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| TO > SEC Filings for TO > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
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 others discussed in this report.
CRITICAL ACCOUNTING ESTIMATES
As of March 28, 2009, there have been no material changes to the critical accounting estimates described in the Company's 2008 10-K. However, if the continuing worldwide economic troubles continue to have a negative effect on our business, estimates used in future periods may vary materially from those the Company previously disclosed.
For example:
(i) if the financial condition of any of the Company's customers deteriorates as a result of continuing business declines, the Company may be required to increase its estimated allowance for bad debts;
(ii) if actual future demand continues to decline more than previously projected, inventory write-downs may be required; or
(iii) significant negative industry or economic trends that adversely affect our future revenues and profits, or a reduction of our market capitalization relative to net book value, among other factors, may change the estimated future cash flows or other factors that we use to determine whether or not goodwill has been impaired and lead us to conclude that an impairment charge is required.
All of these factors, and others resulting from the current economic situation, may have a material adverse impact on the Company's results.
Pension Plan Assumptions
The Company's pension plans are significant relative to the size of the Company. Pension plan assets were $18,162,000 at September 30, 2008 and the total assets of the Company were $19,755,000. Although the plan assets are not included in the assets of the Company, they were equal to 92% of the Company's total assets at September 30, 2008. In accordance with SFAS No. 158 the funded status of the pension plans (plan assets less the accumulated benefit obligation) is recognized in the Company's balance sheet as "Liability for pension benefits", which amounted to $307,000 at March 28, 2009, compared to $378,000 at September 30, 2008.
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 March 28, 2009 that the Company estimates would arise from the respective changes in significant plan assumptions. The data used to calculate the estimated impact on the funded status at March 28, 2009 is derived from the most recently available actuarial review of the pension plans with an effective date of September 30, 2008:
Impact on
Change in Funded Status
Plan Assumption Assumption (in thousands Change in
(increase) of dollars) funded status
(decrease)
Assumptions impacting
accumulated benefit
obligation:
Discount rate 0.1% $450 155%
Inflation rate 0.1% 300 103%
Salary Increase 0.5% 775 267%
Mortality rate 1 year 375 129%
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Goodwill Impairment
As discussed in our 2008 10-K, the Company carries out an annual assessment of the realizability of goodwill. Despite the current uncertain economic outlook, management believes the goodwill of $1,435,000 at March 28, 2009 is not impaired. However, if in future periods, the Company's results of operations, cash flows or the market price of the Company's stock continue to decline significantly, then it may be necessary to record an impairment charge relating to goodwill of up to $1,435,000.
OVERVIEW OF SECOND QUARTER AND FIRST SIX MONTHS
Results of Operations
Three months ended March 28, 2009 and March 29, 2008
Results of operations have continued to be materially adversely affected by the
general economic decline, as well as adverse movements in exchange rates. The
following table compares results by segment for the second quarter of fiscal
2009 with the prior year period and shows the percentage changes in total and
split between the currency impact and volume / other changes:
Three months ended % change due to:
March 28, March 29,
2009 2008 Total Currency Volume / other
Sales:
Controls - to external
customers $ 4,486 $ 10,067 -55% -5% -50%
Capacitors - to external
customers 397 493 -20% -33% 13%
Capacitors - inter-segment 20 10 100% -80% 180%
Capacitors - total 417 503 -17% -34% 17%
Total sales to external
customers 4,883 10,560 -54% -7% -47%
Gross Profit:
Controls 1,880 3,574 -48% -10% -38%
Capacitors 181 140 29% -52% 81%
Total 2,061 3,714 -44% -11% -33%
Selling research and
administrative expenses and
restructuring charge:
Controls 2,271 2,718 -17% -18% 1%
Capacitors 163 198 -18% -34% 16%
Unallocated corporate expense 101 163 -38% 0% -38%
Total 2,535 3,079 -18% -18% 0%
Operating (loss) income:
Controls (391 ) 856 -145% 17% -162%
Capacitors 18 (58 ) -131% 9% -140%
Unallocated corporate expense (101 ) (163 ) -38% 0% -38%
Total (474 ) 635 -174% 22% -196%
Other income and expense 64 74 -14% -29% 15%
(Loss) income before income
taxes (410 ) 709 -158% 16% -174%
Income taxes 117 (248 ) -147% 19% -166%
Net (loss) income $ (293 ) $ 461 -164% 15% -179%
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Sales in the second fiscal quarter ended March 28, 2009 declined by $5,677,000, or 54%, to $4,883,000 compared to $10,560,000 in the second fiscal quarter last year. Volumes shipped were 47% lower than last year. In addition, the strengthening of the US dollar by 29% and 15% against the British Pound and the Euro, respectively, reduced reported total sales by $694,000, or 7%, compared to the second fiscal quarter of 2008. In the controls business, volumes shipped were lower in all geographic areas in which the Company operates. The most significant reduction was in the European demand for aerial work platforms. In the capacitor business, volumes shipped were 13% higher than during the second quarter last year, which was largely due to higher demand from customers in the industrial sector. Currency changes, mainly the strengthening of the US Dollar against the British Pound, reduced reported total sales in the capacitor business by $161,000, or 33%, from the second fiscal quarter of 2008.
