Williams Controls (WMCO) 10-Q 2009 Q1 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: December 31, 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	84-1099587
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer 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, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act

Large accelerated filer [    ]	Accelerated filer [ X ]
Non-accelerated filer [    ]	Smaller reporting company [ X ]

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, 2009: 7,234,501

Williams Controls, Inc.

December 31, 2008

Table of Contents

			Page Number
Part I.  Financial Information
	Item 1.	Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets, December 31, 2008 and September 30, 2008	1
		Condensed Consolidated Statements of Operations, three months ended December 31, 2008 and 2007	2
		Condensed Consolidated Statements of Cash Flows, three months ended December 31, 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	12
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
	Item 4.	Controls and Procedures	19
Part II.  Other Information
	Item 1.	Legal Proceedings	20
	Item 1A.	Risk Factors	20
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
	Item 3.	Defaults Upon Senior Securities	20
	Item 4.	Submission of Matters to a Vote of Security Holders	20
	Item 5.	Other Information	20
	Item 6.	Exhibits	21
	Signature Page		22

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, 2008			September 30, 2008
ASSETS
Current Assets:
Cash and cash equivalents	$	6,382		$	9,060
Short-term investments		127			263
Trade accounts receivable, less allowance of       $79 and $47 at December 31, 2008 and September 30       2008, respectively		6,436			10,438
Other accounts receivable		1,500			835
Inventories		8,480			8,215
Deferred income taxes		353			428
Prepaid expenses and other current assets		1,049			301
Total current assets		24,327			29,540
Property, plant and equipment, net		9,322			9,096
Deferred income taxes		1,473			1,446
Other assets, net		515			526
Total assets	$	35,637		$	40,608
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	3,048		$	4,784
Accrued expenses		4,785			5,224
Current portion of employee benefit obligations		285			285
Total current liabilities		8,118			10,293
Long-term Liabilities:
Employee benefit obligations		4,359			4,322
Other long-term liabilities		352			345
Commitments and contingencies
Stockholders’ Equity:
Preferred Stock ($.01 par value, 50,000,000 authorized) Series C       (0 issued and outstanding at December 31, 2008 and September 30,       2008)		-			-
Common stock ($.01 par value, 12,500,000 authorized; 7,234,501       and 7,534,642 issued and outstanding at December 31, 2008 and       September 30, 2008, respectively)		75			75
Additional paid-in capital		35,927			35,744
Accumulated deficit		(5,570	)		(4,729	)
Treasury stock (321,841 and 21,700 shares at December 31, 2008 and September 30, 2008)		(2,665	)		(377	)
Accumulated other comprehensive loss		(4,959	)		(5,065	)
Total stockholders’ equity		22,808			25,648
Total liabilities and stockholders’ equity	$	35,637		$	40,608

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 Months Ended December 31,
	2008			2007
Net sales	$	10,691		$	14,972
Cost of sales		8,137			10,086
Gross profit		2,554			4,886
Operating expenses:
Research and development		1,146			1,009
Selling		651			678
Administration		1,666			1,401
Total operating expenses		3,463			3,088
Operating income (loss)		(909	)		1,798
Other (income) expenses:
Interest income		(13	)		(22	)
Interest expense		5			88
Loss on impairment of investments		317			-
Other (income) expense, net		87			(34	)
Total other expenses		396			32
Income (loss) before income taxes		(1,305	)		1,766
Income tax expense (benefit)		(464	)		610
Net income (loss)	$	(841	)	$	1,156
Net income (loss) per common share – basic	$	(0.11	)	$	0.15
Weighted average shares used in per share calculation – basic		7,463,409			7,508,861
Net income (loss) per common share – diluted	$	(0.11	)	$	0.15
Weighted average shares used in per share calculation – diluted		7,463,409			7,756,635

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

2

Williams Controls, Inc.

