-----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, Kc0NkTYNa/pfCNkXLi3CHQWkIoYFZkZPuunlu+1yc03hcegTmS5KX9dUCq7e5qQP 0W1beptT/9IC3pMLBNFRTQ== 0000825411-05-000017.txt : 20050815 0000825411-05-000017.hdr.sgml : 20050815 20050815082627 ACCESSION NUMBER: 0000825411-05-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20050702 FILED AS OF DATE: 20050815 DATE AS OF CHANGE: 20050815 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: 051023541 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 a.txt FISCAL 2005 THIRD QUARTER RESULTS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 2, 2005 ------------ / / 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 August 15, 2005 - ---------------------------- --------------------------- Common stock, par value $.10 3,172,051 TECH/OPS SEVCON, INC. PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Balance Sheets ASSETS (in thousands) July 2, Sept 30, 2005 2004 --------- ------------ (unaudited) (derived from audited statements) Current assets: Cash and cash equivalents $ 874 $ 905 Accounts receivable, less allowances of $121 at 7/2/2005 and $192 at 9/30/2004 6,280 6,109 Inventories 3,672 4,043 Prepaid expenses and other current assets 1,219 931 ------- ------- Total current assets 12,045 11,988 ------- ------- Property, plant and equipment, at cost 9,448 9,270 Less: Accumulated depreciation and amortization 6,428 6,085 ------- ------- Net property, plant and equipment 3,020 3,185 ------- ------- Goodwill 1,435 1,435 ------- ------- $16,500 $16,608 ======= ======= The accompanying notes are an integral part of these financial statements. TECH/OPS SEVCON, INC. Consolidated Balance Sheets LIABILITIES AND STOCKHOLDERS' INVESTMENT (in thousands) July 2, Sept 30, 2005 2004 ----------- ------------ (unaudited) (derived from audited statements) Current liabilities: Accounts payable 2,533 3,001 Dividend payable 95 94 Accrued expenses 2,789 2,541 Accrued taxes on income 626 447 ------- ------- Total current liabilities 6,043 6,083 ------- ------- Deferred taxes on income 60 61 ------- ------- Stockholders' investment Preferred stock - - Common stock 317 313 Premium paid in on common stock 4,310 4,047 Retained earnings 6,256 6,133 Unearned compensation on restricted stock (211) - Cumulative other comprehensive(loss) (275) (29) ------- ------- Total stockholders' investment 10,397 10,464 ------- ------- $16,500 $16,608 ======= ======= 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 Nine Months Ended ------------------ ------------------ July 2, July 3, July 2, July 3, 2005 2004 2005 2004 ------- ------- ------- ------- Net sales $ 8,453 $ 7,486 $24,089 $21,225 Costs and expenses: Cost of sales 5,293 4,525 14,961 12,670 Selling, research and administrative 2,779 2,840 8,442 7,981 ------- ------- ------- ------- 8,072 7,365 23,403 20,651 ------- ------- ------- ------- Operating income 381 121 686 574 Foreign currency gain or (loss) (36) 53 (20) (50) Interest income (expense), net (12) (17) (38) (23) ------- ------- ------- ------- Income before income taxes 333 157 628 501 Income taxes (117) (54) (220) (175) ------- ------- ------- ------- Net income $ 216 $ 103 $ 408 $ 326 ======= ======= ======= ======= Basic income per share $ .07 $ .03 $ .13 $ .10 ======= ======= ======= ======= Fully diluted income per share $ .07 $ .03 $ .13 $ .10 ======= ======= ======= ======= Consolidated Statement of Comprehensive Income (Unaudited) (in thousands) Three Months Ended Nine Months Ended ------------------ ------------------ July 2, July 3, July 2, July 3, 2005 2004 2005 2004 ------- ------- ------- ------- Net income $ 216 $ 103 $ 408 $ 326 Foreign currency translation adjustment (568) 27 (228) 646 Change in fair market value of cash flow hedge (3) 21 (18) 20 ------- ------- ------- ------- Comprehensive income (loss) $ (355) $ 151 $ 162 $ 992 ======= ======= ======= ======= The accompanying notes are an integral part of these financial statements. TECH/OPS SEVCON, INC. Consolidated Statement of Cash Flows (Unaudited) (in thousands) Nine Months Ended ------------------- July 2, July 3, 2005 2004 ------- ------- Net cash flow from operating activities: Net income $ 408 $ 326 Adjustments to reconcile net income to net cash generated from (used by) by operating activities: Depreciation and amortization 503 470 Stock-based compensation 56 - Deferred tax provision (1) 5 Increase (decrease) in cash resulting from changes in operating assets & liabilities: Receivables (171) (1,464) Inventories 371 (103) Pre-paid expenses and other current assets (270) (91) Accounts payable (468) 973 Accrued compensation and expenses 248 254 Accrued taxes on income 179 94 ------- ------- Net cash generated from (used by) operating activities 855 (458) ------- ------- Cash flow used by investing activities: Acquisition of property, plant, and equipment, net (345) (479) ------- ------- Net cash used by investing activities (345) (479) Cash flow used by financing activities: Dividends paid (284) (281) ------- ------- Effect of exchange rate changes on cash (257) 340 ------- ------- Net (decrease) increase in cash (31) 38 Opening balance - cash and cash equivalents 905 524 ------- ------- Ending balance - cash and cash equivalents $ 874 $ 562 ======= ======= Supplemental disclosure of cash flow information Cash paid for income taxes $ 117 $ 43 Cash paid for interest 41 24 ------- ------- Supplemental disclosure of non-cash financing activity: Dividend declared $ 95 $ 94 ======= ======= The accompanying notes are an integral part of these financial statements. TECH/OPS SEVCON, INC. Notes to Consolidated Financial Statements - July 2, 2005 (Unaudited) (1) Basis of Presentation In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normally recurring accruals) necessary to present fairly the financial position of Tech/Ops Sevcon as of July 2, 2005 and the results of operations and cash flows for the three months and nine months ended July 2, 2005. The significant accounting policies followed by Tech/Ops Sevcon are set forth in Note 1 to the financial statements in the 2004 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 2004 to the significant accounting policies followed by Tech/Ops Sevcon. Inventories Inventories are valued at the lower of cost or market. Inventory costs include materials, direct labor and manufacturing overhead, and are relieved from inventory on a first-in, first-out basis. The Company's reported financial condition includes a provision for estimated slow- moving and obsolete inventory that is based on a comparison of inventory levels with forecast future demand. Such demand is estimated based on many factors, including management judgments, relating to each customer's business and to economic conditions. The Company reviews in detail all significant inventory items with holdings in excess of estimated normal requirements. It also considers the likely impact of changing technology. It makes an estimate of the provision for slow moving and obsolete stock on an item-by-item basis based on a combination of likely usage based on forecast customer demand, potential sale or scrap value and possible alternative use. This provision represents the difference between original cost and market value at the end of the financial period. In cases where there is no estimated future use for the inventory item and there is