Williams Controls 10Q 2008 Q3 Quarterly report

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: June 30, 2008

[ ] 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 (State or other jurisdiction of incorporation or organization)	84-1099587 (I.R.S. Employer Identification No.)
14100 SW 72nd Avenue, Portland, Oregon (Address of principal executive office)	97224 (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

at July 31, 2008: 7,534,308

Williams Controls, Inc.

June 30, 2008

Table of Contents

	Page Number
Part I. Financial Information

Item 1. Financial Statements (unaudited)

Condensed Consolidated Balance Sheets, June 30, 2008 and September 30, 2007	1

Condensed Consolidated Statements of Operations, three and nine months ended June 30, 2008 and 2007	2

Condensed Consolidated Statements of Cash Flows, nine months ended June 30, 2008 and 2007	3

Notes to Unaudited Condensed Consolidated Financial Statements	4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3. Quantitative and Qualitative Disclosures About Market Risk	21

Item 4. Controls and Procedures	22

Part II. Other Information

Item 1. Legal Proceedings	23

Item 1A. Risk Factors	23

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 3. Defaults Upon Senior Securities	23

Item 4. Submission of Matters to a Vote of Security Holders	23

Item 5. Other Information	23

Item 6. Exhibits	23

Signature Page	25

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)

	June 30, 2008			September 30, 2007
ASSETS
Current Assets:
Cash and cash equivalents	$	6,937		$	1,621
Short-term investments		264			-
Trade accounts receivable, less allowance of $56 and $33 at June 30, 2008 and September 30, 2007, respectively		9,650			8,054
Other accounts receivable		824			1,656
Inventories		7,850			9,152
Deferred income taxes		545			486
Prepaid expenses and other current assets		472			297
Total current assets		26,542			21,266

Property, plant and equipment, net		8,872			8,953
Deferred income taxes		1,537			1,461
Other assets, net		547			623
Total assets	$	37,498		$	32,303

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	4,110		$	3,811
Accrued expenses		5,183			4,983
Current portion of employee benefit obligations		288			288
Current portion of long-term debt		-			1,000
Total current liabilities		9,581			10,082

Long-term Liabilities:
Employee benefit obligations		4,003			4,803
Other long-term liabilities		263			249

Commitments and contingencies

Stockholders’ Equity:
Preferred stock ($.01 par value, 50,000,000 authorized) Series C (0 issued and outstanding at June 30, 2008 and September 30, 2007)		-			-
Common stock ($.01 par value, 12,500,000 authorized; 7,534,308 and 7,495,482 issued and outstanding at June 30, 2008 and September 30, 2007, respectively)		75			75
Additional paid-in capital		35,569			34,899
Accumulated deficit		(6,726	)		(12,477	)
Treasury stock (21,700 shares at June 30, 2008 and September 30, 2007)		(377	)		(377	)
Accumulated other comprehensive loss		(4,890	)		(4,951	)
Total stockholders’ equity		23,651			17,169
Total liabilities and stockholders’ equity	$	37,498		$	32,303

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

Williams Controls, Inc.

Condensed Consolidated Statements of Operations

(Dollars in thousands, except share and per share information)

(Unaudited)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2008			2007			2008			2007
Net sales	$	17,137		$	15,822		$	48,593		$	52,573
Cost of sales		10,965			10,117			31,908			34,441
Gross profit		6,172			5,705			16,685			18,132
Operating expenses:
Research and development		1,005			797			3,006			2,465
Selling		700			560			2,037			1,653
Administration		1,315			1,394			4,080			4,049
Gain from settlement of environmental claims		(10	)		-			(1,020	)		-
Realignment of operations		-			210			-			643
Total operating expenses		3,010			2,961			8,103			8,810
Operating income		3,162			2,744			8,582			9,322

Other (income) expense:
Interest income		(12	)		(34	)		(44	)		(95	)
Interest expense		5			185			136			651
Other income, net		(97	)		(150	)		(205	)		(1,012	)
Total other (income) expense		(104	)		1			(113	)		(456	)
Income before income taxes		3,266			2,743			8,695			9,778
Income tax expense		1,069			919			2,862			3,357
Net income	$	2,197		$	1,824		$	5,833		$	6,421
Net income per common share – basic	$	0.29		$	0.24		$	0.78		$	0.86
Weighted average shares used in per share calculation – basic		7,530,053			7,480,287			7,519,009			7,460,170
Net income per common share – diluted	$	0.28		$	0.24		$	0.75		$	0.83
Weighted average shares used in per share calculation – diluted		7,730,143			7,743,778			7,745,893			7,730,619

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

Williams Controls, Inc.

