADDRESS: STREET 1: 155 NORTHBORO ROAD CITY: SOUTHBOROUGH STATE: MA ZIP: 01772 10-Q 1 y.txt SECOND QUARTER FISCAL 2003 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, 2003 -------------- / / 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.) 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 --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes 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 14, 2003 - ---------------------------- --------------------------- Common stock, par value $.10 3,125,051 TECH/OPS SEVCON, INC. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets ASSETS (in thousands) Mar 31, Sept 30, 2003 2002 --------- ------------ (unaudited) (derived from audited statements) Current assets: Cash and cash equivalents $ 280 $ 695 Accounts receivable, less allowances of $349 at 3/31/2003 and $356 at 9/30/2002 4,718 3,938 Inventories: Raw materials 2,059 2,096 Work-in-process 359 594 Finished goods 1,683 1,447 ------- ------- 4,101 4,137 ------- ------- Prepaid expenses and other current assets 905 539 ------- ------- Total current assets 10,004 9,309 ------- ------- Property, plant and equipment, at cost 8,307 7,913 Less: Accumulated depreciation and amortization 5,435 5,136 ------- ------- Net property, plant and equipment 2,872 2,777 ------- ------- Cost of purchased businesses in excess of net assets acquired 1,435 1,435 ------- ------- $14,311 $13,521 ======= ======= 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, 2003 2002 --------- ------------ (unaudited) (derived from audited statements) Current liabilities: Short-term borrowings $ 725 $ - Accounts payable 1,538 1,406 Dividend payable 94 94 Accrued expenses 2,137 2,315 Accrued taxes on income 177 160 ------- ------- Total current liabilities 4,671 3,975 ------- ------- Deferred taxes on income 90 93 ------- ------- Stockholders' investment Preferred stock - - Common stock 313 313 Premium paid in on common stock 4,047 4,047 Retained earnings 6,219 6,189 Cumulative other comprehensive income (loss) (1,029) (1,096) ------- ------- Total stockholders' investment $ 9,550 $ 9,453 ------- ------- $14,311 $13,521 ======= ======= 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, 2003 2002 2003 2002 ------- ------- ------- ------- Net sales $ 6,138 $ 5,575 $11,783 $10,977 Costs and expenses: Cost of sales 3,722 3,428 7,240 6,849 Selling, research and administrative 2,113 1,846 4,226 3,735 ------- ------- ------- ------- 5,835 5,274 11,466 10,584 ------- ------- ------- ------- Operating income 303 301 317 393 Other income (expense), net 22 (7) 17 (20) ------- ------- ------- ------- Income before income taxes 325 294 334 373 Income taxes (114) (102) (117) (130) ------- ------- ------- ------- Net income $ 211 $ 192 217 243 ======= ======= ======= ======= Basic income per share $ .07 $ .06 $ .07 $ .08 ======= ======= ======= ======= Fully diluted income per share $ .07 $ .06 $ .07 $ .08 ======= ======= ======= ======= Consolidated Statement of Comprehensive Income (Unaudited) (in thousands) Three Months Ended Six Months Ended ------------------ ------------------ Mar 31, Mar 31, Mar 31, Mar 31, 2003 2002 2003 2002 ------- ------- ------- ------- Net income $ 211 $ 192 $ 217 $ 243 Foreign currency translation adjustment (97) (134) 86 (260) Change in fair market value of cash flow hedge (24) (61) (19) (114) ------- ------- ------- ------- Comprehensive income (loss) $ (90) $ (3) $ 284 $ (131) ======= ======= ======= ======= 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, 2003 2002 ------- ------- Net cash flow from operating activities: Net income $ 217 $ 243 Adjustments to reconcile net income to net cash (used by)generated from operating activities: Depreciation and amortization 300 270 Deferred tax provision (3) (5) Increase (decrease) in cash resulting from changes in operating assets & liabilities: Receivables (780) 1,022 Inventories 36 702 Pre-paid expenses and other current assets (377) 135 Accounts payable 132 (1,024) Accrued compensation and expenses (178) (272) Accrued and deferred taxes on income 9 (37) ------- ------- Net cash (used by)generated from operating activities (644) 1,034 Cash flow used by investing activities: Acquisition of property, plant, and equipment, net (386) (52) Increase in short-term borrowings 725 - ------- ------- Net cash generated from (used by) investing activities 339 (52) ------- ------- Cash flow (used by) financing activities: Dividends paid (187) (840) Exercise and repurchase of stock options - 14 ------- ------- Net cash used by financing activities (187) (826) Effect of exchange rate changes on cash 77 (152) ------- ------- Net increase (decrease) in cash (415) 4 Opening balance - cash and cash equivalents 695 812 ------- ------- Ending balance - cash and cash equivalents $ 280 $ 816 ======= ======= Supplemental disclosure of cash flow information Cash paid for income taxes $ 244 $ 31 Cash paid for interest 37 14 ------- ------- Supplemental disclosure of non-cash financing activity: Dividend declared $ 94 $ 281 ======= ======= The accompanying notes are an integral part of these financial statements. TECH/OPS SEVCON, INC. Notes to Consolidated Financial Statements - March 31, 2003 (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, 2003, the results of operations and cash flows for the three months and six months ended March 31, 2003. The accounting policies followed