no estimated scrap or resale value, a 100% provision is recorded. Where the Company estimates that only part of the total holding of an inventory item will not be used, or there is an estimated scrap, resale or alternate use value, then a proportionate provision is recorded. Once an item has been written down, it is not subsequently revalued upwards. The provision for slow moving and obsolete inventories at July 2, 2005 was $864,000, or 19% of the original cost of gross inventory. At September 30, 2004 the provision was $879,000, or 18% of gross inventory. Inventories were comprised of: (in thousands of dollars) July 2, Sept 30, 2005 2004 ----------- ------------ Raw materials $ 1,635 $ 2,076 Work-in-process 452 177 Finished goods 1,585 1,790 ------- ------- Total inventories $ 3,672 $ 4,043 ------- ------- The results of operations for the nine-month periods ended July 2, 2005 and July 3, 2004 are not necessarily indicative of the results to be expected for the full year. (2) New Accounting Pronouncements In October 2004, the President signed into law the American Jobs Creation Act (the Act). The Act allows for a federal income tax deduction for a percentage of income earned from certain domestic production activities. The Company's domestic, or U.S., production activities may qualify for the deduction. Based on the effective date of the Act, the Company would be eligible for this deduction in the first quarter of fiscal 2006. Additionally, on December 21, 2004, the FASB issued FASB Staff Position 109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes (SFAS No. 109), to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" (FSP 109-1). FSP 109-1, which was effective upon issuance, states that the deduction under this provisionof the Act should be accounted for as a special deduction in accordance with SFAS 109. The Company has not yet quantified the benefit that may be realized from this provision of the Act. The Act also allows for an 85% dividends received deduction on the repatriation of certain earnings of foreign subsidiaries. On December 21, 2004, the FASB issued FASB Staff Position 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" (FSP 109-2). FSP 109-2, which was effective upon issuance, allows companies time beyond the financial reporting period of enactment to evaluate the effect of the Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. Additionally FSP 109-2 provides guidance regarding the required disclosures surrounding a company's reinvestment or repatriation of foreign earnings. The Company continues to evaluate this provision of the Act to determine the amount of foreign earnings to repatriate. Currently the Company does not expect the potential repatriation to have a material impact on its effective tax rate. In November 2004, the Financial Accounting Standards Board issued SFAS #151, "Inventory Costs - an amendment of ARB No. 43" ("SFAS #151"), which is the result of its efforts to converge U.S. accounting standards for inventories with International Accounting Standards. SFAS #151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS #151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is evaluating the impact of this standard on our consolidated financial statements. In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS)#123R, "Share-Based Payment". This Statement, when effective, will replace SFAS #123 "Accounting for Stock based Compensation" and supersede APB #25 "Accounting for Stock Issued to Employees". This Statement establishes fair value on the grant date as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans. This Statement is effective for public entities that do not file as small business issuers as of the beginning of the first annual reporting period that begins after June 15, 2005. In addition, in March 2005, the SEC issued Staff Accounting Bulletin No. 107, "Share-Based Payment" (SAB 107). SAB 107 provides supplemental implementation guidance on Statement 123R, including guidance on valuation methods, classification of compensation expense, inventory capitalization of share-based compensation cost, income tax effects, disclosures in Management's Discussion and Analysis and several other issues. The Company will adopt the provisions of SFAS #123R effective at the beginning of fiscal 2006. The Company will adopt the modified prospective application transition method. Under this method the Company expects to incur expense relating to previously issued stock options of approximately $30,000 in fiscal 2006. The accounting for restricted stock issued in fiscal 2005 will be substantially unchanged by the application of SFAS #123R. (3) Stock-Based Compensation Plans SFAS #123 "Accounting for Stock-Based Compensation" as amended by SFAS #148 "Accounting for Stock-Based Compensation - Transition and Disclosure" and to be replaced by SFAS 123R "Share-Based Payment" 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". Until SFAS #123R becomes effective in fiscal 2006 the Company 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 #123 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 Nine Months Ended ------------------ ------------------ July 2, July 3, July 2, July 3, 2005 2004 2005 2004 ------ ------ ------ ------ Net income - As reported $ 216 $ 103 $ 408 $ 326 Pro forma effect of expensing stock options (net of income tax) (11) (17) (39) (51) ------- ------- ------- ------- Net income - Pro forma $ 205 $ 86 $ 369 $ 275 ------- ------- ------- ------- Income per share: Basic - As reported $ .07 $ .03 $ .13 $ .10 Basic - Pro forma $ .07 $ .03 $ .12 $ .09 Diluted - As reported $ .07 $ .03 $ .13 $ .10 Diluted - Pro forma $ .07 $ .03 $ .12 $ .09 - ------------------------------------------------------------------------------ The effects of applying SFAS #123 in this pro forma disclosure are not indicative of future amounts. SFAS #123 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. 2005 2004 2003 ---- ---- ---- Risk-free interest rate N/A N/A 3.0% Expected dividend yield N/A N/A 2.7% Expected life (years) N/A N/A 7 Expected volatility of N/A N/A 47% No options were granted in the first nine months of fiscal 2005 or in fiscal 2004. In November 2004 the Company granted 35,000 shares of restricted stock to five employees which will vest in five equal annual installments providing that the grantee remains an employee of the Company, or as determined by the Compensation Committee. The estimated fair value of the stock on the date of grant was $182,000 based on the fair market value of the stock on date of issue and estimated forfeitures of 4% per year. The estimated forfeitures are based on the historical rate of turnover of the relevant group of employees. This amount was credited to common stock and paid in surplus and the $182,000 was recorded as "Unearned compensation on restricted stock", a deduction from stockholders equity. The unearned compensation is being charged to income on a straight line basis over the five year period during which the forfeiture conditions lapse. The charge to income for employee restricted stock grants in the first nine months of fiscal 2005 was $21,000 and the subsequent charge will be approximately $9,000 on a quarterly basis. In January 2005 the Company granted 12,000 shares of restricted stock to six non-employee directors which will vest on the day before