The Company has begun selectively instituting price increases; however, these did not have a material impact on the quarter's results and it is too early to predict their impact in the future.
Gross profit of $2,061,000 was 42.2% of sales in the second quarter compared to $3,714,000 or 35.2% of sales in the same quarter last year. The reduction in gross profit of $1,653,000 was due mainly to the lower volume of sales. Foreign currency fluctuations reduced reported gross profit by $412,000 or 11%.
Selling, research and administrative expenses and the restructuring charge in the second quarter of 2009 were $2,535,000, a reduction of $544,000, or 18%, compared to the same period last year. A restructuring charge of $303,000 was incurred in the second fiscal quarter of 2009. The charge was in response to the reduction in the Company's revenues due to lower customer demand as a result of the global business decline. The restructuring charge comprised severance costs for 21 employees and associated professional fees in the controls business segment and will save an anticipated $1 million of operating costs on an annualized basis. In addition, the Company has taken further action to temporarily reduce the compensation expense of employees in the controls business segment. The anticipated savings are subject to a variety of factors such as the cost of employee severance and associated costs that may cause actual results to vary from those anticipated. Foreign currency fluctuations reduced selling, research and administrative expense by $549,000, or 18%, compared with the prior year. Excluding the restructuring charge and the impact of currency fluctuations, operating expense was $298,000, or 10%, lower due to reduced spending in all overhead areas.
There was an operating loss for the second quarter of $474,000, compared with operating income of $635,000 in the same period last year, a reduction of $1,109,000. Foreign currency fluctuations had an overall positive impact of $137,000 in the quarter. Excluding the currency impact, the operating loss for the controller business was $534,000, which was $1,390,000 lower than last year, due principally to the significantly lower demand for the Company's products and the restructuring charge of $303,000. In the capacitor business segment, there was an operating profit of $18,000 compared with an operating loss of $58,000 in the second quarter last year.
In the second quarter, interest expense was $9,000, a reduction of $14,000 compared to the prior year. There was a foreign currency gain of $73,000 in the second quarter of fiscal 2009 compared to a gain of $95,000 in the same period last year.
The Company recorded a loss before income taxes of $410,000 compared to income before income taxes of $709,000 in the same period last year, a reduction of $1,119,000. Favorable foreign currency fluctuations reduced the pretax loss by $116,000.
There was a net loss for the quarter of $293,000 or $.09 per share compared to net income of $461,000 and $.14 per share in the second quarter fiscal 2008.
Six months ended March 28, 2009 and March 29, 2008
The following table compares first half year results by segment for the six months ended March 28, 2009 with the same period in the prior year, and shows the percentage changes in total and split between the currency impact and volume / other changes.
Six months ended % change due to:
March 28, March 29,
2009 2008 Total Currency Volume / other
Sales:
Controls - to external
customers $ 10,866 $ 19,774 -45% -6% -39%
Capacitors - to external
customers 844 1,029 -18% -31% 13%
Capacitors - inter-segment 25 22 14% -41% 55%
Capacitors - total 869 1,051 -17% -31% 14%
Total sales to external
customers 11,710 20,803 -44% -8% -36%
Gross Profit:
Controls 3,956 7,260 -46% -11% -35%
Capacitors 387 336 15% -43% 58%
Total 4,343 7,596 -43% -12% -31%
Selling research and
administrative expenses and
restructuring charge:
Controls 4,268 5,753 -25% -15% -10%
Capacitors 317 428 -26% -28% 2%
Unallocated corporate expense 159 195 -18% 0% -18%
Total 4,744 6,376 -26% -16% -10%
Operating (loss) income:
Controls (312 ) 1,507 -121% 8% -129%
Capacitors 70 (92 ) -176% 26% -202%
Unallocated corporate expense (159 ) (195 ) -18% 0% -18%
Total (401 ) 1,220 -133% 8% -141%
Other income and expense (227 ) (29 ) 683% 802% -119%
(Loss) income before income
taxes (628 ) 1,191 -153% -11% -142%
Income taxes 194 (417 ) -147% -10% -137%
Net (loss) income $ (434 ) $ 774 -156% -12% -144%
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Sales in the six months ended March 28, 2009 were $11,710,000, a decrease of $9,093,000, or 44%, compared to the same period last year when sales were $20,803,000. Foreign currency fluctuations accounted for a decrease in reported sales of $1,584,000, or 8%. Excluding the currency impact, volumes shipped were 36% lower than the same period last year. The reduced shipment volumes were due to significantly lower levels of demand across most of the Company's customer base. Volumes in the controller business were 39% lower than in the same period last year, with volumes shipped lower in all geographic areas in which the Company operates. In the capacitor business, recorded sales to external customers decreased by $185,000 compared to the same period last year. Capacitor volumes in the first six months were higher by $130,000, or 13%. Foreign currency fluctuations accounted for a $315,000, or 31%, decrease in the reported sales of capacitors.
