UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 2007
[ ] 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 0-18083
Williams Controls, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 84-1099587 | |||
| (State or other jurisdiction of | (I.R.S. Employer | |||
| incorporation or organization) | Identification No.) | |||
| 14100 SW 72nd Avenue, | ||||
| Portland, Oregon | 97224 | |||
| (Address of principal executive office) | (zip code) |
(503) 684-8600
(Registrant's telephone number, including area code)
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 [ ]
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 [ ] | Accelerated Filer [ X ] | Non-Accelerated Filer [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No [ X ]
The number of shares outstanding of the registrant's common stock
as of January 31, 2008: 7,512,897
Williams Controls, Inc.
December 31, 2007
Table of Contents
Page Number | |
| Part I. Financial Information | |
| Item 1. Financial Statements (unaudited) | |
Condensed Consolidated Balance Sheets, December 31, 2007 and September 30, 2007 | 1 |
Condensed Consolidated Statements of Operations, three month periods ended December 31, 2007 and 2006 | 2 |
Condensed Consolidated Statements of Cash Flows, three month periods ended December 31, 2007 and 2006 | 3 |
| Notes to Unaudited Condensed Consolidated Financial Statements | 4 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 19 |
| Item 4. Controls and Procedures | 20 |
| Part II. Other Information | |
| Item 1. Legal Proceedings | 21 |
| Item 1A. Risk Factors | 21 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 21 |
| Item 3. Defaults Upon Senior Securities | 21 |
| Item 4. Submission of Matters to a Vote of Security Holders | 21 |
| Item 5. Other Information | 22 |
| Item 6. Exhibits | 22 |
| Signature Page | 23 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Williams Controls, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share and per share information)
(Unaudited)
| December 31, 2007 | September 30, 2007 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 1,373 | $ | 1,621 | ||||
| Trade accounts receivable, less allowance of | ||||||||
| $41 and $33 at December 31, 2007 and September 30 | ||||||||
| 2007, respectively | 8,599 | 8,054 | ||||||
| Other accounts receivable | 827 | 1,656 | ||||||
| Inventories | 8,760 | 9,152 | ||||||
| Deferred income taxes | 543 | 486 | ||||||
| Prepaid expenses and other current assets | 955 | 297 | ||||||
| Total current assets | 21,057 | 21,266 | ||||||
| Property, plant and equipment, net | 8,769 | 8,953 | ||||||
| Deferred income taxes | 1,483 | 1,461 | ||||||
| Other assets, net | 582 | 623 | ||||||
| Total assets | $ | 31,891 | $ | 32,303 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 2,668 | $ | 3,811 | ||||
| Accrued expenses | 4,866 | 4,983 | ||||||
| Current portion of employee benefit obligations | 288 | 288 | ||||||
| Current portion of long-term debt | 875 | 1,000 | ||||||
| Total current liabilities | 8,697 | 10,082 | ||||||
| Long-term Liabilities: | ||||||||
| Long-term debt | - | - | ||||||
| Employee benefit obligations | 4,437 | 4,803 | ||||||
| Other long-term liabilities | 254 | 249 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred Stock ($.01 par value, 50,000,000 authorized) Series C | ||||||||
| (0 issued and outstanding at December 31, 2007 and September 30, | ||||||||
| 2007) | - | - | ||||||
| Common stock ($.01 par value, 12,500,000 authorized; 7,511,647 | ||||||||
| and 7,495,482 issued and outstanding at December 31, 2007 and | ||||||||
| September 30, 2007, respectively) | 75 | 75 | ||||||
| Additional paid-in capital | 35,118 | 34,899 | ||||||
| Accumulated deficit | (11,403 | ) | (12,477 | ) | ||||
| Treasury stock (21,700 shares at December 31, 2007 and | ||||||||
| September 30, 2007) | (377 | ) | (377 | ) | ||||
| Accumulated other comprehensive loss | (4,910 | ) | (4,951 | ) | ||||
| Total stockholders’ equity | 18,503 | 17,169 | ||||||
| Total liabilities and stockholders’ equity | $ | 31,891 | $ | 32,303 | ||||
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.
1
Williams Controls, Inc.
Condensed Consolidated Statements of Operations
(Dollars in thousands, except share and per share information)
(Unaudited)
Three Month Period Ended December 31, | ||||||||
| 2007 | 2006 | |||||||
| Net sales | $ | 14,972 | $ | 18,442 | ||||
| Cost of sales | 10,086 | 12,150 | ||||||
| Gross profit | 4,886 | 6,292 | ||||||
| Operating expenses: | ||||||||
| Research and development | 1,009 | 830 | ||||||
| Selling | 678 | 520 | ||||||
| Administration | 1,401 | 1,273 | ||||||
| Realignment of operations | - | 176 | ||||||
| Total operating expenses | 3,088 | 2,799 | ||||||
| Operating income | 1,798 | 3,493 | ||||||
| Other (income) expenses: | ||||||||
| Interest income | (22 | ) | (36 | ) | ||||
| Interest expense | 88 | 258 | ||||||
| Other income, net | (34 | ) | (603 | ) | ||||
| Total other (income) expenses | 32 | (381 | ) | |||||
| Income before income taxes | 1,766 | 3,874 | ||||||
| Income tax expense | 610 | 1,331 | ||||||
| Net income | $ | 1,156 | $ | 2,543 | ||||
| Net income per common share – basic | $ | 0.15 | $ | 0.34 | ||||
| Weighted average shares used in per share calculation – basic | 7,508,861 | 7,439,746 | ||||||
| Net income per common share – diluted | $ | 0.15 | $ | 0.33 | ||||
| Weighted average shares used in per share calculation – diluted | 7,756,635 | 7,693,601 | ||||||
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.
2
Williams Controls, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Three Month Period Ended December 31, | ||||||||
| 2007 | 2006 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 1,156 | $ | 2,543 | ||||
| Adjustments to reconcile net income to net cash provided by | ||||||||
| operating activities: | ||||||||
| Depreciation and amortization | 459 | 501 | ||||||
| Deferred income taxes | (37 | ) | - | |||||
| Stock based compensation | 149 | 114 | ||||||
| Gain on settlement of liabilities | - | (589 | ) | |||||
| Changes in operating assets and liabilities | ||||||||
| Receivables, net | 284 | 1,356 | ||||||
| Inventories | 392 | (841 | ) | |||||
| Accounts payable and accrued expenses | (1,384 | ) | (1,010 | ) | ||||
| Prepaid expenses and other current assets | (658 | ) | (556 | ) | ||||
| Other | (341 | ) | (232 | ) | ||||
| Net cash provided by operating activities | 20 | 1,286 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property, plant and equipment | (213 | ) | (687 | ) | ||||
| Net cash used in investing activities | (213 | ) | (687 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payments of debt | (125 | ) | (712 | ) | ||||
| Net proceeds from exercise of stock options | 70 | 44 | ||||||
| Net cash used in financing activities | (55 | ) | (668 | ) | ||||
| Net decrease in cash and cash equivalents | (248 | ) | (69 | ) | ||||
| Cash and cash equivalents at beginning of period | 1,621 | 2,530 | ||||||
| Cash and cash equivalents at end of period | $ | 1,373 | $ | 2,461 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Interest paid | $ | 42 | $ | 221 | ||||
| Income taxes paid | $ | - | $ | - | ||||
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.
3
Notes to Unaudited Condensed Consolidated Financial Statements
Three Month periods ended December 31, 2007 and 2006
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Note 1. Organization
Williams Controls, Inc., including its wholly-owned subsidiaries as follows, are hereinafter referred to as the “Company,” “Registrant,” “we,” “our,” or “us.”