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

	Nine Months Ended June 30,
	2008			2007
Cash flows from operating activities:
Net income	$	5,833		$	6,421
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,347			1,452
Deferred income taxes		(93	)		(139	)
Share-based compensation		498			413
Gain on settlement of liabilities		-			(877	)
Gain from stock settlement of environmental claims		(337	)		-
Gain from disposal of fixed assets		(55	)		(71	)
Changes in operating assets and liabilities
Receivables, net		(764	)		1,485
Inventories		1,302			24
Prepaid expenses and other current assets		(175	)		-
Accounts payable and accrued expenses		375			(1,368	)
Other		(729	)		(862	)
Net cash provided by operating activities		7,202			6,478

Cash flows from investing activities:
Purchases of property, plant and equipment		(1,115	)		(1,693	)
Proceeds from sales of property, plant and equipment		57			82
Net cash used in investing activities		(1,058	)		(1,611	)

Cash flows from financing activities:
Payments of debt		(1,000	)		(4,549	)
Net proceeds from exercise of stock options		172			207
Net cash used in financing activities		(828	)		(4,342	)

Net increase in cash and cash equivalents		5,316			525
Cash and cash equivalents at beginning of period		1,621			2,530

Cash and cash equivalents at end of period	$	6,937		$	3,055

Supplemental disclosure of cash flow information:
Interest paid	$	90		$	548
Income taxes paid	$	1,559		$	2,900

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

Williams Controls, Inc.

Notes to Condensed Consolidated Financial Statements

Three and Nine Months ended June 30, 2008 and 2007

(Dollars in thousands, except share and per share amounts)

(Unaudited)

Note 1. Organization

Williams Controls, Inc., including its wholly-owned subsidiaries as follows and hereinafter referred to as the “Company,” “we,” “our,” or “us.”

Active Subsidiaries – Williams Controls Industries, Inc. ("Williams"); Williams (Suzhou) Controls Co. Ltd. (“Williams Controls Asia”); Williams Controls Europe GmbH (“Williams Controls Europe”); and Williams Controls India Private Limited (“Williams Controls India”).

Inactive Subsidiaries – Aptek Williams, Inc. ("Aptek"); Premier Plastic Technologies, Inc. ("PPT"); ProActive Acquisition Corporation ("ProActive"); WMCO-Geo, Inc. ("GeoFocus"); NESC Williams, Inc. ("NESC"); Williams Technologies, Inc. ("Technologies"); Williams World Trade, Inc. ("WWT"); Techwood Williams, Inc. ("TWI"); Agrotec Williams, Inc. ("Agrotec") and its 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 June 30, 2008 and the results of operations and cash flows for the three and nine months ended June 30, 2008 and 2007. The results of operations for the three and nine months ended June 30, 2008 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, deferred tax assets, stock options and commitments and contingencies.

Note 3. 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 expects to adopt SFAS No. 159 during the first quarter of fiscal 2009. The Company is currently in the process of determining the effects of adopting this statement in its consolidated financial statements.

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. 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. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.

Note 4. Realignment of Operations

The realignment of operations was essentially completed as of the date of the Company’s last fiscal year end on September 30, 2007.

During fiscal 2006, the Company initiated a plan for realignment (“the Plan”) of its manufacturing operations as part of ongoing efforts to focus on its core product competencies and improve its global competitiveness. The Plan consisted of outsourcing all of the Company’s Portland, Oregon 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 manufacturing facility during fiscal 2007. As part of the Plan, the Company incurred a one-time termination benefit with those employees affected by the Plan.

The total costs of the Plan were approximately $1.5 million and included 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 $210 and $643, respectively, for the three and nine months ended June 30, 2007, which were recorded in operating expenses in the accompanying condensed consolidated statements of operations. No realignment expense was recorded during the three and nine months ended June 30, 2008. 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 Months Ended June 30,						Nine Months Ended June 30,
	2008			2007			2008			2007
Balance at beginning of period	$	2		$	482		$	86		$	226
Payments		(2	)		(207	)		(86	)		(207	)
Additional accruals		-			94			-			350
Balance at end of period	$	-		$	369		$	-		$	369

Note 5. Accounting for Share-Based Compensation

The Company uses SFAS No. 123R, “Share Based Payment,” to account for its share-based compensation plans. 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. Share-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 share-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.

The Company currently has two qualified stock option plans. The Restated 1993 Stock Option Plan (the “1993 Plan”) reserves an aggregate of 870,000 shares of the Company’s common stock for the issuance of stock options, which includes the 120,000 share increase in authorized shares approved by the stockholders at the February 28, 2008 Annual Meeting of Stockholders. These shares 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. The non-employee Director Plan (the “1995 Plan”) reserves an aggregate of 86,666 shares of the Company’s common stock for the issuance of stock options, which includes the 20,000 share increase in authorized shares approved by the stockholders at the February 28, 2008 Annual Meeting of Stockholders. These shares may be granted to non-employee directors of the Company. Under this 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 June 30, 2008, there was $1,912 of total unrecognized compensation costs related to nonvested stock options. That cost is expected to be recognized over a weighted average period of 3.5 years.

