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| TO > SEC Filings for TO > Form 10-Q on 5-Aug-2008 | All Recent SEC Filings |
5-Aug-2008
Quarterly Report
FORWARD LOOKING STATEMENTS
Statements in this discussion and analysis about the Company's anticipated financial results and growth, as well as those about the development of its products and markets, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. These include the risks discussed under 'Risk Factors' below and throughout this Item 2.
CRITICAL ACCOUNTING ESTIMATES
As of June 28, 2008 there have been no material changes to the critical accounting estimates described in the Company's 2007 10-K, except as follows:
Pension Plan Assumptions
The Company's pension plans are significant relative to the size of the Company. Pension plan assets were $22,280,000 at September 30, 2007 and the total assets of the Company were $21,926,000. Although the plan assets are not included in the assets of the Company, they were equal to 102% of the Company's total assets at September 30, 2007. In accordance with SFAS No. 158 the funded status of the pension plans (plan assets less the accumulated benefit obligation) is recognized in the Company's balance sheet as "Liability for pension benefits" which amounted to $2,179,000 at June 28, 2008 compared to $2,244,000 at September 30, 2007.
The Company makes a number of assumptions relating to its pension plans in order to measure the financial position of the plans and the net periodic benefit cost. The most significant assumptions relate to the discount rate, the expected long term return on plan assets and the rate of future compensation increase. If these assumptions prove to be incorrect then the Company may need to record additional expense relating to the pension plans which could have a material effect on the Company's results of operations.
The table below sets out the approximate impact on the funded status of the Company's pension plans at June 28, 2008 that the Company estimates would arise from the following respective changes in significant plan assumptions:
Plan Assumption Change in Impact on Change in
Assumption Funded Status funded status
(in thousands
of dollars)
Assumptions impacting
accumulated benefit
obligation:
Discount rate 0.1% $650 30%
Inflation rate 0.1% 400 18%
Salary Increase 0.5% 900 41%
Mortality rate 1 year 650 30%
Assumption impacting
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OVERVIEW OF THIRD QUARTER AND FIRST NINE MONTHS
Results of Operations
Three months ended June 28, 2008
The following table compares results by segment for the third quarter of fiscal
2008 with the prior year period and shows the percentage changes in total and
split between the currency impact and volume / other changes:
% change due to:
2008 2007 Total Currency Volume / other
Sales:
Controls - to external
customers $ 9,499 $ 9,753 -3 % 5 % -8 %
Capacitors - to external
customers 516 588 -12 % 0 % -12 %
Capacitors - inter-segment 6 8 -25 % 0 % -25 %
Capacitors - total 522 596 -12 % 0 % -12 %
Total sales to external
customers 10,015 10,341 -3 % 4 % -7 %
Gross Profit:
Controls 3,027 3,566 -15 % 6 % -21 %
Capacitors 189 225 -16 % -1 % -15 %
Total 3,216 3,791 -15 % 6 % -21 %
Selling research and
administrative expenses and
restructuring charge:
Controls 3,269 2,603 26 % 2 % 24 %
Capacitors 271 217 25 % 0 % 25 %
Unallocated corporate expense 67 189 -65 % 0 % -65 %
Total 3,607 3,009 20 % 2 % 18 %
Operating income:
Controls (242 ) 963 -125 % 16 % -141 %
Capacitors (82 ) 8 -1,125 % -9 % -1,116 %
Unallocated corporate expense (67 ) (189 ) -65 % 0 % -65 %
Total (391 ) 782 -150 % 20 % -170 %
Other income and expense (53 ) (47 ) 13 % -30 % 43 %
Income (loss) before income
taxes (444 ) 735 -160 % 23 % -183 %
Income taxes 155 (252 ) -162 % 23 % -185 %
Net Income (loss) $ (289 ) $ 483 -160 % 23 % -183 %
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Sales in the third quarter ended June 28, 2008 declined by $326,000, or 3%, to $10,015,000 compared to $10,341,000 in the third fiscal quarter last year. Volumes were 7% lower than last year. However, in the third fiscal quarter the US dollar weakened by 2% and 14% against the British Pound and the Euro, respectively, compared to the third fiscal quarter of 2007, and these foreign currency fluctuations offset by $453,000, or 4%, the reported decline in sales caused by lower volume shipped. The Company achieved sales increases in North America and the Far East due to increases in volume shipped; in Europe there was a reduction in sales due to lower demand from aerial lift customers.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
In the capacitor business, sales volume was 12% lower than during the third quarter last year. Sales in the capacitor business were adversely affected by lower demand from the signaling and audio sectors of its business.
Gross profit was 32.1 % in the third quarter compared to 36.7% in the same quarter last year. Gross profit reduced by $575,000 from $3,791,000 in the third quarter last year to $3,216,000 in fiscal 2008. Foreign currency fluctuations increased reported gross profit by $210,000 or 6%. Net of the currency impact, gross profit was $785,000 lower than last year. The reduction in gross profit was due to several non-recurring items including start up costs at a subcontractor, component obsolescence in the UK and warranty costs at one customer.