Active Subsidiaries – Williams Controls Industries, Inc. (“Williams”); Williams (Suzhou) Controls Co. Ltd. (“Williams Controls Asia”); and Williams Controls Europe GmbH (“Williams Controls Europe”).
Inactive Subsidiaries – Aptek Williams, Inc. (“Aptek”); Premier Plastic Technologies, Inc. (“PPT”); ProActive Acquisition Corporation (“ProActive”); WMCO-Geo (“GeoFocus”); NESC Williams, Inc. (“NESC”); Williams Technologies, Inc. (“Technologies”); Williams World Trade, Inc. (“WWT”); Techwood Williams, Inc. (“TWI”); Agrotec Williams, Inc. (“Agrotec”) and our 80% owned subsidiaries Hardee Williams, Inc. (“Hardee”) and Waccamaw Wheel Williams, Inc. (“Waccamaw”).
Note 2. Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared by the Company and, in the opinion of management, reflect all material normal recurring adjustments necessary to present fairly the Company’s financial position as of December 31, 2007 and the results of operations and cash flows for the three month periods ended December 31, 2007 and 2006. The results of operations for the three month period ended December 31, 2007 are not necessarily indicative of the results to be expected for the entire fiscal year.
Certain information and footnote disclosures made in the last Annual Report on Form 10-K have been condensed or omitted for the interim consolidated statements. Certain costs are estimated for the full year and allocated to interim periods based on activity associated with the interim period. Accordingly, such costs are subject to year-end adjustment. It is management’s opinion that, when the interim consolidated statements are read in conjunction with the Company’s annual report on Form 10-K, for the fiscal year ended September 30, 2007, the disclosures are adequate to make the information presented not misleading. The interim consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions, based upon all known facts and circumstances, that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from these estimates. Estimates are used in accounting for, among other things, pension and post-retirement benefits, product warranty, excess and obsolete inventory, allowance for doubtful accounts, useful lives for depreciation and amortization, future cash flows associated with the evaluation of impairment of long-lived assets, deferred tax assets, stock options and commitments and contingencies.
Note 3. Realignment of Operations
During the second quarter of fiscal year 2006, the Company initiated a plan for realignment (“the Plan”) of its Portland, Oregon manufacturing operations as part of ongoing efforts to focus on its core product competencies and improve its global competitiveness. The Plan was essentially completed in fiscal 2007. The Plan consisted of outsourcing all of the Company’s die casting and machining operations to high-quality suppliers, primarily in Asia, and relocating of the Company’s assembly operations for the majority of its pneumatic products to its manufacturing facility in Suzhou, China. In conjunction with the realignment, the Company eliminated 50 hourly and 2 salaried positions from its Portland, Oregon headquarters during fiscal 2007. As part of the Plan, the Company incurred a one-time termination benefit with those employees affected by the Plan.
4
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” and related guidance, a one-time benefit arrangement must meet certain criteria in order for a Company to recognize a liability for such one-time benefits. The plan must establish the terms of the benefit arrangement, including the benefits that employees will receive upon termination, in sufficient detail to enable employees to determine the type and amount of benefits they will receive if they are involuntarily terminated. That determination was reached when the Company began negotiations over the effects of the realignment related workforce reductions with the United Automobile Workers of America (“UAW”) during the third quarter of fiscal 2006, at which time the Company began to record an estimated liability for anticipated termination costs. The Company reached an agreement with the UAW regarding the effects of the realignment associated workforce reduction on April 6, 2007.
The total costs of the Plan were approximately $1.5 million and include costs related to hourly and salaried termination benefits of $605; supplier and parts qualification of $100; refurbishment of tools of $150; accelerated depreciation on certain assets of $240; and general administrative and other costs of $400. Certain of these costs are classified in financial statement line items other than realignment of operations expense. The Company recorded realignment expenses of $176 for the three month period ended December 31, 2006, which were recorded in operating expenses in the accompanying condensed consolidated statements of operations. No realignment expense was recorded during the three month period ended December 31, 2007, as the realignment was substantially complete. Following is a reconciliation of the changes in the Company’s liability accrual related to the employee termination benefits during fiscal 2008 and the comparable period in fiscal 2007.
| Three month period ended December 31, | ||||||||
| 2007 | 2006 | |||||||
| Balance at beginning of period | $ | 86 | $ | 226 | ||||
| Payments | (48 | ) | - | |||||
| Additional accruals | - | 105 | ||||||
| Balance at end of period | $ | 38 | $ | 331 | ||||
The liability of $38 at December 31, 2007 represents the remaining employee termination benefits that have been earned but have yet to be paid out.
Note 4. Accounting for Stock Based Compensation
The Company uses SFAS No. 123R, “Share Based Payment,” which revises SFAS No. 123, “Accounting for Stock-Based Compensation” to account for stock based compensation. Prior to fiscal year 2006, the Company accounted for its stock-based compensation plans using the intrinsic value-based method under Accounting Principles Board Opinion No. 25 (APB 25). No compensation expense was recorded for stock options granted to employees prior to October 1, 2005 under the intrinsic value method.
SFAS No. 123R applies to new awards and to awards modified, repurchased, or cancelled after the required effective date, as well as to the unvested portion of awards outstanding as of the required effective date. The effective date for the Company was October 1, 2005. The Company uses the Black-Scholes option pricing model to value its stock option grants under SFAS No. 123R, applying the “modified prospective method” for existing grants which requires the Company to value stock options prior to its adoption of SFAS No 123R under the fair value method and expense the unvested portion over the remaining vesting period. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period, which equals the vesting period. Under SFAS No 123R, the Company is also required to estimate forfeitures in calculating the expense related to stock-based compensation. In addition, SFAS No. 123R requires the Company to reflect the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash inflow upon adoption.
The Company currently has two qualified stock option plans. The Restated 1993 Stock Option Plan (the “1993 Plan”) reserves an aggregate of 750,000 shares of the Company’s common stock for the issuance of stock options, which may be granted to employees, officers and directors of and consultants to the Company. Under the terms of the 1993 Plan, the Company may grant “incentive stock options” or “non-qualified options” with an exercise price of not less than the fair market value on the date of grant. Options granted under the 1993 Plan have a vesting schedule, which is typically five years, determined by the Compensation Committee of the Board of Directors and expire ten years after the date of grant.
5
The non-employee Director Plan (the “1995 Plan”) reserves an aggregate of 66,666 shares of the Company’s common stock for the issuance of stock options, which may be granted to non-employee directors of the Company. Under the 1995 Plan the non-employee directors are each automatically granted 1,666 options at a price equal to the market value on the date of grant which is the date of the annual stockholders’ meeting each year, exercisable for 10 years after the date of the grant. These options are exercisable as to 25% of the shares thereby on the date of grant and as to an additional 25%, cumulatively on the first, second and third anniversaries of the date of grant.
As of December 31, 2007 there was $1,794 of total unrecognized compensation costs related to nonvested stock options. That cost is expected to be recognized over a weighted average period of 3.3 years. For the three month period ended December 31, 2007, the Company’s total stock-based compensation expense was $149 ($126 net of tax). Stock-based compensation expense was recorded in cost of sales and operating expenses in the amounts of $25 and $124, respectively, in the accompanying condensed consolidated statement of operations. For the three month period ended December 31, 2006, the Company’s total stock-based compensation expense was $114 ($104 net of tax). Stock-based compensation expense was recorded in cost of sales and operating expenses in the amounts of $16 and $98, respectively, in the accompanying condensed consolidated statement of operations.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants issued during the three month period ended December 31, 2006. No options were granted during the three month period ended December 31, 2007.
| Three Month Period Ended December 31, | ||||
| 2006 | ||||
| Risk-free interest rate | 4.60% | |||
| Expected dividend yield | 0% | |||
| Expected term | 6.5 years | |||
| Expected volatility | 86% | |||
The expected term of options granted represents the weighted average period the stock options are expected to remain outstanding and is calculated using the simplified method under SAB 107, which expresses the view of the Securities and Exchange Commission (“SEC”) Staff regarding interaction between SFAS No. 123R and certain SEC rules and regulations and provides the Staff’s views regarding the valuation of share-based payment arrangements for public companies. Expected volatilities are based on the historical volatility of the Company’s common stock.