The Company’s share-based compensation expenses were recorded in the following expense categories for the three and nine months ended June 30, 2008 and 2007:

	Three Months Ended June 30,				Nine Months Ended June 30,
	2008		2007		2008		2007
Cost of sales	$	27	$	12	$	77	$	38
Research and development		18		10		51		21
Selling		20		20		54		48
Administration		115		118		316		306
Total share-based compensation expense	$	180	$	160	$	498	$	413

Total share-based compensation expense (net of tax)	$	131	$	116	$	396	$	324

In the third quarter of fiscal 2008, the Company elected to pay 7% of Mr. Cavanagh’s fiscal 2008 salary in common stock of the Company and issued 1,364 shares of restricted common stock at $13.34 per share. Also during the third quarter of fiscal 2008, the Company paid $5 of Dennis E. Bunday’s, Executive Vice President and Chief Financial Officer, and $3 of Mark S. Koenen’s, Vice President of Sales and Marketing, salary in common stock of the Company and issued 374 and 224 shares, respectively, of restricted common stock at $13.34 per share. During the third quarter of fiscal 2007, the Company elected to pay 7% of Mr. Cavanagh’s fiscal 2007 salary in common stock of the Company and issued 989 shares of restricted common stock at $16.98 per share. Also during the third quarter of fiscal 2007, the Company paid $5 of Dennis E. Bunday’s, Executive Vice President and Chief Financial Officer, and $3 of Mark S. Koenen’s, Vice President of Sales and Marketing, salary in common stock of the Company and issued 294 and 176 shares, respectively, of restricted common stock at $16.98 per share.

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 months ended June 30, 2008. There were no stock options granted during the three months ended June 30, 2007.

		Three Months Ended June 30, 2008

Risk-free interest rate		3.83%
Expected dividend yield		0%
Expected term		6.5 years
Expected volatility		71%

The Company uses the US Treasury (constant maturity) interest rate on the date of grant as the risk-free interest rate. The expected term of options granted represents the weighted average period the stock options are expected to remain outstanding. Expected volatilities are based on the historical volatility of the Company’s common stock.

The following table summarizes stock options outstanding as of June 30, 2008 as well as activity during the nine month period then ended:

	Shares			Weighted Average Exercise Price

Outstanding at September 30, 2007		622,785		$	8.40
Granted		50,996			13.94
Exercised		(36,864	)		4.66
Forfeited		(21,062	)		11.63
Outstanding at June 30, 2008		615,855			8.97

Exercisable at June 30, 2008		351,867		$	6.46

At June 30, 2008, the weighted average remaining contractual term of options outstanding and options exercisable was 6.7 years and 5.6 years, respectively.

The aggregate intrinsic value of options outstanding and options exercisable at June 30, 2008 was $2,911 and $2,276, 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 June 30, 2007 was $6,135 and $3,458, respectively. The weighted average grant date fair value of stock options granted during the three months ended June 30, 2008 was $8.90 per share. There were no options granted during the three months ended June 30, 2007. The weighted average grant date fair value of stock options granted during the nine months ended June 30, 2008 and 2007 was $9.02 and $12.18 per share, respectively. The intrinsic value of all stock options exercised during the three and nine months ended June 30, 2008 was $47 and $418, respectively. Cash received from the exercise of stock options for the three and nine months ended June 30, 2008 was $25 and $172, respectively. The intrinsic value of all stock options exercised during the three and nine months ended June 30, 2007 was $72 and $483, respectively. Cash received from the exercise of stock options for the three and nine months ended June 30, 2007 was $27 and $207, respectively.

Note 6. 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. The following table summarizes the components of comprehensive income:

	Three Months Ended June 30,					Nine Months Ended June 30,
	2008			2007		2008			2007
Net income	$	2,197		$	1,824	$	5,833		$	6,421
Translation adjustment		51			13		165			37
Unrealized gain (loss)		(127	)		-		(104	)		-
Comprehensive income	$	2,121		$	1,837	$	5,894		$	6,458

Note 7. 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 from continuing operations:

	Three Months Ended June 30, 2008						Three Months Ended June 30, 2007
	Income		Shares		Per Share Amount		Income		Shares		Per Share Amount

Basic EPS –	$	2,197		7,530,053	$	0.29	$	1,824		7,480,287	$	0.24
Effect of dilutive securities –
Stock options		-		200,090				-		263,491

Diluted EPS –	$	2,197		7,730,143	$	0.28	$	1,824		7,743,778	$	0.24

	Nine Months Ended June 30, 2008						Nine Months Ended June 30, 2007
	Income		Shares		Per Share Amount		Income		Shares		Per Share Amount

Basic EPS –	$	5,833		7,519,009	$	0.78	$	6,421		7,460,170	$	0.86

Effect of dilutive securities –
Stock options		-		226,884				-		270,449

Diluted EPS –	$	5,833		7,745,893	$	0.75	$	6,421		7,730,619	$	0.83

For the three and nine months ended June 30, 2008, the Company had options covering 187,958 and 101,662 shares, respectively, that were not considered in the diluted EPS calculation since they would have been antidilutive. For the three and nine months ended June 30, 2007, the Company had options covering 45,246 and 46,912 that were not considered in the diluted EPS calculation since they would have been antidilutive.

