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| TO > SEC Filings for TO > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-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 June 27, 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 included in the Company's previous disclosures.
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 at that date ($15,458,000 at June 27, 2009). 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 compared to 117% of the Company's total assets at June 27, 2009. 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 $283,000 at June 27, 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 June 27, 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 June 27, 2009 is derived from the most recently available actuarial review of the pension plans with an effective date of September 30, 2008:
Impact on
Funded
Status (in
Change in thousands of
Assumption dollars) Change in
Plan Assumption (increase) (decrease) funded status
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 June 27, 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 THIRD QUARTER AND FIRST NINE MONTHS
Results of Operations
Three months ended June 27, 2009 and June 28, 2008
Due to the continuing economic recession our customers have experienced substantially lower demand for their products in construction, transportation, shipping and other economic activity. This situation has resulted in a materially adverse demand for our products from our customers. The following table compares results by segment for the third quarter of 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
(in thousands of dollars) % change due to:
June 27, June 28,
2009 2008 Total Currency Volume / other
Sales:
Controls - to external
customers $ 3,665 $ 9,499 -61 -3 -59
Capacitors - to external
customers 395 516 -23 -20 -3
Capacitors - inter-segment 6 6 0 -32 32
Capacitors - total 401 522 -23 -20 -3
Total sales to external
customers 4,060 10,015 -59 -3 -56
Gross Profit:
Controls 1,306 3,027 -57 5 -62
Capacitors 175 189 -7 -25 18
Total 1,481 3,216 -54 4 -58
Selling research and
administrative expenses and
restructuring charge:
Controls 1,767 3,269 -46 -8 -38
Capacitors 168 271 -38 -16 -22
Unallocated corporate expense 115 67 72 0 72
Total 2,050 3,607 -43 -9 -34
Operating (loss) income:
Controls (461 ) (242 ) -90 180 -270
Capacitors 7 (82 ) 109 -6 114
Unallocated corporate expense (115 ) (67 ) -72 0 -72
Total (569 ) (391 ) -46 110 -156
Other income and expense 73 (53 ) 238 200 38
Loss before income taxes (496 ) (444 ) -12 121 -133
Income taxes 196 155 26 -117 143
Net loss $ (300 ) $ (289 ) -4 123 -127
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Sales in the third quarter ended June 27, 2009 declined by $5,955,000, or 59%, to $4,060,000 compared to $10,015,000 in the same quarter last year, as customers continue to reduce existing inventory. Volumes shipped were 56% lower. Foreign currency fluctuations, mainly the strengthening of the US dollar against the British Pound and the Euro reduced reported sales by $366,000, or 3%, compared to the third quarter of 2008. In the controls business, volumes shipped were lower in all geographic areas in which the Company operates, except for China. The most significant reduction was in the global demand for industrial vehicles. The Company has seen some stabilization in its markets, which has led to a modest recent recovery in order intake. In addition, new product introduction has led to customer gains in on- road vehicle applications since the beginning of the third quarter; however, there cannot yet be any assurance that these gains will translate into increased sales. In the capacitor business, volumes shipped were 3% lower than during the third quarter last year, which was largely due to lower 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 $105,000, or 20%, from the third quarter of 2008.
Gross profit of $1,481,000 was 36.5% of sales in the third quarter compared to $3,216,000 or 32.1% of sales in the same quarter last year. In June of 2008 the Company took action to close its remaining controls manufacturing activities in the UK and reduce associated overheads. A combination of the savings realized from this action, negotiated material cost reductions and foreign currency fluctuations improved the gross margin percentage. The reduction in gross profit of $1,735,000 was largely due to the lower volume of products shipped, partially offset by the savings achieved in production-related overheads and lower material costs. Foreign currency fluctuations increased reported gross profit by $113,000.
Selling, research and administrative expenses and restructuring charges in the third quarter of 2009 were $2,050,000, a reduction of $1,557,000, or 43%, compared to the same period last year when the Company incurred a restructuring charge of $700,000. Foreign currency fluctuations reduced operating expense by $318,000 or 9%, compared with the same quarter last year. Excluding the impact of currency fluctuations, selling, research and administrative expenses were $539,000, or 15%, lower in the third quarter compared to the same period last year due largely to restructuring actions taken in the third quarter of 2008 and the second quarter of 2009.