The following table summarizes stock options outstanding as of December 31, 2007 as well as activity during the three month period then ended.
Shares | Weighted Average Exercise Price | |||||||
| Outstanding at September 30, 2007 | 622,785 | $ | 8.40 | |||||
| Granted | - | - | ||||||
| Exercised | (16,165 | ) | 4.37 | |||||
| Forfeited | (7,686 | ) | 7.80 | |||||
| Outstanding at December 31, 2007 | 598,934 | 8.51 | ||||||
| Exercisable at December 31, 2007 | 342,142 | $ | 6.33 | |||||
At December 31, 2007, the weighted average remaining contractual term of options outstanding and options exercisable was 6.7 years and 5.8 years, respectively.
The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2007 was $5,226 and $3,690, respectively (the intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option). The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2006 was $4,967 and $2,594, respectively. There were no stock options granted during the three month period ended December 31, 2007. The weighted average grant date fair value of stock options granted during the three month period ended December 31, 2006 was $10.45 per share. The intrinsic value of all stock options exercised during the three month period ended December 31, 2007 was $217. Cash received from the exercise of stock options for the three month period ended December 31, 2007 was $70.
6
The intrinsic value of all stock options exercised during the three month period ended December 31, 2006 was $109. Cash received from the exercise of stock options for the three month period ended December 31, 2006 was $44.
Note 5. Comprehensive Income
SFAS No. 130, “Reporting Comprehensive Income," requires companies to report a measure of all changes in equity except those resulting from investments by owners and distributions to owners. Total comprehensive income for the three month periods ended December 31, 2007 and 2006 was $1,197 and $2,555, respectively, and consisted of net income and foreign currency translation adjustments. As of December 31, 2007, accumulated other comprehensive loss was $4,910 and consisted of accumulated benefit obligations in excess of the plan assets for both the Hourly Employees pension plan and the Salaried Employees pension plan and the effect of foreign currency translation adjustments.
Note 6. Earnings Per Share
Basic earnings per share ("EPS") and diluted EPS are computed using the methods prescribed by SFAS No. 128, "Earnings Per Share". Basic EPS is based on the weighted-average number of common shares outstanding during the period. Diluted EPS is based on the weighted-average number of common shares outstanding and the dilutive impact of common equivalent shares outstanding.
Following is a reconciliation of basic EPS and diluted EPS:
Three Month Period Ended December 31, 2007 | Three Month Period Ended December 31, 2006 | |||||||||||||||||||||||
Income | Shares | Per Share Amount | Income | Shares | Per Share Amount | |||||||||||||||||||
| Basic EPS – | $ | 1,156 | 7,508,861 | $ | 0.15 | $ | 2,543 | 7,439,746 | $ | 0.34 | ||||||||||||||
| Effect of dilutive securities – | ||||||||||||||||||||||||
| Stock options | 247,774 | 253,855 | ||||||||||||||||||||||
| Diluted EPS – | $ | 1,156 | 7,756,635 | $ | 0.15 | $ | 2,543 | 7,693,601 | $ | 0.33 | ||||||||||||||
For the three month period ended December 31, 2007, the Company had options covering 99,246 shares that were not considered in the dilutive EPS calculation since they would have been antidilutive. For the three month period ended December 31, 2006, the Company had options and warrants covering 47,034 shares not considered in the dilutive EPS calculation since they would have been antidilutive.
Note 7. Inventories
Inventories, net of reserves, consist of the following:
December 31, 2007 | September 30, 2007 | |||||||
| Raw materials | $ | 6,677 | $ | 7,057 | ||||
| Work in process | 37 | 66 | ||||||
| Finished goods | 2,046 | 2,029 | ||||||
| $ | 8,760 | $ | 9,152 | |||||
Note 8. Settlement of Accounts Payable
Included in the accompanying condensed consolidated balance sheet is approximately $155 of accounts payable related to closed insolvent subsidiaries of the Company. In accordance with SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, a debtor can only relieve itself of a liability if it has been extinguished. Accordingly, a liability is considered extinguished if (a) the debtor pays the creditor and is relieved of its obligation for the liability or (b) the debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor.
7
During the first quarter of fiscal 2007, the Company was judicially released from and reversed $589 of old accounts resulting in a gain, which has been recorded in other (income) expense in the accompanying condensed consolidated statements of operations. No amounts were released and reversed during the first quarter of fiscal 2008. The Company will continue to monitor its ability to reverse amounts in future periods based on the recognition of the liabilities being judicially released in accordance with SFAS No. 140. If judicially released, the Company would reverse $90 in fiscal 2010 and a total of $65 in fiscal 2011 – 2016.
Note 9. Debt
In September 2004, the Company entered into a $25,000 senior secured lending facility with Merrill Lynch, consisting of an $8,000 revolving loan facility and a $17,000 term loan. The loans are secured by substantially all the assets of the Company. Borrowings under the revolving loan facility are subject to a borrowing base equal to 85% of eligible accounts receivables and 60% of eligible inventories. Interest rates under the agreement are based on the election of the Company of either a LIBOR rate or Prime rate. Under the LIBOR rate option, the revolving loan facility will bear interest at the LIBOR rate plus 3.75% per annum and borrowings under the term loan facility will bear interest at the LIBOR rate plus 4.25%. Under the Prime rate option, the revolving loan facility will bear interest at the Prime rate plus 2.75% per annum and the term loan facility will bear interest at the Prime rate plus 3.25%. Fees under the loan agreement include an unused line fee of 0.50% per annum on the unused portion of the revolving credit facility.
The Company is required to repay the term loan in equal quarterly scheduled payments which are adjusted annually to repay the remaining loan balance by the end of the term. The Company is entitled to prepay the term loan, in whole or in part, in minimum amounts without penalty and through December 31, 2007 the Company has made prepayments on the term loan so that on December 31, 2007 only $875 remained outstanding under the term loan. Mandatory prepayments of the loans under the term loan are required in amounts equal to 75% of the Company’s excess cash flow, as defined in the agreement, for each fiscal year. The revolving loan facility expires on September 29, 2009, at which time all outstanding amounts under the revolving loan facility are due and payable. The Company is subject to certain quarterly and annual financial covenants.
The Company had available under its revolving credit facility $8,000 at December 31, 2007 and September 30, 2007.
The Company’s long-term debt consists of the following:
| December 31, 2007 | September 30, 2007 | |||||||
| Revolving credit facility due September 29, 2009, bearing interest at a variable rate. | $ | - | $ | - | ||||
Term loan due September 29, 2009, balance bearing interest at a variable rate, (10.5% at December 31, 2007) | 875 | 1,000 | ||||||
| 875 | 1,000 | |||||||
| Less current portion | (875 | ) | (1,000 | ) | ||||
| $ | - | $ | - | |||||
Note 10. Product Warranties
The Company establishes a product warranty liability based on a percentage of product sales. The liability is based on historical return rates of products and amounts for significant and specific warranty issues, and is included in accrued expenses in the accompanying condensed consolidated balance sheets. Warranty is limited to a specified time period, mileage or hours of use, and varies by product, application and customer. The Company has recorded a liability, which in the opinion of management, is adequate to cover such warranty costs. Following is a reconciliation of the changes in the Company’s warranty liability for the three month periods ended December 31, 2007 and 2006.