Note 8. Inventories

Inventories, net of reserves, consist of the following:

	June 30, 2008		September 30, 2007
Raw materials	$	5,326	$	7,057
Work in process		39		66
Finished goods		2,485		2,029
	$	7,850	$	9,152

Note 9. Debt

As of June 30, 2008, the Company has paid off its entire term loan debt and has no amounts outstanding under its revolving loan facility.

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 term loan has been repaid in its entirety. 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. Under the Prime rate option, the revolving loan facility will bear interest at the Prime rate plus 2.75% per annum. 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 had available under its revolving credit facility $8,000 at both June 30, 2008 and September 30, 2007.

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. Warranty payments can vary significantly from year to year and quarter to quarter depending on the timing of the settlement of warranty claims with various customers. Following is a reconciliation of the changes in the Company’s warranty liability for the three and nine months ended June 30, 2008 and 2007:

	Three Months Ended June 30,						Nine Months Ended June 30,
	2008			2007			2008			2007
Balance at beginning of period	$	1,263		$	2,138		$	1,712		$	1,720
Payments		(352	)		(120	)		(1,243	)		(360	)
Warranty claims accrued		259			213			701			632
Adjustments in estimates		(174	)		-			(174	)		239

Balance at end of period	$	996		$	2,231		$	996		$	2,231

During the third quarter of fiscal 2008, the Company adjusted an estimated warranty liability by $174 related to warranty claims with one customer. The Company reviewed its assumptions for its warranty liability with this one customer, which covers a period in excess of one year, and determined a decrease in liability would more accurately reflect our estimated warranty costs for this customer. This reduction in liability has been recorded in cost of sales in the accompanying condensed consolidated statement of operations.

During the second quarter of fiscal 2007, the Company recorded an additional warranty liability of $239 related to warranty claims with one customer. The Company reviewed its assumptions for its warranty liability with this one customer, which covers a period in excess of one year, and determined an additional liability was required. This additional liability was recorded in cost of sales in the accompanying condensed consolidated statement of operations.

Included in the warranty liability at June 30, 2007 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 Plan
	Three Months Ended June 30,						Nine Months Ended June 30,
	2008			2007			2008			2007
Service cost	$	-		$	-		$	-		$	-
Interest cost		74			73			222			219
Expected return on plan assets		(77	)		(68	)		(231	)		(204	)
Amortization of prior service cost		-			-			-			-
Amortization of loss		16			23			48			69
Net periodic benefit cost	$	13		$	28		$	39		$	84

	Hourly Plan
	Three Months Ended June 30,						Nine Months Ended June 30,
	2008			2007			2008			2007
Service cost	$	16		$	29		$	48		$	87
Interest cost		115			112			345			336
Expected return on plan assets		(118	)		(100	)		(354	)		(300	)
Amortization of prior service cost		5			12			15			36
Amortization of loss		42			62			126			186
Net periodic benefit cost	$	60		$	115		$	180		$	345

During the nine months ended June 30, 2008, the Company has made contributions of $949. The Company expects total contributions to its pension plans in fiscal 2008 to be $1,307.

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 health care plan for the three and nine months ended June 30, 2008 and 2007.

Components of Net Periodic Benefit Cost:
	Post-Retirement Plan
	Three Months Ended June 30,						Nine Months Ended June 30,
	2008			2007			2008			2007
Service cost	$	1		$	2		$	3		$	6
Interest cost		59			55			177			165
Amortization		(8	)		(6	)		(24	)		(18	)
Net periodic benefit cost	$	52		$	51		$	156		$	153

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. There have not been any significant changes in the Company’s uncertain tax benefits since adoption. 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. Geographic Information

The Company accounts for its segments in accordance with SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information”. The Company operates in one segment: vehicle components. During the three and nine months ended June 30, 2008 and 2007, the Company operated in two geographic reportable segments as shown in the table below.

