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| SEV > SEC Filings for SEV > Form 10-Q on 14-May-2012 | All Recent SEC Filings |
14-May-2012
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 referred to and described under "Risk Factors" below and others discussed in this report.
CRITICAL ACCOUNTING ESTIMATES
As of March 31, 2012, there have been no material changes to the critical accounting estimates described in the Company's 2011 10-K. However, if the continuing worldwide economic uncertainty continues 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 further business declines, the Company may be required to increase its estimated allowance for bad debts;
(ii) if actual future demand is less than previously projected, inventory write-downs may be required;
(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 adverseimpact on the Company's results.
OVERVIEW OF SECOND QUARTER AND FIRST SIX MONTHS
Results of Operations
Three months ended March 31, 2012 and April 2, 2011
The following table compares the results by segment for the three months ended
March 31, 2012 with the same period in the prior year. The table shows the
effect of currency and volume changes in percentage terms.
Favorable (unfavorable)
Three months ended % change due to:
March 31, April 2,
2012 2011 Total Currency Volume
Sales:
Controls - to
external
customers $ 9,702 $ 7,154 36 (3 ) 39
Capacitors - to
external
customers 399 633 (37 ) (1 ) (36 )
Capacitors -
inter-segment 9 15 (37 ) (1 ) (36 )
Capacitors -
total 409 648 (37 ) (1 ) (36 )
Total sales to
external
customers 10,101 7,787 30 (3 ) 33
Gross Profit:
Controls 3,479 2,359 47 (1 ) 48
Capacitors 143 329 (57 ) (1 ) (56 )
Total 3,622 2,688 35 (1 ) 36
Selling,
research and
administrative
expenses and
gain on sale of
fixed assets:
Controls (2,736 ) (2,014 ) (36 ) 3 (39 )
Capacitors (161 ) (178 ) 10 1 9
Unallocated
corporate
expense (30 ) (289 ) 90 - 90
Gain on sale of
fixed assets - 451 (100 ) - (100 )
Total (2,927 ) (2,030 ) (44 ) 2 (46 )
Operating
income (loss):
Controls 743 796 (7 ) 2 (9 )
Capacitors (18 ) 151 (112 ) - (112 )
Unallocated
corporate
expense (30 ) (289 ) 90 - 90
Total 695 658 6 2 4
Other income
and expense (67 ) (73 ) 9 60 (51 )
Income before
income taxes 628 585 7 10 (3 )
Income taxes (158 ) (80 ) (97 ) (20 ) (77 )
Net income $ 470 $ 505 (7 ) 9 (16 )
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Sales in the second quarter of 2012 were $10,101,000, an increase of $2,314,000 or 30% compared to $7,787,000 reported in the same quarter last year. This increase was due to higher shipment volumes of the Company's Gen4 controller to both new and traditional markets, partially offset by lower shipments from the capacitor business. Volumes were $2,548,000 or 36% higher in the controls business segment but were $234,000 lower in the capacitor segment. Foreign currency fluctuations decreased reported sales in the second fiscal quarter by $205,000, or 3%, mainly due to a weaker U.S. Dollar compared to both the British Pound and the Euro than in the prior year period.
In the controls business segment, demand for the Company's products grew globally. Volumes shipped were higher by 52% in the Far East, 40% in Europe and 19% in North America compared to the same period last year. Increased sales volume was mainly due to further customer gains and the start of production in a range of on-road and off-road EV applications; sales in this sector increased by 146%. Customer demand grew by 17% overall in the Company's traditional markets of industrial applications for construction, distribution, mining, airport ground support and utility applications. In the capacitor business, volumes shipped were 36% lower than last year due to lower demand from customers in the industrial sector.
Gross profit was 35% higher compared to the same fiscal period last year. Gross profit of $3,622,000 was 35.9% of sales in the second quarter compared to $2,688,000 or 34.5% of sales in the same quarter last year. Foreign currency fluctuations decreased the reported gross profit by $32,000, or 1.2%, compared to the same period last year.
Selling, research and administrative expenses in the second quarter of 2012 were $2,927,000, an increase of $446,000 or 18%, compared to $2,481,000 reported in the same period last year. In the second quarter of 2012 the company recorded grant income of $110,000 from on-going project work sponsored by the Technology Strategy Board, a U.K. government body. Prior to the grant income, operating expenses were $3,037,000.