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

	Three Months Ended December 31,
	2008			2007
Cash flows from operating activities:
Net income (loss)	$	(841	)	$	1,156
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		479			459
Deferred income taxes		48			(37	)
Stock based compensation		183			149
Losses on impairment of investments		317			-
Loss from sale and disposal of property, plant and equipment		89			-
Changes in operating assets and liabilities
Receivables, net		3,337			284
Inventories		(265	)		392
Prepaid expenses and other current assets		(748	)		(658	)
Accounts payable and accrued expenses		(2,175	)		(1,384	)
Other		(38	)		(341	)
Net cash provided by operating activities		386			20
Cash flows from investing activities:
Purchases of property, plant and equipment		(783	)		(213	)
Proceeds from sale of property, plant and equipment		6			-
Net cash used in investing activities		(777	)		(213	)
Cash flows from financing activities:
Payments of debt		-			(125	)
Net proceeds from exercise of stock options		-			70
Repurchase of common stock		(2,287	)		-
Net cash used in financing activities		(2,287	)		(55	)
Net decrease in cash and cash equivalents		(2,678	)		(248	)
Cash and cash equivalents at beginning of period		9,060			1,621
Cash and cash equivalents at end of period	$	6,382		$	1,373
Supplemental disclosure of cash flow information:
Interest paid	$	-		$	42
Income taxes paid	$	111		$	-

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

3

Williams Controls, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Three Months ended December 31, 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, 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”); 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 (“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, 2008 and the results of operations and cash flows for the three months ended December 31, 2008 and 2007.  The results of operations for the three months ended December 31, 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, 2008, 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, deferred tax assets, stock options and commitments and contingencies.

Note 3.  Recently Adopted Accounting Standards

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”).  SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.  Under SFAS No. 157, fair value measurements would be separately disclosed by level within the fair value hierarchy.  On October 1, 2008, the Company adopted the provisions of SFAS No. 157 and it did not have a material effect on the Company’s consolidated financial position, results of operations, or cash flows.  In February 2008, FASB Staff Position FAS No. 157-2, “Effective Date of FASB Statement No. 157” was issued and delayed the application of SFAS No. 157 for non-financial assets and liabilities until fiscal years beginning after November 15, 2008 (see Note 8—Fair Value Measurements).

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Also effective October 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” (“SFAS 159”)  This statement permits entities to choose to measure many financial instruments and certain other items at fair value.  As of December 31, 2008, the Company did not elect to apply the fair value option to any financial instruments or other items upon adoption of SFAS No. 159.

Note 4.  Recently Issued Accounting Standards

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.”  This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in the preparation of financial statements presented in conformity with generally accepted accounting principles in the United States.  This statement is effective 60 days following approval by the U.S. Securities and Exchange Commission (“SEC”).  The Company does not expect SFAS No. 162 to have a material impact on the preparation of its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations.”  (“SFAS 141R”) SFAS No. 141R changes the accounting for business combinations in a number of areas including the treatment of contingent consideration, preacquisition contingencies, transaction costs, in-process research and development and restructuring costs.  In addition, under SFAS No. 141R, changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense.  This statement will be effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2008.  This statement, when adopted, will change the Company’s accounting treatment for business combinations on a prospective basis.

Note 5.  Accounting for Share Based Compensation

The Company uses SFAS No. 123R, “Share Based Payment,” (“SFAS 123R”) 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.  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 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 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, 2008 there was $1,979 of total unrecognized compensation costs related to nonvested stock options.  That cost is expected to be recognized over a weighted average period of 3.2 years.

The Company’s share-based compensation expenses were recorded in the following expense categories for the three months ended December 31, 2008 and 2007:

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	Three Months Ended December 31,
	2008		2007
Cost of sales	$	36	$	25
Research and development		21		17
Selling		21		17
Administration		105		90
Total share-based compensation expense	$	183	$	149
Total share-based compensation expense (net of tax)	$	157	$	126

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.  No options were granted during the three months ended December 31, 2008 or 2007.

The following table summarizes stock options outstanding as of December 31, 2008 as well as activity during the three months then ended.

	Shares			Weighted Average Exercise Price
Outstanding at September 30, 2008		645,521		$	9.17
Forfeited		(9,266	)		13.03
Outstanding at December 31, 2008		636,255		$	9.11
Exercisable at December 31, 2008		396,281		$	6.78

At December 31, 2008, the weighted average remaining contractual term of options outstanding and options exercisable was 6.4 years and 5.4 years, respectively.

