UNITED
STATES
SECURITIES
AND EXCHANGE
COMMISSION
Washington,
DC
20549
FORM
10-K
(Mark
One)
ANNUAL
REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF
1934
For
the fiscal year ended September
30, 2007 or
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 incorporation or organization)
|
(I.R.S.
Employer
Identification No.)
|
155
Northboro Road, Southborough,
Massachusetts 01772
(Address
of Principal Executive
Offices) (Zip
Code)
Registrant's
Area Code and Telephone Number (508) 281 5510
Securities
registered pursuant to Section 12(b) of the Act:
|
(Title
of Each Class)
|
(Name
of Exchange on Which Registered)
|
|
COMMON
STOCK, PAR VALUE $.10
PER SHARE
|
AMERICAN
STOCK
EXCHANGE
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o
No
x
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
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o Accelerated
Filer o Non
accelerated filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act of 1934).
Yes
o No
x
As
of
March 31, 2007, 3,233,051 common shares were outstanding, and the aggregate
market value of the common shares (based upon the closing price on the American
Stock Exchange) held by non-affiliates was $16,460,000. As of December 14,
2007,
3,257,702 common shares were outstanding.
Documents
incorporated by reference: Portions of the Proxy Statement for Annual Meeting
of
Stockholders to be held January 22, 2008 are incorporated by reference into
Part
III of this report.
-
1
-
INDEX
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ITEM
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PAGE
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3
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3
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|
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3
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|
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3
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3
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|
|
3
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|
|
3
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|
|
4
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|
|
4
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|
|
4
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|
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5
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|
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5
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|
|
5
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|
|
5
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|
|
5
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|
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6
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|
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7
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|
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13
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14
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15
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15
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16
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|
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17
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|
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18
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|
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29
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|
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30
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|
|
30
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|
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30
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|
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30
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|
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31
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|
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31
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|
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31
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|
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31
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|
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32
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|
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32
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|
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33
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|
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36
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Schedules
other than the one referred to above have been omitted as inapplicable or not
required, or the information is included elsewhere in financial statements
or
the notes thereto.
Unless
explicitly stated otherwise, each reference to “year” in this Annual Report is
to the fiscal year ending on the respective September 30.
-
2
-
Tech/Ops
Sevcon, Inc. (“Tech/Ops Sevcon” or the “Company”) is a Delaware corporation
organized on December 22, 1987 to carry on the electronic controls business
previously performed by Tech/Ops, Inc. (Tech/Ops). Through wholly-owned
subsidiaries located in the United States, England, France, South Korea and
Japan, the Company designs, manufactures, sells, and services, under the Sevcon
name, solid-state products which control motor speed and acceleration for
battery powered electric vehicles in a number of applications, primarily
electric fork lift trucks, aerial lifts and underground coal-mining equipment.
Through another subsidiary located in the United Kingdom, Tech/Ops Sevcon
manufactures special metallized film capacitors for electronics applications.
These capacitors are used as components in the power electronics, signaling
and
audio equipment markets. Approximately 94% of the Company’s revenues in 2007
were derived from the controls business, with the remainder derived from the
capacitor business. The largest customer accounted for 14% of sales in fiscal
2007 compared to 17% in fiscal 2006 and 16% in fiscal 2005.
In
fiscal
2007 sales were $39,213,000, an increase of $4,583,000, or 13%, compared to
the
previous year. Foreign currency fluctuations accounted for an increase of
$2,162,000, or 6%, in reported sales. Excluding the foreign currency impact,
sales volume grew by 7% compared to fiscal 2006. Operating income in fiscal
2007
was $2,063,000, compared to $1,844,000 in the previous year, an increase of
12%.
Net income was $1,303,000, or $ .41 per diluted share, compared to $1,114,000,
or $.35 per diluted share, last year. See Management’s Discussion and Analysis
of Financial Condition and Results of Operations for a more detailed analysis
of
fiscal 2007 performance.
Sales
are
made primarily through a small full-time marketing staff. Sales in the United
States were $14,832,000, $14,643,000 and $12,893,000, in fiscal years 2007,
2006
and 2005, respectively, which accounted for approximately 38%, 42% and 41%,
respectively, of total sales. Approximately 63% of sales are made to 10
manufacturers of electric vehicles in the United States, Europe and the Far
East. Approximately 90% of the Company’s sales are direct to end customers, with
10% made to the Company’s international dealer network. See Note 8 to the
Consolidated Financial Statements (Segment Information) in this Annual Report
for an analysis of sales by segment, geographic location and major customers,
and the risk factor on page 4 regarding sales and operations outside the
United States which are incorporated by reference herein.
Although
the Company has international patent protection for some of its product ranges,
the Company believes that its business is not significantly dependent on patent
protection. The Company is primarily dependent upon technical competence, the
quality of its products, and its prompt and responsive service performance.
Tech/Ops
Sevcon's backlog at September 30, 2007 was $5,566,000, compared to $4,923,000
at
September 2006 and $4,957,000 at September 2005.
Tech/Ops
Sevcon's products require a wide variety of components and materials. The
Company has many sources for most of such components and materials and produces
certain of these items internally. However, the Company relies on certain
suppliers and subcontractors for all of its requirements for certain components,
sub-assemblies, and finished products. The Company is taking steps to reduce
its
reliance on any single subcontractor and as a consequence to diversify its
risk.
The
Company has global competitors which are divisions of larger public companies,
including Danaher’s Motion division, Sauer Danfoss, Hitachi and the motors
division of General Electric. It also competes on a worldwide basis with Curtis
Instruments Inc., Zapi SpA. and Iskra, private companies based in U.S., Italy
and Slovenia, respectively that have international operations. In addition,
some
large fork lift truck manufacturers make their own controls and system products.
The Company differentiates itself by providing highly reliable, technically
innovative products which the Company is prepared to customize for a specific
customer or application. The Company believes that it is one of the largest
independent suppliers of controls for battery operated vehicles.
Tech/Ops
Sevcon's technological expertise is an important factor in its business. The
Company regularly pursues product improvements to maintain its technical
position. Research and development expenditures amounted to $3,790,000 in 2007,
compared to $3,582,000 in 2006 and $3,499,000 in 2005. The increase in research
and development spending of $208,000, or 6%, in fiscal 2007 was due to the
effect of adverse exchange rate changes.
-
3
-
·Environmental
regulations
The
Company complies, to the best of its knowledge, with federal, state and local
provisions which have been enacted or adopted regulating the discharge of
materials into the environment or otherwise protecting the environment. This
compliance has not had, nor is it expected to have, a material effect on the
capital expenditures, earnings, or competitive position of Tech/Ops
Sevcon.
·Employees
and
labor relations
As
of
September 30, 2007, the Company employed 157 full-time employees, of whom 15
were in the United States, 128 were in the United Kingdom (of which 32 were
employed by the capacitor business), 11 were in France, and 3 were in the Far
East. Tech/Ops Sevcon believes its relations with its employees are
good.
In
addition to the market risk factors relating to foreign currency and interest
rate risk set out in Item 7A on page 13, 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.
The
Company relies on a small number
of key customers for a substantial portion of its revenues
Ten
customers accounted for 63% of the Company’s revenues in fiscal 2007 and the
largest customer accounted for 14% of revenues. Although we have had business
relationships with these customers for many years, there are no long-term
contractual supply agreements in place. Accordingly our performance could be
adversely affected by the loss of one or more of these key
customers.
The
Company has substantial sales and
operations outside the United States that could be adversely affected by changes
in international markets
A
significant portion of our operations is located, and a significant portion
of
our business comes from, outside the United States. Accordingly, our performance
could be adversely affected by economic downturns in Europe or the Far East
as
well as in the United States. A consequence of significant international
business is that a large percentage of our revenues and expenses are denominated
in foreign currencies that fluctuate in value versus the U.S. dollar. Although
we enter into hedging arrangements, significant fluctuations in foreign exchange
rates can and do have a material impact on our financial results, which are
reported in U.S. dollars. Other risks associated with international business
include: changing regulatory practices and tariffs; staffing and managing
international operations, including complying with local employment laws; longer
collection cycles in certain areas; and changes in tax and other
laws.
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
two
plants 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.
Product
liability claims may have a
material adverse effect
The
Company’s products are technically complex and are installed and used by third
parties. Defects in their design, installation, use or manufacturing may result
in product liability claims against the Company. Such claims may result in
significant damage awards, and the cost of any such litigation could be
material.
-
4
-
None.
The
US
subsidiary of the Company leases approximately 13,500 square feet in
Southborough, Mass., under a lease expiring in 2013. The United Kingdom (UK)
electronic controls business of Tech/Ops Sevcon is carried on in two adjacent
buildings owned by it located in Gateshead, England, containing 40,000 and
20,000 square feet of space respectively. The land on which these buildings
stand are held on ground leases expiring in 2068 and 2121 respectively. The
UK
subsidiary sub-lets approximately 11,000 square feet of unused space in one
of
its buildings for a five-year term expiring in 2011. The French subsidiary
leases 5,000 square feet of space near Paris, France under a lease expiring
in
December 2009. The capacitor subsidiary of the Company owns a 9,000 square
foot
building, built in 1981, in Wrexham, Wales. The South Korean subsidiary of
the
Company leases approximately 600 square feet of office space in Bucheon City,
near Seoul, under a lease due to expire in 2008. The Japanese subsidiary leases
approximately 600 square feet of office space in Tokyo, Japan under a lease
due
to expire in 2009. The properties and equipment of the Company are in good
condition and, in the opinion of the management, are suitable and adequate
for
the Company's operations.
The
Company is involved in various legal proceedings arising in the ordinary course
of business, but believes that these matters will be resolved without a material
effect on its financial position.
None.
The
Common Stock of the Company is traded on the American Stock Exchange under
the
symbol TO. A summary of the market prices of, and dividends paid on, the
Company’s Common Stock is shown below. At December 14, 2007, there were
approximately 266 shareholders of record.
|
Quarter
1
|
Quarter
2
|
Quarter
3
|
Quarter
4
|
Year
|
||||||||||||
|
2007
Quarters
|
||||||||||||||||
|
Cash
dividends per share
|
$
|
.03
|
$
|
.03
|
$
|
.03
|
$
|
.03
|
$
|
.12
|
||||||
|
Common
stock price per
share - High
- Low
|
$
|
7.85
6.61
|
$
|
7.94
6.40
|
$
|
11.25
6.88
|
$
|
11.93
7.80
|
$
|
11.93
6.40
|
||||||
|
2006
Quarters
|
||||||||||||||||
|
Cash
dividends per share
|
$
|
.03
|
$
|
.03
|
$
|
.03
|
$
|
.03
|
$
|
.12
|
||||||
|
Common
stock price per share - High
- Low
|
$
|
6.10
4.95
|
$
|
6.55
5.36
|
$
|
7.36
5.95
|
$
|
7.09
6.20
|
$
|
7.36
4.95
|
-
5
-
PERFORMANCE
GRAPH
The
following graph compares the cumulative total return (change in stock price
plus
reinvested dividends) assuming $100 invested in the Common Stock of the Company,
in the American Stock Exchange (“AMEX”) Market Value Index, and in the Hemscott
Electric Industrial Apparatus Index during the period from September 30, 2002
through September 30, 2007. This performance graph is furnished and shall not
be
deemed “filed” with the SEC nor subject to Section 18 of the Securities Exchange
Act of 1934, nor shall it be deemed incorporated by reference in any of our
filings under the Securities Act of 1933.
Value
of
Investment at September 30,
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
|
|
Tech/Ops
Sevcon, Inc.
|
100
|
138
|
140
|
143
|
172
|
219
|
|
AMEX
Market Value Index
|
100
|
124
|
143
|
173
|
180
|
222
|
|
Hemscott
Electric Industrial Apparatus Index
|
100
|
133
|
162
|
201
|
255
|
321
|
A
summary
of selected financial data for the last five years is set out
below:
As
of
September 30 (in
thousands except per share data)
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||
|
Net
sales
|
$
|
39,213
|
$
|
34,630
|
$
|
31,675
|
$
|
29,150
|
$
|
23,113
|
||||||
|
Operating
income
|
2,063
|
1,844
|
999
|
972
|
151
|
|||||||||||
|
Net
income
|
1,303
|
1,114
|
641
|
611
|
83
|
|||||||||||
|
Basic
income per share
|
$
|
.41
|
$
|
.35
|
$
|
.21
|
$
|
.20
|
$
|
.03
|
||||||
|
Cash
dividends per share
|
$
|
.12
|
$
|
.12
|
$
|
.12
|
$
|
.12
|
$
|
.12
|
||||||
|
Average
shares outstanding
|
3,167
|
3,139
|
3,125
|
3,125
|
3,125
|
|||||||||||
|
Pension
and other long-term liabilities
|
2,305
|
2,942
|
-
|
-
|
-
|
|||||||||||
|
Stockholders’
equity
|
12,434
|
10,037
|
10,589
|
10,464
|
9,648
|
|||||||||||
|
Total
assets
|
$
|
21,926
|
$
|
18,652
|
$
|
16,446
|
$
|
16,608
|
$
|
13,784
|
-
6
-
ITEM
7 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 in Item 1A to this Annual Report, entitled ‘Risk
Factors’.
NEW
ACCOUNTING PRONOUNCEMENTS
The
Company adopted the following new accounting pronouncement in fiscal 2007.