Gross profit was 37.1% of sales in this period compared to 36.5% in the comparable period in fiscal 2008. Gross profit reduced by $3,253,000, or 43%, compared to the first half of last year due to the reduction in volumes shipped in the period. In the controller business, gross profit decreased by $3,304,000, or 46%, compared to the first six fiscal months of fiscal 2008. In the capacitor business, gross profit of $387,000 was $51,000, or 15% ahead of last year.
Selling, research and administrative expenses and the restructuring charge were $4,744,000, a decrease of $1,632,000, or 26%, compared to the same period last year. Foreign currency fluctuations decreased reported selling, research and administrative expenses by $1,009,000, or 16%. Excluding the impact of the favorable currency fluctuations, selling, research and administrative expenses in the first six months of fiscal 2008 were $623,000, or 10% lower than the same period last year with lower spending in all areas. Total operating expenses included a charge of $303,000 relating to a restructuring program which was incurred in the second fiscal quarter of 2009.
There was an operating loss for the first half of fiscal 2009 of $401,000 compared with an operating income of $1,220,000 last year, a decrease of $1,621,000. Foreign currency fluctuations resulted in a $101,000 decrease in the reported operating loss for the Company. Excluding the currency impact, the operating loss for the controller business was $437,000 which was $1,944,000 lower than last year, due principally to the significantly lower demand for the Company's products and the restructuring charge of $303,000 in the second fiscal quarter. In the capacitor business segment, there was an operating profit of $70,000 compared with an operating loss of $92,000 in the same period last year.
In the first half of fiscal 2009 interest expense was $16,000 compared to $53,000 in the same period last year. There was a foreign currency loss of $216,000 in fiscal 2009 compared to a gain of $20,000 in the same period last year, mainly due to the strength of the Euro compared to the British Pound and the US Dollar.
The Company recorded a loss before income taxes of $628,000 compared to an income before income taxes of $1,191,000 in the same period last year, a reduction of $1,819,000. Foreign currency fluctuations increased the pretax loss by $132,000.
There was a net loss for the first half of the fiscal year of $434,000 or $.13 per share compared to a net income of $774,000 and $.24 per share in the same period in fiscal 2008.
Financial Condition
While the Company has paid regular quarterly dividends in the past, due to the current uncertain economic outlook, the Board of Directors suspended payment of dividends in the first and second fiscal quarters of 2009 and will consider whether to resume paying dividends on a quarter by quarter basis. In the first fiscal quarter, the Company paid a dividend declared for the fourth fiscal quarter of 2008 of $.03 per share, which amounted to $98,000. Cash balances at the end of the second quarter of fiscal 2009 were $754,000, compared to $1,630,000 on September 30, 2008, a decrease in cash of $876,000 in the first six months of fiscal 2009.
In the first half of fiscal 2009, there was a net loss of $434,000 and operating activities used $267,000 of cash. Excluding the impact of currency fluctuations, receivables decreased by $2,180,000 which generated cash during the period. The number of days sales in receivables reduced slightly in the first six months of fiscal 2009 from 65 days at September 30, 2008 to 63 days at March 28, 2009. Adjusted for the effects of currency, there was an increase in inventories of $869,000 and a reduction in accounts payable and accrued expenses of $555,000 and $324,000, respectively, which reduced cash balances during the second fiscal quarter. Capital expenditures in the first six months were $162,000. Exchange rate changes decreased reported cash by $349,000 in the first six months of fiscal 2009.
The Company has no long-term debt but has overdraft facilities of approximately $1.5 million in the UK and of $130,000 in France. At the end of the second quarter of fiscal 2009, the Company had no borrowings against these overdraft facilities. The UK overdraft facilities are secured by a long leasehold property owned by the Company and the French overdraft facilities are unsecured. In line with normal practice in Europe, both facilities can be withdrawn on demand by the bank. Accordingly, management does not rely on their availability in projecting the adequacy of the Company's capital resources.
Tech/Ops Sevcon Inc.'s capital resources and projected cash flows from operations, in the opinion of management, are adequate for projected operations and capital spending programs over the next twelve months. Capital spending programs are not expected to be significantly higher than depreciation over the next twelve months and projected volume is not expected to require significant additional cash resources. However, as discussed above, current economic conditions and the global decline in business activity are having a negative effect on the Company's business. If these conditions continue, that may materially reduce the cash the Company is able to generate from operations, which may cause it to reduce the amounts it is able or willing to use for the foregoing purposes. If the Company is unable to generate sufficient cash from operations and if the bank overdraft facilities are withdrawn, the Company would need to raise additional debt or equity capital from other sources to avoid significantly curtailing its business and materially adversely affecting its results.
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