Selling, research and administrative expenses were $2,907,000, a reduction of $102,000, or 3.5% compared to the same period last year. Foreign currency fluctuations increased selling, research and administrative expense by $45,000, or 1.5%, compared with the prior year; excluding the currency impact, operating expense was $147,000, 5%, lower principally due to reduced administrative and engineering spend. A restructuring charge of $700,000 was incurred in the third quarter relating principally to the closure of the residual manufacturing operation in the UK in the controls business segment. This followed a strategic review of the controls business which identified an opportunity to significantly reduce ongoing manufacturing costs through further reliance on subcontractors to manufacture the Company's products. The restructuring cost comprised severance costs for 36 employees and associated professional fees in the controls business segment and severance costs for a further 5 employees in the capacitor business segment. The closure of the UK manufacturing facility in the controls business segment is anticipated to immediately remove $2 million of operating costs on an annualized basis. The Company expects to incur an additional $20,000 in costs for the restructuring in the fourth quarter of fiscal 2008. The anticipated savings and expense are subject to a variety of factors such as the cost of employee severance costs and associated costs that may cause actual results to vary from those anticipated.
There was an operating loss for the third quarter of $391,000, compared with an operating income of $782,000 in the same period last year, a reduction of $1,173,000. Foreign currency fluctuations had an overall positive impact of $155,000 in the quarter; excluding the currency impact, operating income for the controller business reduced by $1,205,000, due principally to the restructuring charge and certain non-recurring items which impacted gross profit. The non-recurring items included start up costs at a subcontractor, component obsolescence in the UK and warranty costs at one customer. In the capacitor business segment, there was an operating loss of $82,000 compared with an operating income of $8,000 in the third quarter last year. The reduction in operating income in the capacitor business was due to lower sales volume and changes in sales mix which reduced the gross profit margin from 37.8% in the third quarter of fiscal 2007 to 36.2% in the third quarter of fiscal 2008.
In the third quarter interest expense was $29,000, an increase of $19,000 compared to the prior year. There was a foreign currency loss of $27,000 in the third quarter of fiscal 2008 compared to a loss of $40,000 in the same period last year.
There was a loss before income taxes of $444,000 compared to an income before income taxes of $735,000 in the same period last year, a reduction of $1,179,000. There was a net loss for the quarter after income taxes of $289,000 compared with a net income for the third quarter last year of $483,000, a reduction of $772,000; the loss per share for the quarter was $0.09 compared to an income per share in the third quarter of fiscal 2007 of $0.15.
Nine months ended June 28, 2008
The following table compares the results by segment for the nine months ended June 28, 2008 with the same period in the prior year, and shows the percentage changes in total and split between the currency impact and volume / other changes.
Nine months ended % change due to:
June 28, June 30,
2008 2007 Total Currency Volume / other
Sales:
Controls - to external
customers $ 29,273 $ 27,437 7 % 6 % 1 %
Capacitors - to external
customers 1,545 1,504 3 % 2 % 1 %
Capacitors - inter-segment 28 39 -28 % 0 % -28 %
Capacitors - total 1,573 1,543 2 % 2 % 0 %
Total sales to external
customers 30,818 28,941 6 % 5 % 1 %
Gross Profit:
Controls 10,287 10,223 1 % 8 % -7 %
Capacitors 525 580 9 % 2 % -11 %
Total 10,812 10,803 0 % 7 % -7 %
Selling research and
administrative expenses and
restructuring charge:
Controls 9,022 8,012 13 % 4 % 9 %
Capacitors 699 605 16 % 2 % 14 %
Unallocated corporate expense 262 302 -13 % 0 % -13 %
Total 9,983 8,919 12 % 3 % 9 %
Operating income:
Controls 1,265 2,211 -43 % 21 % -64 %
Capacitors (174 ) (25 ) 596 % 13 % 583 %
Unallocated corporate expense (262 ) (302 ) -13 % 0 % -13 %
Total 829 1,884 -56 % 25 % -81 %
Other income and expense (82 ) (140 ) -41 % -87 % 46 %
Income before income taxes 747 1,744 -57 % 34 % -91 %
Income taxes (262 ) (605 ) -57 % 34 % -91 %
Net Income $ 485 $ 1,139 -57 % 34 % -91 %
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Sales in the nine months ended June 28, 2008 were $30,818,000, an increase of $1,877,000, or 6%, compared to the same period last year when sales were $28,941,000. Foreign currency fluctuations accounted for an increase in reported sales of $1,522,000 or 5%; in addition, volumes were also 1% ahead of the same period last year. The increased volumes were mainly due to broadly-based higher levels of demand across most of the Company's customer base; there were no significant "one-off" or "exceptional" sales revenues in the first nine months of fiscal 2008. Volumes in the controller business were 1% better than in the same period last year, with gains in the Far East and North America partially offset by lower sales volume in Europe. In the capacitor business, sales to external customers also increased by 1% compared to the same period last year; foreign currency fluctuations accounted for a 2%, increase in the reported sales of capacitors.