by Tech/Ops Sevcon are set forth in Note 1 to the financial statements in the 2002 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, 2003 are not necessarily indicative of the results to be expected for the full year. New Accounting Pronouncements In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of FIN No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in interim periods beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. Because the Company currently has no investments in variable interest entities, the adoption of the provisions of FIN No. 46 did not have a material impact on the consolidated results of operations or financial position. On December 31, 2002, the FASB issued FASB Statement No. 148 (SFAS 148), Accounting for Stock-Based Compensation -- Transition and Disclosure, amending FASB Statement No. 123 (SFAS 123), Accounting for Stock-Based Compensation. This Statement amends SFAS 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, SFAS 148 amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. For entities that voluntarily change to the fair value based method of accounting for stock-based employee compensation, the transition provisions are effective for fiscal years ending after December 15, 2002. For all other companies, the disclosure provisions and the amendment to APB No. 28 are effective for interim periods beginning after December 15, 2002. The Company continues to account for stock option plans under APB No. 25 "Accounting for Stock Issued to Employees" and related interpretations while evaluating the transition options under SFAS 148. The company has adopted the disclosure requirements of SFAS 148 in this quarterly report. On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. FIN 45 clarifies the requirements of FASB Statement No. 5, Accounting for Contingencies (SFAS 5), relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45 covers guarantee contracts that have any of the following four characteristics: (a) contracts that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, a liability, or an equity security of the guaranteed party (e.g., financial and market value guarantees), (b) contracts that contingently require the guarantor to make payments to the guaranteed party based on another entity's failure to perform under an obligating agreement (performance guarantees), (c) indemnification agreements that contingently require the indemnifying party (guarantor) to make payments to the indemnified party (guaranteed party) based on changes in an underlying that is related to an asset, a liability, or an equity security of the indemnified party, such as an adverse judgment in a lawsuit or the imposition of additional taxes due to either a change in the tax law or an adverse interpretation of the tax law, and (d) indirect guarantees of the indebtedness of others. FIN 45 specifically excludes certain guarantee contracts from its scope. Additionally, certain guarantees are not subject to FIN 45's provisions for initial recognition and measurement but are subject to its disclosure requirements. The initial recognition and measurement provisions are effective for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for our annual financial statements for the year ended September 30, 2003. The adoption of FIN 45 did not have a material effect on the financial position or results of operations or retained earnings of the Company. In July 2002, FASB issued Statement No. 146 "Accounting for Costs Associated with Exit or Disposal Activities", which became effective January 2003. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment. The adoption of SFAS No. 146 did not have a material effect on the financial position or results of operations or retained earnings. (2) Stock-Based Compensation Plans SFAS # 148 "Accounting for Stock-Based Compensation - Transition and Disclosure"defines a fair value based method of accounting for employee stock options or similar equity instruments and encourages all entities to adopt that method of accounting. However, it also allows an entity to continue to measure compensation costs using the method of accounting proscribed by APB #25 "Accounting for Stock Issued to Employees". The Company is evaluating the transition options under SFAS #148 and continues to account for its stock based compensation plans under APB #25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with SFAS #148, the Company's net income and earnings per share would have equaled the following pro forma amounts: (in thousands of dollars, except for per share amounts) Three Months Ended Six Months Ended ------------------ ---------------- Mar 31 Mar 31 Mar 31 Mar 31 2003 2002 2003 2002 ------ ------ ------ ------ Net income As reported $ 211 $ 192 $ 217 $ 243 Pro forma effect of expensing stock options (net of income tax) (14) (13) (28) (26) Net income Pro forma $ 197 $ 179 $ 189 $ 217 Income per share: Basic As reported $ .07 $ .06 $ .07 $ .08 Basic Pro forma $ .06 $ .06 $ .06 $ .07 Diluted As reported $ .07 $ .06 $ .07 $ .08 Diluted Pro forma $ .06 $ .06 $ .06 $ .07 - ---------------------------------------------------------------------------- The effects of applying SFAS #148 in this pro forma disclosure are not indicative of future amounts. SFAS #148 does not apply to awards prior to fiscal 1996 and additional awards in future years are anticipated. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for the grants in 2003: risk-free interest rate of 6%; expected dividend yield of 2.4%; expected life of 7 years; expected volatility of 47%. (3) Cash Dividends On March 10, 2003, the Company declared a quarterly dividend of $.03 per share for the second quarter of fiscal 2003, which was paid on April 10, 2003 to stockholders of record on March 26, 2003. The Company has paid regular quarterly cash dividends since the first quarter of fiscal 1990. (4) 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 2003 2002 2003 2002 ------ ------ ------ ------ Net income $ 211 $ 192 $ 217 $ 243 Basic income per share $ .07 $ .06 $ .07 $ .08 Average shares outstanding 3,125 3,115 3,125 3,112 Options outstanding - common stock equivalents - 3 - 9 Average common and common equivalent shares outstanding 3,125 3,118 3,125 3,121 Fully diluted income per share $ .07 $ .06 $ .07 $ .08 ====== ====== ====== ====== (5) 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 2002 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, 2003 - --------------------------------------------------------------------- Controls Capacitors Corporate Total - --------------------------------------------------------------------- Sales to external customers $ 5,371 $ 767 - $ 6,138 Inter-segment revenues - 88 - 88 Operating income 173 207 (77) 303 Identifiable assets 12,227 1,606 478 14,311 - --------------------------------------------------------------------- - --------------------------------------------------------------------- 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 - --------------------------------------------------------------------- - --------------------------------------------------------------------- Six months ended March 31, 2003 - --------------------------------------------------------------------- Controls Capacitors Corporate Total - --------------------------------------------------------------------- Sales to external customers $10,555 $ 1,228 - $11,783 Inter-segment revenues - 260 - 260 Operating income 177 277 (137) 317 - --------------------------------------------------------------------- - --------------------------------------------------------------------- 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 - --------------------------------------------------------------------- (6) 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 ------------------ ---------------- Mar 31 Mar 31 Mar 31 Mar 31 2003 2002 2003 2002 ------ ------ ------ ------ Research and Development Expense $ 680 $ 524 $1,347 $1,064 ------ ------ ------ ------ 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 he 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; ability of consultants to assist in the engineering of new products that meet the Company's cost and quality targets; level of demand for controls; impact of potential airline bankruptcies on customers in the airport ground support market; 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 customer's 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. NEW ACCOUNTING PRONOUNCEMENTS The Company has considered the impact of the following new accounting pronouncements: FASB Interpretation #46, "Consolidation of Variable Interest Entities." "-Adoption did not have a material effect on consolidated financial statements" SFAS #148 "Accounting for Stock-Based Compensation - Transition and Disclosure" "-Currently evaluating impact on consolidated financial Statements of transition provisions; disclosure provisions have been adopted" FASB Interpretation #45 "Guarantor's Accounting and Disclosure Requirements for Guarantees" "-Adoption did not have a material effect on consolidated financial statements" SFAS #146 "Accounting for Costs Associated with Exit or Disposal Activities" "-Adoption did not have a material effect on consolidated financial statements" A discussion of these pronouncements is contained in Note (1) of the Notes to Consolidated Financial Statements. The Company adopted the following new accounting pronouncements in the first quarter of fiscal 2003: SFAS #143, "Accounting for Asset Retirement Obligations" "-Adoption did not have a material effect on consolidated financial statements" SFAS #144, "Accounting for the Impairment or Disposal of Long-Lived Assets" "-Adoption did not have a material effect on consolidated financial statements" SFAS #145, "Rescission of FASB Statements No 4, 44, and 64, Amendment of FASB 13, and Technical Corrections" "-Adoption did not have a material effect on consolidated financial statements" CRITICAL ACCOUNTING POLICIES 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 reserves are maintained, which management believes are adequate. 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. 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 $562,000 in fiscal 2001 relating to one US customer, credit losses have not been significant in the past ten years. Ten customers accounted for approximately 51% of the Company's sales in fiscal 2002. 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 customer specific. 