In the second quarter of 2011, selling, research and administrative expenses were partially offset by grant income of $383,000 from One North East, a U.K. government regional development organization. Prior to the grant, income, selling, research and administrative expenses in 2011 were $2,864,000 on a comparable basis. The increase in expenses after adjusting for government grant income in each period was $173,000. The increase of $173,000 was due to one-time employment costs and the salary costs of additional staff which were added later in the 2011 fiscal year. Foreign currency fluctuations decreased operating expense by $48,000 or 1.9%, compared with the same quarter last year.
Operating income in the second quarter of 2012 was $695,000, which includes grant income of $110,000. Operating income in the same period last year was $658,000 which included a one-time gain of $451,000 from the disposal of a surplus building in the U.K. and grant income of $383,000. Before these adjustments the Company recorded an operating loss in 2011 of $176,000. The $761,000 improvement in operating income after adjusting for the one-time gain on the property sale in 2011 and also adjusting for grant income in each period was due to higher shipment volumes partially offset by higher operating costs.
The Company recorded income before income taxes of $628,000 in the second quarter of 2012 compared to income before income taxes of $585,000 in the same period last year.
The Company recorded an effective tax rate of 25.1% and 13.7% of pre-tax income in the second quarter of fiscal 2012 and 2011, respectively. The increase in effective income tax rates from 2011 to 2012 was due to a number of factors, the most significant of which being that the gain on the sale of the surplus U.K. property recognized in the second quarter of 2011was not subject to tax. In addition, in 2011, the Company recorded a $176,000 provision to reduce the balance sheet value of certain U.K. deferred tax assets due to a change in the U.K. Corporation tax rate from 28% to 26%, effective April 1, 2011. The Company also re-evaluated the realizability of its deferred tax assets in the second quarter of 2011 as a result of economic conditions, the Company's operating results, and the Company's revised estimate of pre-tax income in the near-term. Based on the review, the Company reversed, in the second quarter of 2011, $207,000 of a $379,000 deferred tax valuation allowance recognized in 2009. This valuation allowance related primarily to deferred tax assets in the U.S. The total income tax provision for the second quarter of 2011 was $80,000.
There was net income for the quarter of $470,000 or $.14 per diluted share compared to net income of $505,000 or $.15 per diluted share in the second quarter of fiscal 2011.
Six months ended March 31, 2012 and April 2, 2011
The following table compares first half year results by segment for the six months ended March 31 2012 with the same period in the prior year. The table shows the effect of currency and volume changes in percentage terms.
Favorable (unfavorable)
Six months ended % change due to:
March 31, April 2,
2012 2011 Total Currency Volume
Sales:
Controls - to external
customers $ 17,775 $ 13,540 31 (2 ) 33
Capacitors - to external
customers 841 1,130 (26 ) (1 ) (25 )
Capacitors - inter-segment 14 18 (22 ) (1 ) (21 )
Capacitors - total 855 1,148 (26 ) (1 ) (25 )
Total sales to external
customers 18,616 14,670 27 (2 ) 29
Gross Profit:
Controls 6,315 4,504 40 (1 ) 41
Capacitors 289 552 (48 ) - (48 )
Total 6,604 5,056 31 (1 ) 32
Selling, research and
administrative expenses and
gain on sale of fixed
assets:
Controls (5,276 ) (4,156 ) 27 (1 ) 28
Capacitors (335 ) (344 ) 3 1 2
Unallocated corporate
expense (46 ) (316 ) 85 - 85
Gain on sale of fixed
assets - 451 (100 ) - (100 )
Total (5,657 ) (4,365 ) (30 ) 1 (31 )
Operating income (loss):
Controls 1,039 799 30 (2 ) 32
Capacitors (46 ) 208 (122 ) 1 (123 )
Unallocated corporate
expense (46 ) (316 ) 85 - 85
Total 947 691 37 (2 ) 39
Other income and expense 54 (100 ) 154 192 (38 )
Income before income taxes 1,001 591 69 30 39
Income taxes (247 ) (81 ) (204 ) (55 ) (149 )
Net income $ 754 $ 510 48 27 21
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Sales in the six months ended March 31, 2012 were $18,616,000, an increase of $3,946,000, or 27%, compared to the same period last year when sales were $14,670,000. The increase in sales was due to increased volumes shipped, which were $4,166,000, or 28.4%, higher than in the same period last year. Foreign currency fluctuations accounted for a reduction in reported sales of $220,000, or 1.5%, mainly due to a stronger Euro compared to the US Dollar from the same period in 2011.