the 2006 annual meeting, provided 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 $85,000 based on the fair market value on the stock on date of issue. Due to the short-term vesting period no forfeitures have been estimated. This amount was credited to common stock and paid in surplus and the $85,000 was recorded as "Unearned compensation on restricted stock", a deduction from stockholders equity. The unearned compensation is being charged to income on a straight line basis over the one year period during which the forfeiture conditions lapse. The charge to income for non-employee director's restricted stock grants in the first nine months of fiscal 2005 was $35,000 and the subsequent will be approximately $21,000 on a quarterly basis. During the restriction period, five years for employees and one year for non-employee directors, ownership of unvested shares cannot be transferred. Restricted stock has the same cash dividend and voting rights as other common stock and is considered to be currently issued and outstanding. For the purposes of calculating average issued shares for earnings per shares these shares are only considered to be outstanding when the forfeiture conditions lapse and the shares vest. The estimated stock-based compensation expense in fiscal 2005 is as follows. No stock-based compensation expense was recorded in fiscal 2004. (in thousands of dollars) First Second Third Fourth Fiscal Quarter Quarter Quarter Quarter 2005 ------- ------- ------- ------- ------ Stock option expense under SFAS #123R* $ - $ - $ - $ - $ - Restricted stock grants - - Employees 3 9 9 9 30 - - Non-employee directors - 14 21 21 56 ------- ------- ------- ------- ------ Total $ 3 $23 $30 $30 $86 ------- ------- ------- ------- ------ * Pro forma expense of approximately $13,000 per quarter is expected to be recorded for stock options accounted for under APB #25 in each quarter of fiscal 2005. (4) Cash Dividends On June 14, 2005, the Company declared a quarterly dividend of $.03 per share for the third quarter of fiscal 2005, which was paid on July 14, 2005 to stockholders of record on June 29, 2005. The Company has paid regular quarterly cash dividends since the first quarter of fiscal 1990. (5) Calculation of Earnings Per Share and Weighted Average Shares Outstanding Basic and fully diluted earnings per share were calculated as follows: (in thousands of dollars, except for per share amounts) Three Months Ended Nine Months Ended ------------------ ------------------ July 2 July 3 July 2 July 3 2005 2004 2005 2004 ------ ------ ------ ------ Net income $ 216 $ 103 $ 408 $ 326 Basic income per share $ .07 $ .03 $ .13 $ .10 Average shares outstanding 3,125 3,125 3,125 3,125 Options outstanding - common stock equivalents 24 23 26 22 ----- ----- ----- ----- Average common and common equivalent shares outstanding 3,149 3,148 3,151 3,147 ----- ----- ----- ----- Fully diluted income per share $ .07 $ .03 $ .13 $ .10 ====== ====== ====== ====== (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 2004 Annual Report filed on Form 10-K. Inter-segment revenues are accounted for at current market prices. The Company evaluates the performance of each segment principally based on operating income. The Company does not allocate income taxes, interest income and expense or foreign currency translation gains and losses to segments. Information concerning operations of these businesses is as follows: - --------------------------------------------------------------------- (in thousands of dollars) - --------------------------------------------------------------------- Three months ended July 2, 2005 - --------------------------------------------------------------------- Controls Capacitors Corporate Total - --------------------------------------------------------------------- Sales to external customers $ 8,005 $ 448 - $ 8,453 Inter-segment revenues - 40 - 40 Operating income 427 56 (102) 381 Identifiable assets 14,796 1,010 694 16,500 - --------------------------------------------------------------------- Three months ended July 3, 2004 - --------------------------------------------------------------------- Controls Capacitors Corporate Total - --------------------------------------------------------------------- Sales to external customers $ 6,953 $ 533 - $ 7,486 Inter-segment revenues - 63 - 63 Operating income 208 69 (156) 121 Identifiable assets 13,915 1,383 473 15,771 - --------------------------------------------------------------------- - --------------------------------------------------------------------- Nine months ended July 2, 2005 - --------------------------------------------------------------------- Controls Capacitors Corporate Total - --------------------------------------------------------------------- Sales to external customers $22,865 $ 1,224 - $24,089 Inter-segment revenues - 189 - 189 Operating income 920 36 (270) 686 - --------------------------------------------------------------------- Nine months ended July 3, 2004 - --------------------------------------------------------------------- Controls Capacitors Corporate Total - --------------------------------------------------------------------- Sales to external customers $19,754 $ 1,471 - $21,225 Inter-segment revenues - 138 - 138 Operating income 711 163 (300) 574 - --------------------------------------------------------------------- In the controls business segment the revenues were derived from the following products and services. (in thousands of dollars) Three Months Ended Nine Months Ended ------------------ ------------------ July 2 July 3 July 2 July 3 2005 2004 2005 2004 ------ ------ ------ ------ Electronic controllers for battery driven vehicles $ 5,348 $ 4,135 $15,906 $13,405 Accessory and aftermarket products and services 2,657 2,818 6,959 6,349 - ---------------------------------------------------------------------------- Total controls segment revenues $ 8,005 $ 6,953 $22,865 $19,754 - ---------------------------------------------------------------------------- (7) Research and Development The cost of research and development programs is charged against income as incurred and was as follows. (in thousands of dollars) Three Months Ended Nine Months Ended ------------------ ------------------ July 2 July 3 July 2 July 3 2005 2004 2005 2004 ------ ------ ------ ------ Research and Development expense $ 879 $1,103 $2,659 $3,097 Percentage of sales 10.4% 14.7% 11.0% 14.6% ------ ------ ------ ------ Research and development expense decreased by $224,000, or 4% of sales, compared to the third quarter of last fiscal year. The decrease was principally due to lower engineering consultancy costs on advanced new product development, which was partially offset by the cost of increased internal engineering resources and foreign currency fluctuations. (8) Employee Benefit Plans Tech/Ops Sevcon has defined benefit plans covering the majority of its US and UK employees. There is also a small defined contribution plan. The following table sets forth the components of the net pension cost as defined by SFAS #132R. (in thousands of dollars) Three Months Ended Nine Months Ended ------------------ ------------------ July 2 July 3 July 2 July 3 2005 2004 2005 2004 ------- ------- ------- ------- Components of net periodic benefit cost: Service cost $ 108 $ 118 $ 329 $ 351 Interest cost $ 223 