Item 1
|
Financial Statements
|
CONSOLIDATED
BALANCE SHEETS
Sevcon, Inc. and Subsidiaries
(in thousands of dollars except per share data)
|
|
|
|
December
28,
2013
|
|
|
September
30,
2013
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,159
|
|
|
$
|
2,062
|
|
Trade receivables, net of allowances for doubtful accounts of $48 at December 28, 2013 and $61 at September 30, 2013
|
|
|
6,292
|
|
|
|
6,746
|
|
Other receivables
|
|
|
833
|
|
|
|
357
|
|
Inventories
|
|
|
5,937
|
|
|
|
5,723
|
|
Prepaid expenses and other current assets
|
|
|
1,363
|
|
|
|
1,862
|
|
Total current assets
|
|
$
|
16,584
|
|
|
|
16,750
|
|
Property, plant and equipment, at cost:
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
|
23
|
|
|
|
23
|
|
Buildings and improvements
|
|
|
745
|
|
|
|
737
|
|
Equipment
|
|
|
11,170
|
|
|
|
10,992
|
|
|
|
|
11,938
|
|
|
|
11,752
|
|
Less: accumulated depreciation and amortization
|
|
|
(10,054
|
)
|
|
|
(9,783
|
)
|
Net property, plant and equipment
|
|
|
1,884
|
|
|
|
1,969
|
|
Long-term deferred tax assets
|
|
|
3,557
|
|
|
|
3,152
|
|
Goodwill
|
|
|
1,435
|
|
|
|
1,435
|
|
Other-long term assets
|
|
|
57
|
|
|
|
54
|
|
Total assets
|
|
|
23,517
|
|
|
$
|
23,360
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long term debt
|
|
|
47
|
|
|
$
|
46
|
|
Accounts payable
|
|
|
3,631
|
|
|
|
3,880
|
|
Accrued expenses
|
|
|
1,934
|
|
|
|
2,087
|
|
Accrued and deferred taxes on income
|
|
|
48
|
|
|
|
47
|
|
Total current liabilities
|
|
|
5,660
|
|
|
|
6,060
|
|
Liability for pension benefits
|
|
|
8,266
|
|
|
|
8,354
|
|
Long term debt
|
|
|
1,716
|
|
|
|
1,728
|
|
Total liabilities
|
|
|
15,642
|
|
|
|
16,142
|
|
S
tockholders’ 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 3,554,388 shares at December 28, 2013 and 3,474,388 at September 30, 2013
|
|
|
355
|
|
|
|
347
|
|
Premium paid in on common stock
|
|
|
5,751
|
|
|
|
5,699
|
|
Retained earnings
|
|
|
9,079
|
|
|
|
8,591
|
|
Accumulated other comprehensive loss
|
|
|
(7,310
|
)
|
|
|
(7,419
|
)
|
Total stockholders’ equity
|
|
|
7,875
|
|
|
|
7,218
|
|
Total liabilities and stockholders’ equity
|
|
|
23,517
|
|
|
$
|
23,360
|
|
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
Sevcon, Inc. and Subsidiaries
(in thousands of dollars except per share data)
|
|
|
|
Three months ended
|
|
|
|
December 28,
2013
|
|
|
December 29,
2012
|
|
Net sales
|
|
$
|
9,049
|
|
|
$
|
6,640
|
|
Cost of sales
|
|
|
(5,217
|
)
|
|
|
(4,400
|
)
|
Gross profit
|
|
|
3,832
|
|
|
|
2,240
|
|
Selling, research and administrative expenses
|
|
|
(3,122
|
)
|
|
|
(3,425
|
)
|
Operating income (loss)
|
|
|
710
|
|
|
|
(1,185
|
)
|
Interest expense
|
|
|
(16
|
)
|
|
|
(24
|
)
|
Foreign currency loss
|
|
|
(85
|
)
|
|
|
(201
|
)
|
Income (loss) before income tax
|
|
|
609
|
|
|
|
(1,410
|
)
|
Income tax (provision) benefit
|
|
|
(121
|
)
|
|
|
108
|
|
Net income (loss)
|
|
$
|
488
|
|
|
$
|
(1,302
|
)
|
Basic income (loss) per share
|
|
$
|
.14
|
|
|
$
|
(.39
|
)
|
Fully diluted income (loss) per share
|
|
$
|
.14
|
|
|
$
|
(.39
|
)
|
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Sevcon, Inc. and Subsidiaries
Net income (loss)
|
|
$
|
488
|
|
|
$
|
(1,302
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
66
|
|
|
|
101
|
|
Defined benefit pension plans:
|
|
|
|
|
|
|
|
|
Actuarial loss net of $13 tax benefit (2013: net of $19 tax benefit)
|
|
|
43
|
|
|
|
53
|
|
Comprehensive income (loss)
|
|
$
|
597
|
|
|
$
|
(1,148
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
Sevcon, Inc. and Subsidiaries
|
|
(in thousands of dollars)
|
|
|
|
Three months ended
|
|
|
|
December 28,
2013
|
|
|
December 29,
2012
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
488
|
|
|
$
|
(1,302
|
)
|
Adjustments to reconcile net income (loss) to net cash generated by (used by) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
168
|
|
|
|
146
|
|
Gain on sale of fixed assets
|
|
|
-
|
|
|
|
(3
|
)
|
Stock-based compensation
|
|
|
59
|
|
|
|
71
|
|
Pension contributions (greater than) less than pension expense
|
|
|
(117
|
)
|
|
|
42
|
|
Deferred tax provision
|
|
|
120
|
|
|
|
(108
|
)
|
Increase (decrease) in cash resulting from changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Trade and other receivables
|
|
|
36
|
|
|
|
540
|
|
Inventories
|
|
|
(169
|
)
|
|
|
(62
|
)
|
Prepaid expenses and other current assets
|
|
|
1
|
|
|
|
63
|
|
Accounts payable
|
|
|
(290
|
)
|
|
|
(641
|
)
|
Accrued expenses
|
|
|
(167
|
)
|
|
|
(202
|
)
|
Accrued and deferred taxes on income