In the controls business segment, volumes shipped were higher in all geographic regions in which the Company operates, Europe, North America and the Far East were 54%, 12% and 34% higher respectively compared to the same period last year. The increase in sales volume is due to the release of new products and continued customer gains in a range of on-road and off-road EV applications coupled with the start of production at new customers. The Company's traditional markets for industrial vehicles like fork lift trucks, aerial work platforms and mining equipment continued recovery in the half year. Following significant reductions during the 2009 recession these markets have improved but are still lower than pre-recession levels. Sales to these sectors increased by 18% compared to the same period in fiscal 2011. Volumes shipped in the capacitor business were 25% lower in the first half year, largely due to lower demand from the railway signaling sector. The railway signaling sector in the capacitor business is mainly driven by infrastructure project demand.
Gross profit of $6,604,000 was 35.5% of sales in this period compared to $5,056,000 or 34.5% in the comparable period in fiscal 2011. Foreign currency fluctuations reduced reported gross profit by $58,000 compared with the prior year period; excluding the impact of foreign currency fluctuations, gross profit increased by $1,606,000, or 31.8%, compared to the first half of last year due to the increase in volumes shipped in the period. Excluding the impact of foreign currency fluctuations, in the controller business, gross profit increased by $1,868,000, or 41.5%, compared to the first six months of fiscal 2011 due to increased volumes shipped; in the capacitor business, gross profit decreased by $262,000, or 47.5%, due to lower demand in the first half year compared to the prior year due to lower demand from the railway signaling sector.
Selling, research and administrative expenses were $5,657,000, an increase of $841,000, or 17.5% from the $4,816,000 in the same period last year. In the second quarter of fiscal 2012 the Company recorded grant income of $110,000 from a U.K. government sponsored development program for a new integrated electric drivetrain. Excluding grant income, expenses were $5,767,000 in the first half of fiscal 2012. In the first six months of 2011 the Company recorded U.K. government grant income of $600,000 which partially offset selling, research and administrative expenses. Excluding grant income, selling, research and administrative expenses were $5,416,000 in the first half of fiscal 2011. The increase of $351,000 in fiscal 2012 was due to higher staffing costs associated with business growth and our investment in new product development resources.
Operating income in the first half of fiscal 2012 was $947,000 including $110,000 of grant income, compared with $691,000 last year, which included $600,000 of grant income and a $451,000 gain from the sale of the surplus property in the U.K. Prior to these adjustments there was an operating loss of $360,000 in the same period in 2011. The increase in operating profit of $1,197,000 on a comparable basis was due to higher shipment volumes partially offset by higher expenses in growing and supporting new business.
In the first half of fiscal 2012 there was a foreign currency gain of $121,000 compared to a loss of $71,000 in the same period last year, mainly due to a stronger U.S. Dollar compared to the Euro in the prior year period.
In the first half of fiscal 2012 the Company recorded an effective income tax rate of 24.7% of pre-tax income. This relatively low rate being largely due to the availability of research and development income tax credits in the Company's two U.K. subsidiaries which reduced the income tax rate to 12.2% on the combined results of the Company's U.K. subsidiary operations.
In the first half of fiscal 2011 the Company recorded an effective income tax rate of 13.7% of pre-tax income; this low effective rate was largely due to there being no income tax payable in respect of the gain on the sale of the U.K. property recognized in the second quarter of 2011. In addition, in 2011, the Company recorded a $176,000 provision to reduce the balance sheet value of U.K. deferred tax asset due to a change in the U.K. Corporation tax rate from 28% to 26%, effective April 1, 2011. The Company also re-evaluated the realizability of its deferred tax assets in the second quarter of 2011as a result of economic conditions, the Company's operating results, and the Company's revised estimate of pre-tax income in the near-term. Based on the review, the Company reversed, in the second quarter of 2011, $207,000 of a $379,000 deferred tax valuation allowance recognized in 2009. This valuation allowance related primarily to deferred tax assets in the U.S. The total income taxes provision for the first six months of 2011 was $81,000.