See
Note (1) P. to Consolidated Financial Statements for a more detailed description
of new accounting pronouncements.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements
when Quantifying Current Year Misstatements”. SAB No. 108 requires analysis of
misstatements using both an income statement (rollover) approach and a balance
sheet (iron curtain) approach in assessing materiality and provides for a
one-time cumulative effect transition adjustment. SAB No. 108 was effective
for
our fiscal year 2007 annual financial statements. This did not have a material
impact on the Company’s financial statements.
CRITICAL
ACCOUNTING ESTIMATES
The
Company's significant accounting policies are summarized in Note 1 of its
Consolidated Financial Statements in this Annual Report. 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 judgment and/or make estimates, consistently 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 judgments 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 judgments.
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 63% of the
Company’s sales. At September 30, 2007, the allowance for bad debts amounted to
$180,000, 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.
-
7
-
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 September 30, 2007 was $860,000, or 14% of the original
cost of gross inventory. At September 30, 2006, the provision was $923,000,
or
16% 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 Financial Accounting Standards Board
Statement No.142 “Goodwill and Other Intangible Assets” (SFAS No. 142). 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 valuation 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, management concluded that the goodwill had not been impaired.
Management updated the analysis in 2007, 2006 and 2005 using similar
methodologies and again concluded 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 or liabilities relating to the pension plans, which
could have a material effect on the Company’s financial position and
results
of operations. The company adopted Financial Accounting Standards Board
Statement No.158 “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans - An
Amendment of FASB Statements No. 87, 88, 106, and 132(R)”
(SFAS
No. 158) in September 2006. At September 30, 2007 there was a pension liability
in the Company’s balance sheet of $2,244,000. The Company’s pension plans are
significant relative to the size of the Company. At September 30, 2007, pension
plan assets were $22,280,000, plan liabilities were $24,524,000, and the total
assets of the Company were $21,926,000. Under SFAS No. 158 changes in the funded
status of the pension plans (plan assets less plan liabilities) are recorded
in
the Company’s balance sheet and could have a material effect on the Company’s
financial position. At September 30, 2007, a change in the assumed discount
rate
of one-tenth of one percent (0.1%) would have resulted in a change in the
liability for pension benefits of approximately $550,000.
-
8
-
·
A) Results of
Operations
2007
compared to
2006
The
following table compares results, for both the controls and capacitor segments,
for fiscal 2007 with the prior year, showing separately the percentage variances
due to currency and volume / other.
|
(in
thousands of dollars except percentages)
|
||||||||||||||||
|
|
%
change due to:
|
|||||||||||||||
|
2007
|
2006
|
Total
|
Currency
|
Volume
/ other
|
||||||||||||
|
Sales
|
||||||||||||||||
|
Controls
- to external customers
|
$
|
37,009
|
$
|
32,808
|
13%
|
|
6%
|
|
7%
|
|
||||||
|
Capacitors-
to external customers
|
2,204
|
1,822
|
21%
|
|
11%
|
|
10%
|
|
||||||||
|
Capacitors
- inter-segment
|
52
|
64
|
-19%
|
|
7%
|
|
-26%
|
|
||||||||
|
Capacitors
- total
|
2,256
|
1,886
|
20%
|
|
11%
|
|
9%
|
|
||||||||
|
Total
sales to external customers
|
39,213
|
34,630
|
13%
|
|
6%
|
|
7%
|
|
||||||||
|
Gross
Profit
|
||||||||||||||||
|
Controls
|
13,479
|
12,268
|
10%
|
|
2%
|
|
8%
|
|
||||||||
|
Capacitors
|
869
|
838
|
4%
|
|
9%
|
|
-5%
|
|
||||||||
|
Total
|
14,348
|
13,106
|
9%
|
|
2%
|
|
7%
|
|
||||||||
|
Selling
research and administrative expenses
|
||||||||||||||||
|
Controls
|
10,810
|
10,094
|
7%
|
|
7%
|
|
0%
|
|
||||||||
|
Capacitors
|
1,158
|
770
|
50%
|
|
12%
|
|
38%
|
|
||||||||
|
Unallocated
corporate expense
|
317
|
398
|
-20%
|
|
0%
|
|
-20%
|
|
||||||||
|
Total
|
12,285
|
11,262
|
9%
|
|
7%
|
|
2%
|
|
||||||||
|
Operating
income
|
||||||||||||||||
|
Controls
|
2,669
|
2,174
|
23%
|
|
-24%
|
|
47%
|
|
||||||||
|
Capacitors
|
(289
|
)
|
68
|
-525%
|
|
-27%
|
|
-498%
|
|
|||||||
|
Unallocated
corporate expense
|
(317
|
)
|
(398
|
)
|
-20%
|
|
0%
|
|
-20%
|
|
||||||
|
Total
|
2,063
|
1,844
|
12%
|
|
-29%
|
|
41%
|
|
||||||||
|
Other
income and expense
|
(75
|
)
|
(110
|
)
|
-32%
|
|
-11%
|
|
-21%
|
|
||||||
|
Income
before income taxes
|
1,988
|
1,734
|
15%
|
|
-30%
|
|
45%
|
|
||||||||
|
Income
taxes
|
(685
|
)
|
(620
|
)
|
10%
|
|
-30%
|
|
40%
|
|
||||||
|
Net
Income
|
$
|
1,303
|
$
|
1,114
|
17%
|
|
-31%
|
|
48%
|
|
||||||
In
fiscal
2007 sales revenues increased by $4,583,000, or 13%, to $39,213,000. In fiscal
2007 approximately 62% of the Company’s sales were made outside the United
States. As the majority of foreign sales were denominated in currencies other
than the US Dollar, principally the Euro and the British Pound, they were
subject to fluctuation when translated into US Dollars. In Fiscal 2007 the
average dollar exchange rate weakened compared to the British Pound by 10%
and
by 8% compared to the Euro. As a result, foreign currency sales translated
into
more dollars, increasing reported sales by 6%. Sales volume, net of foreign
currency fluctuations, was 7% higher than the previous year, with the increase
spread across most of our businesses.
In
the
controls business segment revenues were 13% higher than in fiscal 2006,
reflecting a 6% increase due to foreign currency fluctuations and a further
7%
increase in volumes shipped. In the United States controller business, sales
were $14,832,000 compared to $14,643,000 in 2006, an increase of 1%. Slightly
lower demand in the United States in the fork lift truck and aerial lift markets
were offset by higher volumes shipped to the mining and other electric vehicle
markets. In the controller businesses foreign sales improved by 22% compared
to
last year reflecting an 11% increase in volumes shipped and an additional 11%
increase due to foreign currency fluctuations. Volumes shipped in Europe and
the
Far East increased largely due to higher demand in the European and Japanese
aerial lift markets.
In
the
capacitor business segment, revenues increased by $382,000, or 21%. Capacitor
volumes increased by 10% compared to last year augmented by foreign currency
fluctuations increasing reported sales by a further 11%. This volume increase
was mainly due to increased demand in industrial and audio markets.
Cost
of
sales was $24,865,000 compared to $21,524,000 in fiscal 2006, an increase of
$3,341,000, or 15.5%. Approximately 72% of this cost of sales was denominated
in
British Pounds. Largely as a result of the weaker US Dollar compared with the
British Pound, foreign currency fluctuations increased cost of sales by
$1,888,000, or 9%. The remaining 6.5% increase, of the 15.5% total increase
in
cost of sales, was mainly due to the 7% increase in volumes
shipped.
-
9
-
Gross
profit was $14,348,000, or 36.6% of sales, compared to $13,106,000, or 37.8%
of
sales, in fiscal 2006. Foreign currency fluctuations had a favorable impact
on
gross profit of $274,000 but, due to the currency impact on sales, this
decreased the gross profit percentage by 1.4%. Excluding the foreign currency
impact, there was a year-to-year increase in the gross profit percentage of
0.2%
of sales. In the controls segment, gross profit of $13,479,000 was 10% ahead
of
last year; this compared to an increase in volumes of 8%. In the capacitor
segment gross profit was $869,000, an increase of $31,000, or 4%, compared
to
fiscal 2006. Capacitor business gross profit was 38.5% of sales in fiscal 2007
compared to 44.4% of sales in fiscal 2006. The decline in the capacitor business
gross profit percentage was mainly due to a decrease in sales to high margin
customers, offset by sales growth at lower than average margins. The table
below
analyses the year-to-year change in sales, cost of sales and gross
profit.
|
|
(in
thousands of dollars except percentages)
|
||||||||||||
|
Sales
|
Cost
of
sales
|
Gross
Profit
|
Gross
Profit
|
%
|
|||||||||
|
Actual
Fiscal 2006
|
$
|
34,630
|
$
|
21,524
|
$
|
13,106
|
37.8%
|
|
|||||
|
Change
in fiscal 2007 due to:
|
|||||||||||||
|
Foreign
Currency fluctuations
|
2,162
|
1,888
|
274
|
(1.4%)
|
|
||||||||
|
Increased
volume, assuming 2006 gross profit percentage
|
2,421
|
1,506
|
915
|
-
|
|||||||||
|
Other
cost of sales changes, net
|
-
|
(53
|
)
|
53
|
0.2%
|
|
|||||||
|
Actual
Fiscal 2007
|
$
|
39,213
|
$
|
24,865
|
$
|
14,348
|
36.6%
|
|
|||||
Selling,
research and administrative expenses (operating expenses) were $12,285,000,
an
increase of $1,023,000, or 9%, compared to fiscal 2006. Adverse foreign currency
fluctuations increased reported operating expenses by $818,000, or 7%. Excluding
the unfavorable currency impact and the $497,000 cost of management changes,
underlying operating expenses decreased by $292,000, or 3%. In fiscal 2007,
expenditure on new product engineering reduced by $67,000, before the impact
of
currency fluctuations. In fiscal 2007 sales and marketing expenses decreased
by
$243,000 before the impact of currency fluctuations. Included in administrative
expense in 2007 in the capacitor business segment was a one-time charge of
$297,000 for management changes. In addition, as a result of the Company’s
succession planning, there was additional expense for the recruitment and
employment of the Principal Accounting Officer. An analysis of the year-to-year
change in selling, research and administrative expenses is set out
below:
|
Selling,
research and
administrative expenses
|
(in thousands of dollars) |
|
||
|
Reported
expense in fiscal 2007
|
$
|
12,285
|
||
|
Reported
expense in fiscal 2006
|
11,262
|
|||
|
Increase
in expense
|
1,023
|
|||
|
Increase
(decrease) due to:
|
||||
|
Effect
of exchange rate changes
|
818
|
|||
|
Lower
engineering expense, net of currency effect
|
(67
|
)
|
||
|
Decrease
in sales and marketing expense, net of currency effect
|
(243
|
)
|
||
|
One-time
cost of management changes in the capacitor business
|
297
|
|||
|
Cost
of recruitment and employment of Principal Accounting
Officer
|
200
|
|||
|
Other
operating expense changes, net
|
18
|
|||
|
Total
increase in selling research and administrative expenses in fiscal
2007
|
$
|
1,023
|
||
Operating
income was $2,063,000 compared to $1,844,000 in fiscal 2006, an increase of
$219,000, or 12%, despite foreign currency fluctuations which reduced operating
income by $544,000 in fiscal 2007. Excluding the currency effect, operating
income increased by 41% compared to fiscal 2006, mainly due to increased
volumes. In the controller business, and excluding the currency impact,
operating income was 47% ahead of the prior year. The capacitor business made
an
operating loss of $289,000 in fiscal 2007 compared to an operating profit of
$68,000 in fiscal 2006; this was mainly due to the one-time charge of $297,000
for management changes in the year.
Other
expense was $75,000 in fiscal 2007 compared to $110,000 in the previous year.
Interest expense was lower by $19,000 at $45,000 and interest income in 2007
was
$4,000 higher at $10,000. The foreign currency exchange loss in 2007 was $40,000
compared to $52,000 in 2006.
Income
before income taxes was $1,988,000 compared to $1,734,000 in 2006, an increase
of $254,000, or 15%. Foreign currency fluctuations decreased pre tax income
by
$532,000 in fiscal 2007. Pre-tax income, before the effect of currency
fluctuations, was 45% ahead of the prior year. Income taxes were 34.5% of
pre-tax income compared to 35.8% in fiscal 2006. The lower tax rate was mainly
due to a change in the deferred tax valuation allowance relating to foreign
tax
credits.
Net
income was $1,303,000, an increase of $189,000, or 17%, compared to $1,114,000
last year. Basic income per share was $.41 per share in 2007 compared to $.35
in
fiscal 2006, an increase of 17%. Diluted income per share was $.41 per share
in
fiscal 2007, an increase of $.06 per share compared to last
year.