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Net cash generated by (used by) operating activities
|
|
|
126
|
|
|
|
(1,459
|
)
|
Cash flow used by investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of property, plant and equipment
|
|
|
(64
|
)
|
|
|
(145
|
)
|
Proceeds of sale of fixed assets
|
|
|
-
|
|
|
|
4
|
|
Net cash used by investing activities
|
|
|
(64
|
)
|
|
|
(141
|
)
|
Cash flow used by financing activities:
|
|
|
|
|
|
|
|
|
Repayments of long term debt
|
|
|
(11
|
)
|
|
|
(10
|
)
|
Net cash used by financing activities
|
|
|
(11
|
)
|
|
|
(10
|
)
|
Effect of exchange rate changes on cash
|
|
|
46
|
|
|
|
76
|
|
Net increase (decrease) in cash
|
|
|
97
|
|
|
|
(1,534
|
)
|
Beginning balance - cash and cash equivalents
|
|
|
2,062
|
|
|
|
2,823
|
|
Ending balance - cash and cash equivalents
|
|
$
|
2,159
|
|
|
$
|
1,289
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
|
3
|
|
|
|
3
|
|
Cash paid for interest
|
|
$
|
16
|
|
|
$
|
24
|
|
The accompanying notes are an integral part of these consolidated financial statements.
SEVCON, INC
.
Notes to Consolidated Financial Statements – December 28, 2013
(Unaudited)
(1)
|
Basis of presentation
|
Sevcon, Inc. (“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. Through wholly-owned subsidiaries located in the United States, the United Kingdom, France, South Korea and Japan, the Company designs and sells, under the Sevcon name, microprocessor based controls for zero emission and hybrid electric vehicles. The controls are used to vary the speed and movement of vehicles, to integrate specialized functions and to prolong the shift life of vehicles’ power source. The Company’s customers are manufacturers of on-road, off-road and industrial vehicles including automobiles, buses, fork lift trucks, aerial lifts, mining vehicles, airport ground support vehicles, utility vehicles, sweepers and other battery powered vehicles. Through another subsidiary located in the United Kingdom, Sevcon, Inc. manufactures special metalized film capacitors that are used as components in the power electronics, signaling and audio equipment markets.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normally recurring accruals) necessary to present fairly the financial position of Sevcon, Inc. as of December 28, 2013 and the results of operations and cash flows for the three months ended December 28, 2013. These unaudited interim financial statements should be read in conjunction with the 2013 annual consolidated financial statements and related notes included in the 2013 Sevcon, Inc. Annual Report filed on Form 10-K (the “2013 10-K”). Unless otherwise indicated, each reference to a year means the Company’s fiscal year, which ends on September 30.
The results of operations for the three month period ended December 28, 2013 are not necessarily indicative of the results to be expected for the full year.
(2)
|
Summary of significant accounting policies
|
There have been no changes since the end of 2013 to the significant accounting policies followed by Sevcon, Inc.
(3)
|
Stock-based compensation plans
|
Under the Company’s 1996 Equity Incentive Plan (the “Plan”) there were 62,000 shares reserved and available for grant at December 28, 2013. There were 122,800 shares reserved and available for grant at December 29, 2012. There were no options granted or exercised in the quarters ended December 28, 2013 and December 29, 2012.
Recipients of grants 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”). SARs 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.
A summary of option activity for all plans for the three months ended December 28, 2013 is as follows:
|
|
Shares
under
Option
|
|
|
Weighted
average
Exercise
Price
|
|
|
Weighted
average
remaining
contractual
life
(years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at September 30, 2013
|
|
|
5,000
|
|
|
$
|
5.40
|
|
|
0.1 years
|
|
|
$
|
-
|
|
Cancelled
|
|
|
(5,000
|
)
|
|
|
5.40
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 28, 2013
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Exercisable at December 28, 2013
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Exercisable and expected to vest at December 28, 2013
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
The aggregate intrinsic value 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 $5.27 and $4.85 closing market price of the Company’s common stock at December 28, 2013 and September 30, 2013, respectively.