8
Three Month Period Ended December 31, 2007 | Three Month Period Ended December 31, 2006 | ||||||||
| Balance at September 30, 2007 | $ | 1,712 | Balance at September 30, 2006 | $ | 1,720 | ||||
| Payments | (178 | ) | Payments | (107 | ) | ||||
| Additional accruals | 189 | Additional accruals | 221 | ||||||
| Balance at December 31, 2007 | $ | 1,723 | Balance at December 31, 2006 | $ | 1,834 | ||||
Included in the warranty liability at December 31, 2006 were $400 of warranty liabilities associated with our former passenger car and light truck product lines, which were sold on September 30, 2003. At September 30, 2007, the Company reversed this $400 warranty liability as the warranty return period had expired.
Note 11. Pension Plans and Post-Retirement Benefits
The Company maintains two pension plans, an hourly employee plan and a salaried employee plan. The hourly plan covers certain of the Company’s union employees. The salaried plan covers certain salaried employees. Annual net periodic pension costs under the plans are determined on an actuarial basis. The Company’s policy is to fund these costs accrued over 15 years and obligations arising due to plan amendments over the period benefited. The assets and liabilities are adjusted annually based on actuarial results. Disclosures regarding the components of net periodic benefit cost and contributions of pension plans are required for interim financial statements and are included below.
| Components of Net Periodic Benefit Cost: | ||||||||||||||||
| Salaried Employees Plan | Hourly Employees Plan | |||||||||||||||
Three Month Period Ended December 31, | Three Month Period Ended December 31, | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
| Service cost | $ | - | $ | - | $ | 16 | $ | 29 | ||||||||
| Interest cost | 74 | 73 | 115 | 112 | ||||||||||||
| Expected return on plan assets | (77 | ) | (68 | ) | (118 | ) | (100 | ) | ||||||||
| Amortization of prior service cost | - | - | 5 | 12 | ||||||||||||
| Amortization of loss | 16 | 23 | 42 | 62 | ||||||||||||
| Net periodic benefit cost | $ | 13 | $ | 28 | $ | 60 | $ | 115 | ||||||||
The Company expects total contributions to its pension plans in fiscal 2008 to be $1,344. During the three month period ended December 31, 2007, the Company has made contributions of $402.
The Company also provides health care and life insurance benefits for certain of its retired employees. These benefits are subject to deductibles, co-payment provisions and other limitations. Disclosures regarding the components of net periodic benefit cost and contributions of the Company’s post-retirement plan are required for interim financial statements and are included below. The Company did not make any contributions to the post-retirement plan for the quarters ended December 31, 2007 and 2006.
| Components of Net Periodic Benefit Cost: | ||||||||
| Post-Retirement Plan | ||||||||
Three Month Periods Ended December 31, | ||||||||
| 2007 | 2006 | |||||||
| Service cost | $ | 1 | $ | 2 | ||||
| Interest cost | 59 | 55 | ||||||
| Amortization | (8 | ) | (6 | ) | ||||
| Net periodic benefit cost | $ | 52 | $ | 51 | ||||
9
Note 12. Income Taxes
In June, 2006 the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 establishes a single model to address accounting for uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company adopted the provisions of FIN 48 on October 1, 2007. As of the date of adoption, the Company had unrecognized tax benefits of $109, of which $72 will favorably affect the effective tax rate, if recognized. The adoption of FIN 48 resulted in a decrease of $82 to retained earnings as a cumulative effect adjustment to stockholder’s equity. The amount of interest and penalties related to the unrecognized tax benefits as of the date of adoption was $14. The Company will recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company believes that it is reasonably possible that all of it unrecognized tax benefits could be recognized within the 12 months of this reporting date.
The Company is subject to U.S. federal, state and foreign income taxes. The Company is no longer subject to U.S. federal, state or foreign income tax examinations for fiscal years ended before September 30, 2004, September 30, 2003 and September 30, 2005, respectively. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating loss or credit carryforward amount.
The Company is not currently under Internal Revenue Service (“IRS”) examination. The Company is undergoing an Oregon tax examination for the fiscal years ended September 30, 2004 through 2006. The Company is not currently under examination in any other states or foreign jurisdictions.
Note 13. Segment Information
The Company accounts for its segments in accordance with SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information”. During the three month periods ended December 31, 2007 and 2006, the Company operated in two geographic reportable segments as shown in the table below.
Three Month Periods Ended December 31, | ||||||||
| 2007 | 2006 | |||||||
| Revenue – External Customers: | ||||||||
| United States | $ | 14,735 | $ | 18,302 | ||||
| China | 237 | 140 | ||||||
| $ | 14,972 | $ | 18,442 | |||||
| Revenue – Intersegments: | ||||||||
| United States | $ | 163 | $ | 483 | ||||
| China | 2,823 | 2,432 | ||||||
| Other | 138 | 115 | ||||||
| Eliminations | (3,124 | ) | (3,030 | ) | ||||
| $ | - | $ | - | |||||
| Income before income taxes: | ||||||||
| United States | $ | 1,671 | $ | 3,805 | ||||
| China | 127 | 194 | ||||||
| Other | (32 | ) | (125 | ) | ||||
| $ | 1,766 | $ | 3,874 | |||||
Note 14. Contingencies
The Company and its subsidiaries are parties to various pending judicial and administrative proceedings arising in the ordinary course of business. The Company’s management and legal counsel have reviewed the probable outcome of these proceedings, the costs and expenses reasonably expected to be incurred, the availability and limits of the Company’s insurance coverage, and the Company’s established liabilities. While the outcome of the pending proceedings cannot be predicted with certainty, based on its review, the Company believes that any unrecorded liability that may result is not more than likely to have a material effect on the Company’s liquidity, financial condition or results of operations.
10
The soil and groundwater at the Company’s Portland, Oregon facility contains certain contaminants, which were deposited from approximately 1968 through 1995. Some of this contamination has migrated offsite to neighboring properties. The Company has retained an environmental consulting firm to investigate the extent of the contamination and to determine what remediation will be required and the associated costs. During fiscal 2004, the Company entered into the Oregon Department of Environmental Quality’s voluntary clean-up program and during fiscal 2004 the Company established a liability of $950 for this matter. At September 30, 2007, the Company recorded an additional liability of $546 based on remaining costs estimates determined by the Company’s environmental consulting firm. As of December 31, 2007, the total liability recorded is $1,025 (and excludes any potential claim recovery as discussed below) and is recorded in accrued expenses in the accompanying condensed consolidated balance sheet. The Company has asserted a contractual indemnity claim against Dana Corporation (“Dana”), from which it acquired the property, and contribution claims against other prior owners of the property as well as businesses previously located on the property (including Blount, Inc. (“Blount”) under the Federal Superfund Act and the Oregon Cleanup Law. Dana is subject to a pending bankruptcy petition. On November 20, 2007, the Company and Blount executed a settlement agreement with Dana with respect to these claims. Dana is submitting the settlement agreement to the bankruptcy court for approval; the settlement agreement also is contingent on the court’s approval of Dana’s proposed plan of reorganization in substantially the form described in Dana’s disclosure statement in effect as of this same date. If the settlement agreement is approved by the bankruptcy court and the plan of reorganization is approved, Blount will be obligated to pay the Company $625 and the Company’s claim against Dana will be allowed as an unsecured general creditor’s claim in the amount of $750. The Company anticipates the claim will be discounted and paid primarily in stock in the reorganized corporation, all in accordance with Dana’s plan of reorganization. At this time, the Company is not able to reasonably estimate the net amount it may be able to realize from this unsecured claim and has not recognized any asset in the financial statements pertaining to any recovery from either Blount or Dana. The Company believes that even with a resolution of the claims against the prior operators and owner of the property, the Company will be liable for some portion of the ultimate costs and it believes that the liability recorded at December 31, 2007 will be sufficient to cover these costs.