-
10
-
2006
compared to
2005
The
following table compares results, for both the controls and capacitor segments,
for fiscal 2006 with fiscal 2005, showing separately the percentage variances
due to currency and volume / other.
|
|
(in
thousands of dollars except percentages)
|
|||||||||||||||
|
%
change due to:
|
||||||||||||||||
|
2006
|
2005
|
Total
|
Currency
|
Volume
/ other
|
||||||||||||
|
Sales
|
||||||||||||||||
|
Controls
- to external customers
|
$
|
32,808
|
$
|
30,009
|
9%
|
|
-2%
|
|
11%
|
|
||||||
|
Capacitors-
to external customers
|
1,822
|
1,666
|
9%
|
|
-3%
|
|
12%
|
|
||||||||
|
Capacitors
- inter-segment
|
64
|
199
|
-68%
|
|
-2%
|
|
-66%
|
|
||||||||
|
Capacitors
- total
|
1,886
|
1,865
|
1%
|
|
-3%
|
|
4%
|
|
||||||||
|
Total
sales to external customers
|
34,630
|
31,675
|
9%
|
|
-2%
|
|
11%
|
|
||||||||
|
Gross
Profit
|
||||||||||||||||
|
Controls
|
12,268
|
11,259
|
9%
|
|
0%
|
|
9%
|
|
||||||||
|
Capacitors
|
838
|
777
|
8%
|
|
-2%
|
|
10%
|
|
||||||||
|
Total
|
13,106
|
12,036
|
9%
|
|
0%
|
|
9%
|
|
||||||||
|
Selling
research and administrative expenses
|
||||||||||||||||
|
Controls
|
10,094
|
9,916
|
2%
|
|
-2%
|
|
4%
|
|
||||||||
|
Capacitors
|
770
|
745
|
3%
|
|
-2%
|
|
5%
|
|
||||||||
|
Unallocated
corporate expense
|
398
|
376
|
6%
|
|
0%
|
|
6%
|
|
||||||||
|
Total
|
11,262
|
11,037
|
2%
|
|
-2%
|
|
4%
|
|
||||||||
|
Operating
income
|
||||||||||||||||
|
Controls
|
2,174
|
1,343
|
62%
|
|
11%
|
|
51%
|
|
||||||||
|
Capacitors
|
68
|
32
|
113%
|
|
-3%
|
|
116%
|
|
||||||||
|
Unallocated
corporate expense
|
(398
|
)
|
(376
|
)
|
6%
|
|
0%
|
|
6%
|
|
||||||
|
Total
|
1,844
|
999
|
85%
|
|
15%
|
|
70%
|
|
||||||||
|
Other
income and expense
|
(110
|
)
|
(48
|
)
|
129%
|
|
117%
|
|
12%
|
|
||||||
|
Income
before income taxes
|
1,734
|
951
|
82%
|
|
10%
|
|
72%
|
|
||||||||
|
Income
taxes
|
(620
|
)
|
(310
|
)
|
100%
|
|
12%
|
|
88%
|
|
||||||
|
Net
Income
|
$
|
1,114
|
$
|
641
|
74%
|
|
9%
|
|
65%
|
|
||||||
In
fiscal
2006 sales revenues increased by $2,525,000, or 9%, to $34,630,000. In fiscal
2006 approximately 58% of the Company’s sales were made outside the United
States. As the majority of foreign sales were denominated in currencies other
than the US Dollar, principally the Euro and the British Pound, they were
subject to fluctuation when translated into US Dollars. In Fiscal 2006 the
average dollar exchange rate strengthened compared to the British Pound by
2%
and by 3% compared to the Euro. As a result, foreign currency sales translated
into fewer dollars. Foreign currency fluctuations accounted for a 2% decrease
in
reported sales, even though volumes were 11% higher than in fiscal
2005.
In
the
controls business segment revenues were 9% higher in fiscal 2006 than in fiscal
2005, reflecting a 2% decrease due to foreign currency fluctuations and an
11%
increase in volumes shipped. In the United States controller business, sales
were $14,643,000 compared to $12,893,000 in 2005, an increase of 14%. Non-U.S.
sales volumes in the controller businesses improved by 9% compared to fiscal
2005. In the aerial lift market volumes in fiscal 2006 were 20% ahead of fiscal
2005 and volumes also increased in the other electric vehicle, mining and
airport ground support markets. Volumes in the fork lift truck market declined
by 8% in fiscal 2006 compared to fiscal 2005.
In
the
capacitor business segment, revenues increased by $156,000, or 9%. Capacitor
volumes increased by 12% compared to fiscal 2005, but were partially offset
by
adverse foreign currency fluctuations. This volume increase was mainly due
to
stronger conditions in the railway signaling market for capacitors.
Cost
of
sales in fiscal 2006 was $21,524,000 compared to $19,639,000 in fiscal 2005,
an
increase of $1,885,000, or 10%. Approximately 75% of this cost of sales was
denominated in British Pounds. As a result foreign currency fluctuations
decreased cost of sales by $450,000, or 2%. The remaining 12% increase in cost
of sales was mainly due to higher volumes. Sales mix was marginally adverse,
with volume gains concentrated in the lower than average margin aerial lift
market.
Gross
profit in fiscal 2006 was $13,106,000, or 37.8% of sales, compared to
$12,036,000, or 38.0% of sales, in fiscal 2005. Foreign currency fluctuations
adversely impacted the gross profit percentage by $50,000, or 0.1%, with adverse
sales mix the main cause of the remaining 0.1% decrease in the gross profit
percentage. In the controls segment, gross profit in fiscal 2006 of $12,268,000
was 9% ahead of fiscal 2005; this compared to an increase in volumes of 11%.
In
the capacitor segment gross profit in fiscal 2006 was $838,000, an increase
of
$61,000, or 8% compared to fiscal 2005. Capacitor business gross profit in
fiscal 2006 was 44.4% of sales compared to 41.7% of sales in fiscal 2005. The
increase in capacitor business gross profit was mainly due to increased volumes.
-
11
-
Selling,
research and administrative expenses (operating expenses) in fiscal 2006 were
$11,262,000, an increase of $225,000, or 2%, compared to fiscal 2005. Foreign
currency fluctuations reduced reported operating expenses by $200,000, or 2%.
Excluding the currency impact, operating expenses increased by $455,000, or
4%.
In fiscal 2006, expenditure on new product engineering increased by $156,000,
before the impact of currency fluctuations. Spending on sales and marketing
resources in fiscal 2006, mainly to support the introduction of new products,
increased by $264,000, before the impact of currency fluctuations. In fiscal
2006 the Company set up a subsidiary in Tokyo, Japan to improve service to
customers in the Japanese market. Included in administrative expense was a
charge of $175,000 in 2006 compared to $87,000 in fiscal 2005, relating to
equity compensation expense. This included restricted stock granted to employees
and directors and expensing options under SFAS No. 123R in 2006, which were
previously accounted for under APB No. 25, under which no expense was recorded.
An analysis of the year-to-year change in selling, research and administrative
expenses is set out below:
|
Selling,
research and
administrative expenses
|
(in thousands of dollars) | |||
|
Reported
expense in fiscal 2006
|
$
|
11,262
|
||
|
Reported
expense in fiscal 2005
|
11,037
|
|||
|
Increase
in expense
|
225
|
|||
|
Increase
(decrease) due to:
|
||||
|
Effect
of exchange rate changes
|
(200
|
)
|
||
|
Additional
engineering expense, net of currency effect
|
156
|
|||
|
Additional
sales and marketing expense, net of currency effect
|
264
|
|||
|
Increased
cost of equity compensation in 2006
|
88
|
|||
|
Net
other operating expense decreases
|
(108
|
)
|
||
|
Total
increase in selling research and administrative expenses in fiscal
2006
|
$
|
225
|
||
Operating
income in fiscal 2006 was $1,844,000 compared to $999,000 in fiscal 2005, an
increase of $845,000, or 85%. Foreign currency fluctuations increased operating
income by $150,000 in fiscal 2006. Excluding the currency effect, operating
income increased by 70% compared to fiscal 2005, mainly due to increased
volumes. In the controller business, and excluding the currency impact,
operating income in fiscal 2006 was 51% ahead of fiscal 2005. Capacitor business
operating income increased by 113% to $68,000 compared to $32,000 in fiscal
2005, mainly due to higher volumes.
Other
expense was $110,000 in fiscal 2006 compared to $48,000 in fiscal 2005. Interest
expense increased by $8,000 to $64,000 and interest income in 2006 was $2,000
higher than fiscal 2005 at $6,000. There was a foreign currency loss of $52,000
in 2006 compared to a foreign currency gain of $4,000 in 2005.
Income
before income taxes in 2006 was $1,734,000 compared to $951,000 in 2005, an
increase of $783,000, or 82%. Foreign currency fluctuations increased pre-tax
income by $94,000 in fiscal 2006. Pre-tax income, before the effect of currency
fluctuations, was 72% ahead of fiscal 2005. Income taxes in fiscal 2006 were
35.8% of pre-tax income compared to 32.6% in fiscal 2005. The higher tax rate
was mainly due to a change in the deferred tax valuation allowance relating
to
foreign tax credits. Net income in fiscal 2006 was $1,114,000, an increase
of
$473,000, or 74%, compared to $641,000 in fiscal 2005. Basic income per share
was $.35 per share in 2006 compared to $.21 in fiscal 2005, an increase of
67%.
Diluted income per share was $.35 per share in fiscal 2006, an increase of
$.15
per share compared to fiscal 2005.
·
B)
Liquidity and Capital Resources
The
Company’s cash flow from operating activities for fiscal 2007 was $849,000
compared to $950,000 in the prior fiscal year. Acquisitions of property, plant
and equipment amounted to $909,000 compared to $706,000 in fiscal 2006.
Quarterly dividend payments were at the rate of $.03 per share throughout both
fiscal 2007 and 2006. In fiscal 2007 dividend payments amounted to $386,000
compared to $384,000 in 2006 Exchange rate changes increased cash by $164,000
in
fiscal 2007 compared to an increase of $292,000 last year. In fiscal 2007,
cash
balances decreased by $276,000, compared to an increase of $160,000 in 2006.
The
main changes in operating assets and liabilities in fiscal 2007 were an increase
in accounts receivable of $2,058,000 and lower accounts payable of $815,000.
Inventories increased by $372,000, accrued expenses increased by $259,000 and
prepaid expenses and other current assets were $45,000 higher than last
year.
The
Company has no long-term debt and has overdraft facilities in the United Kingdom
(UK) amounting to $2,241,000 and in France of $142,000. These facilities were
unused at September 30, 2007 and September 30, 2006. The UK overdraft facilities
are secured by all of the Company’s assets in the UK and are due for renewal in
September 2008 but, in line with normal practice in Europe, can be withdrawn
on
demand by the bank. The French overdraft facilities are unsecured and are due
for renewal in September 2008 but, in line with normal practice in Europe,
can
be withdrawn on demand by the bank.
-
12
-
At
September 30, 2007 the Company’s cash balances were $1,014,000 and there was no
short-term or long-term debt. The Company has, since January 1990, maintained
a
program of regular cash dividends. The dividends amounted to $.03 per quarter
in
fiscal 2007. In the opinion of management, the Company’s requirements for
working capital to meet future business growth can be met by a combination
of
existing cash resources, future earnings and existing borrowing facilities
in
Europe. The Company’s capital expenditures are not expected, on average over a
two to three year period, to significantly exceed the depreciation charge,
which
over the last three fiscal years averaged $686,000. There were no significant
capital expenditure commitments at September 30, 2007. Tech/Ops Sevcon's
resources, in the opinion of management, are adequate for projected operations
and capital spending programs, as well as continuation of cash
dividends.
·
C) Off
balance sheet arrangements
The
Company does not have any off balance sheet financing or arrangements.
·
D)
Contractual Obligations
Set
out
below are the Company’s contractual obligations at September 30,
2007:
|
|
(in thousands of dollars) | |||||||||||||||
|
Total
|
Less
than 1 year
|
1
- 3 years
|
3
- 5 years
|
More
than 5 years
|
||||||||||||
|
Long-term
debt obligations
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
Capital
lease obligations
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Operating
lease obligations
|
2,547
|
236
|
436
|
381
|
1,494
|
|||||||||||
|
Purchase
Obligations
|
4,293
|
4,293
|
-
|
-
|
-
|
|||||||||||
|
Other
long term liabilities
|
61
|
-
|
-
|
61
|
-
|
|||||||||||
|
Total
|
$
|
6,901
|
$
|
4,529
|
$
|
436
|
$
|
442
|
$
|
1,494
|
||||||
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 Notes (1) J.
and
(6) to the Company’s Consolidated Financial Statements included under Item 8 and
other risks are described under the caption Risk Factors in Item 1A above.
Foreign
currency
risk
The
Company sells to customers throughout the industrialized world. In fiscal 2007
approximately 38% of the Company’s sales were made in US Dollars, 27% were made
in British Pounds and 35% were made in Euros. The majority of the Company’s
products are manufactured in the United Kingdom or by a sub-contractor based
in
Poland and approximately 72% of the Company’s cost of sales in fiscal 2007 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.
In
addition, the translation of the sales and income of foreign subsidiaries into
US Dollars is subject to fluctuations in foreign currency exchange
rates.
Where
appropriate, the Company undertakes hedging activities to manage the foreign
exchange exposures related to forecast 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 contained in Note (1)
J.
to the Company’s consolidated financial statements included under Item 8, which
is incorporated herein by reference.
Because
the difference between the spot and hedged foreign exchange rates at September
30, 2007 was less than 2%, and amounted to $43,000, 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 September
30, 2007 the risk arising from changes in interest rates was not
material.