The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2008 was $682 and $613, 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, 2007 was $5,226 and $3,690, respectively.  There were no stock options exercised during the three months ended December 31, 2008. The intrinsic value of all stock options exercised during the three months ended December 31, 2007 was $217.  Cash received from the exercise of stock options for the three months ended December 31, 2007 was $70.

Note 6.  Comprehensive Income (Loss)

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 (loss):

	Three Months Ended December 31,
	2008			2007
Net income (loss)	$	(841	)	$	1,156
Translation adjustment		1			41
Change of unrealized gain or loss		105			-
Comprehensive income (loss)	$	(735	)	$	1,197

Note 7.  Earnings (Loss) 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.

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Following is a reconciliation of basic EPS and diluted EPS:

	Three Months Ended December 31, 2008								Three Months Ended December 31, 2007
	Loss			Shares		Per Share Amount			Income		Shares		Per Share Amount
Basic EPS –	$	(841	)		7,463,409	$	(0.11	)	$	1,156		7,508,861	$	0.15
Effect of dilutive securities –
Stock options					-							247,774
Diluted EPS –	$	(841	)		7,463,409	$	(0.11	)	$	1,156		7,756,635	$	0.15

For the three months ended December 31, 2008, the Company had options covering 636,255 shares that were not considered in the dilutive EPS calculation since they would have been antidilutive.  For the three months ended December 31, 2007, the Company had options covering 99,246 shares not considered in the dilutive EPS calculation since they would have been antidilutive.

Note 8.  Fair Value Measurement

The Company adopted the provisions of SFAS No. 157 effective October 1, 2008 as discussed in Note 3—Recently Adopted Accounting Standards.  SFAS 157 established a three-tier hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable as follows:

Level 1 – observable inputs such as quoted prices in active markets for identical assets or liabilities;

Level 2 – inputs, other than the quoted market prices in active markets, which are observable, either directly or indirectly; and

Level 3 – unobservable inputs for which there is little or no market data available, which require the reporting entity to develop its own assumptions.

The following table presents information about financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2008:

	Fair Value as of December 31, 2008		Level 1		Level 2		Level 3
Cash and cash equivalents	$	6,382	$	6,382	$	-	$	-
Short-term investments		127		127		-		-
Total financial assets and liabilities	$	6,509	$	6,509	$	-	$	-

We use a market approach to determine the fair value of cash and cash equivalents and short-term investments. Cash and cash equivalents include highly liquid investments with original maturities of three months or less.  Short-term investments consist of available-for-sale securities.  There were no assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2008.

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During the first quarter ended December 31, 2008, the Company recorded a non-cash, mark-to-market impairment charge of approximately $317 relating to its investment in Dana Holding CP (“Dana”).  The decision to record the impairment charge was based on the continued decline in the market value of the Dana stock, as well as the deteriorations of the market where Dana operates.  The Company recorded no income tax benefit on this impairment charge given the uncertainty of the Company’s ability to generate future taxable investment gains required to utilize these investment losses.  Prior to the Company recording the impairment charge, the decline in market value was carried net of tax in other comprehensive loss.

Note 9.  Stock Repurchase Program

In October 2008, the Company’s Board of Directors authorized the purchase, from time to time, of up to $5,000 of shares of the Company’s common stock.  Repurchases may be made in the open market or through block trades, in compliance with Securities and Exchange Commission guidelines, subject to market conditions, applicable legal requirements and other factors.  The Company has no obligation to repurchase shares under the repurchase program and the timing, actual number and price of shares to be purchased will depend on the performance of the Company’s stock price, general market conditions, and various other factors within the discretion of management.  As of December 31, 2008, the Company has repurchased 300,141 shares of common stock at a total value of $2,287.

Note 10.  Inventories

Inventories, net of reserves, consist of the following:

	December 31, 2008		September 30, 2008
Raw materials	$	6,119	$	5,578
Work in process		15		53
Finished goods		2,346		2,584
	$	8,480	$	8,215

Note 11.  Debt

As of December 31, 2008, the Company has paid off its entire term loan debt and has no amounts outstanding under its revolving loan facility.

The Company has a revolving loan facility with GE Capital.  The revolving loan facility is 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 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.  At December 31, 2008, the Company was in compliance with all of its quarterly covenants.  At September 30, 2008, the Company was in compliance with all but one of its financial covenants, and as of the filing of these financial statements, the Company has not yet obtained a waiver from GE Capital with respect to such covenant.  The Company is continuing to work with GE Capital to resolve this item.