	Three Months Ended June 30,						Nine Months Ended June 30,
	2008			2007			2008			2007
Revenue – External Customers:
United States	$	15,688		$	15,487		$	46,435		$	51,973
China		1,449			335			2,158			600
	$	17,137		$	15,822		$	48,593		$	52,573
Revenue – Intersegments:
United States	$	578		$	746		$	1,220		$	2,090
China		2,778			1,856			8,789			6,075
Other		147			139			451			407
Eliminations		(3,503	)		(2,741	)		(10,460	)		(8,572	)
	$	-		$	-		$	-		$	-
Income before income taxes:
United States	$	2,449		$	2,718		$	7,290		$	9,775
China		733			1			1,202			42
Other		84			24			203			(39	)
	$	3,266		$	2,743		$	8,695		$	9,778

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.

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 June 30, 2008, the total liability recorded is $983 (and excludes any claim recovery as discussed below) and is recorded in accrued expenses in the accompanying condensed consolidated balance sheet. The Company asserted a contractual indemnity claim against Dana Corporation (“Dana”), from which it acquired the property, and contribution claims against the other prior owner 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. During the second quarter of fiscal 2008, the Company entered into a settlement agreement with Dana and Blount. In connection with the settlement agreement, the Company received cash payments of $683 and shares of Dana stock equal to approximately $327 at the time of settlement and assumed the full obligation to, and risks associated with, completing the remediation. During the third quarter of fiscal 2008, the Company received additional shares of Dana stock equal to approximately $10 at the time of settlement. The Company recorded these shares as available-for-sale securities in short-term investments in the accompanying condensed consolidated balance sheets. As of June 30, 2008 the Company has recorded a total gain of $1,020, which was recorded in operating expenses in the condensed consolidated financial statements for the receipt of the cash and stock.

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). The complaint seeks an unspecified amount of damages on behalf of the class. During the second quarter of fiscal 2007, the Oklahoma district court granted the plaintiffs class action status. The Company and Ford appealed the District Court’s class certification ruling to the Court of Civil Appeals of the State of Oklahoma (“Appeals Court”) and during the second quarter of fiscal 2008, the Appeals Court, in a 3-to-0 decision, reversed the District Court’s ruling and decertified the nationwide class. As permitted under Oklahoma law, the plaintiffs filed for a re-hearing by the Appeals Court and during the third quarter of fiscal 2008, the Appeals Court denied the motion for re-hearing. The plaintiffs have since appealed the Court of Civil Appeals decision to the Oklahoma Supreme Court. The Company continues to believe the claim to be without merit and intends to continue to vigorously defend against this action. Although the Appeals Court decision is favorable to the Company, there can be no assurance that the ultimate 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 may incur future 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.

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 and nine months ended June 30, 2008 and 2007. 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 section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2007 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 are enacting 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.

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.

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.

Share-Based Compensation Expense

We use SFAS No. 123R for computing share-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.

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 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 deferred tax assets.

Results of Operations

Financial Summary

(Dollars in Thousands)

	Three Months Ended June 30,								Nine Months Ended June 30,
	2008			2007			% Change		2008			2007			% Change
Net sales	$	17,137		$	15,822			8.3%	$	48,593		$	52,573			(7.6%)
Cost of sales		10,965			10,117			8.4%		31,908			34,441			(7.4%)
Gross profit		6,172			5,705			8.2%		16,685			18,132			(8.0%)
Research and development		1,005			797			26.1%		3,006			2,465			21.9%
Selling		700			560			25.0%		2,037			1,653			23.2%
Administration		1,315			1,394			(5.7%)		4,080			4,049			0.8%
Gain from settlement of environmental claims		(10	)		-		NM			(1,020	)		-		NM
Realignment of operations		-			210		NM			-			643		NM

Operating income	$	3,162		$	2,744			15.2%		8,582		$	9,322			(7.9%)

As a percentage of net sales:
Cost of sales		64.0	%		63.9	%				65.7	%		65.5	%
Gross margin		36.0	%		36.1	%				34.3	%		34.5	%
Research and development		5.9	%		5.0	%				6.2	%		4.7	%
Selling		4.1	%		3.5	%				4.2	%		3.1	%
Administration		7.7	%		8.8	%				8.4	%		7.7	%
Gain from settlement of environmental claims		(0.1	%)		-					(2.1	%)		-
Realignment of operations		-			1.3	%				-			1.2	%
Operating income		18.5	%		17.3	%				17.7	%		17.7	%

Comparative – Three months ended June 30, 2008 and 2007

NM = Not Meaningful

					Percent Change
For the Three Months Ended June 30:	2008		2007		2007 to 2008
Net sales	$	17,137	$	15,822		8.3%

Net sales increased $1,315 in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007, primarily due to an increase in the build rates of heavy trucks in the Asian market. In that market, sales were up 85% when compared to the same quarter in fiscal 2007. Sales of heavy trucks in the North American market increased approximately 7% over the prior year quarter whereas sales to our European truck customers decreased 2% on a quarter over quarter basis. The increase in sales of heavy trucks in the North American market is the first increase in this market on a quarter over quarter basis since the new emission standards went into effect on January 1, 2007. Net sales in the world-wide off-road market declined approximately 6%.