-
13
-
Tech/Ops
Sevcon, Inc. and Subsidiaries
September
30, 2007 and 2006
(in
thousands of dollars)
|
ASSETS
|
2007
|
2006
|
|||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
1,014
|
$
|
1,290
|
|||
|
Receivables,
net of allowances for doubtful accounts of $180 in 2007 and $141
in
2006
|
8,714
|
6,187
|
|||||
|
Inventories
|
5,422
|
4,717
|
|||||
|
Prepaid
expenses and other current assets
|
916
|
847
|
|||||
|
Total
current assets
|
16,066
|
13,041
|
|||||
|
Property,
plant and equipment,
at cost:
|
|||||||
|
Land
and improvements
|
29
|
26
|
|||||
|
Buildings
and improvements
|
2,462
|
2,256
|
|||||
|
Equipment
|
9,774
|
8,215
|
|||||
|
12,265
|
10,497
|
||||||
|
Less:
accumulated depreciation and amortization
|
8,497
|
7,202
|
|||||
|
Net
property, plant and equipment
|
3,768
|
3,295
|
|||||
|
Long-term
deferred tax asset
|
657
|
881
|
|||||
|
Goodwill
|
1,435
|
1,435
|
|||||
|
Total
assets
|
$
|
21,926
|
$
|
18,652
|
|||
|
LIABILITIES
AND STOCKHOLDERS’
EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
3,398
|
$
|
2,397
|
|||
|
Dividend
payable
|
97
|
96
|
|||||
|
Accrued
expenses
|
3,162
|
2,701
|
|||||
|
Accrued
taxes on income
|
530
|
479
|
|||||
|
Total
current liabilities
|
7,187
|
5,673
|
|||||
|
Liability
for pension benefits
|
2,244
|
2,886
|
|||||
|
Other
long term liabilities
|
61
|
56
|
|||||
|
Total
liabilities
|
9,492
|
8,615
|
|||||
|
Commitments
and contingencies (note 5)
|
|||||||
|
Stockholders’
equity
|
|||||||
|
Preferred
stock, par value $.10 per share - authorized - 1,000,000 shares;
outstanding - none
|
-
|
-
|
|||||
|
Common
stock, par value $.10 per share - authorized - 8,000,000 shares;
outstanding
|
|||||||
|
3,238,702
shares in 2007 and 3,211,051 shares in 2006
|
324
|
321
|
|||||
|
Premium
paid in on common stock
|
4,623
|
4,309
|
|||||
|
Retained
earnings
|
7,961
|
7,123
|
|||||
|
Accumulated
other comprehensive loss
|
(474
|
)
|
(1,716
|
)
|
|||
|
Total
stockholders’ equity
|
12,434
|
10,037
|
|||||
|
Total
liabilities and
stockholders’ equity
|
$
|
21,926
|
$
|
18,652
|
The
accompanying notes are an integral part of these consolidated financial
statements.
-
14
-
Tech/Ops
Sevcon, Inc. and Subsidiaries
For
the
Years ended September 30, 2007, 2006 and 2005
(in
thousands of dollars except per share data)
|
2007
|
2006
|
2005
|
||||||||
|
Net
sales
|
$
|
39,213
|
$
|
34,630
|
$
|
31,675
|
||||
|
Cost
of sales
|
24,865
|
21,524
|
19,639
|
|||||||
|
Gross
profit
|
14,348
|
13,106
|
12,036
|
|||||||
|
Selling,
research and administrative expenses
|
12,285
|
11,262
|
11,037
|
|||||||
|
Operating
income
|
2,063
|
1,844
|
999
|
|||||||
|
Interest
expense
|
(45
|
)
|
(64
|
)
|
(56
|
)
|
||||
|
Interest
income
|
10
|
6
|
4
|
|||||||
|
Foreign
currency gain (loss)
|
(40
|
)
|
(52
|
)
|
4
|
|||||
|
Income
before income taxes
|
1,988
|
1,734
|
951
|
|||||||
|
Income
taxes
|
(685
|
)
|
(620
|
)
|
(310
|
)
|
||||
|
Net
income
|
$
|
1,303
|
$
|
1,114
|
$
|
641
|
||||
|
Basic
income per share
|
$
|
.41
|
$
|
.35
|
$
|
.21
|
||||
|
Diluted
income per share
|
$
|
.41
|
$
|
.35
|
$
|
.20
|
Tech/Ops
Sevcon, Inc. and Subsidiaries
For
the
Years ended September 30, 2007, 2006 and 2005
(in
thousands of dollars)
|
2007
|
2006
|
2005
|
||||||||
|
Net
income
|
$
|
1,303
|
$
|
1,114
|
$
|
641
|
||||
|
Foreign
currency translation adjustment
|
732
|
459
|
(208
|
)
|
||||||
|
Changes
in fair market value of cash flow hedges
|
3
|
-
|
(15
|
)
|
||||||
|
Pension
liability adjustment, net of tax
|
507
|
-
|
-
|
|||||||
|
Comprehensive
income
|
$
|
2,545
|
$
|
1,573
|
$
|
418
|
The
accompanying notes are an integral part of these consolidated financial
statements.
-
15
-
Tech/Ops
Sevcon, Inc. and Subsidiaries
For
the
Years ended September 30, 2007, 2006 and 2005
(in
thousands of dollars except per share data)
|
|
Common
stock
|
Premium
paid in on common stock
|
Retained
earnings
|
Unearned
compensation on restricted stock
|
Cumulative
other comprehensive income (loss
|
)
|
Total
stockholders’ equity
|
||||||||||||
|
Balance
September 30, 2004
|
$
|
313
|
$
|
4,047
|
$
|
6,133
|
$
|
-
|
$
|
(29
|
)
|
$
|
10,464
|
||||||
|
Net
income
|
-
|
-
|
641
|
-
|
-
|
641
|
|||||||||||||
|
Dividends
($.12 per share)
|
-
|
-
|
(380
|
)
|
-
|
-
|
(380
|
)
|
|||||||||||
|
Currency
translation adjustment
|
-
|
-
|
-
|
-
|
(208
|
)
|
(208
|
)
|
|||||||||||
|
Change
in fair market value of cash flow
hedge
|
-
|
-
|
-
|
-
|
(15
|
)
|
(15
|
)
|
|||||||||||
|
Issuance
of restricted stock
|
4
|
263
|
-
|
(267
|
)
|
-
|
-
|
||||||||||||
|
Restricted
stock expense
|
-
|
-
|
-
|
87
|
-
|
87
|
|||||||||||||
|
Balance
September 30, 2005
|
317
|
4,310
|
6,394
|
(180
|
)
|
(252
|
)
|
10,589
|
|||||||||||
|
Net
income
|
-
|
-
|
1,114
|
-
|
-
|
1,114
|
|||||||||||||
|
Dividends
($.12 per share)
|
-
|
-
|
(385
|
)
|
-
|
-
|
(385
|
)
|
|||||||||||
|
Currency
translation adjustment
|
-
|
-
|
-
|
-
|
459
|
459
|
|||||||||||||
|
Reclassification
of unearned compensation on
adoption of SFAS No. 123R
|
-
|
(180
|
)
|
-
|
180
|
-
|
-
|
||||||||||||
|
Issuance
of restricted stock
|
4
|
(4
|
)
|
-
|
-
|
-
|
-
|
||||||||||||
|
Exercise
of stock options
|
-
|
8
|
-
|
-
|
-
|
8
|
|||||||||||||
|
Equity
compensation expense
|
-
|
175
|
-
|
-
|
175
|
||||||||||||||
|
Pension
liability adjustment to initially apply SFAS
No. 158, net of tax benefit of $849
|
-
|
-
|
-
|
-
|
(1,923
|
)
|
(1,923
|
)
|
|||||||||||
|
Balance
September 30, 2006
|
321
|
4,309
|
7,123
|
-
|
(1,716
|
)
|
10,037
|
||||||||||||
|
Net
income
|
-
|
-
|
1,303
|
-
|
-
|
1,303
|
|||||||||||||
|
Dividends
($.12 per
share)
|
-
|
-
|
(387
|
)
|
-
|
-
|
(387
|
)
|
|||||||||||
|
Currency
translation
adjustment
|
-
|
-
|
-
|
-
|
732
|
732
|
|||||||||||||
|
Change
in fair market value of
cash flow
hedge
|
-
|
-
|
-
|
-
|
3
|
3
|
|||||||||||||
|
Issuance
of restricted
stock
|
2
|
(2
|
)
|
-
|
-
|
-
|
-
|
||||||||||||
|
Exercise
of stock
options
|
2
|
94
|
-
|
-
|
-
|
96
|
|||||||||||||
|
Purchase
and retirement of
common stock in
connection with stock option
exercise
|
(1
|
)
|
(11
|
)
|
(78
|
)
|
-
|
-
|
(90
|
)
|
|||||||||
|
Tax
benefit on exercise of
stock options
|
-
|
40
|
-
|
-
|
-
|
40
|
|||||||||||||
|
Equity
compensation
expense
|
193
|
193
|
|||||||||||||||||
|
Pension
liability adjustment,
net of tax charge
of
$239
|
-
|
-
|
-
|
-
|
507
|
507
|
|||||||||||||
|
Balance
September 30,
2007
|
$
|
324
|
$
|
4,623
|
$
|
7,961
|
$
|
-
|
$
|
(474
|
)
|
$
|
12,434
|
The
accompanying notes are an integral part of these consolidated financial
statements.
-
16
-
Tech/Ops
Sevcon, Inc. and Subsidiaries
For
the
Years ended September 30, 2007, 2006 and 2005
(in
thousands of dollars)
|
2007
|
2006
|
2005
|
||||||||
|
Cash
flow from operating activities:
|
||||||||||
|
Net
income
|
$
|
1,303
|
$
|
1,114
|
$
|
641
|
||||
|
Adjustments
to reconcile net income to net cash from operating
activities:
|
||||||||||
|
Depreciation
and amortization
|
739
|
657
|
661
|
|||||||
|
Stock-based
compensation
|
193
|
175
|
87
|
|||||||
|
Pension
contributions in excess of pension expenses
|
(45
|
)
|
-
|
-
|
||||||
|
Deferred
tax provision (benefit)
|
61
|
64
|
(6
|
)
|
||||||
|
Increase
(decrease) in cash resulting from changes in operating assets and
liabilities:
|
||||||||||
|
Receivables
|
(2,058
|
)
|
6
|
(84
|
)
|
|||||
|
Inventories
|
(372
|
)
|
(980
|
)
|
306
|
|||||
|
Prepaid
expenses and other current assets
|
(45
|
)
|
10
|
(21
|
)
|
|||||
|
Accounts
payable
|
815
|
(202
|
)
|
(401
|
)
|
|||||
|
Accrued
expenses
|
259
|
16
|
144
|
|||||||
|
Accrued
taxes on income
|
(1
|
)
|
34
|
(2
|
)
|
|||||
|
Proceeds
of rental deposit
|
-
|
56
|
-
|
|||||||
|
Net
cash generated from operating activities
|
849
|
950
|
1,324
|
|||||||
|
Cash
flow used by investing activities:
|
||||||||||
|
Acquisition
of property, plant and equipment
|
(909
|
)
|
(706
|
)
|
(571
|
)
|
||||
|
Net
cash used by investing activities
|
(909
|
)
|
(706
|
)
|
(571
|
)
|
||||
|
Cash
flow used by financing activities:
|
||||||||||
|
Dividends
paid
|
(386
|
)
|
(384
|
)
|
(379
|
)
|
||||
|
Exercise
of stock options
|
6
|
8
|
-
|
|||||||
|
Net
cash used by financing activities
|
(380
|
)
|
(376
|
)
|
(379
|
)
|
||||
|
Effect
of exchange rate changes on cash
|
164
|
292
|
(149
|
)
|
||||||
|
Net
(decrease) increase in cash
|
(276
|
)
|
160
|
225
|
||||||
|
Beginning
balance - cash and cash equivalents
|
1,290
|
1,130
|
905
|
|||||||
|
Ending
balance - cash and cash equivalents
|
$
|
1,014
|
$
|
1,290
|
$
|
1,130
|
||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||
|
Cash
paid for income taxes
|
$
|
677
|
$
|
650
|
$
|
354
|
||||
|
Cash
paid for interest
|
$
|
45
|
$
|
64
|
$
|
56
|
||||
|
Supplemental
disclosure of non-cash financing activity:
|
||||||||||
|
Dividend
declared
|
$
|
97
|
$
|
96
|
$
|
95
|
The
accompanying notes are an integral part of these consolidated financial
statements.
-
17
-
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
Tech/Ops
Sevcon, Inc. and Subsidiaries
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
A.
Basis of
presentation
The
accompanying consolidated financial statements include the accounts of Tech/Ops
Sevcon, Inc. (Tech/Ops Sevcon), Sevcon, Inc., Sevcon Limited and subsidiaries,
Sevcon SA and Sevcon Asia Limited. All material intercompany transactions have
been eliminated. Certain prior year amounts have been reclassified to conform
to
the current year presentation.
B.
Revenue
recognition
The
Company recognizes revenue upon shipment of its products. The Company’s only
post shipment obligation relates to warranty in the normal course of business
for which ongoing reserves, which management believes to be adequate, are
maintained. The movement in warranty reserves was as follows:
(in
thousands of dollars)
|
2007
|
2006
|
||||||
|
Warranty
reserves at beginning of year
|
$
|
364
|
$
|
364
|
|||
|
Decrease
in beginning balance for warranty obligations settled during the
year
|
(308
|
)
|
(329
|
)
|
|||
|
Other
changes to pre-existing warranties
|
16
|
4
|
|||||
|
Net
increase in warranty reserves for products sold during the
year
|
386
|
325
|
|||||
|
Warranty
reserves at end of year
|
$
|
458
|
$
|
364
|
C.