There was an operating loss in the third quarter of $569,000, compared with an operating loss of $391,000 in the same period last year when the Company incurred a restructuring charge of $700,000. Lower shipment volumes reduced operating profit by $2,299,000. Foreign currency fluctuations had an overall positive impact of $430,000 in the quarter. Lower overhead costs in cost of sales and lower selling, research and administrative expenses and restructuring charges improved operating profit by $1,691,000 compared to the same quarter last year. In the capacitor business segment, there was an operating profit of $7,000 compared with an operating loss of $82,000 in the third quarter last year.
In the third quarter, interest expense was $5,000, a reduction of $24,000 compared to the prior year. There was a foreign currency gain of $79,000 in the third quarter of 2009 compared to a loss of $27,000 in the same period last year. The foreign currency gain in the third quarter of 2009 was due to the weakening of the US Dollar compared to the British Pound and the Euro during the quarter.
The Company recorded a loss before income taxes of $496,000 in the third quarter of 2009 compared to a loss before income taxes of $444,000 in the same period last year. The main reasons for the higher losses were the reduction in shipments due to the global economic slowdown, partially offset by the actions taken by the Company to reduce overheads and material costs and by favorable currency movements in the quarter.
There was a net loss for the quarter of $300,000 or $0.09 per share compared to a net loss of $289,000 and $0.09 per share in the third quarter of 2008.
Nine months ended June 27, 2009 and June 28, 2008
The following table compares the results by segment for the nine months ended June 27, 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.
Nine months ended
(in thousands of dollars) % change due to:
June 27, June 28,
2009 2008 Total Currency Volume / other
Sales:
Controls - to external
customers $ 14,531 $ 29,273 -50 -5 -45
Capacitors - to external
customers 1,239 1,545 -20 -27 7
Capacitors - inter-segment 31 28 11 -39 50
Capacitors - total 1,270 1,573 -19 -27 8
Total sales to external
customers 15,770 30,818 -49 -6 -43
Gross Profit:
Controls 5,262 10,287 -49 -6 -43
Capacitors 562 525 7 -36 43
Total 5,824 10,812 -46 -7 -39
Selling research and
administrative expenses and
restructuring charge:
Controls 6,035 9,022 -33 -13 -20
Capacitors 485 699 -31 -23 -8
Unallocated corporate expense 274 262 5 0 5
Total 6,794 9,983 -32 -13 -19
Operating (loss) income:
Controls (773 ) 1,265 -161 44 -205
Capacitors 77 (174 ) -144 17 -161
Unallocated corporate expense (274 ) (262 ) 5 0 5
Total (970 ) 829 -217 64 -281
Other income and expense (154 ) (82 ) -88 -154 66
(Loss) income before income
taxes (1,124 ) 747 -250 54 -304
Income taxes 390 (262 ) -249 54 -303
Net (loss) income $ (734 ) $ 485 -251 55 -306
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Sales in the nine months ended June 27, 2009 were $15,770,000, a decrease of $15,048,000, or 49%, compared to the same period last year when sales were $30,818,000. Foreign currency fluctuations accounted for a decrease in reported sales of $1,948,000, or 6%. Excluding the currency impact, volumes shipped were 43% 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 due to the present challenging economic climate for our customer's products. Volumes in the controller business were 45% 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 $306,000 compared to the same period last year. Capacitor volumes in the first nine months were higher by $112,000, or 7%. Foreign currency fluctuations accounted for a $418,000, or 27%, decrease in the reported sales of capacitors.
Gross profit was 36.9% of sales in this period compared to 35.1% in the comparable period in 2008. Reported gross profit reduced by $4,988,000, or 46%, compared to the first nine months of last year. The reduction in gross profit was largely due to the reduction in volumes shipped so far this year, partially offset by the savings from the Company's actions to reduce overhead costs in the third quarter of 2008 and in the second quarter of 2009. In the controller business, gross profit of $5,262,000 was $5,025,000, or 49% lower than in the first nine months of 2008. In the capacitor business, gross profit of $562,000 was $37,000, or 7% ahead of last year.