On October 1, 2004, the Company was named as a co-defendant in a product liability case (Cuesta v. Ford, et al, District Court for Bryant, Oklahoma). During the second quarter of fiscal 2007, the Oklahoma district court granted the plaintiffs class action status. Both the Company and Ford are appealing this decision. The complaint seeks an unspecified amount of damages on behalf of the class. The Company continues to believe the claims to be without merit and intends to continue to vigorously defend against this action. There can be no assurance, however, that the outcome of the lawsuit will be favorable to the Company or will not have a material adverse effect on the Company’s business, consolidated financial condition and results of operations. The Company cannot reasonably estimate the possible loss or range of loss at this time. In addition, the Company has incurred and will continue to incur substantial litigation expenses in defending this litigation.
On August 1, 2005, Mr. Thomas Ziegler, the Company’s former president and chief executive officer, filed a suit against the Company, American Industrial Partners, L.P.; American Industrial Partners Fund III, L.P., and American Industrial Partners Fund III Corporation in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida. This suit is similar to a suit filed by Mr. Ziegler on May 12, 2003 against the same defendants. The 2003 suit was dismissed without prejudice for failure to prosecute. In the suit, Mr. Ziegler alleges the Company breached an “oral agreement” with Mr. Ziegler to pay him additional compensation, including a bonus of "at least" $500 for certain tasks performed by Mr. Ziegler while he was the Company's president and chief executive officer and seeks additional compensation to which he claims he is entitled. The Company disputes the existence of any such agreement and any resulting liability to Mr. Ziegler and is vigorously defending this action.
11
Williams Controls, Inc.
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except share and per share amounts) |
This section summarizes the significant factors affecting our consolidated results of operations, financial condition and liquidity position for the three month periods ended December 31, 2007 and 2006. This section should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this document. Statements in this report that relate to future results and events are based on our current expectations. Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties, including, but not limited to, those risks discussed in the section entitled “Risk Factors” in our annual report on Form 10-K for the fiscal year ended September 30, 2007.
Forward-Looking Statements
This report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, those statements relating to development of new products, the financial condition of the Company and the ability to increase distribution of our products. Forward-looking statements can be identified by the use of forward-looking terminology, such as “may, ” “will, ” “should, ” “expect, ” “anticipate, ” “estimate, ” “continue, ” “plans, ” “intends, ” or other similar terminology. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated by the forward-looking statements. These risks and uncertainties are beyond our control and, in many cases, we cannot predict the risks and uncertainties that could cause our actual results to differ materially from those indicated by the forward-looking statements.
The forward-looking statements are made as of the date hereof, and, except as otherwise required by law, we disclaim any intention or obligation to update or revise any forward-looking statements or to update the reasons why the actual results could differ materially from those projected in the forward-looking statements, whether as a result of new information, future events or otherwise.
Investors are cautioned to consider the risk factors identified below when considering forward-looking statements. If any of these items actually occur, our business, results of operations, financial condition or cash flows could be materially adversely affected.
Overview
We design, manufacture and sell electronic throttle and pneumatic control systems for heavy trucks, transit busses and off-road equipment. Electronic throttle controls send a signal proportional to throttle position to adjust the speed of electronically controlled engines. The use of electronically controlled engines is influenced primarily by emissions regulations, because these engines generally produce lower emissions. The original applications of electronic engines and electronic throttle controls were in heavy trucks and transit busses in the United States and Europe in the late 1980’s. As a result of the continuing implementation of more stringent emissions standards worldwide, demand for electronically controlled engines and electronic throttle control systems is expanding. Both China and India have announced requirements for more stringent emissions standards for heavy trucks and transit busses. Additionally, worldwide emissions regulations have been enacted that increase the use of electronic throttle controls in off-road equipment. We also produce a line of pneumatic control products, which are sold to the same customer base as our electronic throttle controls. These pneumatic products are used for vehicle control system applications. We believe that the demand for our products will be driven by worldwide emissions legislation and the economic cycles for heavy trucks, transit busses and off-road equipment.
As we move forward in fiscal 2008 and beyond, we will continue to work closely with our existing and potential customers to design and develop new products and adapt existing products to new applications, and to improve the performance, reliability and cost-effectiveness of our products.
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Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales, cost of sales and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies and the related judgments and estimates affect the preparation of our condensed consolidated financial statements.
Revenue Recognition
Revenue is recognized at the time of product delivery, which is when title and risk of loss transfers to customers, and when all of the following have occurred: a firm sales agreement is in place, pricing is fixed or determinable, and collection is reasonably assured. Revenues are reported net of rebates and customer discounts. Discounts and rebates are recorded during the period they are earned by the customer.
Warranty
We provide a warranty covering defects arising from products sold. The product warranty liability is based on historical return rates of products and amounts for significant and specific warranty issues. The warranty is limited to a specified time period, mileage or hours of use, and varies by product, application and customer. The Company has recorded a warranty liability, which in the opinion of management is adequate to cover such costs. While we believe our estimates are reasonable, they are subject to change and such change could be material.
Legal
We are involved in various claims, lawsuits and other proceedings from time to time. Such litigation involves uncertainty as to possible losses we may ultimately realize when one or more future events occur or fail to occur. In connection with such claims and lawsuits, we estimate the probability of losses based on advice of legal counsel, the outcomes of similar litigation, legislative development and other factors. Due to the numerous variables associated with these judgments and assumptions, both the precision and reliability of the resulting estimates of the related loss contingencies are subject to substantial uncertainties. We regularly monitor our estimated exposure to these contingencies and, as additional information becomes known, may change our estimates significantly. A significant change in our estimates, or a result that materially differs from our estimates, could have a significant impact on our financial position, results of operations and cash flows.
Environmental
We estimate the costs of investigation and remediation for certain soil and groundwater contaminants at our Portland, Oregon facility. The ultimate costs to the Company for the investigation, remediation and monitoring of this site cannot be predicted with certainty due to the often unknown magnitude of the pollution or the necessary cleanup, the varying costs of alternative cleanup methods, the amount of time necessary to accomplish such cleanups and the evolving nature of cleanup technologies and governmental regulations. The Company has recognized a liability for environmental remediation costs for this site in an amount that management believes is probable and reasonably estimable. When the estimate of a probable loss is within a range, the minimum amount in the range is accrued when no estimate within the range is better than another. In making these judgments and assumptions, the Company considers, among other things, the activity to-date at the site and information obtained through consultation with applicable regulatory authorities and third party consultants and contractors. The Company regularly monitors its exposure to environmental loss contingencies. As additional information becomes known, it is at least reasonably possible that a change in the estimated liability accrual will occur in the near future.
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Pensions and Post-Retirement Benefit Obligations
Pension and post-retirement benefit obligations and net period benefit cost are calculated using actuarial models. The most important assumptions that affect these computations are the discount rate, expected long-term rate of return on plan assets, and healthcare cost trend rates. We evaluate these assumptions at least annually. Other assumptions involve demographic factors such as retirement, mortality and turnover. These assumptions are evaluated at least annually and are updated to reflect our experience. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors.
Our discount rate assumption is intended to reflect the rate at which retirement benefits could be effectively settled based upon the assumed timing of the benefit payments. To determine our discount rate, we discount the expected benefit payments using the Citigroup Pension Discount Liability Index yield curve. The equivalent level interest rate that produces the same present value of benefits is then determined. Our assumed rate does not differ significantly from this benchmark rate. To determine the expected long-term rate of return on pension plan assets, we consider the current asset allocations and the historical and expected returns on various categories of plan assets obtained from our investment portfolio manager. Our post-retirement plan does not contain any plan assets.