Research and
development
The
cost
of research and development programs is charged against income as incurred
and
amounted to approximately $3,790,000 in 2007, $3,582,000 in 2006 and $3,499,000
in 2005. This expense is included in selling, research and administrative
expense in the income statement. Research and development expense was 9.7%
of
sales in 2007 compared to 10.0% in 2006 and 11.0% in 2005.
D.
Depreciation and
maintenance
Plant
and
equipment are depreciated on a straight-line basis over their estimated useful
lives, which are primarily fifty years for buildings, seven years for equipment
and four years for computer equipment and software. Maintenance and repairs
are
charged to expense and renewals and betterments are capitalized.
E.
Stock based compensation
plans
SFAS
No.
123 “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148
“Accounting for Stock-Based Compensation - Transition and Disclosure” and
replaced by SFAS No.123R “Share-Based Payment”, defined a fair value based
method of accounting for employee stock options or similar equity instruments
and encouraged all entities to adopt that method of accounting. However, it
also
allowed an entity to continue to measure compensation costs using the method
of
accounting prescribed by APB No. 25 “Accounting for Stock Issued to Employees”,
until SFAS No. 123R became effective in fiscal 2006. Prior to fiscal 2006,
the
Company accounted for its stock-based compensation plans under APB No. 25,
under
which no compensation cost was recognized. The Company has not restated prior
periods to reflect this change in accounting. Had compensation cost for these
plans been determined consistent with SFAS No. 123, the Company’s net income and
earnings per share would have equaled the following pro forma amounts for
2005:
|
(in
thousands of dollars except per share data)
|
||||
|
2005
|
||||
|
Net
income - As reported
|
$
|
641
|
||
|
Pro-forma
effect of expensing stock options (net of tax)
|
$
|
(52
|
)
|
|
|
Net
income - Pro forma
|
$
|
589
|
||
|
Basic
net income per share - As reported
|
$
|
.21
|
||
|
Basic
net income per share - Pro forma
|
$
|
.19
|
||
|
Diluted
net income per share - As reported
|
$
|
.20
|
||
|
Diluted
net income per share - Pro forma
|
$
|
.19
|
||
The
adoption of SFAS No. 123R reduced net income in fiscal 2007 by $33,000 and
in
fiscal 2006 by $46,000 ($.01 per basic and diluted share in each year). The
adoption of this statement had no effect on the statement of cash flows for
fiscal 2007 and fiscal 2006.
The
fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. There were no option grants in fiscal 2007,
2006 or 2005 and therefore no assumptions were made as to risk-free interest
rate, expected dividend yield, expected life or expected volatility. When
options are exercised the Company normally issues new shares.
-
18
-
F.
Income taxes
Tech/Ops
Sevcon files tax returns in the respective countries in which it operates.
The
financial statements reflect the current and deferred tax consequences of all
events recognized in the financial statements or tax returns. See Note
4.
G.
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 September
30,
2007 was $860,000, or 14% of the original cost of gross inventory. At September
30, 2006 the provision was $923,000, or 16% of gross inventory. Inventories
were
comprised of:
(in
thousands of dollars)
|
2007
|
2006
|
||||||
|
Raw
materials
|
$
|
2,517
|
$
|
2,195
|
|||
|
Work-in-process
|
134
|
119
|
|||||
|
Finished
goods
|
2,771
|
2,403
|
|||||
|
$
|
5,422
|
$
|
4,717
|
H.
Accounts
receivable
In
the
normal course of business, the Company provides credit to customers, performs
credit evaluations of these customers, monitors payment performance, and
maintains reserves for potential credit losses in the allowance for doubtful
accounts which, when realized, have historically been within the range of the
Company’s reserves.
I.
Translation of foreign
currencies
Tech/Ops
Sevcon translates the assets and liabilities of its foreign subsidiaries at
the
current rate of exchange, and income statement accounts at the average exchange
rates in effect during the period. Gains or losses from foreign currency
translation are credited or charged to cumulative translation adjustment
included in the statement of comprehensive income and as a component of
cumulative other comprehensive income in stockholders' equity in the balance
sheet. Foreign currency transaction gains and losses are shown in the statement
of income.
J.
Derivative instruments and
hedging
The
Company accounts for derivative instruments and hedging under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities”, which requires
that all derivatives, including foreign currency exchange contracts, be
recognized on the balance sheet at fair value. Derivatives that are not hedges
must be recorded at fair value through earnings. If a derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivative are either offset against the change in fair value of assets,
liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative’s change in fair value is immediately
recognized in earnings.
The
Company sells to customers throughout the industrialized world. The majority
of
the Company’s products are manufactured in the United Kingdom or by a
sub-contractor based in Poland. Approximately 38% of the Company’s sales are
made in US Dollars, 27% are made in British Pounds and 35% are made in Euros.
Approximately 72 % of the Company’s cost of sales is incurred in British Pounds.
This results in the Company’s sales and margins being exposed to fluctuations
due to the change in the exchange rates of US Dollar, the British Pound and
the
Euro.
-
19
-
Forward
foreign exchange contracts are used primarily by the Company to hedge the
operational (“cash-flow” hedges) exposures resulting from changes in foreign
currency exchange rates described above. These foreign exchange contracts are
entered into to hedge anticipated intercompany product purchases and third
party
sales and the associated accounts payable and receivable made in the normal
course of business. Accordingly, these forward foreign exchange contracts are
not speculative in nature. As part of its overall strategy to manage the level
of exposure to the risk of foreign currency exchange rate fluctuations, the
Company hedges a portion of its foreign currency exposures anticipated over
the
ensuing 9-month period. At September 30, 2007, the Company had effectively
hedged approximately 25% of its estimated foreign currency exposures that
principally relate to anticipated cash flows to be remitted to the UK over
the
next year, using foreign exchange contracts that have maturities of twelve
months or less. The Company does not hold or transact in financial instruments
for purposes other than risk management.
Under
hedge accounting, the Company records its foreign currency exchange contracts
at
fair value in its consolidated balance sheet as other current assets and a
portion of the related gains or losses on these hedge contracts related to
anticipated transactions are deferred as a component of other comprehensive
income. These deferred gains and losses will be recognized in income in the
period in which the underlying anticipated transaction occurs.
Unrealized
gains and losses resulting from the impact of currency exchange rate movements
on forward foreign exchange contracts designated to offset certain functional
currency denominated assets are recognized as other income or expense in the
period in which the exchange rates change and offset the foreign currency losses
and gains on the underlying exposures being hedged.
The
Company discontinues hedge accounting prospectively when (1) it is determined
that the derivative is no longer effective in offsetting changes in fair value
or cash flows of a hedged item (including forecasted transactions); (2) the
derivative is sold or terminated; (3) the derivative is de-designated as a
hedge
instrument, because it is unlikely that a forecasted transaction will occur
or a
balance sheet exposure ceases to exist; or (4) management determines that
designation of the derivative as a hedge instrument is no longer
appropriate.
The
following table provides information about the Company’s foreign currency
derivative financial instruments outstanding as of September 30, 2007 and 2006.
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. All contracts mature within twelve months.
Foreign
currency spot/forward
contracts:
(in
thousands of dollars, except average contract rates)
|
2007
|
2006
|
|||
|
Notional
Amount
|
Average
Contract
Rate
|
Notional
Amount
|
Average
Contract
Rate
|
|
|
Sell
Euros for British Pounds
Sell
US Dollars for British Pounds
|
$
2,942
$
2,700
|
€1.45
= £1
$1.99
=
£1
|
$
-
$250
|
-
$1.73
= £1
|
|
Total
|
$
5,642
|
|
$250
|
|
|
Estimated
fair value *
|
$
43
|
|
$
19
|
|
|
Amount
recorded as other comprehensive income
|
$
3
|
$
-
|
*The
estimated fair value is based on the estimated amount at which the contracts
could be settled based on forward exchange rates.
K.
Cash equivalents and short-term
investments
The
Company considers all highly liquid investments with a maturity of 90 days
or
less to be cash equivalents. Highly liquid investments with maturities greater
than 90 days and less than one year are classified as short-term
investments.
Such
investments are generally money market funds, bank certificates of deposit,
US
Treasury bills and short-term bank deposits in Europe.
L.
Earnings per
share
Basic
and
diluted net income per common share for the three years ended September 30,
2007
are calculated as follows:
(in
thousands except per share data)
|
2007
|
2006
|
2005
|
||||||||
|
Net
income
|
$
|
1,303
|
$
|
1,114
|
$
|
641
|
||||
|
Weighted
average shares outstanding
|
3,167
|
3,139
|
3,125
|
|||||||
|
Basic
income per share
|
$
|
.41
|
$
|
.35
|
$
|
.21
|
||||
|
Common
stock equivalents
|
47
|
27
|
27
|
|||||||
|
Average
common and common equivalent shares outstanding
|
3,214
|
3,166
|
3,152
|
|||||||
|
Diluted
income per share
|
$
|
.41
|
$
|
.35
|
$
|
.20
|
For
the
years ended 2007, 2006 and 2005 respectively, approximately 80,000, 100,000
and
105,000 shares attributable to the exercise of outstanding options were excluded
from the calculation of diluted earnings per share because the effect was
antidilutive.
-
20
-
M.
Use of estimates in the
preparation of financial statements
The
presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
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. The
most significant estimates and assumptions made by management include bad debt,
inventory and warranty reserves, goodwill impairment assessment, pension plan
assumptions and income tax assumptions. Operating results in the future could
vary from the amounts derived from management's estimates and
assumptions.
N.
Fair value of financial
instruments
The
Company's financial instruments consist mainly of cash and cash equivalents,
short-term investments, accounts receivable and accounts payable. The carrying
amount of these financial instruments as of September 30, 2007, approximates
fair value due to the short-term nature of these instruments.
O.
Goodwill
The
amount by which the cost of purchased businesses included in the accompanying
financial statements exceeded the fair value of net assets at the date of
acquisition has been recorded as "goodwill". The Company assesses the carrying
value of this asset whenever events or changes in circumstances indicate that
this value has diminished. The Company considers the future profitability of
the
business in assessing the value of this asset.
In
accordance with SFAS No. 142 “Goodwill and Other Intangible Assets” the Company
performs an annual assessment of goodwill impairment and has determined that
goodwill has not been impaired.
P.
New Accounting Pronouncements
In
June
2006 the Financial Accounting Standards Board (FASB) issued Interpretation
No.
48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”) which is effective
for fiscal years beginning after December 15, 2006. FIN 48 prescribes detailed
guidance for the financial statement recognition, measurement and disclosure
of
uncertain tax positions recognized in an enterprise’s financial statements in
accordance with Statement of Financial Accounting Standard (SFAS)
No.
109. Tax positions must meet a more-likely-than-not recognition threshold at
the
effective date to be recognized upon the adoption of FIN 48, and in subsequent
periods. The Company is currently evaluating the impact, if any, of adopting
FIN
48 on its consolidated results of operations and financial position but does
not
anticipate that its adoption will have a material impact on either the
consolidated results from operations or its financial position.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements
when Quantifying Current Year Misstatements”. SAB No. 108 requires analysis of
misstatements using both an income statement (rollover) approach and a balance
sheet (iron curtain) approach in assessing materiality and provides for a
one-time cumulative effect transition adjustment. SAB No. 108 was effective
for
our fiscal year 2007 annual financial statements. This did not have a material
impact on the Company’s financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing
a
fair value hierarchy used to classify the source of the information. This
statement is effective for the Company beginning October 1, 2008. The Company
does not expect that the adoption of SFAS No. 157 will have a material impact
on
its financial statements.
In
September 2006, the FASB issued SFAS No. 158, "Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106, and 132(R)." SFAS No. 158 requires an employer to recognize
a
plan’s over funded or under funded status in its balance sheets and recognize
the changes in a plan’s funded status in comprehensive income in the year which
the changes occur. The Company adopted SFAS No. 158 effective on September
30,
2006. In addition, SFAS No. 158 requires an employer to measure plan assets
and
obligations that determine its funded status as of the end of its fiscal year.
See Note 7 to these Consolidated Financial Statements for details of the impact
of this on the Company’s financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS 159), which permits entities
to choose to measure many financial instruments and certain other items at
fair
value that are not currently required to be measured at fair value. SFAS No.
159
will be effective for the Company on October 1, 2008. The Company is currently
evaluating the impact, if any, of adopting SFAS No. 159 on its financial
position and results of operations.
-
21
-
(2)
CAPITAL STOCK
Tech/Ops
Sevcon, Inc. has two classes of capital stock, preferred and common. There
are
authorized 1,000,000 shares of preferred stock, $.10 par value and 8,000,000
shares of common stock, $.10 par value.
The
company issued 37,000 shares of restricted common stock to employees and
directors in fiscal 2006 and a further 14,000 shares of restricted common stock
in fiscal 2007.
(3)
STOCK-BASED COMPENSATION
PLANS
Under
the
Company’s 1996 Equity Incentive Plan there were 78,000 shares reserved and
available for grant at September 30, 2007. No options were granted in fiscal
2007, 2006 or 2005. In fiscal 2007 options for 22,000 shares were exercised
by 4
employees. In fiscal 2006 one employee exercised an option for 2000
shares.
Recipients
of grants or options must execute a standard form of non-competition agreement.