Selling, research and administrative expenses and restructuring charges were $6,794,000, a decrease of $3,189,000, or 32%, compared to the same period last year. Foreign currency fluctuations decreased reported operating expenses by $1,326,000, or 13%. Excluding the impact of the favorable currency fluctuations, selling, research and administrative expenses and restructuring charges in the first nine months of 2009 were $1,863,000, or 19% lower than the same period last year, with lower spending in all areas. Restructuring charges were $298,000 in the first nine months of 2009 compared to a charge of $700,000 in the same period last year.
There was an operating loss for the first nine months of 2009 of $970,000 compared with operating income of $829,000 last year, a decrease of $1,799,000. Lower shipments in the first nine months of 2009 compared to the same period in 2008 reduced operating income by $4,789,000. Foreign currency fluctuations improved the reported operating loss for the Company by $531,000. Lower overhead costs in cost of sales and lower selling, research and administrative expenses and restructuring charges improved operating profit by $2,459,000 compared to the same period last year. In the first nine months of 2009 the Company incurred a charge of $298,000 to reduce costs due to the decline in the global economic outlook for its customer's products. In the capacitor business segment, there was an operating profit of $77,000 compared with an operating loss of $174,000 in the same period last year; this was primarily due to an improvement in the mix of capacitor sales as well as the impact of the restructuring action taken in 2008.
In the first nine months of 2009, interest expense was $21,000 compared to $82,000 in the same period last year. There was a foreign currency loss of $137,000 in 2009 compared to a loss of $7,000 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 $1,124,000 compared to income before income taxes of $747,000 in the same period last year, a reduction of $1,871,000. Foreign currency fluctuations reduced the pretax loss by $405,000. The main reason for this was the reduction in shipments experienced in 2009.
There was a net loss for the first nine months of the year of $734,000 or $0.23 per share compared to a net income of $485,000 and income per share of $0.15 in the same period in 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, second and third quarters of 2009 and will consider whether to resume paying dividends on a quarter by quarter basis. In the first quarter, the Company paid a dividend declared for the fourth quarter of 2008 of $.03 per share, which amounted to $98,000. Cash balances at the end of the third quarter of 2009 were $193,000, compared to $1,630,000 on September 30, 2008, a decrease in cash of $1,437,000 in the first nine months of 2009.
In the first nine months of 2009, there was a net loss of $734,000 and operating activities used $817,000 of cash. Excluding the impact of currency fluctuations, receivables decreased by $3,062,000, which generated cash during the period. The number of days sales in receivables increased in the first nine months of 2009 from 65 days at September 30, 2008 to 73 days at June 27, 2009. The present economic situation has meant that some customers have been conserving cash and paying later than normal. Management continually reviews reserves for doubtful accounts and has receivables insurance covering much of the Company's outstanding receivables. Adjusted for the effects of currency, there was an increase in inventories of $642,000 in the first nine months of 2009. The main reason for the increase in inventories was that the Company had existing commitments upon its suppliers when, at the end of the first quarter, there was an extremely sharp decline in orders from its customers. When adjusted for currency, inventories came down by $300,000 in the third quarter. The Company reviews its inventories for obsolescence on a quarterly basis and sees no need to provide further reserves at this time. There was also a reduction in accounts payable and accrued expenses of $1,766,000 and $532,000, respectively, which reduced cash balances during first nine months of 2009. The reduction in accounts payable and accrued expenses was due to the significant reduction in the Company's business activity during the nine month period to June 27, 2009. Capital expenditures in the first nine months were $194,000. Exchange rate changes decreased reported cash by $328,000 in the first nine months of 2009.
The Company has no long-term debt but has overdraft facilities of approximately $1.8 million in the UK and $140,000 in France. At the end of the third quarter of 2009, the Company had no borrowings against these overdraft facilities. The UK overdraft facilities are secured by UK real estate 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 continue to have 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. In addition, to the extent the Company's increasing development of new products, such as on road vehicle applications, that are not yet in inventory results in sales, additional resources will be needed to manufacture these products for sale. 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. The Company owns real estate property in the UK that could be used as collateral for raising additional borrowings, if appropriate.
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