215 $ 684 640 Expected return on plan assets $ (209) (218) $ (640) (649) Amortization of transition obligation $ - - $ - - Amortization of prior service cost $ 13 13 $ 39 38 Recognized net actuarial gain (loss) $ - - $ - - ----- ----- ----- ----- Net periodic benefit cost $ 135 $ 128 $ 412 $ 380 ----- ----- ----- ----- Net cost of defined contribution plan $ 7 $ 8 $ 21 $ 23 ----- ----- ----- ----- Tech/Ops Sevcon contributed $355,000 to its pension plans in the nine months ended July 2, 2005 and presently anticipates contributing a further $117,000 to fund its plans in the remainder of fiscal 2005, for a total contribution of $472,000. In addition employee contributions to the UK plan were $186,000 in the first nine months and are estimated to total $247,000 in fiscal 2005. (9) Accrued expenses Set out below is an analysis of other accrued expenses at July 2, 2005 and September 30, 2004 which shows separately any items in excess of 5% of total current liabilities. (In thousands of dollars) - ---------------------------------------------------------------------------- July 2, Sept 30, 2005 2004 - ---------------------------------------------------------------------------- Accrued compensation and related costs $ 1,147 $ 979 Warranty reserves 421 386 Accrued director's pension 195 201 Other accrued expenses 1,026 975 - ---------------------------------------------------------------------------- Total $ 2,789 $ 2,541 - ---------------------------------------------------------------------------- (10) Warranty reserves The movement in warranty reserves was as follows: (in thousands of dollars) Three Months Ended Nine Months Ended ------------------ ----------------- July 2 July 3 July 2 July 3 2005 2004 2005 2004 ------- ------- ------- ------- Balance at beginning of period $ 404 $ 386 $ 386 $ 404 Decrease in opening balance for warranty obligations settled during the period (64) (101) (290) (335) Other changes to pre-existing warranties (7) - 5 4 Net increase in warranty reserves for products sold during the period 88 87 320 299 - ----------------------------------------------------------------------------- Balance at end of period $ 421 $ 372 $ 421 $ 372 - ----------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. FORWARD LOOKING STATEMENTS Statements in this discussion and analysis about the Company's anticipated financial results and growth, as well as those about the development of its products and markets, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. These include the risks discussed under 'Risk Factors' below and throughout this Item 2. NEW ACCOUNTING PRONOUNCEMENTS The Company will adopt the following new accounting pronouncements in fiscal 2005. See Note 2 to Consolidated Financial Statements for a more detailed description of these new accounting pronouncements. FASB Staff Position 109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes (SFAS No. 109), to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" - The Company has not yet quantified the benefit that may be realized from this provision of the Act. FASB Staff Position 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" - Currently the Company does not expect the potential repatriation to have a material impact on its effective tax rate. SFAS #151, "Inventory Costs - an amendment of ARB No. 43" - The Company is evaluating the impact of this standard on its consolidated financial statements. SFAS#123R, "Share-Based Payment" - Adoption was planned for the fourth quarter of fiscal 2005 but, following a change announced by the SEC on April 15, 2005, adoption has been deferred to the start of fiscal 2006. CRITICAL ACCOUNTING ESTIMATES The Company's significant accounting policies are summarized in Note 1 of its Consolidated Financial Statements in this Quarterly Report on Form 10-Q. While all these significant accounting policies impact its financial condition and results of operations, certain of these policies require management to use a significant degree of judgement and/or make estimates, consistent with generally accepted accounting principles, that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting periods. Since these are judgements and estimates, they are sensitive to changes in business and economic realities, and events may cause actual operating results to differ materially from the amounts derived from management's estimates and judgements. The Company believes the following represent the most critical accounting judgments and estimates affecting its reported financial condition and results of operations: Bad Debts The Company estimates an allowance for doubtful accounts based on known factors related to the credit risk of each customer and management's judgment about the customer's business. Ten customers account for approximately 58% of the Company's sales in the current fiscal year to date. At July 2, 2005 the allowance for bad debts amounted to $121,000, which represented 2% of receivables. Because of the Company's long term relationships with the majority of its customers, in most cases, the principal bad debt risk to the Company arises from the insolvency of a customer rather than its unwillingness to pay. In addition, in certain cases the Company maintains credit insurance covering up to 90% of the amount outstanding from specific customers. The Company also carries out some of its foreign trade, particularly in the Far East, using letters of credit. The Company reviews all accounts receivable balances on a regular basis, concentrating on any balances that are more than 30 days overdue, or where there is an identified credit risk with a specific customer. A decision is taken on a customer-by-customer basis as to whether a bad debt reserve is considered necessary based on the specific facts and circumstances of each account. In general, the Company would reserve 100% of the receivable, net of any recoverable value added taxes or insurance coverages, for a customer that becomes insolvent or files for bankruptcy, and lesser amounts for less imminent defaults. To a lesser degree, the Company maintains a small bad debt reserve to cover the remaining balances based on historical default percentages. If the financial condition of any of the Company's customers is worse than estimated or were to deteriorate, resulting in an impairment of its ability to make payments, the Company's results may be adversely affected and additional allowances may be required. With the exception of a significant loss of $562,000 in fiscal 2001 relating to one US customer, credit losses have not been significant in the past ten years. Inventories Inventories are valued at the lower of cost or market. Inventory costs include materials, direct labor and manufacturing overhead, and are relieved from inventory on a first-in, first-out basis. The Company carries out a significant amount of customization of standard products and also designs and manufactures special products to meet the unique requirements of its customers. This results in a significant proportion of the Company's inventory being customer specific. The Company's reported financial condition includes a provision for estimated slow- moving and obsolete inventory that is based on a comparison of inventory levels with forecast future demand. Such demand is estimated based on many factors, including management