We expect that electronic throttle control sales will increase or decrease in the future in part in line with changes in heavy truck, transit bus and off-road production volumes in the various geographic markets in which we serve and increase or decrease when product applications change. Additionally, competitive pricing may continue to reduce per unit pricing. The 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 quarter of fiscal 2007 and continued up to the second quarter of fiscal 2008. In addition, higher fuel costs and other negative economic factors in the United States in 2008 appear to be negatively influencing the NAFTA heavy truck market. 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 year 2006 production volumes. These same reports estimate that the 2008 calendar year heavy truck production levels will remain generally in line with the 2007 calendar year production levels.

					Percent Change
For the Three Months Ended June 30:	2008		2007		2007 to 2008
Gross profit	$	6,172	$	5,705		8.2%

Gross profit was $6,172, or 36.0% of net sales in the third quarter of 2008, an increase of $467 compared to the gross profit of $5,705, or 36.1% of net sales, in the comparable fiscal 2007 period.

The increase in gross profit in the third quarter of fiscal 2008 is primarily driven by the 85% and 7% net increases in sales of electronic throttle control systems to Asian and North American heavy truck customers, respectively. During fiscal 2007, we substantially completed our realignment of operations, as discussed in Note 4 to our unaudited condensed 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. During the third quarter of fiscal 2008, gross profit was negatively impacted by higher purchase prices for certain raw materials, which has resulted in gross profit margins as a percent of sales during the quarter to be essentially at the same level as the fiscal 2007 third quarter. Overhead expenses remained relatively flat between quarters, but decreased as a percentage of sales during the quarter ended June 30, 2008. Gross profit for the three months ended June 30, 2008 also included a reduction in warranty liability of $174 compared to a negative impact of increasing our warranty liability by $239 in the corresponding quarter in fiscal 2007, as noted in Note 10 to our unaudited condensed consolidated financial statements.

					Percent Change
For the Three Months Ended June 30:	2008		2007		2007 to 2008
Research and development	$	1,005	$	797		26.1%

Research and development expenses increased $208 for the third quarter of fiscal 2008 when compared to the same period in fiscal 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 third quarter over last year’s third quarter, primarily due to higher salary costs and costs related to our Conceptual Development Center, which was completed in mid fiscal 2007 and a higher level of new product development. 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 Months Ended June 30:	2008		2007		2007 to 2008
Selling	$	700	$	560		25.0%

Selling expenses increased $140 during the three months ended June 30, 2008 as compared with the three months ended June 30, 2007 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, and off-road markets.

					Percent Change
For the Three Months Ended June 30:	2008		2007		2007 to 2008
Administration	$	1,315	$	1,394		(5.7%)

Administration expenses for the three months ended June 30, 2008 decreased $79 when compared with the same period in fiscal 2007. The decrease in administration expenses is primarily a result of a decrease in all legal fees, including those associated with the class action lawsuit discussed in Note 14 to our unaudited condensed consolidated financial statements.

						Percent Change
For the Three Months Ended June 30:	2008			2007		2007 to 2008
Gain from settlement of environmental claims	$	(10	)	$	-	NM

As part of its contractual indemnity claim against Dana and contribution claim against Blount, as described in Note 14 to our unaudited condensed consolidated financial statements, during the third quarter of fiscal 2008 the Company received additional shares in Dana equal to approximately $10 at the time of settlement and recorded this as a gain in operating expenses in the condensed consolidated financial statements in the third quarter of fiscal 2008.

					Percent Change
For the Three Months Ended June 30:	2008		2007		2007 to 2008
Realignment of operations	$	-	$	210	NM

The Company recorded expenses of $210 during the third quarter of fiscal 2007 related to its realignment of operations as discussed in Note 4 of the unaudited condensed consolidated financial statements. No realignment expenses were recorded during the third quarter of fiscal 2008 as the realignment was substantially complete as of September 30, 2007.

							Percent Change
For the Three Months Ended June 30:	2008			2007			2007 to 2008
Interest income	$	(12	)	$	(34	)		(64.7%)

Interest expense	$	5		$	185			(97.3%)

Interest expense decreased $180 in the third quarter of fiscal 2008 as compared to the third quarter of fiscal 2007 due to the significant reductions in debt levels throughout late fiscal 2007 and the first half of fiscal 2008. As of June 30, 2008, all of our debt has been fully paid off.

							Percent Change
For the Three Months Ended June 30:	2008			2007			2007 to 2008
Other income	$	(97	)	$	(150	)		(35.3%)

Included in other income for the three months ended June 30, 2008 and 2007 was a gain of $31 and $70, respectively, related to the disposal of certain fixed assets. Also included in the three months ended June 30, 2007 was a gain of $37 for the reversal of old accounts payable related to closed insolvent subsidiaries of the Company. No amounts were reversed in the third quarter of fiscal 2008.