The Company had available under its revolving credit facility $6,847 at December 31, 2008 and $8,000 at September 30, 2008.

Note 12.  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 months ended December 31, 2008 and 2007.

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	Three Months Ended December 31,
	2008			2007
Beginning balance	$	719		$	1,712
Payments		(242	)		(178	)
Additional accruals		150			189
Ending balance	$	627		$	1,723

Note 13.  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 Months Ended December 31,						Three Months Ended December 31,
	2008			2007			2008			2007
Service cost	$	-		$	-		$	14		$	16
Interest cost		79			74			128			115
Expected return on plan assets		(70	)		(77	)		(107	)		(118	)
Amortization of prior service cost		-			-			4			5
Amortization of loss		26			16			79			42
Net periodic benefit cost	$	35		$	13		$	118		$	60

The Company expects total contributions to its pension plans in fiscal 2009 to be $183.  During the three months ended December 31, 2008, the Company did not make any contributions.  At September 30, 2008, the Company had total benefit obligations for both plans of $12,336 and a fair value of assets for both plans of $10,884.  Since year end , asset values have declined as a result of recent volatility in the capital markets.  The Company estimates that the value of plan assets for both plans at December 31, 2008 decreased approximately $2,760 when compared to the value of plan assets at the August 31, 2008 measurement date.

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 three months ended December 31, 2008 and 2007.

Components of Net Periodic Benefit Cost:

	Post-Retirement Plan
	Three Months Ended December 31,
	2008			2007
Service cost	$	1		$	1
Interest cost		51			59
Amortization		(22	)		(8	)
Net periodic benefit cost	$	30		$	52

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Note 14.  Income Taxes

The Company’s unrecognized tax benefits remained unchanged during the three months ended December 31, 2008.  The Company believes that it is reasonably possible that unrecognized tax benefits could decrease by $23 within the 12 months of this reporting date. 

During the fourth quarter of fiscal 2008, the Company settled with the State of Oregon on all outstanding examination issues.  The settlement did not have a material adverse effect on the Company’s results of operations.  The settlement liability was paid in October 2008.  The Company is not currently under examination in any other states or foreign jurisdictions. 

Note 15.  Geographic Information

The Company accounts for its geographic information in accordance with SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information”.  During the three months ended December 31, 2008 and 2007, the Company operated in two geographic regions as shown in the table below.

	Three Months Ended December 31,
	2008			2007
Revenue – External Customers:
United States	$	10,348		$	14,735
China		343			237
	$	10,691		$	14,972
Revenue – Intersegments:
United States	$	105		$	163
China		2,405			2,823
Other		134			138
Eliminations		(2,644	)		(3,124	)
	$	-		$	-
Income (loss) before income taxes:
United States	$	(1,508	)	$	1,671
China		217			127
Other		(14	)		(32	)
	$	(1,305	)	$	1,766

Note 16.  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 with the help of an environmental consulting firm.  As of December 31, 2008, the total liability recorded is $1,006, and such liability is recorded in accrued expenses in the accompanying condensed consolidated balance sheet.  The Company asserted and settled 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”) and Rosan, Inc. (“Rosan”)) under the Federal Superfund Act and the Oregon Cleanup Law.  

10

During 2008, the Company entered into a settlement agreement with Dana, Blount and Rosan under which it received total cash payments from Dana, Blount and Rosan of $735, and shares of Dana stock equal to approximately $337 at the time of settlement.  In exchange for such cash payments and Dana stock, the Company assumed the full obligation to, and risks associated with, completing the remediation.  The Company recorded the shares received as available-for-sale securities in short-term investments in the accompanying condensed consolidated balance sheets.

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 which has not taken action yet.  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.

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 months ended December 31, 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, 2008.

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, 2008 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, the portion of the heavy truck and off-road markets consisting of 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 2009 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.

13

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 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.

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.