judgments, relating to each customer's business and to economic conditions. The Company reviews in detail all significant inventory items with holdings in excess of estimated normal requirements. It also considers the likely impact of changing technology. It makes an estimate of the provision for slow moving and obsolete stock on an item-by-item basis based on a combination of likely usage based on forecast customer demand, potential sale or scrap value and possible alternative use. This provision represents the difference between original cost and market value at the end of the financial period. In cases where there is no estimated future use for the inventory item and there is no estimated scrap or resale value, a 100% provision is recorded. Where the Company estimates that only part of the total holding of an inventory item will not be used, or there is an estimated scrap, resale or alternate use value, then a proportionate provision is recorded. Once an item has been written down, it is not subsequently revalued upwards. The provision for slow moving and obsolete inventories at July 2, 2005 was $864,000, or 19% of the original cost of gross inventory. At September 30, 2004 the provision was $879,000, or 18% of gross inventory. If actual future demand or market conditions are less favorable than those projected by management, or if product designs change more quickly than forecast, additional inventory write-downs may be required, which may have a material adverse impact on reported results. Warranty Costs The Company provides for the estimated cost of product warranties at the time revenue is recognized. While the Company engages in product quality programs and processes, the Company's warranty obligation is affected by product failure rates and repair or replacement costs incurred in correcting a product failure. Accordingly, the provision for warranty costs is based upon anticipated in-warranty failure rates and estimated costs of repair or replacement. Anticipating product failure rates involves making difficult judgments about the likelihood of defects in materials, design and manufacturing errors, and other factors that are based in part on historical failure rates and trends, but also on management's expertise in engineering and manufacturing. Estimated repair and replacement costs are affected by varying component and labor costs. Should actual product failure rates and repair or replacement costs differ from estimates, revisions to the estimated warranty liability may be required and the Company's results may be materially adversely affected. In the event that the Company discovers a product defect that impacts the safety of its products, then a product recall may be necessary, which could involve the Company in substantial unanticipated expense significantly in excess of the reserve. There were no significant safety related product recalls during the past three fiscal years. Goodwill Impairment The Company carries out an annual assessment to determine if the goodwill relating to the controls business amounting to $1,435,000 has been impaired, in accordance with the requirements of SFAS #142 "Goodwill and Other Intangible Assets". In fiscal 2004 the Company retained an investment banking firm specializing in valuations to assist the Company in performing this impairment assessment. The assessment was based on three separate methods of valuing the controls business based on expected free cash flows, the market price of the Company's stock and an analysis of precedent transactions. These methods require estimates of future revenues, profits, capital expenditures and working capital requirements which are based on evaluation of historical trends, current budgets, operating plans and industry data. Based on all of these valuation methods the conclusion was that the goodwill had not been impaired. If, in future periods, the Company's results of operations, cash flows or the market price of the Company's stock were to decrease significantly then it may be necessary to record an impairment charge relating to goodwill of up to $1,435,000. Pension Plan Assumptions The Company makes a number of assumptions relating to its pension plans in order to measure the financial position of the plans and the net periodic benefit cost. The most significant assumptions relate to the discount rate, the expected long term return on plan assets and the rate of future compensation increase. If these assumptions prove to be incorrect then the Company may need to record additional expense relating to the pension plans which could have a material effect on the Company's results of operations. The Company's pension plans are significant relative to the size of the Company. Pension plan assets were $12,899,000 at September 30, 2004 and the total assets of the Company were $16,608,000. Although the plan assets are not included in the assets of the Company they are 78% of size of the Company's total assets. If, as a result of changes in assumptions, the accumulated benefit obligation of either of the plans were to exceed the fair value of assets of that plan, then an adjustment to record this additional liability and corresponding decrease stockholders equity would be necessary, which could have a material effect on the Company's financial position. RISK FACTORS In addition to the market risk factors relating to foreign currency and interest rate risk set out below, the Company believes that the following represent the most significant risk factors for the Company: Capital goods markets are cyclical The Company's customers are mainly manufacturers of capital goods such as fork lift trucks, aerial lifts and railway signaling equipment. These markets are cyclical and are currently showing modest growth, but demand in these markets could decrease or customers could decide to purchase alternative products. In this event the Company's sales could decrease below its current break even point and there is no certainty that the Company would be able to decrease overhead expenses to enable it to operate profitably. Single source materials and sub-contractors may not meet the Company's needs. The Company relies on certain suppliers and sub-contractors for all of its requirements for certain components, sub-assemblies and finished products. In the event that such suppliers and sub-contractors are unable or unwilling to continue supplying the Company, or to meet the Company's cost and quality targets or needs for timely delivery, there is no certainty that the Company would be able to establish alternative sources of supply in time to meet customer demand. Damage to the Company's or sub-contractor's buildings would hurt results. In the controller business the majority of product is produced in a single plant in England and uses sub-assemblies sourced from a sub-contractor with single plant 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. The Company risks adverse litigation impact In fiscal 2002 the Company received a demand for repayment of an alleged preference payment of $180,000 received from a customer in the 90 days prior to their filing for protection under Chapter 11 during fiscal 2000. At the time this customer filed for Chapter 11 protection it owed the Company $50,000 and this amount was fully reserved in the fiscal 2000 financial statements. In July 2005 the Company