					Percent Change
For the Three Months Ended June 30:	2008		2007		2007 to 2008
Income tax expense	$	1,069	$	919		16.3%

Income tax expense reflects an effective tax rate of 32.7% for the three months ended June 30, 2008 compared to an effective tax rate of 33.5% for the comparable three month period in fiscal 2007. The rate reduction in 2008 is due primarily to an increase in the United States Domestic Manufacturing Credit and a larger percentage of the Company’s earnings being taxed at the lower Chinese tax rate.

Comparative – Nine months ended June 30, 2008 and 2007

NM = Not Meaningful

					Percent Change
For the Nine Months Ended June 30:	2008		2007		2007 to 2008
Net sales	$	48,593	$	52,573		(7.6%)

Net sales decreased $3,980 in the first nine months of fiscal 2008 compared to the first nine months of fiscal 2007, primarily due to an overall decrease in the build rates of heavy trucks in the North American market during the first six months of the fiscal year. In that market, sales were down 39% when compared to the same period in fiscal 2007. The Company’s share of this market and unit pricing remained essentially unchanged from the prior year. Net sales in the off-road market declined approximately 7%. Sales to our European truck and Asian customers increased approximately 20% and 56%, respectively, over the first nine months of the prior year. The combination of these increases helped to offset a portion of the decline from the North American truck market and world-wide off-road market.

					Percent Change
For the Nine Months Ended June 30:	2008		2007		2007 to 2008
Gross profit	$	16,685	$	18,132		(8.0%)

Gross profit was $16,685, or 34.3% of net sales in the first nine months of 2008, a decrease of $1,447 compared to gross profit of $18,132, or 34.5% of net sales, in the comparable fiscal 2007 period.

The decrease in gross profit in the first nine months of fiscal 2008 is primarily driven by the 39% net decrease in sales of electronic throttle control systems to North American heavy truck customers. During fiscal 2007, we substantially completed our realignment of operations, as discussed in Note 4 to our unaudited condensed 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 nine months of fiscal 2008, gross profit was negatively impacted by higher purchase prices for certain raw materials. Overhead expenses decreased between periods, but remained relatively flat as a percentage of sales. Gross profit for the nine months ended June 30, 2008 also included a reduction in warranty liability of $174 compared to a negative impact of increasing our warranty liability by $239 in the corresponding period in fiscal 2007, as noted in Note 10 to our unaudited condensed consolidated financial statements.

					Percent Change
For the Nine Months Ended June 30:	2008		2007		2007 to 2008
Research and development	$	3,006	$	2,465		21.9%

Research and development expenses increased $541 during the first nine months of fiscal 2008 when compared to the first nine months of fiscal 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 nine months of 2008 when compared to the same period in the prior year, primarily 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 and a full year of the Conceptual Development Center.

					Percent Change
For the Nine Months Ended June 30:	2008		2007		2007 to 2008
Selling	$	2,037	$	1,653		23.2%

Selling expenses increased $384 during the nine months ended June 30, 2008 as compared with the nine months ended June 30, 2007 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 Nine Months Ended June 30:	2008		2007		2007 to 2008
Administration	$	4,080	$	4,049		0.8%

Administration expenses for the first nine months of fiscal 2008 increased $31 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, relocation costs and increased expenses associated with our China manufacturing facility offset by a decrease in all legal fees, including those associated with the class action lawsuit discussed in Note 14 to our unaudited condensed consolidated financial statements.

						Percent Change
For the Nine Months Ended June 30:	2008			2007		2007 to 2008
Gain from settlement of environmental claims	$	(1,020	)	$	-	NM

As part of its contractual indemnity claim against Dana and contribution claim against Blount, as described in Note 14 to our unaudited condensed consolidated financial statements, in the first nine months of fiscal 2008 the Company received cash payments totaling $683 from Dana and Blount and shares in Dana equal to approximately $337 at the time of settlement. As of June 30, 2008, the Company recorded a gain of $1,020 in operating expenses in the condensed consolidated financial statements.

					Percent Change
For the Nine Months Ended June 30:	2008		2007		2007 to 2008
Realignment of operations	$	-	$	643	NM

The Company recorded expenses of $643 during the first nine months of fiscal 2007 related to its realignment of operations as discussed in Note 4 of the unaudited condensed consolidated financial statements. No realignment expenses were recorded during the first nine months of fiscal 2008 as the realignment was substantially complete as of September 30, 2007.