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, 2003 Sales in the second fiscal quarter ended March 31, 2003 were $6,138,000 compared to $5,575,000 in the same quarter of the previous year, an increase of $563,000, or 10%. Foreign currency fluctuations resulted in a $675,000, or 12% increase in reported sales. Shipment volumes decreased by 2% compared to the second quarter of last year. Volumes in the U.S. Controller business decreased by 14% mainly due to lower demand in the airport ground support and aerial lift markets. Shipments to the US mining and other electric vehicle markets were ahead of last year despite the continued depressed conditions in these markets. Shipments to the US fork lift truck market were in line with last year. Volumes in the foreign controller markets were 3% lower than last year, mainly due to weakness in the aerial lift and airport ground support markets. Capacitor volumes were 80% higher than last year with foreign currency fluctuations resulting in a further 22% increase in reported sales of capacitors. The volume increase in the second quarter was due to unusually high demand for special contracts in the European markets for railway signaling and audio capacitors. Second quarter gross profit was 39.4% of sales, an increase of 0.9% from 38.5% in the same quarter of fiscal 2002. Gross profit of $2,416,000 was $269,000 higher than last year. The increase in gross profit percentage was mainly due to foreign currency fluctuations which caused a $345,000 increase in gross profit in the second quarter. Selling, research and administrative expenses were $2,113,000 an increased of $267,000, or 14%, compared to the same quarter last year. In the second quarter of the current year engineering and R&D expense increased by $156,000 mainly due to increased consulting expense to accelerate the development of new high quality products. The Company commenced a three year program to use external consultants to accelerate new product development during the second quarter of fiscal 2002. Foreign currency fluctuations increased reported operating expenses by $230,000. In the second quarter there was operating income of $303,000 compared to $301,000 in the same quarter last year, an increase of $2,000. Foreign currency fluctuations increased reported operating income by $115,000. Operating income in the capacitor business segment increased by $174,000 to $207,000, due to both higher volumes and foreign currency fluctuations. Operating income in the controller business of $173,000 was $132,000 lower than in fiscal 2002. The decrease in controller business operating income was mainly due to lower volumes, and higher engineering and R&D expense partially offset by a positive impact of foreign currency fluctuations. Unallocated corporate expenses increased by $40,000 compared to the second quarter of last year. Other income in the second quarter of fiscal 2003 was $22,000 compared to other expense of $7,000 last year. Foreign currency gains in fiscal 2003 compared to losses in the prior year more than offset higher net interest expense. Income before income taxes was $325,000, compared to $294,000 last year, a gain of $31,000. Income taxes were 35% of pre-tax income in line with the same quarter last year. Net income was $211,000 compared to $192,000 last year, an increase of $19,000. Basic and fully diluted income per share increased from $.06 in the second quarter of fiscal 2002, to $.07 in the current year. Six months ended March 31, 2003 Sales in the first six months of fiscal 2003 were $11,783,000, compared to $10,977,000 in the same period last year, an increase of $806,000, or 7%. Foreign currency fluctuations accounted for a $990,000 increase in reported sales. Volumes were 2% less than last year. Volumes in the controller business were 4% lower than last year. In the capacitor business volumes were higher by $260,000, or 31%, compared to the first six months of last year and foreign currency fluctuations accounted for a further 14% increase in reported sales. Revenues in the US controller business decreased by 6%. This was mainly due to decreased demand in the airport ground support, aerial lift and mining markets, partially offset by increased sales into the fork lift truck and other electric vehicle markets. Controller volumes in foreign markets decreased by 3%, mainly due to lower demand in the European aerial lift market. Gross profit was 38.6% of sales in the first half of fiscal 2003 compared to 37.6% in 2002. Gross profit increased by $415,000 compared to the first six months of last year. Lower volumes caused a $150,000 decrease in gross profit. Foreign currency fluctuations increased reported gross profit by $430,000. Better margins on new products was the main cause of the remaining $135,000 improvement in gross profit. Selling, research and administrative expenses were $4,226,000, an increase of $491,000, or 13%, compared to the same period last year. In the first six months of the current year engineering and R&D expense increased by $283,000 mainly due to increased consulting expense to accelerate the development of new high quality products. The Company commenced a three year program to use external consultants to accelerate new product development during the second quarter of fiscal 2002. Foreign currency fluctuations increased reported operating expenses by $340,000. Operating income for the first half year was $317,000, a decrease of $76,000 compared to last year. Foreign currency fluctuations resulted in a $90,000 increase in reported operating income. Operating income for the controller business decreased by $223,000 to $177,000. The main causes of this decrease were