reached agreement in principle to settle the claim for repayment of the alleged preference payment for $90,000, although this agreement has not yet been finalized. It is expected that a payment of $90,000 to settle this claim will be made during the fourth quarter of fiscal 2005. This amount has been fully reserved as at the end of the third quarter. There was no significant impact on third quarter earnings as a result of this settlement. OVERVIEW OF THIRD QUARTER AND FIRST NINE MONTHS The Company reported that net income for its third fiscal quarter was $216,000, or $.07 per diluted share, an increase of $113,000, or $0.04 per diluted share, compared to the third fiscal quarter last year. Revenues for the third quarter of $8,453,000 were up by 13%, compared to $7,486,000 in the third quarter fiscal 2004. Business volumes increased by 10% compared to the third quarter of last year, with currency fluctuations accounting for the remaining 3%increase in sales. Operating income for the third quarter was $381,000 compared to $121,000 in the same quarter last year. The increase in operating income of $260,000 was mainly due to higher volumes. For the nine month period net income was $408,000, or $.13 per diluted share, compared to $326,000, or $.10 per diluted share, in the comparable period last year. Revenues in the first nine months of this year were $24,089,000, an increase of $2,864,000, or 13%, compared to the first nine months of last year. Foreign currency fluctuations accounted for $715,000, or about one quarter of the increase in reported sales. Gross profit was 37.9% of sales compared to 40.3% in the same period last year. The decrease in the gross profit percentage was due to both foreign currency fluctuations and lower than average margins on certain business. Selling, general and administrative expenses were 6% higher than the same period last year, with foreign currency fluctuations accounting for half of the increase. Operating income for the first nine months was $686,000 compared to $574,000 in the first nine months of fiscal 2004. The increase in operating income was mainly due to increased volumes, partially offset by foreign currency fluctuations and the higher operating expenses. Cash balances decreased by $31,000 in the first nine months of fiscal 2005 to $874,000. Operating activities generated cash of $855,000, principally due to net income and lower inventories, partially offset by higher receivables and lower payables. Capital expenditure used cash of $345,000 and dividend payments amounted to $284,000. Exchange rate changes decreased cash by $257,000. Results of Operations Nine months ended July 2, 2005 The following table compares results for the current nine months by segment with the same prior year period, and shows the percentage changes in total and split between the currency impact and volume / other changes. (in thousands of dollars) % change due to: ----------------------- Volume/ 2005 2004 Total Currency other ----- ----- ----- -------- ------- Sales: Controls - to external customers $22,865 $19,754 16% 3% 13% - ------------------------------------------------------------------------- Capacitors- to external customers 1,224 1,471 (17%) 3% (20%) Capacitors - inter-segment 189 138 37% 4% 33% - ------------------------------------------------------------------------- Capacitors - total 1,413 1,609 (12%) 4% (14%) - ------------------------------------------------------------------------- Total sales to external customers 24,089 21,225 13% 3% 10% - ------------------------------------------------------------------------- Gross Profit: Controls 8,530 7,870 8% 1% 7% Capacitors 598 685 (13%) 4% (17%) - ------------------------------------------------------------------------- Total 9,128 8,555 7% 1% 6% - ------------------------------------------------------------------------- Selling general and administrative expense: Controls 7,610 7,159 6% 3% 3% Capacitors 562 522 8% 4% 4% Unallocated corporate expense 270 300 (10%) 0% (10%) - ------------------------------------------------------------------------- Total 8,442 7,981 6% 3% 3% - ------------------------------------------------------------------------- Operating income: Controls 920 711 29% (24%) 53% Capacitors 36 163 (78%) 3% (81%) Unallocated corporate expense (270) (300) (10%) 0% (10%) - ------------------------------------------------------------------------- Total 686 574 20% (29%) 49% - ------------------------------------------------------------------------- Other income and expense (58) (73) (21%) (41%) 20% - ------------------------------------------------------------------------- Income before income taxes 628 501 25% (27%) 52% Income taxes (220) (175) 26% (27%) 53% - ------------------------------------------------------------------------- Net Income $408 $326 25% (27%) 52% Sales in the third fiscal quarter ended July 2, 2005 were $8,453,000 compared to $7,486,000 in the third quarter of last year, an increase of $967,000, or 13%. Foreign currency fluctuations, principally the weakness of the US dollar compared to the Euro and the British pound, accounted for an increase of $110,000, or 1%, in revenues. Shipment volumes were 12% ahead of the third quarter of last year. Volumes in the U.S. Controller business increased by 22% with gains in shipments to the aerial lift, fork lift truck and mining markets partially offset by lower demand in the US airport ground support and other electric vehicle markets. Volumes in the foreign controller markets increased by 9% compared to the third quarter of fiscal 2004, mainly due to higher shipments to aerial lift markets. Capacitor sales were 18% lower than last year at $488,000, compared to $596,000 in the third quarter of fiscal 2004, due to lower demand in the audio capacitor and railway signaling markets. Gross profit of $3,160,000 was $199,000 higher than in the comparable period last year. The increase in gross profit was mainly due to higher volumes and foreign currency fluctuations, which increased gross profit by $55,000 in the third quarter. Sales mix adversely impacted gross profit with the increase in sales concentrated in low margin products, particularly in the United States where costs have been adversely impacted by the weakness of the US dollar. Third quarter gross profit was 37.4% of sales, a decrease of 2.1% from 39.5% of sales in the same quarter of fiscal 2004. Selling, research and administrative expenses were $2,779,000, a decrease of $61,000, or 2%, compared to last year's third quarter. Foreign currency fluctuations increased these expenses by $35,000, or 1%. In the third quarter of fiscal 2005, engineering and R&D expense was lower by $224,000 compared to the same period last year. This was mainly due to lower engineering consulting expense, partly offset by additional internal engineering resources, as the development of new high quality products is completed and these products move into the testing and customer prototyping phases. In addition, sales and marketing expense increased by $96,000 compared to the same quarter last year, mainly due to an increase in number of sales employees and additional marketing expense related to the introduction of advanced new products. In the third quarter there was operating income of $381,000 compared to $121,000 in the third quarter last year, an increase in