14

Results of Operations

Financial Summary

(Dollars in Thousands)

	Three Months Ended December 31,
	2008			2007			2007 to 2008
Net sales	$	10,691		$	14,972			(28.6)%
Cost of sales		8,137			10,086			(19.3)%
Gross profit		2,554			4,886			(47.7)%
Research and development		1,146			1,009			13.6%
Selling		651			678			(4.0)%
Administration		1,666			1,401			18.9%
Operating income (loss)	$	(909	)	$	1,798			(150.6)%
As a percentage of net sales:
Cost of sales		76.1	%		67.4	%
Gross margin		23.9	%		32.6	%
Research and development		10.7	%		6.7	%
Selling		6.1	%		4.5	%
Administration		15.6	%		9.4	%
Operating income (loss)		(8.5	)%		12.0	%

The rapid and significant decline in the domestic and world-wide economic situation has had a significant impact on the Company’s results of operations in the first quarter of fiscal 2009.  The 28.6% revenue decline and the $841 net loss incurred during the quarter were solely a result of that economic downturn.  Gross margins declined in the first quarter of fiscal 2009 primarily as overhead costs did not decline as rapidly as sales volumes while materials and labor generally fluctuated with sales volumes.  Although the future remains unclear, based on comments in the popular press it appears possible this economic downturn will continue for some time into the future.  In response to this significant negative shift in the world-wide economic situation, the Company is minimizing operational costs as a result of reduced volumes and during the second quarter of fiscal 2009 the Company reduced overhead and operating expenses at an annualized rate of approximately $1,500 while continuing to invest in product development and technology for the future.  Although no assurances can be given, it appears likely that the Company’s $6,382 in cash plus its borrowing capacity will be more than adequate to sustain the Company through this economic downturn.

 Comparative – Three months ended December 31, 2008 and 2007

NM = Not Meaningful

					Percent Change
For the Three Months Ended December 31:	2008		2007		2007 to 2008
Net sales	$	10,691	$	14,972		(28.6)%

Net sales decreased $4,281 in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008.  The decrease results from volume reductions in essentially all of the Company’s principal markets, which the Company believes were due to the declining world economic climate and the impact that decline has had on our customers and the end markets for their products.  In the first quarter of fiscal 2009, we began to see a significant reduction in the number of units of trucks, and to a lesser degree off-road vehicles, built world-wide due to the significant recessionary pressures in the United States and portions of the rest of the world.  A number of our large truck OEM customers have publicly announced reductions in build rates.  These reductions impacted our first fiscal quarter of 2009 and likely will impact our sales to those customers in at least some portion of the remainder of our fiscal 2009.  It is uncertain how protracted or severe the current financial situation will be world-wide and the impact it may have on the Company throughout fiscal 2009.

15

In the North American market, sales to heavy truck customers were down 24% compared to the first quarter of fiscal 2008, and are 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 and Asian customers both decreased 48% on a quarter over quarter basis.  Net sales to off-road customers decreased 24%.  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.  When new product lines are established, however, competitive pricing may continue to reduce per unit pricing.

					Percent Change
For the Three Months Ended December 31:	2008		2007		2007 to 2008
Gross profit	$	2,554	$	4,886		(47.7)%

Gross profit was $2,554, or 23.9% of net sales in the first quarter of fiscal 2009, a decrease of $2,332 compared to the gross profit of $4,886, or 32.6% of net sales, in the comparable fiscal 2008 period.

The decrease in gross profit in the first quarter of fiscal 2009 is primarily driven by the 29% net decrease in sales of electronic throttle systems to our heavy truck and off-road customers.

					Percent Change
For the Three Months Ended December 31:	2008		2007		2007 to 2008
Research and development	$	1,146	$	1,009		13.6%

Research and development expenses increased $137 for the first quarter of fiscal 2009 compared to the comparable period in fiscal 2008.  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 due to more new product introductions in process.  Overall, we expect research and development expenses to increase slightly over fiscal 2008 levels due to additional new product design projects

					Percent Change
For the Three Months Ended December 31:	2008		2007		2007 to 2008
Selling	$	651	$	678		(4.0)%

Selling expenses decreased $27 during the three month period ended December 31, 2008 as compared with the three month period ended December 31, 2007 mainly due to lower overall travel expenses.