lower volumes and higher engineering and R&D expense. In the capacitor business segment operating income increased by $155,000, or 127%, to $277,000, mainly due to increased volumes. Income before income taxes was $334,000, compared to $373,000 last year, a decrease of $39,000. Other income was $17,000 compared to other expense of $20,000 in the first half of fiscal 2002. The year-to-year swing was mainly due to foreign currency translation gains in 2002 compared to losses last year. Income taxes were 35% of pre-tax income, in line with last year. Net income was $217,000, a decrease of $26,000 compared to the same period last year. Basic and fully diluted income per share was $.07 per share compared to $.08 per share in the first half of fiscal 2002. Financial Condition The Company has, since January 1990, maintained a program of regular cash dividends, which, for the most recent quarter, amounted to $94,000. Cash balances at the end of March 2003 were $280,000 compared to $695,000 at September 30, 2002. The Company used $725,000 of its short-term borrowing facilities in Europe at the end of the second quarter compared to no borrowings at the beginning of fiscal 2003. In the first six months net income was $217,000, and operating activities used $644,000 of cash. Dividend payments for the first 6 months of the current fiscal year amounted to $187,000. Capital Expenditure was $386,000 compared to depreciation of $300,000. The Company has no long-term debt and has overdraft facilities in the UK of $1,727,000 and $356,000 in France. The UK overdraft facilities are secured by all of the Company's assets in the UK and the French overdraft facilities are unsecured. Both the UK and French overdraft facilities are due for renewal in September 2003 but, in line with normal practice in Europe, can be withdrawn on demand by the bank. Tech/Ops Sevcon's capital resources, in the opinion of management, are adequate for projected operations and capital spending programs. Item 3. Market Risk The primary market risks for the Company are foreign currency risk and interest rate risk. Foreign currency risk The Company manufactures products principally in the United Kingdom and sells products world-wide. Therefore the Company's operating results are subject to fluctuations in foreign currency exchange rates. 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 forecast 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. As of and for the three months and six months ended March 31, 2003 approximately 59% and 63% of the Company's revenues and 53% of its assets were denominated in foreign currencies. Interest Rate Risk The Company from time-to-time draws upon its overdraft facility in its European businesses. The Company invests surplus funds in instruments with maturities of less than 12 months at both fixed and floating interest rates. Due to the short-term nature of both the Company's overdrafts and investments at March 31, 2003 the risk arising from changes in interest rates was not material. Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. The Company's chief executive officer and chief financial officer, after evaluating the effectiveness of the "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the "Evaluation Date") within 90 days before the filing date of this quarterly report, have concluded that, as of the Evaluation Date, the disclosure controls and procedures were adequate 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 controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the Evaluation Date. TECH/OPS SEVCON, INC. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits filed with this report. See Exhibit Index immediately following the Certifications (b) Reports on Form 8-K. None 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 14, 2003 By: /s/ Paul A. McPartlin --------------------- Paul A. McPartlin Chief Financial and Accounting Officer CERTIFICATIONS I, Matthew Boyle, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tech/Ops Sevcon, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effective- ness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 _/s/ Matthew Boyle Matthew Boyle President and Chief Executive Officer I, Paul A McPartlin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tech/Ops Sevcon, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effective- ness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 _/s/ Paul A. McPartlin Paul A McPartlin Vice President, Chief Financial Officer and Treasurer Exhibit Index Exhibit Description - ------- ----------- 99.1 Written statement of the Chief Executive Officer and Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith. EX-99.1 CHARTER 3 z.txt CERTIFICATION OF PERIODIC FINANCIAL REPORT EXHIBIT 99.1 TECH/OPS SEVCON, INC. Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350 Each of the undersigned officers of Tech/Ops Sevcon, Inc. (the "Company") certifies, under the standards set forth in and solely for the purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in that Form 10-Q fairly presents, in all materail respects, the financial condition and results of operations of the Company. Dated: May 14, 2003 /s/ Matthew Boyle ----------------------- Matthew Boyle Chief Executive Officer Dated: May 14, 2003 /s/ Paul A. McPartlin ---------------------- Paul A. McPartlin Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----