Stock-Based Compensation Expense
We use SFAS No. 123R for computing stock based compensation expense, which requires us to measure compensation cost for all outstanding unvested share-based awards, and awards we grant, modify, repurchase or cancel in the future, at fair value and recognize compensation over the requisite service period for awards expected to vest. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when calculating fair value including estimated stock price volatility, expected term and expected forfeitures. Factors considered in estimating forfeitures include the types of awards, employee class, and historical experience. Actual results may differ substantially from these estimates. We recorded $149 and $114 of stock-based compensation expense for the three month periods ended December 31, 2007 and December 31, 2006 respectively. Stock-based compensation expense recorded for the three month period ended December 31, 2007 included $25 in cost of sales, $17 in research and development, $17 in selling and the remaining $90 in administration expense. Stock-based compensation expense recorded for the three month period ended December 31, 2006 included $16 in cost of sales, $9 in research and development, $13 in selling and the remaining $76 in administration expense.
Income Taxes
For each jurisdiction that we operate in, we are required to estimate our annual effective tax rate together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our condensed consolidated balance sheet. We must also assess the likelihood that our deferred tax assets will be recovered from future taxable income and unless we believe that recovery is more likely than not, a valuation allowance is established. Our income tax provision on the consolidated statement of operations would be impacted by changes in the valuation allowance. This process is complex and involves significant management judgment in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowances recorded against our net deferred tax assets.
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Results of Operations
Financial Summary
(Dollars in Thousands)
Three Month Periods Ended December 31, | ||||||||||||
2007 | 2006 | 2006 to 2007 | ||||||||||
| Net sales | $ | 14,972 | $ | 18,442 | (18.8)% | |||||||
| Cost of sales | 10,086 | 12,150 | (17.0)% | |||||||||
| Gross profit | 4,886 | 6,292 | (22.3)% | |||||||||
| Research and development | 1,009 | 830 | 21.6% | |||||||||
| Selling | 678 | 520 | 30.4% | |||||||||
| Administration | 1,401 | 1,273 | 10.1% | |||||||||
| Realignment of operations | - | 176 | NM | |||||||||
| Operating income | $ | 1,798 | $ | 3,493 | (48.5)% | |||||||
| As a percentage of net sales: | ||||||||||||
| Cost of sales | 67.4% | 65.9% | ||||||||||
| Gross margin | 32.6% | 34.1% | ||||||||||
| Research and development | 6.7% | 4.5% | ||||||||||
| Selling | 4.5% | 2.8% | ||||||||||
| Administration | 9.4% | 6.9% | ||||||||||
| Realignment of operations | - | 1.0% | ||||||||||
| Operating income | 12.0% | 18.9% | ||||||||||
Comparative – Three month periods ended December 31, 2007 and 2006
NM = Not Meaningful
| Percent Change | ||||||||||||
| For the Three Month Period Ended December 31: | 2007 | 2006 | 2006 to 2007 | |||||||||
| Net sales | $ | 14,972 | $ | 18,442 | (18.8)% | |||||||
Net sales decreased $3,470 in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007. The major factor in the sales decline was a reduction in the build rates of heavy trucks in the North American market. In that market, sales were down 58% compared to the first quarter of fiscal 2007, and is representative of the overall reduction in the truck build rates. The Company’s share of that market and unit pricing remained essentially unchanged from the prior year. Sales to European truck customers increased 13% on a quarter over quarter basis and helped offset a portion of the decline from the North American truck market. Net sales in Asia decreased 1% and off-road decreased 3%. We expect that electronic throttle control sales will increase or decrease in the future in line with changes in heavy truck and transit bus production volumes in the various geographic markets in which we serve and when new product lines are established, however, competitive pricing may continue to reduce per unit pricing. A change in emissions regulations in the United States effective January 1, 2007 had a negative impact on truck sales in North America beginning in our second fiscal quarter of 2007 and continued into the first quarter of fiscal 2008. The published reports of the decline in North American heavy truck production are that overall truck production volumes in North America in calendar year 2007 declined approximately 35% over the calendar 2006 production volumes. As this production shift has been attributed to the change in emission standards, the Company anticipates that North American truck production volumes will increase in subsequent years, although potentially not until 2009 and potentially not to the 2006 levels.
15
| Percent Change | ||||||||||||
| For the Three Month Period Ended December 31: | 2007 | 2006 | 2006 to 2007 | |||||||||
| Gross profit | $ | 4,886 | $ | 6,292 | (22.3)% | |||||||
Gross profit was $4,886, or 32.6% of net sales in the first quarter of fiscal 2008, a decrease of $1,406 compared to the gross profit of $6,292, or 34.1% of net sales, in the comparable fiscal 2007 period.
The decrease in gross profit in the first quarter of fiscal 2008 is primarily driven by a 58% net decrease in sales of electronic throttle systems to North American heavy truck customers. During fiscal 2007, we substantially completed our realignment of operations, as discussed in Note 3 in the Notes to Consolidated Financial Statements, and as a result of this realignment we have experienced an overall reduction in labor costs and net material costs due to continued efforts in global sourcing and the production of our own internally developed contacting and non-contacting sensors. Throughout fiscal 2007 and the first quarter of fiscal 2008, gross profit was negatively impacted by higher purchase prices for certain raw materials.
| Percent Change | ||||||||||||
| For the Three Month Period Ended December 31: | 2007 | 2006 | 2006 to 2007 | |||||||||
| Research and development | $ | 1,009 | $ | 830 | 21.6% | |||||||
Research and development expenses increased $179 for the first quarter of fiscal 2008 compared to the comparable period in 2007. The Company’s research and development expenditures will fluctuate based on the products under development at any given point in time. Expenses were up in the first quarter over last year’s first quarter and were due to higher salary costs and costs related to our Conceptual Development Center, which was completed in mid-fiscal 2007. Overall, we expect research and development expenses to increase slightly over fiscal 2007 levels due to additional new product design projects
| Percent Change | ||||||||||||
| For the Three Month Period Ended December 31: | 2007 | 2006 | 2006 to 2007 | |||||||||
| Selling | $ | 678 | $ | 520 | 30.4% | |||||||
Selling expenses increased $158 during the three month period ended December 31, 2007 as compared with the three month period ended December 31, 2006 mainly due to higher overall salaries and expanded selling and marketing efforts, including expenses associated with sales and marketing related travel in the European, Asian, South American, Australian and off-road markets.
| Percent Change | ||||||||||||
| For the Three Month Period Ended December 31: | 2007 | 2006 | 2006 to 2007 | |||||||||
| Administration | $ | 1,401 | $ | 1,273 | 10.1% | |||||||
Administration expenses for the three month period ended December 31, 2007 increased $128 when compared with the same period in fiscal 2007. The increase in administration expenses is primarily a result of designing changes to our compensation structure, employee recruitment and relocation costs and continued costs to comply with Sarbanes Oxley, slightly offset by a decrease in legal fees associated with the class action lawsuit discussed in Note 14 to our unaudited condensed consolidated financials statements.
| Percent Change | ||||||||||||
| For the Three Month Period Ended December 31: | 2007 | 2006 | 2006 to 2007 | |||||||||
| Realignment of operations | $ | - | $ | 176 | NM | |||||||
The Company recorded expenses of $176 during the three month period ended December 31, 2006, related to its realignment of operations as discussed in Note 3 of the unaudited condensed consolidated financial statements. No realignment expenses were recorded during the first quarter of fiscal 2008 as the realignment was substantially complete as of September 30, 2007.