In March 2012 the U.K. government announced a reduction in the U.K. Corporation tax rate from 25% to 24% effective April 1, 2012 and a further reduction to 23% effective April 1, 2013. It is anticipated that both tax rate reductions will be substantively enacted in U.K. law in July 2012. The effect on deferred tax assets and liabilities of the change in the tax rates will be recognized in income in the period that includes the enactment date. It is estimated that the charge to income to write down the value of the U.K. deferred tax asset will be approximately $160,000 when the rate changes are enacted.
The Company recorded net income of for the first half of fiscal 2012 of $754,000 or $.22 per diluted share compared to net income of $510,000 and $.15 per diluted share in the same period in fiscal 2011.
Financial Condition
While the Company has paid regular quarterly dividends in the past, due to the continuing uncertain economic outlook, the Board of Directors continues to suspend the payment of dividends and will consider whether to resume paying dividends on a quarter by quarter basis.
Cash balances at the end of the second quarter of fiscal 2012 were $1,284,000, compared to $1,797,000 on September 30, 2011, a decrease in cash of $513,000 in the first six months of fiscal 2012.
In the first six months of fiscal 2012, there was a net income of $754,000 and operating activities used $294,000 of cash. Excluding the impact of currency fluctuations, receivables increased by $1,940,000 and inventories increased $38,000 both of which reduced cash during the period. Payables increased by $1,008,000 and accrued expenses decreased by $516,000, during the period. The number of days sales in receivables increased in the first six months of 2012 by one day from 62 days at September 30, 2011 to 63 days at March 31, 2012. Capital expenditures in the first six months were $272,000. Exchange rate changes increased reported cash by $71,000 in the first six months of fiscal 2012.
The Company had a U.K. bank loan of $135,000, of which $40,000 was short-term and $95,000 long-term debt at March 31, 2012. It has overdraft facilities in the United Kingdom amounting to $1,450,000 which were unused as of March 31, 2012 and September 30, 2011. The overdraft facility of the U.K. capacitor subsidiary is secured by a legal charge over the facility owned and occupied by that company. The overdraft facility of the U.K. controls subsidiary is secured by a legal charge over a facility owned by that company. Both facilities were renewed in 2012 for a period of twelve months but, in line with normal practice in Europe, can be withdrawn on demand by the bank. Management believes that, if these facilities were withdrawn, adequate alternative credit resources would be available. However, this would depend on the Company's situation and the economic environment at the time. Accordingly, management does not rely on their availability in projecting the adequacy of the Company's capital resources.
In June 2011, the Company's wholly owned subsidiary, Sevcon USA, Inc., entered into a $3,500,000 secured revolving credit facility with RBS Citizens, National Association for working capital and general corporate purposes. The obligations under the revolving credit facility are guaranteed by the Company and are secured by all of the assets of Sevcon USA, Inc. and a pledge of all of the capital stock of Sevcon USA, Inc. The facility imposes customary limitations on Sevcon USA, Inc.'s ability to, among other things, pay dividends, make distributions, and incur additional indebtedness. Under the facility, Sevcon USA, Inc. must maintain, on a quarterly basis, a debt to tangible net worth ratio of no more than 2:1 and a debt service coverage ratio of no less than 1.25:1 for each rolling twelve-month period. At March 31, 2012, the Company was in compliance with these covenants. Upon entering into the revolving credit facility, Sevcon USA, Inc. drew down $1,700,000, which was the total amount outstanding at March 31, 2012. The revolving credit facility will expire on June 14, 2014 when all outstanding principal and unpaid interest will be due and payable in full.
There were no significant capital expenditure commitments at March 31, 2012. It is estimated that the Company will make contributions to its U.K. and U.S. defined benefit pension plans of approximately $549,000 in fiscal 2012; should the Company suffer a material reduction in revenues in 2012 this commitment could adversely impact the Company's financial position. In the opinion of management, the Company's requirements for working capital to meet projected operational and capital spending in both the short and long term can be met by a combination of existing cash resources, future earnings and existing borrowing facilities in Europe. However, the outlook continues to remain uncertain, given the continuing worldwide economic situation and in particular the low economic growth in Europe and North America. Any material reduction in revenues will have a materially adverse impact on the Company's financial position, which would be exacerbated if any of the Company's lenders withdraws or reduces available credit. 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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