					Percent Change
For the Three Months Ended December 31:	2008		2007		2007 to 2008
Administration	$	1,666	$	1,401		18.9%

Administration expenses for the three month period ended December 31, 2008 increased $265 when compared with the same period in fiscal 2008.  The increase in administration expenses is primarily a result of non-cash compensation expense recognized in conjunction with the Company’s unfunded deferred compensation plan.

							Percent Change
For the Three Months Ended December 31:	2008			2007			2007 to 2008
Interest income	$	(13	)	$	( 22	)		(40.9)%
Interest expense	$	5		$	88			(94.3)%

16

Interest expense decreased $83 in the first quarter of fiscal 2009 as compared to the first quarter of fiscal 2008 due to significant reductions in debt levels.  We expect interest expense to continue to remain at low levels in fiscal 2009, and as of December 31, 2008 we do not have any outstanding debt.

					Percent Change
For the Three Months Ended December 31:	2008		2007		2007 to 2008
Loss on impairment of investments	$	317	$	-	NM

Loss on impairment of investments is a non-cash, other-than-temporary impairment charge relating to the Company’s investment in Dana Holding CP (“Dana”)during the first quarter of fiscal 2009.  The impairment charge assumes no income tax benefit given the uncertainty of the Company’s ability to generate future taxable investment gains required to utilize these investment losses.  Prior to the Company recording the impairment charge, the decline in market value was carried net of tax in other comprehensive loss.

						Percent Change
For the Three Months Ended December 31:	2008		2007			2007 to 2008
Other (income) expense, net	$	87	$	(34	)	NM

Other expense was $87 in the first quarter of fiscal 2009 compared to other income of $34 in the first quarter of fiscal 2008.  Other expense in the first quarter of fiscal 2009 primarily consisted of losses related to the disposal of certain fixed assets.

						Percent Change
For the Three Months Ended December 31:	2008			2007		2007 to 2008
Income tax expense (benefit)	$	(464	)	$	610	NM

Income tax expense (benefit) reflects an effective tax rate of 35.6% for the quarter ended December 31, 2008 compared to an effective tax rate of 34.5% for the quarter ended December 31, 2007.  The effective tax rate fluctuations are primarily due to the jurisdictions in which pretax income (loss) is being earned and income tax rate differences between the domestic and foreign jurisdictions.  The increase in tax rate from fiscal 2008 to fiscal 2009 is primarily due to the elimination of the United States Domestic Manufacturing Credit due to our net loss position and taxes associated with our operations in China.

Financial Condition, Liquidity and Capital Resources

Cash generated by operating activities was $386 for the first quarter of fiscal 2009, an increase of $366 from the cash generated by operating activities of $20 during the first quarter of fiscal 2008.   Net income (loss) plus non cash charges for depreciation and stock based compensation contributed $179 in the first quarter of fiscal 2009 and $1,764 in the first quarter of fiscal 2008.

Changes in working capital items generated cash of $111 in the first quarter of fiscal 2009 compared to a cash use of $1,707 in the first quarter of fiscal 2008.  Collections on receivables at September 30, 2008, with corresponding lower sales in the first quarter of fiscal 2009, generated cash of $3,337 in fiscal 2009.  Inventories increased $265 in the first quarter of fiscal 2009 compared to a decrease in inventories of $392 in the first quarter of fiscal 2008.  Accounts payable and accrued expenses decreased in the first quarter of fiscal 2009 and 2008 primarily due to the lower sales and inventory purchases plus seasonal payments of certain expenses.  Cash flows from operations for the three months ended December 31, 2007 included payments to our pension plans of $402.  We did not make any contributions to our pension plans for the three months ended December 31, 2008.  We believe it is likely we will continue to generate positive cash from operations, however, depending on the current uncertain world-wide economic market, we could experience periods of negative cash flow from operations.

Cash used in investing activities was $777 for the three months ended December 31, 2008 and $213 for the three months ended December 31, 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.

17

Cash used in financing activities was $2,287 for the quarter ended December 31, 2008, compared to cash used in financing activities of $55 for the quarter ended December 31, 2007.  In October 2008, the Company announced a share repurchase plan whereby the Company can, but is under no obligation to, repurchase up to $5 million of the Company’s common stock.  Repurchases may be made in the open market or through block trades, in compliance with Securities and Exchange Commission guidelines, subject to market conditions, applicable legal requirements and other factors.  During the quarter, the Company purchased 300,141 shares of common stock at a total value of $2,287.  The use of cash for financing activities for the first quarter of fiscal 2008 primarily relates to scheduled debt payments on our term loan, offset slightly by proceeds from the exercise of stock options.