16
| Percent Change | ||||||||||||
| For the Three Month Period Ended December 31: | 2007 | 2006 | 2006 to 2007 | |||||||||
| Interest income | $ | ( 22 | ) | $ | ( 36 | ) | (38.9)% | |||||
| Interest expense | $ | 88 | $ | 258 | (65.9)% | |||||||
Interest expense decreased $170 in the first quarter of fiscal 2008 as compared to the first quarter of fiscal 2007 due to significant reductions in debt levels throughout fiscal 2007. We expect interest expense to continue to decrease in fiscal 2008 when compared with fiscal 2007 due to the continued reduction of debt levels resulting from scheduled debt payments. Our outstanding debt balance at December 31, 2007 was $875.
| Percent Change | ||||||||||||
| For the Three Month Period Ended December 31: | 2007 | 2006 | 2006 to 2007 | |||||||||
| Other income, net | $ | (34 | ) | $ | ( 603 | ) | NM | |||||
Other income was $34 in the first quarter of fiscal 2008 compared to other income of $603 in the first quarter of fiscal 2007. Included in other income for the three month period ended December 31, 2006 was a gain of $589 for the reversal of old accounts payable as discussed in Note 8 of the unaudited condensed consolidated financials statements.
| Percent Change | ||||||||||||
| For the Three Month Period Ended December 31: | 2007 | 2006 | 2006 to 2007 | |||||||||
| Income tax expense | $ | 610 | $ | 1,331 | (54.2)% | |||||||
Income tax expense reflects an effective tax rate of 34.5% for the quarter ended December 31, 2007 compared to an effective tax rate of 34.4% for the quarter ended December 31, 2006.
Financial Condition, Liquidity and Capital Resources
Cash generated by operating activities was $20 for the first quarter of fiscal 2008, a decrease of $1,266 from the cash generated by operating activities of $1,286 during the first quarter of fiscal 2007. Net income plus non cash charges for depreciation and stock based compensation contributed $1,764 in the first quarter of fiscal 2008 and $3,158 in the first quarter of fiscal 2007.
Changes in working capital items used cash of $1,707 in the first quarter of fiscal 2008 and $1,283 in the first fiscal quarter of 2007. Timing of collections on receivables generated cash of $284 in fiscal 2008 and $1,356 in 2007. Inventories were reduced $392 in the first quarter of fiscal 2008 compared to an increase in inventories of $841 in the first quarter of fiscal 2007. Cash was used to increase inventory levels in the first quarter of fiscal 2007 to facilitate switching of suppliers to lower cost suppliers, primarily in China, the realignment efforts and to support increasing operations in our Suzhou, China manufacturing facility. We feel that inventory levels reached their maximum levels in mid fiscal 2007 and will continue to decline as supplier switching is completed. Accounts payable and accrued expenses decreased in the first quarter of fiscal 2008 primarily due to the lower sales and inventory levels plus seasonal payments of certain expenses. In the first quarter of fiscal 2007 accounts payable and accrued expenses declined from seasonal payments of certain expenses. Also during the first quarter of fiscal 2007, the Company was judicially released from and wrote off $589 of old accounts payable. In addition, cash flows from operations for the three month period ended December 31, 2007 included payments to our pension plans of $402. For the three month period ended December 31, 2006, we contributed $372 to our pension plans. We believe we will continue to generate positive cash from continuing operations.
Cash used in investing activities was $213 for the three month period ended December 31, 2007 and $687 for the three months ended December 31, 2006 and was comprised solely of purchases of equipment for both periods. We expect our cash use for investing activities to increase throughout the fiscal year as we continue to make purchases of capital equipment.
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Cash used in financing activities was $55 for the quarter ended December 31, 2007, compared to cash used in financing activities of $668 for the quarter ended December 31, 2006. The use of cash for financing activities for the first quarter of fiscal 2008 primarily relates to scheduled debt payments on our Merrill Lynch term loan, offset slightly by proceeds from the exercise of stock options. The use of cash for financing activities for the first quarter of fiscal 2007 primarily relates to scheduled debt payments on our term loan.
At December 31, 2007, we had $8,000 available under our revolving credit facility with Merrill Lynch plus cash and cash equivalents of $1,373. We believe these resources, when combined with cash provided by operations, will be sufficient to meet our working capital needs on a short-term and long-term basis.
Contractual Obligations as of December 31, 2007
At December 31, 2007, our contractual obligations consisted of bank debt, operating lease obligations, a service agreement and a license agreement. We did not have any material letters of credit, or debt guarantees outstanding at December 31, 2007. Maturities of these contractual obligations consist of the following:
| Payments due by period | ||||||||||||||||||||
Total | Less than 1 year | 1 – 3 years | 3 – 5 years | More than 5 years | ||||||||||||||||
| Term loan | $ | 875 | $ | 875 | $ | - | $ | - | $ | - | ||||||||||
| Revolver | - | - | - | - | - | |||||||||||||||
| Operating leases | 2,090 | 532 | 1,337 | 221 | - | |||||||||||||||
| MMT license - minimum royalties | 385 | 45 | 140 | 150 | 50 | |||||||||||||||
| Management Services Agreement | 60 | 60 | - | - | - | |||||||||||||||
| $ | 3,410 | $ | 1,512 | $ | 1,477 | $ | 371 | $ | 50 | |||||||||||
Certain liabilities, including those related to our pension and post-retirement benefit plans, are reported in the accompanying condensed consolidated balance sheets but are not reflected in the table above due to the absence of stated maturities. We have net obligations at December 31, 2007 related to our pension plans and post-retirement medical plan of $774 and $3,951, respectively. We funded $402 to our pension plans during the first quarter of fiscal 2008 compared to $372 contributed for the first quarter of fiscal 2007. We expect to make payments to our pension plans of $942 throughout the rest of fiscal 2008.
Included in the accompanying condensed consolidated balance sheet is approximately $155 of accounts payable related to closed insolvent subsidiaries of the Company. In accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” a debtor can only relieve itself of a liability if it has been extinguished. A liability is considered extinguished if (a) the debtor pays the creditor and is relieved of its obligation for the liability or (b) the debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor. During the first quarter of fiscal 2007, the Company was judicially released from and reversed $589 of old accounts payable resulting in a gain, which has been recorded in other (income) expense in the accompanying condensed consolidated statements of operations. No amounts were released and reversed during the first quarter of fiscal 2008. The Company will continue to monitor its ability to reverse amounts in future periods based on the recognition of the liabilities being judicially released in accordance with SFAS No. 140. If judicially released, the Company would reverse $90 in fiscal 2010 and a total of $65 in fiscal 2011 – 2016.
Recently Issued Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected to expand the use of fair value measurement. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently in the process of determining the effects of adopting this statement in its consolidated financial statements.
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In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement 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 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently in the process of determining the effects of adopting this statement in its consolidated financial statements. In November 2007, the FASB approved the deferral of the effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis.
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of SFAS No. 109, “Accounting for Income Taxes,” which clarifies the accounting uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109. The interpretation prescribes a recognition threshold of more-likely-than-not and a measurement attribute on all tax positions taken or expected to be taken in a tax return in order to be recognized in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. Accordingly, the Company adopted FIN 48 on October 1, 2007 with the cumulative effect of adoption being recorded in retained earnings. Refer to the discussion in Note 12 of the unaudited condensed consolidated financials statements regarding the impact FIN 48 had on the Company’s financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and changes in the market value of investments. The Company’s primary market risk results from fluctuations in interest rates.