operating income of $260,000. Foreign currency fluctuations increased reported operating income by $20,000. Operating income in the controller business of $427,000 was $219,000 higher than in the third quarter of last year. The increase in controller business operating income was mainly due to higher volumes and lower engineering expense partially offset by additional spending on sales and marketing of new products. Operating income in the capacitor business segment decreased to $56,000 compared to $69,000 in the prior year third quarter, mainly due to lower volumes. Unallocated corporate expenses were $102,000 in the current year compared to $156,000 in the third quarter of last year. Foreign currency exchange losses in the third quarter of this year were $36,000 compared to a gain of $53,000 in the same quarter last year, a difference of $89,000. Net interest expense was $12,000 compared to $17,000 in the third quarter of fiscal 2004. Income before income taxes of $333,000 increased by $176,000 compared to the third quarter of last year when pre-tax income was $157,000. Income taxes were 35% of pre-tax income in both periods. Net income was $216,000 compared to $103,000 in the same quarter last year, an increase of $113,000. Basic and fully diluted income per share was $.07 per share in the third quarter of the current year compared to $.03 per share in last year's third quarter. Three months ended July 2, 2005 The following table compares third quarter results by segment for the three months ended July 2, 2005 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. (in thousands of dollars) % change due to: ----------------------- Volume/ 2005 2004 Total Currency other ----- ----- ----- -------- ------- Sales: Controls - to external customers $8,005 $6,953 15% 1% 14% - ------------------------------------------------------------------------- Capacitors- to external customers 448 533 (16%) 2% (18%) Capacitors - inter-segment 40 63 (37%) 2% (39%) - ------------------------------------------------------------------------- Capacitors - total 488 596 (18%) 2% (20%) - ------------------------------------------------------------------------- Total sales to external customers 8,453 7,486 13% 1% 12% - ------------------------------------------------------------------------- Gross Profit: Controls 2,913 2,707 8% 2% 6% Capacitors 247 254 (3%) 0% (3%) - ------------------------------------------------------------------------- Total 3,160 2,961 7% 2% 5% - ------------------------------------------------------------------------- Selling general and administrative expense: Controls 2,486 2,499 (1%) 1% (2%) Capacitors 191 185 3% 1% 2% Unallocated corporate expense 102 156 (35%) 0% (35%) - ------------------------------------------------------------------------- Total 2,779 2,840 (2%) 1% (3%) - ------------------------------------------------------------------------- Operating income: Controls 427 208 105% 10% 95% Capacitors 56 69 (19%) 0% (19%) Unallocated corporate expense (102) (156) (35%) 0% (35%) - ------------------------------------------------------------------------- Total 381 121 215% 17% 198% - ------------------------------------------------------------------------- Other income and expense (48) 36 (233%) (233%) 0% - ------------------------------------------------------------------------- Income before income taxes 333 157 112% (41%) 153% Income taxes (117) (54) 117% (40%) 157% - ------------------------------------------------------------------------- Net Income $216 $103 110% (41%) 151% - ------------------------------------------------------------------------- Sales in the first nine months of fiscal 2005 were $24,089,000, compared to $21,225,000 in the same period last year, an increase of $2,864,000, or 13%. Foreign currency fluctuations accounted for an increase in reported sales of $715,000, or 3%, Volumes were 10% ahead last year. Volumes in the controller business were 13% better than in the same period last year, mainly due to strong performance in the aerial lift market. In the capacitor business sales to external customers decreased by $247,000 compared to the same period last year. Capacitor volumes decreased by $297,000, or 20%, compared to the first nine months of last year due to slow conditions in both the audio and railway signaling markets. Foreign currency fluctuations accounted for a $50,000 increase in reported sales of capacitors. Revenues in the US controller business increased by 24%. This was mainly due to increased demand in the aerial lift and mining markets. Controller volumes in foreign markets grew by 5%, mainly due to increased demand in the European aerial lift market, partially offset by lower demand in the fork lift truck market, particularly in the Far East. Gross profit was 37.9% of sales in this period compared to 40.3% in the comparable period in fiscal 2004. Gross profit increased by $573,000 compared to the first nine months of last year. The positive impact of higher volumes was partially offset by lower average margins in the US aerial lift market. Foreign currency fluctuations increased reported gross profit by $70,000. In the controller business gross profit increased by $660,000. This was partially offset by a decrease in capacitor business gross profit of $87,000, mainly due to lower volumes. Selling, research and administrative expenses were $8,442,000, an increase of $461,000, or 6%, compared to the same period last year. In the first nine months of the current year engineering and R&D expense decreased by $438,000 mainly due to lower engineering consulting expense, partially offset by additional internal resources as the new product range moves from the development to customer prototype phase. Sales and marketing expenses were $597,000 ahead of the first nine months of last year, mainly due to additional resource relating to new products. Foreign currency fluctuations increased reported operating expenses by $235,000, or 3%. Operating income for the nine months was $686,000, an increase of $112,000 compared to the same period last year. Foreign currency fluctuations resulted in a $165,000 decrease in reported operating income. Excluding the currency impact, operating income for the controller business increased by $379,000, or 53%. The main causes of this increase in operating income were higher volumes partially offset by increased selling general and administrative expenses. In the capacitor business segment operating income decreased by $127,000 to $36,000, mainly due to lower volumes. Foreign currency exchange losses were $20,000 compared to $50,000 for the prior year period. Net interest expense was $38,000, an increase of $15,000 compared to the same period in fiscal 2004. Income before income taxes was $628,000 compared to $501,000 in the same period last year, an increase of $127,000. Income taxes were 35% of pre-tax income, in line with the same period last year. Net income for the nine month period was $408,000, an increase of $82,000 compared to the same period last year. Basic and fully diluted income per share was $.13 per share compared to $.10 per share in the first nine months of fiscal 2004. Financial Condition The Company has, since January 1990, maintained a program of regular cash dividends. The dividend for the third quarter of fiscal 2005 was paid on July 14, 2005, and amounted