Revenues in the US controller business increased by $1,629,000, or 15% compared to the first nine months of last fiscal year. This was mainly due to strong demand in the aerial lift market and to the introduction of new products.
Gross profit was $10,812,000, or 35.1%, of sales in this period compared to $10,803,000, or 37.3%, in the comparable period in fiscal 2007. Volume was lower by $756,000, or 7%, offset by favorable foreign currency fluctuations which increased reported gross profit by $765,000, also 7%. In the controller business, gross profit increased marginally by $64,000 from $10,223,000 in fiscal 2007 to $10,287,000 in the third quarter of fiscal 2008; in the capacitor business, gross profit of $525,000 was 9% behind last year.
Selling, research and administrative expenses were $9,283,000, an increase of $364,000, or 4%, compared to the same period last year. Foreign currency fluctuations increased reported selling, research and administrative expenses by $281,000, or 3%. Excluding the impact of the adverse currency fluctuations, selling, research and administrative expenses in the first nine months of fiscal 2008 were $83,000, or 1%, higher than the same period last year, primarily due to higher administrative expense partly offset by lower selling and research and development expense. Total operating expenses included a charge of $700,000 relating to a restructuring program which was incurred in the third fiscal quarter of 2008 (see Note 12).
Operating income for the first nine months of fiscal 2008 was $829,000, a reduction of $1,055,000, or 56%, compared to the same period last year. Foreign currency fluctuations resulted in a $472,000 increase in reported operating income. Excluding the currency impact, operating income for the controller business decreased by $1,421,000, or 64% compared to last year. The main cause of this decrease in operating income in the controller business was the restructuring charge of $700,000 in the third quarter and several non-recurring items which impacted gross margin, also in the third quarter, including start up costs at a subcontractor, component obsolescence in the UK and warranty costs at one customer. In the capacitor business segment there was an operating loss of $174,000 compared to a $25,000 operating loss in the first nine months of fiscal 2007. The increase in the operating loss in the capacitor business was due to lower sales volume and reduced gross profit margins arising from changes in sales mix.
In the first nine months of fiscal 2008, interest expense was $82,000 compared to $17,000 in the same period last year. There was a foreign currency loss of $7,000 in fiscal 2008 compared to a loss of $130,000 in the same period last year; the reduction in the foreign currency loss mainly due to the strength of the Euro compared to the British Pound and US Dollar in fiscal 2008 compared with the first nine months of fiscal 2007.
Income before income taxes was $747,000 compared to $1,744,000 in the same period last year, a reduction of $997,000, or 57%. Income taxes were 35% of pre-tax income, in line with the same period last year. Net income for the first nine months of fiscal 2008 was $485,000, a reduction of $654,000, or 57%, compared to the same period last year. Basic and fully diluted income per share decreased by $0.21 per share to $0.15 per share compared to $0.36 per share in the first nine months of fiscal 2007.
Financial Condition
The Company has, since January 1990, maintained a program of regular cash dividends. The dividend for the third quarter of fiscal 2008 was paid on July 17, 2008, and amounted to $98,000. Cash balances at the end of the third quarter of 2008 were $1,250,000, compared to $1,014,000 on September 30, 2007, an increase in cash of $236,000 in the first nine months of fiscal 2008.
In the first nine months of fiscal 2008, net income was $485,000, and operating activities generated $1,317,000 of cash. Receivables decreased by $572,000 to $8,142,000. The number of days sales in receivables reduced in the first nine months of fiscal 2008 from 70 days at September 30, 2007 to 67 days at June 28, 2008. Inventories and prepaid expense and other current assets remained relatively constant at $5,420,000 and $978,000 respectively at June 30, 2008 compared with $5,422,000 and $916,000 respectively at September 30, 2007. Accrued income taxes decreased by $530,000, due to the payment of foreign income taxes. Dividends paid in the first nine months of fiscal 2008 amounted to $293,000. Capital expenditures in the first nine months were $678,000. Exchange rate changes decreased reported cash by $130,000 in the first nine months of fiscal 2008.
The Company has no long-term debt but has overdraft facilities in the UK of approximately $2 million and of $200,000 in France. At the end of the third quarter of fiscal 2008, the Company had no borrowings against these overdraft facilities. The UK overdraft facilities are secured by all of the Company's assets in the UK and the French overdraft facilities are unsecured.
Tech/Ops Sevcon Inc's capital resources, in the opinion of management, are adequate for projected operations and capital spending programs. Capital spending programs are not expected to be significantly higher than depreciation over the next twelve months and projected volume growth is not expected to require significant additional cash resources.
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