In December 2013, the Company granted 80,000 shares of restricted stock to seven employees, which will vest in five equal annual installments so long as the employee is then employed by the Company or as determined by the Compensation Committee. The estimated fair value of the stock on the date of grant was $354,000 based on the fair market value of stock on the date of issue. This unvested compensation is being charged to income on a straight line basis over five years. The charge to income for this employee restricted stock will be approximately $18,000 on a quarterly basis.
A summary of restricted stock activity for the three months ended December 28, 2013 is as follows:
|
|
Number of shares of
Restricted Stock
|
|
|
Weighted Average
Grant-Date
Fair Value
|
|
Non-vested balance as of September 30, 2013
|
|
|
103,800
|
|
|
$
|
5.05
|
|
Granted
|
|
|
80,000
|
|
|
$
|
4.43
|
|
Vested
|
|
|
(27,000
|
)
|
|
$
|
4.86
|
|
Non-vested balance as of December 28, 2013
|
|
|
156,800
|
|
|
$
|
4.77
|
|
Stock-based compensation expense was $59,000 and $71,000 for the three month periods ended December 28, 2013 and December 29, 2012, respectively. At December 28, 2013, there was $667,000 of unrecognized compensation expense related to restricted stock granted under the Plan. The Company expects to recognize that cost over a weighted average period of 4.0 years.
The Board of Directors suspended dividends to conserve cash during the global recession that began in 2009 and will consider whether to resume paying dividends as conditions and the Company’s operating results improve.
(5)
|
Calculation of earnings per share and weighted average shares outstanding
|
Basic and fully diluted earnings per share were calculated as follows:
|
|
(in thousands except per share data)
|
|
|
|
Three Months ended
|
|
|
|
December 28,
2013
|
|
|
December 29,
2012
|
|
Net income (loss)
|
|
$
|
488
|
|
|
$
|
(1,302
|
)
|
Weighted average shares outstanding - basic
|
|
|
3,375
|
|
|
|
3,339
|
|
Basic income (loss) per share
|
|
$
|
.14
|
|
|
$
|
(.39
|
)
|
Common stock equivalents
|
|
|
36
|
|
|
|
18
|
|
Weighted average shares outstanding - diluted
|
|
|
3,411
|
|
|
|
3,357
|
|
Diluted income (loss) per share
|
|
$
|
.14
|
|
|
$
|
(.39
|
)
|
No. of options that are anti-dilutive excluded from calculation of common stock equivalents
|
|
|
-
|
|
|
|
36
|
|
The Company has two reportable segments: electronic controls and capacitors. The electronic controls segment produces microprocessor based control systems for zero emission and hybrid electric vehicles. The capacitors segment produces metalized film capacitors for sale to electronic equipment manufacturers. Each segment has its own management team and sales force and the capacitors segment has its own manufacturing facility.
The significant accounting policies of the segments are the same as those described above and in Note 1 to the Notes to Consolidated Financial Statements in the 2013 10-K. Inter-segment revenues 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)
|
|
|
|
Three months ended December 28, 2013
|
|
|
|
Controls
|
|
|
Capacitors
|
|
|
Corporate
|
|
|
Total
|
|
Sales to external customers
|
|
|
8,535
|
|
|
|
514
|
|
|
|
-
|
|
|
|
9,049
|
|
Inter
-
segment revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Operating income
|
|
|
649
|
|
|
|
40
|
|
|
|
21
|
|
|
|
710
|
|
Identifiable assets
|
|
|
21,798
|
|
|
|
1,385
|
|
|
|
334
|
|
|
|
23,517
|
|
|
|
Three months ended December 29, 2012
|
|
|
|
Controls
|
|
|
Capacitors
|
|
|
Corporate
|
|
|
Total
|
|
Sales to external customers
|
|
|
6,202
|
|
|
|
438
|
|
|
|
-
|
|
|
|
6,640
|
|
Inter-segment revenues
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
Operating income (loss)
|
|
|
(1,143
|
)
|
|
|
(14
|
)
|
|
|
(28
|
)
|
|
|
(1,185
|
)
|
Identifiable assets
|
|
|
20,027
|
|
|
|
1,283
|
|
|
|
407
|
|
|
|
21,717
|
|
In the electronic controls segment, revenues derive from the following products and services:
|
|
(in thousands of dollars)
|
|
|
|
Three Months ended
|
|
|
|
December 28,
2013
|
|
|
December 29,
2012
|
|
Electronic controls for zero emission and hybrid electric vehicles
|
|
$
|
6,584
|
|
|
$
|
4,085
|
|
Accessory and aftermarket products and services
|
|
|
1,951
|
|
|
|
2,117
|
|
Total electronic controls segment revenues
|
|
$
|
8,535
|
|
|
$
|
6,202
|
|
(7)
|
Research and development
|
The cost of research and development programs is charged against income as incurred and was as follows:
|
|
(in thousands of dollars)
|
|
|
|
Three Months ended
|
|
|
|
December 28,
2013
|
|
|
December 29,
2012
|
|
Research and development expense, net of grants receivable
|
|
$
|
930
|
|
|
$
|
1,083
|
|
Percentage of sales
|
|
|
10.3
|
|
|
|
16.3
|
|
In recent years the Company has received several awards of research and development grants by the Technology Strategy Board, a public body established by the U.K. government to stimulate technology-enabled innovation.