Interest Rate Risk:
| ● | The Company has a five-year revolving and term loan agreement with its primary lender Merrill Lynch. Interest rates under the agreements are variable and are based on the election of the Company of either a LIBOR rate or Prime rate. |
| ● | As of December 31, 2007, the outstanding balance on the term loan was $875, and there was no balance on the revolving loan. The effective annual interest rate on the term loan was 10.5% as of December 31, 2007. The Company does not believe that a hypothetical 10% change in end of the period interest rates or changes in future interest rates on these variable rate obligations would have a material effect on its financial position, results of operations, or cash flows. The Company has not hedged its exposure to interest rate fluctuations. |
Foreign Currency Risk:
| ● | We sell our products to customers in the heavy truck, transit bus and off-road equipment industries. For the three month periods ended December 31, 2007 and 2006, the Company had foreign sales of approximately 44% and 39% of net sales, respectively. All worldwide sales in the first quarter of fiscal 2008 and 2007, with the exception of $237 and $140, respectively, were denominated in U.S. dollars. During fiscal 2005, we established a manufacturing facility in Suzhou, China and we opened sales offices in Shanghai, China and Ismaning (which is near Munich), Germany. We purchase components internationally for use in both our products whose sales are denominated in U.S. dollars and other currencies. Although the Company is expanding its international exposure, it does not believe that changes in future exchange rates would have a material effect on its financial position, results of operations, or cash flows at this time. As a result, the Company has not entered into forward exchange or option contracts for transactions to hedge against foreign currency risk. The Company will continue to assess its foreign currency risk as its international operations, international purchases and sales increase. |
Investment Risk:
| ● | The Company does not use derivative financial or commodity instruments. The Company’s financial instruments include cash and cash equivalents, accounts and notes receivable, accounts payable and long-term obligations. The Company’s cash and cash equivalents, accounts receivable and accounts payable balances are short-term in nature, and, thus, the Company believes they are not exposed to material investment risk. |
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls
There has been no change in the Company’s internal controls over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Internal control systems, no matter how well designed and operated, have inherent limitations. Therefore, even a system which is determined to be effective cannot provide absolute assurance that all control issues have been detected or prevented. Our systems of internal controls are designed to provide reasonable assurance with respect to financial statement preparation and presentation.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are a party to various pending judicial and administrative proceedings arising in the ordinary course of business. Our management and legal counsel have reviewed the probable outcome of these proceedings, the costs and expenses reasonably expected to be incurred, the availability and limits of our insurance coverage, and our established liabilities. While the outcome of the pending proceedings cannot be predicted with certainty, based on our review, we believe that any unrecorded liability that may result is not likely to have a material effect on our liquidity, financial condition or results of operations.
The soil and groundwater at the Company’s Portland, Oregon facility contains certain contaminants, which were deposited from approximately 1968 through 1995. Some of this contamination has migrated offsite to neighboring properties. The Company has retained an environmental consulting firm to investigate the extent of the contamination and to determine what remediation will be required and the associated costs. During fiscal 2004, the Company entered into the Oregon Department of Environmental Quality’s voluntary clean-up program and during fiscal 2004 the Company established a liability of $950 for this matter. At September 30, 2007, the Company recorded an additional liability of $546 based on remaining costs estimates determined by the Company’s environmental consulting firm. As of December 31, 2007, the total liability recorded is $1,025 (and excludes any potential claim recovery as discussed below) and is recorded in accrued expenses in the accompanying condensed consolidated balance sheet. The Company has asserted a contractual indemnity claim against Dana Corporation (“Dana”), from which it acquired the property, and contribution claims against other prior owners of the property as well as businesses previously located on the property (including Blount, Inc. (“Blount”) under the Federal Superfund Act and the Oregon Cleanup Law. Dana is subject to a pending bankruptcy petition. On November 20, 2007, the Company and Blount executed a settlement agreement with Dana with respect to these claims. Dana is submitting the settlement agreement to the bankruptcy court for approval; the settlement agreement also is contingent on the court’s approval of Dana’s proposed plan of reorganization in substantially the form described in Dana’s disclosure statement in effect as of this same date. If the settlement agreement is approved by the bankruptcy court and the plan of reorganization is approved, Blount will be obligated to pay the Company $625 and the Company’s claim against Dana will be allowed as an unsecured general creditor’s claim in the amount of $750. The Company anticipates the claim will be discounted and paid primarily in stock in the reorganized corporation, all in accordance with Dana’s plan of reorganization. At this time, the Company is not able to reasonably estimate the net amount it may be able to realize from this unsecured claim and has not recognized any asset in the financial statements pertaining to any recovery from either Blount or Dana. The Company believes that even with a resolution of the claims against the prior operators and owner of the property, the Company will be liable for some portion of the ultimate costs and it believes that the liability recorded at December 31, 2007 will be sufficient to cover these costs.
Item 1A. Risk Factors
There have been no significant changes in risk factors for the quarter ended December 31, 2007. See the information set forth in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
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Item 5. Other Information
None
Item 6. Exhibits
| 2.01 | Asset Purchase Agreement, dated as of September 30, 2003, by and among the Registrant, Teleflex Incorporated and Teleflex Automotive Incorporated. (Incorporated by reference to Exhibit 2.1 to the Registrant’s current report on form 8-k filed on December 9, 2003) | |
| 3.01(a) | Certificate of Incorporation of the Registrant, as amended. (Incorporated by reference to Exhibit 3.01(a) to the Registrant’s quarterly report on Form 10-Q for the quarter ended December 31, 2006) | |
| 3.01(b) | Certificate of Amendment to Certificate of Incorporation of the Registrant, dated February 27, 1995. (Incorporated by reference to Exhibit 3.01 (b) to the Registrant’s quarterly report on Form 10-Q for the quarter ended December 31, 2006) | |
| 3.01(c) | Certificate of Amendment to Certificate of Incorporation of the Registrant, dated October 28, 2004. (Incorporated by reference to Exhibit 3.01 (c) to the Registrant’s quarterly report on Form 10-Q for the quarter ended December 31,2006) | |
| 3.01(d) | Certificate of Amendment to Certificate of Incorporation of the Registrant, dated February 22, 2005. (Incorporated by reference to Exhibit 3.01 (d) to the Registrant’s quarterly report on Form 10-Q for the quarter ended December 31, 2006) | |
| 3.01(e) | Certificate of Amendment to Certificate of Incorporation of the Registrant, dated March 2, 2006. (Incorporated by reference to Exhibit 3.01 (e) to the Registrant’s quarterly report on Form 10-Q for the quarter ended December 31, 2006) | |
| 3.02 | Restated By-Laws of the Registrant, as amended July 1, 2002. (Incorporated by reference to Exhibit 3.6 to the Registrant’s quarterly report on Form 10-Q, Commission File No. 000-18083, for the quarter ended June 30, 2002) | |
| 4.01 | Specimen Unit Certificate (including Specimen Certificate for shares of Common Stock and Specimen Certificate for the Warrants). (Incorporated by reference to Exhibits 1.1 and 1.2 to the Registrant’s Registration Statement on Form 8-A, Commission File No. 000-18083, filed with the Commission on November 1, 1989) | |
| 31.01 | Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) (Filed herewith) | |
| 31.02 | Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) (Filed herewith) | |
| 32.01 | Certification of Patrick W. Cavanagh pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith) | |
| 32.02 | Certification of Dennis E. Bunday pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith) |
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SIGNATURES
Pursuant to the requirements 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.
| WILLIAMS CONTROLS, INC. | |||
| Date: February 8, 2008 | By: | /s/ PATRICK W. CAVANAGH | |
| Patrick W. Cavanagh | |||
| President and Chief Executive Officer | |||
| Date: February 8, 2008 | By: | /s/ DENNIS E. BUNDAY | |
| Dennis E. Bunday | |||
| Chief Financial Officer | |||
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