The plan provides for the grant of Restricted Stock, Restricted Stock Units,
Options, and Stock Appreciation Rights (SARs). Stock Appreciation Rights may
be
awarded either separately, or in relation to options granted, and for the grant
of bonus shares. Options granted are exercisable at a price not less than fair
market value on the date of grant.
Option
transactions under the plans for the three years ended September 30, 2006 were
as follows:
|
|
Shares
under option
|
Weighted
average
exercise
price
|
Weighted
average remaining contractual life (years
|
)
|
Aggregate
Intrinsic value
|
||||||||
|
Outstanding
at September 30, 2004
|
188,000
|
$
|
9.42
|
||||||||||
|
Cancelled
in 2005
|
(6,000
|
)
|
$
|
14.48
|
|||||||||
|
Outstanding
at September 30, 2005
|
182,000
|
$
|
9.26
|
||||||||||
|
Exercised
in 2006
|
(2,000
|
)
|
$
|
4.37
|
|||||||||
|
Cancelled
in 2006
|
(8,000
|
)
|
$
|
8.46
|
|||||||||
|
Outstanding
at September 30, 2006
|
172,000
|
$
|
9.35
|
||||||||||
|
Exercised
in 2007
|
(22,000
|
)
|
$
|
4.37
|
|||||||||
|
Cancelled
in 2007
|
(21,000
|
)
|
$
|
13.84
|
|||||||||
|
Outstanding
at September 30, 2007
|
129,000
|
$
|
9.47
|
2
years
|
$
|
204,000
|
|||||||
|
Exercisable
at September 30, 2007
|
93,250
|
$
|
10.38
|
3
years
|
$
|
111,000
|
The
aggregate intrinsic value included in the table above represents the difference
between the exercise price of the options and the market price of the Company’s
common stock for the options that had exercise prices that were lower than
the
$8.70 market price of the Company’s common stock at September 30, 2007. Options
for 22,000 shares were exercised by 4 employees in fiscal 2007. The total
intrinsic value of options exercised in 2007 was $137,000 and the proceeds
received on the exercise of these options were $96,000. In connection with
the
exercise of options in fiscal 2007 the company repurchased 8,349 shares at
market for a total cost of $89,000. In fiscal 2006 options for 2,000 shares
were
exercised with a total intrinsic value of options exercised in fiscal 2006
was
$3,000 and the proceeds received on the exercise of these options were $8,000.
At September 30, 2007 there was $59,000 of total unrecognized compensation
expense related to options granted under all equity compensation plans. The
Company expects to recognize that cost over a weighted average period of 3
years.
Details
of options outstanding at September 30, 2007 were as follows:
|
Price
range
|
Shares
under option
|
Weighted
average remaining contractual life
|
|||||
|
$
4.37 - $ 6.56
|
49,000
|
6
years
|
|||||
|
$
6.57 - $ 9.85
|
10,000
|
4
years
|
|||||
|
$
9.86 - $14.79
|
50,000
|
1
years
|
|||||
|
$
14.80 - $22.20
|
20,000
|
0.3
years
|
|||||
|
129,000
|
2
years
|
-
22
-
In
April
2007, the Company granted 2,000 shares of restricted stock to a new employee
that vested in December 2007. The estimated fair value of the stock on the
date
of grant was $17,000 based on the fair market value of the stock on date of
issue. This amount was credited to common stock and premium paid in on common
stock and the $17,000 was netted off premium paid in on common stock in
stockholders’ equity. This unearned compensation is being charged to income on a
straight line basis over the eight month period during which the forfeiture
conditions lapse. The charge to income for this employee restricted stock grants
in 2007 was $11,000, and the remaining $6,000 will be charged to income in
fiscal 2008.
In
January 2007, the Company granted 12,000 shares of restricted stock to six
non-employee directors which will vest on the day before the 2008 annual meeting
providing 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 $92,000 based on the fair market value of the stock on date of
issue. This amount was credited to common stock and premium paid in on common
stock and the $92,000 was netted off premium paid in on common stock in
stockholders’ equity. This unearned compensation is being charged to income on a
straight line basis over the twelve month period during which the forfeiture
conditions lapse. The charge to income for these director restricted stock
grants in fiscal 2007 was $61,000 and the remaining $31,000 will be charged
to
income in fiscal 2008.
In
fiscal
2006 the Company granted 25,000 shares of restricted stock to five employees
which will vest in five equal annual installments and 12,000 shares of
restricted stock to six non-employee directors which vested on the day before
the 2007 annual meeting.
During
the restriction period, generally five years for employees (except for a grant
to a new employee in fiscal 2007 which had an eight month restriction period)
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 share these
shares are only considered to be outstanding when the forfeiture conditions
lapse and the shares vest.
Restricted
stock transactions under the plans for the three years ended September 30,
2007
were as follows:
(in
thousands of shares)
|
2007
|
2006
|
2005
|
||||||||
|
Beginning
Balance - Non-vested
|
65
|
47
|
-
|
|||||||
|
Granted
to employees - 5 year vesting
|
-
|
25
|
35
|
|||||||
|
Granted
to employees - 8 month vesting
|
2
|
|||||||||
|
Granted
to non-employee directors - 1 year vesting
|
12
|
12
|
12
|
|||||||
|
Vested
|
(24
|
)
|
(19
|
)
|
-
|
|||||
|
Forfeited
|
-
|
-
|
-
|
|||||||
|
Ending
Balance - Non-vested
|
55
|
65
|
47
|
|||||||
|
Weighted-average
fair value for shares granted during the year
|
$
|
7.77
|
$
|
5.58
|
$
|
6.18
|
||||
|
Weighted-average
fair value for shares vested during the year
|
$
|
5.72
|
$
|
6.64
|
$
|
-
|
||||
|
Weighted-average
fair value for ending balance - non-vested
|
$
|
6.22
|
$
|
5.70
|
$
|
6.18
|
As
of
September 30, 2007, there was $198,000 of total restricted stock compensation
expense related to non-vested awards not yet recognized, which is expected
to be
recognized over a weighted average period of 2.3 years.
The
stock-based compensation expense in the last three fiscal years was as
follows:
(in
thousands of dollars)
|
2007
|
2006
|
2005
|
||||||||
|
Stock
option expense under SFAS No. 123R
|
$
|
33
|
$
|
46
|
$
|
-
|
||||
|
Restricted
stock grants:
|
||||||||||
|
Employees
|
$
|
84
|
$
|
55
|
$
|
30
|
||||
|
Non-employee
directors
|
$
|
76
|
$
|
74
|
$
|
57
|
||||
|
Total
stock based compensation expense
|
$
|
193
|
$
|
175
|
$
|
87
|
-
23
-
(4)
INCOME TAXES
The
domestic and foreign components of income before income taxes are as
follows:
(in
thousands of dollars)
|
2007
|
2006
|
2005
|
||||||||
|
Domestic
|
$
|
(53
|
)
|
$
|
(87
|
)
|
$
|
1
|
||
|
Foreign
|
2,041
|
1,821
|
950
|
|||||||
|
$
|
1,988
|
$
|
1,734
|
$
|
951
|
The
components of the provision / (benefit) for income taxes for the years ended
September 30, 2007, 2006 and 2005 are as follows:
(in
thousands of dollars)
|
2007
|
||||||||||
|
Current
|
Deferred
|
Total
|
||||||||
|
Federal
|
$
|
60
|
$
|
(45
|
)
|
$
|
15
|
|||
|
State
|
1
|
(16
|
)
|
(15
|
)
|
|||||
|
Foreign
|
660
|
25
|
685
|
|||||||
|
$
|
721
|
$
|
(36
|
)
|
$
|
685
|
||||
|
2006
|
||||||||||
|
Current
|
Deferred
|
Total
|
||||||||
|
Federal
|
$
|
77
|
$
|
(45
|
)
|
$
|
32
|
|||
|
State
|
21
|
(1
|
)
|
20
|
||||||
|
Foreign
|
504
|
65
|
569
|
|||||||
|
$
|
601
|
$
|
19
|
$
|
620
|
|||||
|
2005
|
||||||||||
|
|
Current
|
Deferred
|
Total
|
|||||||
|
Federal
|
$
|
24
|
$
|
(32
|
)
|
$
|
(8
|
)
|
||
|
State
|
7
|
8
|
15
|
|||||||
|
Foreign
|
338
|
(35
|
)
|
303
|
||||||
|
$
|
369
|
$
|
(59
|
)
|
$
|
310
|
The
provision for income taxes in each period differs from that which would be
computed by applying the statutory US Federal income tax rate to the income
before income taxes. The following is a summary of the major items affecting
the
provision:
(in
thousands of dollars)
|
2007
|
2006
|
2005
|
||||||||
|
Statutory
Federal income tax rate
|
34%
|
|
34%
|
|
34%
|
|
||||
|
Computed
tax provision at statutory rate
|
$
|
676
|
$
|
590
|
$
|
323
|
||||
|
Increases
(decreases) resulting from:
|
||||||||||
|
Foreign
tax rate differentials
|
(64
|
)
|
(53
|
)
|
(20
|
)
|
||||
|
State
taxes net of federal tax benefit
|
7
|
13
|
(7
|
)
|
||||||
|
Change
in deferred tax valuation allowance
|
(18
|
)
|
58
|
7
|
||||||
|
Other
|
84
|
12
|
7
|
|||||||
|
Income
tax provision in the Statement of Income
|
$
|
685
|
$
|
620
|
$
|
310
|
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to
taxable income in the years in which those temporary differences are expected
to
be recovered or settled. The effect on deferred tax assets and liabilities
of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is provided for deferred tax assets if
it
is more likely than not that these items will either expire before the Company
is able to realize the benefit, or that future deductibility is uncertain.
The
significant items comprising the domestic and foreign deferred tax accounts
at
September 30, 2007 and 2006 are as follows:
-
24
-
(in
thousands of dollars)
|
2007
|
|||||||||||||
|
|
Domestic
current
|
Domestic
long-term
|
Foreign
current
|
Foreign
long-term
|
|||||||||
|
Assets:
|
|||||||||||||
|
Pension
accruals (prepaid)
|
$
|
78
|
$
|
160
|
$
|
-
|
$
|
514
|
|||||
|
Inventory
basis differences
|
61
|
-
|
62
|
-
|
|||||||||
|
Warranty
reserves
|
48
|
-
|
-
|
-
|
|||||||||
|
Foreign
tax credit carry forwards
|
224
|
-
|
-
|
-
|
|||||||||
|
Accrued
compensation expense
|
209
|
-
|
62
|
-
|
|||||||||
|
Other
(net)
|
12
|
-
|
-
|
-
|
|||||||||
|
632
|
160
|
124
|
514
|
||||||||||
|
Liabilities:
|
|||||||||||||
|
Property
basis differences
|
-
|
-
|
-
|
(17
|
)
|
||||||||
|
Net
asset (liability)
|
632
|
160
|
124
|
497
|
|||||||||
|
Valuation
allowance
|
(171
|
)
|
-
|
-
|
-
|
||||||||
|
Net
deferred tax asset (liability)
|
$
|
461
|
$
|
160
|
$
|
124
|
$
|
497
|
|||||
|
2006
|
|||||||||||||
|
|
Domestic
current
|
Domestic
long-term
|
Foreign
current
|
Foreign
long-term
|
|||||||||
|
Assets:
|
|||||||||||||
|
Pension
accruals (prepaid)
|
$
|
83
|
$
|
233
|
$
|
28
|
$
|
687
|
|||||
|
Inventory
basis differences
|
58
|
-
|
58
|
-
|
|||||||||
|
Warranty
reserves
|
45
|
-
|
-
|
-
|
|||||||||
|
Foreign
tax credit carry forwards
|
189
|
-
|
-
|
-
|
|||||||||
|
Accrued
compensation expense
|
196
|
-
|
-
|
-
|
|||||||||
|
Other
(net)
|
34
|
-
|
2
|
-
|
|||||||||
|
605
|
233
|
88
|
687
|
||||||||||
|
Liabilities:
|
|||||||||||||
|
Property
basis differences
|
-
|
(22
|
)
|
-
|
(17
|
)
|
|||||||
|
Net
asset (liability)
|
605
|
211
|
88
|
||||||||||
|
Valuation
allowance
|
(189
|
)
|
-
|
-
|
-
|
||||||||
|
Net
deferred tax asset (liability)
|
$
|
416
|
$
|
211
|
$
|
88
|
$
|
670
|
|||||
(5)
ACCRUED
EXPENSES
The
analysis of accrued expenses at September 30, 2007 and 2006, showing separately
any items in excess of 5% of total current liabilities, was as
follows:
(in
thousands of dollars)
|
2007
|
2006
|
||||||
|
Accrued
compensation and related costs
|
$
|
1,118
|
$
|
1,047
|
|||
|
Warranty
reserves
|
458
|
364
|
|||||
|
Other
accrued expenses
|
1,586
|
1,290
|
|||||
|
$
|
3,162
|
$
|
2,701
|
(6)
COMMITMENTS AND
CONTINGENCIES
Tech/Ops
Sevcon is involved in various legal proceedings in the ordinary course of
business but believes that it is remote that the outcome will be material to
operations.
The
Company maintains a directors' retirement plan which provides for certain
retirement benefits to non-employee directors. Effective January 1997 the plan
was frozen and no further benefits are being accrued. While the cost of the
plan
has been fully charged to expense, the plan is not separately funded. The
estimated maximum liability which has been recorded based on the cost of buying
deferred annuities at September 30, 2007 was $200,000.