to $95,000. Cash balances at the end of the third quarter of 2005 were $874,000 compared to $905,000 in September 2004, a decrease in cash of $31,000. In the first nine months of fiscal 2005 net income was $408,000, and operating activities generated $855,000 of cash. There was an increase of $171,000 in receivables due to higher volumes and foreign currency fluctuations, partially offset by faster collections. The number of days sales in receivables decreased in the first nine months of fiscal 2005 from 70 days to 67 days. Inventories decreased by $371,000 and prepaid expense and other current assets increased by $270,000. Accounts payable decreased by $468,000. Dividends paid in this period amounted to $284,000. Capital expenditures were $345,000 offset by depreciation of $503,000. The Company has no long-term debt and has overdraft facilities in the UK of approximately $1,947,000 and of $395,000 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. Tech/Ops Sevcon's capital resources, in the opinion of management, are adequate for projected operations and capital spending programs. Capital spending programs are not expected to be significantly higher than depreciation over the next two years and projected volume growth is not expected to require significant additional cash resources. 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 5 to the Company's Consolidated Financial Statements included under Item 8 of the Company's Form 10-K for the year ended September 30, 2004 and other risks are described under the caption Risk Factors in Management's discussion and analysis of financial condition and results of operations above. Foreign currency risk The Company sells to customers throughout the industrialized world. The majority of the Company's products are manufactured in the United Kingdom. In the first quarter of fiscal 2005 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 90% of the Company's cost of sales was incurred in British Pounds. This resulted in the Company's sales and margins being exposed to fluctuations due to the change in the exchange rates of the US Dollar, the British Pound and the Euro. The Company has trade accounts receivable and accounts payable denominated in both British pounds and Euros which are exposed to exchange fluctuations. In addition, the translation of the sales and income of foreign subsidiaries into US Dollars is also subject to fluctuations in foreign currency exchange rates. The Company undertakes hedging activities to manage the foreign exchange exposures related to forecasted purchases and sales in foreign currency and the associated foreign currency denominated receivables and payables. The Company does not engage in speculative foreign exchange transactions. Details of this hedging activity and the underlying exposures are set out below. The following table provides information about the Company's foreign currency accounts receivable, accounts payable, firmly committed sales contracts and derivative financial instruments outstanding as of July 2, 2005. The information is provided in US Dollar amounts, as presented in the Company's consolidated financial statements. The table presents the notional amount (at contract exchange rates) and the weighted average contractual foreign currency exchange rates. The contracts mature at varying dates between July 2005 to December 2006. - ----------------------------------------------------------------------------- (in thousands, except average contract rates) - ----------------------------------------------------------------------------- Expected maturity or transaction date Fair FY2005 FY2006 Total Value - ----------------------------------------------------------------------------- On balance sheet financial instruments: In $US Functional Currency Accounts receivable in pounds 1,201 - 1,201 1,201 Accounts receivable in euros 2,559 - 2,559 2,559 Accounts payable in pounds 1,706 - 1,706 1,706 Accounts payable in euros 244 - 244 244 Anticipated Transactions and related derivatives In $US Functional Currency Firmly committed sales contracts In pounds 1,073 - 1,073 - In Euros 864 - 864 - Forward exchange agreements Sell Euros for British Pounds 359 - 359 (4)* Average contractual exchange rate EUR1.50-GBP1 Sell US Dollars for British Pounds 1,100 1,050 2,150 (56)* Average contractual exchange rate USD1.82-GBP1 - ----------------------------------------------------------------------------- Amount recorded as other comprehensive income $ 3 $ - $ 3 $(3) - ----------------------------------------------------------------------------- *The estimated fair value is based on the estimated amount at which the contracts could be settled based on forward exchange rates. Because the difference between the spot and hedged foreign exchange rates at July 2, 2005 was approximately 2%, and amounted to $59,000, the risk of default by counterparties is not material to the Company. Interest Rate Risk The Company does not currently have any interest bearing debt. The Company does invest surplus funds in instruments with maturities of less than 12 months at both fixed and floating interest rates. The Company incurs short-term borrowings from time-to-time on its overdraft facilities in Europe at variable interest rates. Due to the short-term nature of the Company's investments at July 2, 2005 the risk arising from changes in interest rates was not material. Item 4. Controls and Procedures. (a) Evaluation of disclosure controls and procedures. Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rule 13a-15(e)) as of July 2, 2005. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of July 2, 2005, these disclosure controls and procedures were effective and designed to ensure that the information required to be disclosed in the reports filed or submitted by the Company under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the requisite time periods. (b) Changes in internal control over financial reporting. Our principal executive officer and principal financial officer have identified no change in our "internal control over financial reporting" (as defined in Securities Exchange Act of 1934 Rule 13a-15(f)) that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION Item 6. Exhibits See Exhibit Index immediately preceding the exhibits. 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: August 15, 2005 By: /s/ Paul A. McPartlin --------------------- Paul A. McPartlin Chief Financial Officer (Principal financial and chief accounting officer) Exhibit Index 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. EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 15, 2005 /s/ Matthew Boyle --------------------- Matthew Boyle President and Chief Executive Officer EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 15, 2005 /s/ Paul A. McPartlin --------------------- Paul A. McPartlin Chief Financial and Accounting Officer EXHIBIT 32.1 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 July 2, 2005 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 material respects, the financial condition and results of operations of the Company. Dated: August 15, 2005 /s/ Matthew Boyle ----------------------- Matthew Boyle Chief Executive Officer Dated: August 15, 2005 /s/ Paul A. McPartlin ----------------------- Paul A. McPartlin Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----