							Percent Change
For the Nine Months Ended June 30:	2008			2007			2007 to 2008
Interest income	$	(44	)	$	(95	)		(53.7%)

Interest expense	$	136		$	651			(79.1%)

Interest expense decreased $515 in the first nine months of fiscal 2008 as compared to the same period in fiscal 2007 due to the significant reductions in debt levels throughout late fiscal 2007 and the first half of fiscal 2008. As of June 30, 2008, all of our debt has been fully paid off.

							Percent Change
For the Nine Months Ended June 30:	2008			2007			2007 to 2008
Other income	$	(205	)	$	(1,012	)		(79.7%)

The decrease in other income is primarily due the first nine months of fiscal 2007 including a gain of $877 related to the reversal of old accounts payable related to closed insolvent subsidiaries of the Company. No amounts were reversed in the first nine months of fiscal 2008. Also included in other income for the three months ended June 30, 2008 and 2007 was a gain of $55 and $71, respectively, related to the disposal of certain fixed assets.

					Percent Change
For the Nine Months Ended June 30:	2008		2007		2007 to 2008
Income tax expense	$	2,862	$	3,357		(14.7%)

Tax expense reflects an effective tax rate of 32.9% for the first nine months of fiscal 2008 compared to an effective tax rate of 34.3% for the comparable period in fiscal 2007. The rate reduction in 2008 is due primarily to an increase in the United States Domestic Manufacturing Credit and a larger percentage of the Company’s earnings being taxed at the lower Chinese tax rate.

Financial Condition, Liquidity and Capital Resources

Cash generated by operating activities was $7,202 for the first nine months of fiscal 2008, an increase of $724 from the cash generated by operating activities of $6,478 during the first nine months of fiscal 2007. Net income plus non-cash charges for depreciation and stock based compensation contributed $7,678 in the first nine months of fiscal 2008 and $8,286 in the first nine months fiscal 2007.

Changes in working capital items generated cash of $9 in the first nine months of fiscal 2008 compared to a use of cash of $721 in the first nine months of 2007. Timing of collections on receivables and sales levels decreased cash by $764 in the first nine months of fiscal 2008 compared with generating cash of $1,485 in the same period of fiscal 2007. Inventories were reduced by $1,302 in the first nine months of fiscal 2008 compared to a reduction in inventories of $24 in the first nine months of fiscal 2007. Cash was used to increase inventory levels in the first nine months 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. Cash flows from operations for the nine months ended June 30, 2008 also included payments to our pension plans of $949. For the nine months ended June 30, 2007, we contributed $1,232 to our pension plans. We believe we will continue to generate positive cash from operations.

Cash used in investing activities was $1,058 for the nine months ended June 30, 2008 and $1,611 for the nine months ended June 30, 2007 and was comprised primarily 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.

Cash used in financing activities was $828 for the nine months ended June 30, 2008, compared to cash used in financing activities of $4,342 for the nine months ended June 30, 2007. The use of cash for financing activities for the first nine months of both fiscal 2008 and 2007 primarily relates to payments on debt, slightly offset by proceeds from the exercise of stock options.

At June 30, 2008, we had $8,000 available under our revolving credit facility with Merrill Lynch plus cash and cash equivalents of $6,937. 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 June 30, 2008

At June 30, 2008, our contractual obligations consisted of operating lease obligations and a license agreement. We do not have any material letters of credit or debt guarantees outstanding at June 30, 2008. 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
Operating leases	$	1,970	$	548	$	1,416	$	6	$	-
MMT license - minimum royalties		336		36		150		150		-
	$	2,306	$	584	$	1,566	$	156	$	-

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. The Company has net obligations at June 30, 2008 related to its pension plans and post-retirement medical plan of $374 and $3,917, respectively. We funded $949 to our pension plans during the first nine months of fiscal 2008 compared to $1,232 during the first nine months of fiscal 2007. We expect to make payments to our pension plans of $358 throughout the rest of fiscal 2008.

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 June 30, 2008, there were no outstanding balances on both the term loan and the revolving loan. The Company does not believe that 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 nine months ended June 30, 2008 and 2007, the Company had foreign sales of approximately 46% and 40% of net sales, respectively. All worldwide sales in the first nine months of fiscal 2008 and 2007, with the exception of $2,158 and $600, 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 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, short-term investments, accounts 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.

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.

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 from operations, except as noted below.

Item 1A. Risk Factors

There have been no significant changes in risk factors for the quarter ended June 30, 2008. 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

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. 0-18083, filed with the Commission on November 1, 1989)

10.01		The Restated 1993 Stock Option Plan of the Registrant (Filed herewith)

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)

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: August 7, 2008		/s/ PATRICK W. CAVANAGH
		Patrick W. Cavanagh
		President and Chief Executive Officer

Date: August 7, 2008		/s/ DENNIS E BUNDAY
		Dennis E. Bunday
		Chief Financial Officer

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	8th grade Avg

Williams Controls (WMCO) Inactive 10-Q2008 Q3 Quarterly report

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