In 2011, the Company was awarded a research and development grant by the Technology Strategy Board to lead a collaborative project with Cummins Generator Technologies and Newcastle University in the U.K. to develop an innovative electric drive system for electric vehicles using advanced switched reluctance motor technology. The Company recorded grant income from this Technology Strategy Board project of $17,000 in the first quarter of 2014 associated with research and development expense of $50,000. The Company recorded grant income of $6,000 associated with research and development expense of $19,000 in respect of this Technology Strategy Board grant in the same period in 2013.
In 2013, the Company was awarded a research and development grant by the Technology Strategy Board as one of a consortium of organizations in the U.K to research and design ultra-efficient systems for electric and hybrid vehicles. The Company recorded grant income from this Technology Strategy Board project of $1,000 in the first quarter of 2014 associated with research and development expense of $3,000. The Company did not record any grant income or incur any research and development expense in respect of this grant in the first quarter of 2013.
In July 2013, the Company was awarded a grant of approximately $480,000 by the Low Emission Transport Collaborative Projects Fund, a U.K. government body. The grant is to develop next-generation controls for high-voltage, low-power applications. This grant will defray part of the research and development expense associated with this project over the period to March 2015. The Company recorded grant income from this project in the first quarter of 2014 of $97,000 associated with research and development expense of $422,000. The Company did not record any grant income or incur any research and development expense in respect of this grant in the first quarter of 2013.
The grant income in the first quarter of 2014 and 2013 was recorded as a reduction of research and development expense.
(8)
|
Employee benefit plans
|
Sevcon has defined contribution plans covering the majority of its U.S. and U.K. employees in the controls business. There is also a small defined contribution plan covering senior managers in the capacitor business. The Company has frozen U.K. and U.S. defined benefit plans for which no future benefits are being earned by employees. The following table sets forth the components of the net pension cost for the three month periods ended December 28, 2013 and December 29, 2012, respectively:
|
|
(in thousands of dollars)
|
|
|
|
Three Months ended
|
|
|
|
December 28,
2013
|
|
|
December 29,
2012
|
|
Interest cost
|
|
$
|
318
|
|
|
$
|
323
|
|
Expected return on plan assets
|
|
|
(320
|
)
|
|
|
(293
|
)
|
Amortization of net loss
|
|
|
56
|
|
|
|
72
|
|
Net periodic benefit cost
|
|
|
54
|
|
|
|
102
|
|
Net cost of defined contribution plans
|
|
$
|
115
|
|
|
$
|
122
|
|
The following table sets forth the movement in the liability for pension benefits in the three month periods ended December 28, 2013 and December 29, 2012:
|
|
(in thousands of dollars)
|
|
|
|
Three Months ended
|
|
|
|
December 28,
2013
|
|
|
December 29,
2012
|
|
Liability for pension benefits at beginning of period
|
|
$
|
8,354
|
|
|
$
|
10,264
|
|
Net periodic benefit cost
|
|
|
54
|
|
|
|
102
|
|
Plan contributions
|
|
|
(171
|
)
|
|
|
(60
|
)
|
Amortization of net loss
|
|
|
(56
|
)
|
|
|
(72
|
)
|
Effect of exchange rate changes
|
|
|
85
|
|
|
|
78
|
|
Balance at end of period
|
|
$
|
8,266
|
|
|
$
|
10,312
|
|
Amounts recognized in the balance sheet consist of:
|
|
(in thousands of dollars)
|
|
|
|
December 28,
2013
|
|
|
December 29,
2012
|
|
Non-current liabilities
|
|
$
|
8,266
|
|
|
$
|
10,312
|
|
Amounts recognized in accumulated other comprehensive (loss) consist of:
|
|
(in thousands of dollars)
|
|
|
|
December 28,
2013
|
|
|
December 29,
2012
|
|
Actuarial loss, net of $13,000 tax benefit (2013: net of $19,000 tax benefit)
|
|
$
|
43
|
|
|
$
|
53
|
|
Sevcon, Inc. contributed $50,000 to its U.S. defined benefit plan in the three months ended December 28, 2013; it presently anticipates contributing $150,000 to fund its U.S. plan in the remainder of fiscal 2014. In addition, employer contributions to the U.K. defined benefit plan were $121,000 in the first three months and are estimated to total $368,000 in 2014.
The table below presents information about the Company’s pension plan assets measured and recorded at fair value as of December 28, 2013 and indicates the fair value hierarchy of the inputs utilized by the Company to determine the fair values.