At December 31, 2008, we had $6,847 available under our revolving credit facility with GE Capital plus cash and cash equivalents of $6,382.  We were not compliant with one financial covenant at September 30, 2008 and this non compliance could limit our ability to borrow against the $6,847 available under the revolving credit facility.  We have not yet obtained a waiver with our lendor GE Capital as of the filing of these financial statements, however, we believe when our cash on hand is combined with cash provided by operations, it will be sufficient to meet our working capital needs on a short-term and long-term basis.

Contractual Obligations as of December 31, 2008

At December 31, 2008, our contractual obligations consisted of operating lease obligations and a license agreement.  We did not have any material letters of credit, or debt guarantees outstanding at December 31, 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	$	1,695	$	565	$	1,080	$	50	$	-
MMT license - minimum royalties		352		52		150		150		-
	$	2,047	$	617	$	1,230	$	200	$	-

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, 2008 related to our pension plans and post-retirement medical plan of $1,604 and $3,040, respectively.  We did not make any contributions to our pension plans during the first quarter of fiscal 2009.  We contributed $402 in the first quarter of fiscal 2008.  We expect to make payments to our pension plans of $183 throughout the rest of fiscal 2009.  The recent decline in the overall world economy and stock markets has resulted in the portfolio assets of the Company’s pension plans to decline approximately 25% since the last measurement date of August 31, 2008.  This market decline will not impact the Company’s contribution requirements under ERISA in fiscal 2009, however, it may increase the required contributions to the Company’s pension plans in future periods.  In addition, the economic downturn has had a significant impact on interest rates and as such could have a significant impact on the discount rate used in valuation of our pension liabilities at our next measurement date of September 30, 2009.  If discount rates continue to decrease this will have an impact of increasing our pension liabilities.

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 exchange rates of the Chinese RMB.

Interest Rate Risk

The Company has a revolving loan agreement with its primary lender GE Capital, which expires on September 29, 2009.  Interest rates under the agreement are variable and are based on the election of the Company of either a LIBOR rate or Prime rate.

As of September 30, 2008, there was no balance outstanding on the term loan and the revolving loan.  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 months ended December 31, 2008 and 2007, the Company had foreign sales of approximately 35% and 44% of net sales, respectively.  All worldwide sales in the first quarter of fiscal 2008 and 2007, with the exception of $343 and $237, 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.  

18

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.

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.

19

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.

Item 1A.  Risk Factors

There have been no significant changes in risk factors for the quarter ended December 31, 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, 2008.

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

During the three months ended December 31, 2008, the Company repurchased the following shares:

	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
October 1, 2008 – October 31, 2008		4,400	$	12.29		4,400	$	4,946
November 1, 2008 – November 30, 2008		59,091		11.46		59,091		4,269
December 1, 2008 – December 31, 2008		236,650		6.58		236,650		2,713
Total		300,141	$	7.62		300,141	$	2,713

In October 2008, the Company’s Board of Directors authorized the purchase up to $5,000 of shares of the Company’s common stock.  Repurchases may be made in the open market or through block trades, in compliance with Securities and Exchange Commission guidelines, subject to market conditions, applicable legal requirements and other factors.  The Company has no obligation to repurchase shares under the repurchase program and the timing, actual number and price of shares to be purchased will depend on the performance of the Company’s stock price, general market conditions, and various other factors within the discretion of management.  As of December 31, 2008, the Company has repurchased 300,141 shares of common stock at a total value of $2,287.  All repurchases were made using cash resources.

Item 3.  Defaults Upon Senior Securities

None

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

None

Item 5.  Other Information

None

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Item 6.  Exhibits

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 11, 2009	By:	/s/ PATRICK W. CAVANAGH
		Patrick W. Cavanagh
		President and Chief Executive Officer
Date:  February 11, 2009		/s/ DENNIS E. BUNDAY
		Dennis E. Bunday
		Chief Financial Officer

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