Minimum
rental commitments under all non-cancelable leases are as follows for the years
ended September 30: 2008 - $236,000; 2009 - $218,000; 2010 - $218,000; 2011
-
$218,000; 2012 - $163,000 and $1,494,000 thereafter. Net rentals of certain
land, buildings and equipment charged to expense were $236,000 in 2007, $224,000
in 2006, and $214,000 in 2005.
The
UK
subsidiaries of the Company have given to a bank a security interest in all
of
their assets as security for overdraft facilities of $2,241,000. There were
no
amounts outstanding on the overdraft facilities at September 30, 2007 or 2006.
-
25
-
(7)
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 covering senior
managers in the capacitor business. The Company uses a September 30 measurement
date for its pension plans.
In
September 2006, the FASB issued SFAS No. 158, "Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106, and 132(R)." SFAS No. 158 requires an employer to recognize
a
plan’s over funded or under funded status in its balance sheets and recognize
the changes in a plan’s funded status in comprehensive income in the year which
the changes occur. Implementation of these provisions of SFAS No. 158 is
required for fiscal years ending after December 15, 2006 and early adoption
is
encouraged. The Company adopted SFAS No. 158 effective on September 30, 2006.
In
addition, SFAS No. 158 requires an employer to measure plan assets and
obligations that determine its funded status as of the end of its fiscal year.
As stated above the Company already measures plan assets and liabilities as
of
September 30, therefore this provision will not impact the Company. The
following table sets forth the estimated funded status of these defined benefit
plans and the amounts recognized by Tech/Ops Sevcon:
(in
thousands of dollars)
|
2007
|
2006
|
||||||
|
Change
in benefit
obligation:
|
|||||||
|
Benefit
obligation at beginning of year
|
$
|
20,476
|
$
|
15,910
|
|||
|
Service
cost
|
592
|
393
|
|||||
|
Interest
cost
|
1,159
|
972
|
|||||
|
Plan
participants contributions
|
289
|
269
|
|||||
|
Actuarial
(gain) loss
|
510
|
2,209
|
|||||
|
Benefits
paid
|
(234
|
)
|
(58
|
)
|
|||
|
Foreign
currency exchange rate changes
|
1,732
|
781
|
|||||
|
Benefit
obligation at end of year
|
24,524
|
20,476
|
|||||
|
Change
in plan
assets:
|
|||||||
|
Fair
value of plan assets at beginning of year
|
17,590
|
14,210
|
|||||
|
Return
on plan assets
|
2,333
|
1,575
|
|||||
|
Employer
contributions
|
758
|
871
|
|||||
|
Plan
participants contributions
|
289
|
269
|
|||||
|
Benefits
paid
|
(234
|
)
|
(58
|
)
|
|||
|
Foreign
currency exchange rate changes
|
1,544
|
723
|
|||||
|
Fair
value of plan assets at end of year
|
22,280
|
17,590
|
|||||
|
Funded
status
|
(2,244
|
)
|
(2,886
|
)
|
|||
|
Unrecognized
transition obligation (asset)
|
n/a
|
n/a
|
|||||
|
Unrecognized
prior service cost
|
n/a
|
n/a
|
|||||
|
Unrecognized
net actuarial (gain) loss
|
n/a
|
n/a
|
|||||
|
Accrued
benefit cost
|
n/a
|
n/a
|
|||||
|
Liability
for pension benefits recorded in the balance sheet
|
$
|
(2,244
|
)
|
$
|
(2,886
|
)
|
The
changes in the balance sheet at September 30, 2006 arising from the adoption
of
SFAS No. 158 are set out below:
(in
thousands of dollars)
|
|
Before
implementation of SFAS No. 158
|
Change
due to SFAS No. 158
|
After
implementation of SFAS No. 158
|
|||||||
|
ASSETS
|
||||||||||
|
Prepaid
expense and other current assets
|
$
|
1,290
|
$
|
(443
|
)
|
$
|
847
|
|||
|
Total
current assets
|
13,484
|
(443
|
)
|
13,041
|
||||||
|
Long-term
deferred tax asset
|
-
|
881
|
881
|
|||||||
|
Total
assets
|
18,214
|
438
|
18,652
|
|||||||
|
LIABILITIES
AND STOCKHOLDERS’
EQUITY
|
||||||||||
|
Accrued
expenses
|
3,102
|
(401
|
)
|
2,701
|
||||||
|
Total
Current liabilities
|
6,074
|
(401
|
)
|
5,673
|
||||||
|
Deferred
taxes on income
|
124
|
(124
|
)
|
-
|
||||||
|
Liability
for pension benefits
|
-
|
2,886
|
2,886
|
|||||||
|
Cumulative
other comprehensive income
|
207
|
(1,923
|
)
|
(1,716
|
)
|
|||||
|
Total
Stockholders’ equity
|
11,960
|
(1,923
|
)
|
10,037
|
||||||
|
Total
liabilities and stockholders’ equity
|
18,214
|
438
|
18,652
|
The
improvement in the funded status of the pension plans during fiscal 2007 was
mainly due to an increase from 5.2% to 5.7% in the discount rate for the UK
plan
and better than estimated investment returns, partially offset by changes in
mortality assumptions.
-
26
-
The
Tech/Ops Sevcon net pension cost included the following components as defined
by
SFAS #132.
(in
thousands of dollars)
|
2007
|
2006
|
2005
|
||||||||
|
Components
of net periodic benefit cost:
|
||||||||||
|
Service
cost
|
$
|
592
|
$
|
382
|
$
|
434
|
||||
|
Interest
cost
|
1,159
|
942
|
901
|
|||||||
|
Expected
return on plan assets
|
(1,148
|
)
|
(886
|
)
|
(845
|
)
|
||||
|
Amortization
of transition obligation
|
(1
|
)
|
(2
|
)
|
(2
|
)
|
||||
|
Amortization
of prior service cost
|
59
|
54
|
55
|
|||||||
|
Recognized
net actuarial gain (loss)
|
14
|
-
|
-
|
|||||||
|
Net
periodic benefit cost
|
$
|
675
|
$
|
490
|
$
|
543
|
||||
|
Net
cost of defined contribution plans
|
$
|
147
|
$
|
35
|
$
|
29
|
The
increase in the net cost of defined contribution plans mainly relates to a
payment into the plan in connection with the termination of one
employee.
The
weighted average assumptions used to determine plan obligations and net periodic
benefit cost for the years ended September 30, 2007 and 2006 were as set out
below:
|
2007
|
2006
|
||||||
|
Plan
obligations:
|
|||||||
|
Discount
rate
|
5.76%
|
|
5.27%
|
|
|||
|
Rate
of compensation increase
|
4.25%
|
|
3.98%
|
|
|||
|
Net
periodic benefit cost:
|
|||||||
|
Discount
rate
|
5.76%
|
|
5.27%
|
|
|||
|
Expected
long term return on plan assets
|
6.50%
|
|
6.04%
|
|
|||
|
Rate
of compensation increase
|
4.25%
|
|
3.98%
|
|
The
changes in these assumptions reflect actuarial advice and changing market
conditions and experience.
The
weighted average asset allocations by asset category are set out below for
both
the UK and US plans:
(percentage
of total assets)
|
2007
|
2006
|
||||||||||||||||||
|
|
US
Plan
|
UK
Plan
|
Total
|
US
Plan
|
UK
Plan
|
Total
|
|||||||||||||
|
Equity
securities
|
40%
|
|
53%
|
|
52%
|
|
39%
|
|
43%
|
|
42%
|
|
|||||||
|
Debt
securities
|
54%
|
|
26%
|
|
28%
|
|
56%
|
|
36%
|
|
38%
|
|
|||||||
|
Real
estate
|
-
|
17%
|
|
16%
|
|
-
|
17%
|
|
16%
|
|
|||||||||
|
Other
|
6%
|
|
4%
|
|
4%
|
|
5%
|
|
4%
|
|
4%
|
|
|||||||
|
Total
|
100%
|
|
100%
|
|
100%
|
|
100%
|
|
100%
|
|
100%
|
|
For
the
US plan the target asset allocations are 40% - 45% equity securities and 55%
-
60% debt securities. The UK plan is invested in an insurance company
with-profits unit fund which holds various investments as decided by the
insurance company’s fund manager, who is responsible for the asset allocation
within the fund. The asset allocations of the insurance company with-profits
units are included in the table above.
The
overall expected long-term rate of return on plan assets has been based on
the
expected returns on equities, bonds and real estate based broadly on the current
asset allocation, with a small reduction in the expected rate to reflect the
conservative nature of the distributions from the insurance company with profits
unit fund.
The
following benefit payments, which reflect future service, as appropriate, are
expected to be paid:
(in
thousands of dollars)
|
2007
|
$111
|
|
2008
|
154
|
|
2009
|
198
|
|
2010
|
303
|
|
2011
|
437
|
|
2012
- 2016
|
4,039
|
In
fiscal
2008 it is estimated that the Company will make contributions to the plans
of
$799,000, and that there will be employee contributions to the UK plan of
$305,000.
-
27
-
(8)
SEGMENT
INFORMATION
The
Company has two reportable segments: electronic controls and capacitors. The
electronic controls segment produces control systems 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
accounting policies of the segments are the same as those described in Note
1.
Intersegment sales 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)
|
2007
|
|||||||||||||
|
|
Controls
|
Capacitors
|
Corporate
|
Total
|
|||||||||
|
Sales
to external
customers
|
$
|
37,009
|
$
|
2,204
|
$
|
-
|
$
|
39,213
|
|||||
|
Inter-segment
revenues
|
-
|
52
|
-
|
52
|
|||||||||
|
Operating
income
|
2,669
|
(289
|
)
|
(317
|
)
|
2,063
|
|||||||
|
Depreciation
and
amortization
|
686
|
56
|
-
|
||||||||||
|
Identifiable
assets
|
20,338
|
1,090
|
498
|
21,296
|
|||||||||
|
Capital
expenditures
|
823
|
87
|
-
|
910
|
|||||||||
|
2006
|
|||||||||||||
|
|
Controls
|
Capacitors
|
Corporate
|
Total
|
|||||||||
|
Sales
to external customers
|
$
|
32,808
|
$
|
1,822
|
$
|
-
|
$
|
34,630
|
|||||
|
Inter-segment
revenues
|
-
|
64
|
-
|
64
|
|||||||||
|
Operating
income
|
2,174
|
68
|
(398
|
)
|
1,844
|
||||||||
|
Depreciation
and amortization
|
586
|
71
|
-
|
657
|
|||||||||
|
Identifiable
assets
|
17,121
|
1,097
|
434
|
18,652
|
|||||||||
|
Capital
expenditures
|
664
|
42
|
-
|
706
|
|||||||||
|
2005
|
|||||||||||||
|
|
Controls
|
Capacitors
|
Corporate
|
Total
|
|||||||||
|
Sales
to external customers
|
$
|
30,009
|
$
|
1,666
|
$
|
-
|
$
|
31,675
|
|||||
|
Inter-segment
revenues
|
-
|
199
|
-
|
199
|
|||||||||
|
Operating
income
|
1,343
|
32
|
(376
|
)
|
999
|
||||||||
|
Depreciation
and amortization
|
611
|
50
|
-
|
661
|
|||||||||
|
Identifiable
assets
|
14,948
|
951
|
547
|
16,446
|
|||||||||
|
Capital
expenditures
|
536
|
35
|
-
|
571
|
The
Company has businesses located in the United States, the United Kingdom, France,
Korea and Japan. The analysis of revenues set out below is by the location
of
the business selling the products rather than by destination of the
products.
(in
thousands of dollars)
|
2007
|
2006
|
2005
|
||||||||
|
Sales:-
|
||||||||||
|
US
sales
|
$
|
14,832
|
$
|
14,643
|
$
|
12,893
|
||||
|
Foreign
sales:
|
||||||||||
|
United
Kingdom
|
12,338
|
10,702
|
9,477
|
|||||||
|
France
|
12,043
|
9,285
|
9,305
|
|||||||
|
Total
Foreign
|
24,381
|
19,987
|
18,782
|
|||||||
|
Total
sales
|
$
|
39,213
|
$
|
34,630
|
$
|
31,675
|
||||
|
Long-lived
assets:
|
||||||||||
|
USA
|
$
|
1,516
|
$
|
1,732
|
$
|
1,543
|
||||
|
Foreign:
|
||||||||||
|
United
Kingdom
|
3,530
|
3,768
|
2,866
|
|||||||
|
France
|
142
|
90
|
51
|
|||||||
|
Korea
and Japan
|
8
|
21
|
11
|
|||||||
|
Total
Foreign
|
3,680
|
3,879
|
2,928
|
|||||||
|
Total
|
$
|
5,196
|
$
|
5,611
|
$
|
4,471
|
The
business located in the United States services customers in North and South
America. The business located in France services customers in France, Spain,
Portugal, Belgium, Germany, Netherlands and North Africa. The businesses located
in Korea and Japan support customers in Asia, however, sales to these customers
are made from the United Kingdom. The businesses located in the United Kingdom
service customers in the rest of the world, principally Europe and the Far
East.
In
fiscal
2007 Tech/Ops Sevcon's largest customer accounted for 14% of sales and for
17%
of receivables. In 2006 the largest customer accounted for 17% of sales and
16%
of receivables. In 2005 the largest customer accounted for 16% of sales and
20%
of receivables.