(in thousands of dollars)
|
|
Level 1*
(Quoted prices in
active
markets)
|
|
|
Level 2**
(Significant
observable
inputs)
|
|
|
Level 3***
(Unobservable
inputs)
|
|
Mutual Funds
|
|
|
|
|
|
|
|
|
|
Standard Life Pension Global Absolute Returns Strategies Fund
|
|
|
6,902
|
|
|
|
-
|
|
|
|
-
|
|
Standard Life UK Indexed Linked Fund
|
|
|
1,687
|
|
|
|
-
|
|
|
|
-
|
|
Standard Life Long Corporate Bond Fund
|
|
|
1,631
|
|
|
|
-
|
|
|
|
-
|
|
CF Ruffer Absolute Return Fund
|
|
|
7,070
|
|
|
|
-
|
|
|
|
-
|
|
U.S. Equity Funds
|
|
|
285
|
|
|
|
-
|
|
|
|
-
|
|
U.S. Fixed Income Funds
|
|
|
2,328
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Types of Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
212
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
20,115
|
|
|
|
-
|
|
|
|
-
|
|
*
|
Level 1 investments represent mutual funds for which a quoted market price is available on an active market. These investments will primarily hold stocks or bonds, or a combination of stocks and bonds.
|
**
|
The Company currently does not have any Level 2 pension plan financial assets.
|
***
|
The Company currently does not have any Level 3 pension plan financial assets.
|
The following estimated benefit payments, which reflect future service, as appropriate, have been or are expected to be paid:
|
|
(in thousands
of dollars)
|
|
2014
|
|
$
|
497
|
|
2015
|
|
|
618
|
|
2016
|
|
|
653
|
|
2017
|
|
|
646
|
|
2018
|
|
|
646
|
|
2019 – 2023
|
|
|
3,296
|
|
Inventories were comprised of:
|
|
(in thousands of dollars)
|
|
|
|
December 28,
2013
|
|
|
September 30,
2013
|
|
Raw materials
|
|
$
|
2,108
|
|
|
$
|
2,201
|
|
Work-in-process
|
|
|
7
|
|
|
|
11
|
|
Finished goods
|
|
|
3,822
|
|
|
|
3,511
|
|
|
|
$
|
5,937
|
|
|
$
|
5,723
|
|
Other receivables of $833,000 at December 28, 2013 include $555,000 of receivables in the Company’s French subsidiary that have been reclassified from trade receivables. In January 2014 management was advised that SITL, a customer of the Company’s French subsidiary and a manufacturer of on-road electric vehicles, had entered administration protection for a minimum period of six months. SITL’s principal activity is the manufacture of domestic appliances; they also have a waste filtration business and a start-up business which manufactures electric vehicles with which the Company trades. The main customer of SITL’s domestic appliances business, Fagor Spain, was placed into administration in late 2013; the impact of this event caused SITL, including its electric vehicle division, to also be placed in administration. The Company has submitted a claim with the French court appointed administrator for the full amount of the receivable of $555,000. The administrator is seeking a buyer for the SITL business and will make an initial report into the administration process to the commercial court in Lyon, France, on March 6, 2014. This is the earliest estimate of when management will have any information upon which to assess the recoverability of this receivable. Due to the high level of uncertainty at this time, management has not assessed a reserve for an uncollectible amount, but any loss incurred may be up to the full amount recorded at December 28, 2013, of $555,000.
(11)
|
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 December 28, 2013 approximates fair value due to the short-term nature of these instruments. The fair value of the Company’s long term debt at December 28, 2013 approximated $1,763,000 (the carrying value on the consolidated balance sheet at December 28, 2013) based on recent financial market pricing. The long term debt represented a level 2 liability in accordance with the fair value hierarchy described in Note 8.
Set out below is an analysis of other accrued expenses at December 28, 2013 and September 30, 2013, which shows separately any items in excess of 5% of total current liabilities:
|
|
(in thousands of dollars)
|
|
|
|
December 28,
2013
|
|
|
September 30,
2013
|
|
Accrued compensation and related costs
|
|
$
|
1,071
|
|
|
$
|
1,015
|
|
Other accrued expenses
|
|
|
863
|
|
|
|
1,072
|
|
|
|
$
|
1,934
|
|
|
$
|
2,087
|
|
The movement in warranty reserves was as follows:
|
|
(in thousands of dollars)
|
|
|
|
Three Months ended
|
|
|
|
December 28,
2013
|
|
|
December 29,
2012
|
|
Warranty reserves at beginning of period
|
|
$
|
138
|
|
|
$
|
89
|
|
Decrease in beginning balance for warranty obligations settled during the period
|
|
|
(43
|
)
|
|
|
(8
|
)
|
Foreign currency translation adjustment
|
|
|
1
|
|
|
|
3
|
|
Net increase in warranty reserves for products sold during the period
|
|
$
|
43
|
|
|
$
|
22
|
|
Warranty reserves at end of period
|
|
$
|
139
|
|
|
$
|
106
|
|
At December 28, 2013 the Company had $63,000 outstanding under a U.K. bank loan entered into in April 2010, with a fixed interest rate of 6.8%. The loan, which was entered into by the U.K. metalized film capacitor subsidiary to purchase an item of capital equipment, is denominated in British Pounds. The loan agreement provides for equal monthly installments comprising interest and principal for a five year period commencing in May 2010. Of the total amount outstanding at December 28, 2013, $47,000 is shown in the current liabilities section of the accompanying consolidated balance sheet under current debt, representing the principal element of the loan installments ending on December 31, 2013. Included in other long term liabilities at December 28, 2013, is $16,000 which represents the principal element of the loan installments payable in the fiscal year 2015. The fair market value of the debt at December 28, 2013 was $63,000.
The Company’s wholly owned subsidiary, Sevcon USA, Inc., has a $3,500,000 secured revolving credit facility with RBS Citizens, National Association for working capital and general corporate purposes. The loan and security agreement will expire on June 14, 2017 when all outstanding principal and unpaid interest will be due and payable in full. The facility may be paid before maturity in whole or in part at the option of Sevcon USA, Inc., without penalty or premium. Interest on the loan is payable monthly, and in the first quarter of 2014, was calculated at a margin of 3.25% over LIBOR. Under the facility, Sevcon USA, Inc. must maintain, on a quarterly basis, a debt to tangible net worth ratio of no more than 2.40:1 and a debt service coverage ratio of no less than 1.25:1 for each rolling twelve-month period. Upon entering into the revolving credit facility, Sevcon USA, Inc. drew down $1,700,000, which was the total amount outstanding at December 28, 2013. This $1,700,000 is shown in the accompanying consolidated balance sheet under long-term debt. The carrying value of the debt approximated to fair value based on current interest rates.
In July 2013, the Company’s U.K. bank renewed the overdraft facilities of the Company’s U.K. controls and capacitor subsidiaries. The Company’s U.K. controls and capacitor subsidiaries each have multi-currency overdraft facilities which together total $1,470,000 and which are secured by real estate owned by those companies. In common with bank overdrafts in Europe, the renewal of the facilities is for a twelve month period although in line with normal practice in Europe, they can be withdrawn on demand by the bank. The facilities were unused at December 28, 2013.
Annual principal payments on long term debt at December 28, 2013 are as follows:
Fiscal year
|
(in thousands of dollars)
|
|
2015
|
|
$
|
16
|
|
2016
|
|
|
-
|
|
2017
|
|
|
1,700
|
|
Total
|
|
$
|
1,716
|
|
In preparing these interim consolidated financial statements, the Company has evaluated, for potential recognition or disclosure, events or transactions subsequent to the end of the most recent quarterly period, the issuance date of these financial statements.
On December 31, 2013 the Company received the required approval of the government authorities in China to enter into a joint-venture agreement with Risenbo Technology Co., Ltd, (Risenbo), based in Hubei Province, China. Operating as Sevcon (Hubei) New Energy Technology Company, Ltd., the new joint venture company will market and sell existing and future Sevcon products for on-road electric and hybrid vehicle applications principally to Tier 1 automotive suppliers in China. Sevcon and Risenbo each will own a 50 percent stake in the joint venture, which will be led by a Sevcon-nominated chair. Subject to the satisfaction of certain closing conditions, the joint-venture agreement is expected to commence operations in the second quarter of 2014.
Item 2
|
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. Important factors that could cause these statements not to be realized include the risks discussed under “Risk Factors” below and others discussed in this report.
CRITICAL ACCOUNTING ESTIMATES
As of December 28, 2013, there have been no material changes to the critical accounting estimates described in the Company’s 2012 10-K. However, if the business and economic realities vary from those assumed in these judgments and estimates, actual operating results may differ materially from the amounts derived from these judgments and estimates. In addition, if the continuing worldwide economic troubles continue to have a negative effect on our business, estimates used in future periods may vary materially from those included in the Company’s previous disclosures.
For example:
(i)
|
if the financial condition of any of the Company's customers deteriorates as a result of further business declines, the Company may be required to increase its estimated allowance for bad debts;
|
(ii)
|
if actual future demand is less than previously projected, inventory write-downs may be required; or
|
(iii)
|
significant negative industry or economic trends that adversely affect our future revenues and profits, or a reduction of our market capitalization relative to net book value, among other factors, may change the estimated future cash flows or other factors that we use to determine whether or not goodwill has been impaired and lead us to conclude that an impairment charge is required.
|
All of these factors, and others resulting from the current economic situation, may have a material adverse
impact on the Company’s results.