-
28
-
The
Board
of Directors and Shareholders of Tech/Ops
Sevcon, Inc.:
We
have
audited the accompanying consolidated balance sheets of Tech/Ops Sevcon, Inc.
and subsidiaries as of September 30, 2007 and 2006 and the related consolidated
statements of income, comprehensive income, stockholders’ equity and cash flows
for each of the three years in the period ended September 30, 2007. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Tech/Ops Sevcon, Inc. and
subsidiaries as of September 30, 2007 and 2006 and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2007 in conformity with accounting principles generally accepted
in the United States of America.
We
have
also audited Schedule II for each of the three years in the period ended
September 30, 2007. In our opinion, this schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information therein.
/s/
Vitale, Caturano & Company, Ltd.
Boston,
Massachusetts
December
6, 2007
-
29
-
SELECTED
QUARTERLY FINANCIAL DATA
(UNAUDITED)
Selected
quarterly financial data for fiscal years 2007 and 2006 is set out
below:
(in
thousands except per share data)
|
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
Year
|
|||||||||||
|
2007
Quarters
|
||||||||||||||||
|
Net
sales
|
$
|
8,226
|
$
|
10,374
|
$
|
10,341
|
$
|
10,272
|
$
|
39,213
|
||||||
|
Gross
profit
|
2,998
|
4,014
|
3,791
|
3,545
|
14,348
|
|||||||||||
|
Operating
income
|
204
|
898
|
782
|
179
|
2,063
|
|||||||||||
|
Net
income
|
88
|
568
|
483
|
164
|
1,303
|
|||||||||||
|
Basic
income per share
|
$
|
.03
|
$
|
.18
|
$
|
.15
|
$
|
.05
|
$
|
.41
|
||||||
|
Diluted
income per
share
|
$
|
.03
|
$
|
.18
|
$
|
.15
|
$
|
.05
|
$
|
.41
|
||||||
|
2006
Quarters
|
||||||||||||||||
|
Net
sales
|
$
|
7,821
|
$
|
8,562
|
$
|
9,313
|
$
|
8,934
|
$
|
34,630
|
||||||
|
Gross
profit
|
3,047
|
3,317
|
3,552
|
3,190
|
13,106
|
|||||||||||
|
Operating
income
|
244
|
562
|
584
|
454
|
1,844
|
|||||||||||
|
Net
income
|
160
|
342
|
369
|
243
|
1,114
|
|||||||||||
|
Basic
income per share
|
$
|
.05
|
$
|
.11
|
$
|
.12
|
$
|
.08
|
$
|
.35
|
||||||
|
Diluted
income per share
|
$
|
.05
|
$
|
.11
|
$
|
.12
|
$
|
.08
|
$
|
.35
|
None.
(a) Evaluation
of disclosure controls and procedures. The Company’s principal executive officer
and principal financial officer, after evaluating the effectiveness of the
Company’s “disclosure controls and procedures” (as defined in Securities
Exchange Act of 1934 Rule 13a-15(e)) have concluded that, as of September 30,
2007, the disclosure controls and procedures were effective.
(b) Changes
in internal control over financial reporting. The Company’s principal executive
officer and principal financial officer have identified no change in the
Company’s “internal control over financial reporting” (as defined in Securities
Exchange Act of 1934 Rule 13a-15(f)) that occurred during the fourth quarter
of
fiscal 2007 that has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial reporting.
None.
The
requisite information regarding the Company’s directors, executive officers and
audit committee members is incorporated by reference from the discussion
responsive thereto under the captions “Election of Directors” and “Section 16(a)
Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for
the 2008 Annual Meeting of Stockholders.
We
have
adopted a Code of Ethics for Senior Officers that applies to our chief executive
officer, chief financial officer, principal accounting officer and controllers.
We have also adopted a Code of Conduct and Ethics that applies to all of our
employees, including, but not limited to, our chief executive officer, chief
financial officer, principal accounting officer, and controllers. A copy of
either Code is available without charge upon request from the Chief Financial
Officer at Tech/Ops Sevcon, Inc., 155 Northboro Road, Southborough, MA 01772.
If
we make any substantive amendments to the Code of Ethics for Senior Officers
or
grant any waiver from a provision of such Code, or if we make any substantive
amendment to a provision of the Code of Conduct that applies to our chief
executive officer, chief financial officer, principal accounting officer or
controller, or if we grant any waiver from a provision of such Code for any
such
persons we will disclose the nature of such amendment or waiver in a report
on
Form 8-K.
-
30
-
EXECUTIVE
OFFICERS OF THE
REGISTRANT
|
Name
of Officer
|
Age
|
Position
|
|
Matthew
Boyle
|
45
|
President
& Chief Executive Officer
|
|
Paul
A. McPartlin
|
62
|
Vice
President & Chief Financial Officer
|
|
Paul
N. Farquhar
|
45
|
Vice
President, Treasurer & Principal Accounting
Officer
|
There
are
no family relationships between any director or executive officer and any other
director or executive officer of the Company.
All
officers serve until the next annual meeting and until their successors are
elected and qualified. Mr. Boyle has been President and Chief Executive Officer
since 1997 and was Vice President and Chief Operating Officer of the Company
from 1996 to 1997. Mr. McPartlin has been Vice President and Chief Financial
Officer of the Company since 1990 and was Treasurer until April 2007. On April
24, 2007 we appointed Mr. Paul N. Farquhar as Vice President, Treasurer and
Principal Accounting Officer. Mr. Farquhar is a British Chartered Accountant
and
from January 2005 to March 2007 was European Financial Controller for AAF
International, a global company providing products for air filtration. From
1997
to January 2005 he was European Finance Director of Haskel International Inc.,
a
world leading manufacturer of hydraulic and pneumatic driven high pressure
products, systems and accessories.
ITEM
11 EXECUTIVE
COMPENSATION
This
information is incorporated by reference from the information under the captions
“Election of Directors - Director Compensation,” and “Executive Compensation” in
the Company’s Proxy Statement for the 2008 Annual Meeting of
Stockholders.
The
requisite information concerning security ownership is incorporated by reference
from the information responsive thereto under the captions “Beneficial Ownership
of Common Stock” and “Election of Directors” in the Company’s Proxy Statement
for the 2008 Annual Meeting of Stockholders.
The
following table sets out the status of shares authorized for issuance under
equity compensation plans at September 30, 2007.
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans(excluding securities reflected in column (a))
at
beginning of year
|
Number
of securities remaining available for future issuance under equity
compensation plans(excluding securities reflected in column (a))
at end of
year
|
|
(a)
|
(b)
|
(c)
|
(d)
|
|
|
Equity
compensation plans approved by security holders:
1996
Equity Incentive Plan
1998
Director Stock Option Plan
|
104,000
25,000
|
$
8.57
$13.23
|
71,000
-
|
78,000
-
|
|
Sub
Total
|
129,000
|
$
9.35
|
71,000
|
78,000
|
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
-
|
|
Total
|
172,000
|
$
9.35
|
71,000
|
78,000
|
This
information is incorporated by reference from the information responsive thereto
under the captions “Transactions with Related Parties” and “Election of
Directors - Director Independence” in the Company’s Proxy Statement for the 2008
Annual Meeting of Stockholders.
This
information is incorporated by reference from the discussion responsive thereto
under the caption “Auditors” in the Company’s Proxy Statement relating to the
2008 Annual Meeting of Stockholders.
-
31
-
|
(a)
|
Financial
statements and schedule
|
|
The
financial statements and financial statement schedule listed under
Item 8
in the index following the cover page are filed as part of this Annual
Report on Form 10-K.
|
|
|
(b)
|
Exhibits
|
|
The
exhibits filed as part of this Annual Report on Form 10-K are listed
on
the Exhibit Index below.
|
|
*(3)(a)
|
Certificate
of Incorporation of the registrant (incorporated by reference to
Exhibit
(3)(a) to Quarterly Report on Form 10-Q for the quarter ended July
3,
2004).
|
|
*(3)(b)
|
By-laws
of the registrant (incorporated by reference to Exhibit (3) (b) to
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000).
|
|
*(4)(a)
|
Specimen
common stock of registrant (incorporated by reference to Exhibit
(4) (a)
to Annual Report for the fiscal year ended September 30,
1994).
|
|
*(10)(a)
|
Tech/Ops
Sevcon, Inc. 1996 Equity Incentive Plan (incorporated by reference
to the
Registrant's 2004 Proxy Statement filed on December 29,
2003).
|
|
*(10)(b)
|
Form
of Option for 1996 Equity Incentive Plan (incorporated by reference
to
Exhibit (10) (b) to Annual Report for the fiscal year ended September
30,
2002).
|
|
*(10)(c)
|
Form
of Restricted Stock Agreement for employees for 1996 Equity Incentive
Plan
(incorporated by reference to Exhibit (10) (c) to Annual Report for
the
fiscal year ended September 30, 2004).
|
|
*(10)(d)
|
Form
of Restricted Stock Agreement for non-employee directors for 1996
Equity
Incentive Plan (incorporated by reference to Exhibit (10) (d) to
Annual
Report for the fiscal year ended September 30, 2004).
|
|
*(10)(e)
|
Form
of Indemnification Agreement dated January 4, 1988 between the registrant
and each of its directors (incorporated by reference to Exhibit (10)
(e)
to Annual Report for the fiscal year ended September 30,
1994).
|
|
*(10)(f)
|
Directors’
Retirement Plan (incorporated by reference to Exhibit (10) (b) to
Annual
Report for the fiscal year ended September 30, 1990).
|
|
*(10)(g)
|
Board
resolution terminating Directors’ Retirement Plan (incorporated by
reference to Exhibit (10) (e) to Annual Report for the fiscal year
ended
September 30, 1997).
|
|
*(10)(h)
|
Tech/Ops
Sevcon, Inc. 1998 Director Stock Option Plan (incorporated by reference
to
Exhibit 10 to Quarterly Report on Form 10-Q for the quarter ended
March
31, 1998).
|
|
(10)(i)
|
Summary
of Director and Executive Officer Non-Plan Compensation (filed
herewith).
|
|
*(21)
|
Subsidiaries
of the registrant (incorporated by reference to exhibit (21) to Annual
Report for the fiscal year ended September 30, 2001).
|
|
(23)
|
Consent
of Vitale Caturano & Company, Ltd. (filed
herewith).
|
|
(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)
|
*Indicates
exhibit previously filed and incorporated by reference. Exhibits filed with
periodic reports were filed under File No. 1-9789.
Executive
Compensation Plans and Arrangements:
Exhibits
(10) (a) - (i) are management contracts or compensatory plans or arrangements
in
which the executive officers or directors of the registrant
participate.
A
copy of these exhibits may be
obtained on the SEC’s EDGAR database (at www.sec.gov)
or will be furnished without charge
to any stockholder upon written request to Tech/Ops Sevcon, Inc., attention
Paul
N. Farquhar, Treasurer, 155 Northboro Road, Southborough MA 01772, Telephone:
(581) 281 5510.
-
32
-
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
||
|
By
/s/
Matthew
Boyle
|
December
14, 2007
|
|
|
Matthew
Boyle
|
||
|
President
and Chief Executive
Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
|
SIGNATURE
|
TITLE
|
DATE
|
|
/s/
Matthew
Boyle
|
President,
Chief Executive
|
December
14, 2007
|
|
Matthew
Boyle
|
Officer
and Director
|
|
|
(Principal
Executive Officer)
|
||
|
/s/
Paul A.
McPartlin
|
Vice
President and Chief
|
December
14, 2007
|
|
Paul
A. McPartlin
|
Financial
Officer
|
|
|
(Principal
Financial Officer)
|
||
|
/s/
Paul N.
Farquhar
|
Vice
President, Treasurer
|
December
14, 2007
|
|
Paul
N. Farquhar
|
and
Principal Accounting Officer
|
|
|
(Principal
Accounting Officer)
|
||
|
/s/
Maarten D.
Hemsley
|
Director
|
December
14, 2007
|
|
Maarten
D. Hemsley
|
||
|
/s/
Paul B.
Rosenberg
|
Director
|
December
14, 2007
|
|
Paul
B. Rosenberg
|
||
|
/s/
Marvin G.
Schorr
|
Director
|
December
14, 2007
|
|
Marvin
G. Schorr
|
||
|
/s/
Bernard F.
Start
|
Director
|
December
14, 2007
|
|
Bernard
F. Start
|
||
|
/s/
David R. A.
Steadman
|
Director
|
December
14, 2007
|
|
David
R. A. Steadman
|
||
|
/s/
Paul O.
Stump
|
Director
|
December
14, 2007
|
|
Paul
O. Stump
|
||
-
33
-
TECH/OPS
SEVCON, INC. AND SUBSIDIARIES
Reserves
for the three years ended September 30, 2007(in
thousands of dollars)
|
Allowance
for doubtful
accounts
|
2007
|
2006
|
2005
|
|||||||
|
Balance
at beginning of year
|
141
|
144
|
192
|
|||||||
|
Additions
charged to costs and expenses
|
38
|
14
|
73
|
|||||||
|
Deductions
from reserves:
|
||||||||||
|
Accounts
collected
|
(11
|
)
|
(10
|
)
|
(8
|
)
|
||||
|
Write
off of uncollectible accounts
|
(1
|
)
|
(13
|
)
|
(111
|
)
|
||||
|
Foreign
currency translation adjustment
|
13
|
6
|
(2
|
)
|
||||||
|
Balance
at end of year
|
180
|
141
|
144
|