OVERVIEW OF FIRST QUARTER
Results of Operations
Three months ended December 28, 2013
The following table compares the results by segment for the three months ended December 28, 2013 with the same period in the prior year. The table shows the effect of currency and volume changes in percentage terms:
|
|
Three months ended
|
|
|
Favorable (unfavorable) % change due to:
|
|
|
|
December 28,
2013
|
|
|
December 29,
2012
|
|
|
Total
|
|
|
Currency
|
|
|
Volume
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls - to external customers
|
|
$
|
8,535
|
|
|
$
|
6,202
|
|
|
|
38
|
|
|
|
2
|
|
|
|
36
|
|
Capacitors - to external customers
|
|
|
514
|
|
|
|
438
|
|
|
|
17
|
|
|
|
-
|
|
|
|
17
|
|
Capacitors - inter-segment
|
|
|
-
|
|
|
|
2
|
|
|
|
100
|
|
|
|
-
|
|
|
|
100
|
|
Capacitors – total
|
|
|
514
|
|
|
|
440
|
|
|
|
17
|
|
|
|
-
|
|
|
|
17
|
|
Total sales to external customers
|
|
|
9,049
|
|
|
|
6,640
|
|
|
|
36
|
|
|
|
1
|
|
|
|
35
|
|
Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
3,625
|
|
|
|
2,105
|
|
|
|
72
|
|
|
|
(4
|
)
|
|
|
76
|
|
Capacitors
|
|
|
207
|
|
|
|
135
|
|
|
|
54
|
|
|
|
2
|
|
|
|
52
|
|
Total
|
|
|
3,832
|
|
|
|
2,240
|
|
|
|
71
|
|
|
|
(4
|
)
|
|
|
75
|
|
Selling research and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
2,976
|
|
|
|
3,248
|
|
|
|
8
|
|
|
|
(1
|
)
|
|
|
9
|
|
Capacitors
|
|
|
167
|
|
|
|
149
|
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
(12
|
)
|
Unallocated corporate expense
|
|
|
(21
|
)
|
|
|
28
|
|
|
|
175
|
|
|
|
-
|
|
|
|
175
|
|
Total
|
|
|
3,122
|
|
|
|
3,425
|
|
|
|
9
|
|
|
|
(1
|
)
|
|
|
10
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls
|
|
|
649
|
|
|
|
(1,143
|
)
|
|
|
157
|
|
|
|
(10
|
)
|
|
|
167
|
|
Capacitors
|
|
|
40
|
|
|
|
(14
|
)
|
|
|
381
|
|
|
|
22
|
|
|
|
359
|
|
Unallocated corporate expense
|
|
|
21
|
|
|
|
(28
|
)
|
|
|
175
|
|
|
|
-
|
|
|
|
175
|
|
Total
|
|
|
710
|
|
|
|
(1,185
|
)
|
|
|
160
|
|
|
|
(10
|
)
|
|
|
170
|
|
Other income and expense
|
|
|
(101
|
)
|
|
|
(225
|
)
|
|
|
55
|
|
|
|
52
|
|
|
|
3
|
|
Income (loss) before income tax
|
|
|
609
|
|
|
|
(1,410
|
)
|
|
|
143
|
|
|
|
-
|
|
|
|
143
|
|
Income tax (provision) benefit
|
|
|
(121
|
)
|
|
|
108
|
|
|
|
(212
|
)
|
|
|
(1
|
)
|
|
|
(211
|
)
|
Net income (loss)
|
|
$
|
488
|
|
|
$
|
(1,302
|
)
|
|
|
138
|
|
|
|
-
|
|
|
|
138
|
|
Sales in the first quarter of 2014 were $9,049,000 compared to $6,640,000 in the same quarter last year. This increase was mainly in our controls business and reflected higher sales in our traditional markets of aerial work platform and fork lift truck. In addition there was higher demand in the on-road sector for four-wheel applications which were partially offset by lower sales in the two-wheel on-road sector. Foreign currency exchange rates were similar to last year and had little effect on reported sales.
In the controls business segment, sales were higher than the first quarter last year in all of our three main geographic markets. Excluding foreign currency effects, revenues increased 38% from the first quarter last year in Europe, reflecting stronger aerial work platform business as well as higher product demand for four-wheel on-road electric vehicle applications. Sales were higher in North America by 31% driven by increased product demand in both the aerial work platform and fork lift truck markets while demand in the mining sector was essentially flat year-over-year. Sales in the Far East increased 65% driven primarily by year-over-year growth in demand for aerial work platform and fork lift truck applications in China and Japan.
In the capacitor business, volumes shipped were 17% higher compared to the first quarter last year, largely reflecting higher demand from railway signaling customers.
Gross profit of $3,832,000 was 42.3% of sales in the first quarter, compared to $2,240,000 or 33.7% of sales in the same quarter last year. The increase in the gross profit percentage compared to the prior year was largely due to an improved sales mix in the controls business as well as fixed overhead costs being a lower percentage of sales as sales volumes increased year-on-year.
Selling, research and administrative expense in the first quarter of 2014 was $3,122,000, a decrease of $303,000, or 9%, compared to the same period last year. This decrease year-on-year partly reflects the cost savings implemented in the second quarter of 2013 in response to the reduction in customer demand in the first quarter of last year. The Company also recorded grant income of $115,000 in the first quarter of 2014 compared to $6,000 in the first quarter in the prior year; this grant income was recorded as a reduction of research and development expense in each year. The decrease in selling, research and administrative expense also reflects lower consulting and legal expenses in the first quarter of 2014 than in the first quarter last year when we recorded the cost of the final round of consultation in closing our U.K. defined benefit pension plan.
Engineering and research and development expense, net of grants receivable, as a percentage of total sales was 10.3% in the first quarter of fiscal 2014, compared with 16.3% in the first quarter of last year. This decrease reflects both the higher sales recorded in 2014 as well as the increased grants receivable in 2014 compared with the prior year.
There was operating income for the first quarter of 2014 of $710,000 which is $1,895,000 higher than last year when we recorded an operating loss of $1,185,000.
In the first quarter of 2014, interest expense was $16,000, a decrease of $8,000 compared to the prior year due to the Company’s U.K. bank overdraft facility being little used during the first quarter of 2014. There was a foreign currency loss of $85,000 in the first quarter of 2014 compared to a loss of $201,000 in the same period last year.
The Company recorded income before income taxes of $609,000 in the first quarter of 2014 compared to a loss before income taxes of $1,410,000 in the same period last year, and the Company recorded an income tax charge of $121,000 compared with an income tax benefit of $108,000 in the same period last year. There was net income after income tax for the quarter of $488,000 or income of $.14 per diluted share, compared to a loss after tax of $1,302,000, or a loss per diluted share of $.39, in the same quarter last year.
As discussed in Part II, Item 1A, “Risk Factors,” the continuing debt crisis in certain European countries poses significant potential risks to the Company’s business, financial position and results of operations.
Financial Condition
Cash balances at the end of the first quarter of 2014 were $2,159,000, compared to $2,062,000 on September 30, 2013, an increase in cash of $97,000 in the first three months of 2014.
In the first three months of 2014, operating activities generated $126,000 of cash. Excluding the impact of currency fluctuations, receivables decreased by $36,000, payables decreased by $290,000, and inventories increased by $169,000 in the quarter. The number of days sales in receivables decreased by two days from 65 day’s sales at September 30, 2013 to 63 days sales at December 28, 2013. Capital expenditures in the first three months were $64,000. Exchange rate changes increased reported cash by $46,000 in the first three months of 2013.
Other receivables of $833,000 at December 28, 2013 include $555,000 of receivables in the Company’s French subsidiary that have been reclassified from trade receivables. In January 2014 management was advised that SITL, a customer of the Company’s French subsidiary and a manufacturer of on-road electric vehicles, had entered administration protection for a minimum period of six months. SITL’s principal activity is the manufacture of domestic appliances; they also have a waste filtration business and a start-up business which manufactures electric vehicles with which the Company trades. The main customer of SITL’s domestic appliances business, Fagor Spain, was placed into administration in late 2013; the impact of this event caused SITL, including its electric vehicle division, to also be placed in administration. The Company has submitted a claim with the French court appointed administrator for the full amount of the receivable of $555,000. The administrator is seeking a buyer for the SITL business and will make an initial report into the administration process to the commercial court in Lyon, France, on March 6, 2014. This is the earliest estimate of when management will have any information upon which to assess the recoverability of this receivable. Due to the high level of uncertainty at this time, management has not assessed a reserve for an uncollectible amount, but any loss incurred may be up to the full amount recorded at December 28, 2013, of $555,000.
The Company had a U.K. bank loan of $63,000, of which $47,000 was short-term and $16,000 long-term debt at December 28, 2013. It has overdraft facilities in the United Kingdom amounting to $1,470,000 which were unused as of December 28, 2013 and September 30, 2013. The overdraft facility of the U.K. capacitor subsidiary is secured by a legal charge over the facility owned and occupied by that company. The overdraft facility of the U.K. controls subsidiary is secured by a legal charge over a facility owned by that company. Both facilities were renewed in the third quarter of 2013 for a further period of twelve months but, in line with normal practice in Europe, can be withdrawn on demand by the bank. Management believes that, if these facilities were withdrawn, adequate alternative credit resources would be available. However, this would depend on the Company’s situation and the economic environment at the time. Accordingly, management does not rely on their availability in projecting the adequacy of the Company’s capital resources.
The Company’s wholly owned subsidiary, Sevcon USA, Inc., has a $3,500,000 secured revolving credit facility with RBS Citizens, National Association for working capital and general corporate purposes. The obligations under the revolving credit facility are guaranteed by the Company and are secured by all of the assets of Sevcon USA, Inc. and a pledge of all of the capital stock of Sevcon USA, Inc. The facility imposes customary limitations on Sevcon USA, Inc.’s ability to, among other things, pay dividends, make distributions, and incur additional indebtedness. Under the facility, Sevcon USA, Inc. must maintain, on a quarterly basis, a debt to tangible net worth ratio of no more than 2.40:1 and a debt service coverage ratio of no less than 1.25:1 for each rolling twelve-month period. Upon entering into the revolving credit facility, Sevcon USA, Inc. drew down $1,700,000, which was the total amount outstanding at December 28, 2013. The revolving credit facility will expire on June 14, 2017 when all outstanding principal and unpaid interest will be due and payable in full.
There were no significant capital expenditure commitments at December 28, 2013. It is estimated that the Company will make contributions to its U.K. and U.S. defined benefit pension plans of approximately $568,000 in fiscal 2014; should the Company suffer a material reduction in revenues in 2014 this commitment could adversely impact the Company’s financial position. In the opinion of management, the Company’s requirements for working capital to meet projected operational and capital spending in both the short and long term can be met by a combination of existing cash resources, future earnings and existing borrowing facilities in Europe. Any material reduction in revenues will have a materially adverse impact on the Company’s financial position, which would be exacerbated if any of the Company’s lenders withdraws or reduces available credit. If the Company is unable to generate sufficient cash from operations and if the bank overdraft facilities are withdrawn, the Company would need to raise additional debt or equity capital from other sources to avoid significantly curtailing its business and materially adversely affecting its results.