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 March 31, 2001 ----------------- / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------ Commission File Number 1-9789 ------ TECH/OPS SEVCON, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 04-2985631 - ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 40 North Avenue, Burlington, Massachusetts, 01803-3391 ------------------------------------------------------ (Address of principal executive offices and zip code) (781) 229-7896 --------------------------------------------------- (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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at May 11, 2001 - ---------------------------- -------------------------- Common stock, par value $.10 3,109,620 TECH/OPS SEVCON, INC. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets ASSETS (in thousands) Mar 31, Sept 30, 2001 2000 --------- ------------ (unaudited) (derived from audited statements) Current assets: Cash and cash equivalents $ 1,380 $ 1,542 Short term investments - 591 Accounts receivable, less allowances of $264,000 at 3/31/2001 and $241,000 at 9/30/2000 6,268 6,132 Inventories: Raw materials 2,240 1,688 Work-in-process 831 944 Finished goods 999 1,052 ------- ------- 4,070 3,684 ------- ------- Prepaid expenses and other current assets 481 831 ------- ------- Total current assets 12,199 12,780 ------- ------- Property, plant and equipment, at cost 6,867 6,905 Less: Accumulated depreciation and amortization 4,002 3,911 ------- ------- Net property, plant and equipment 2,865 2,994 ------- ------- Cost of purchased businesses in excess of net assets acquired 1,435 1,435 ------- ------- $16,499 $17,209 ======= ======= The accompanying notes are an integral part of these financial statements. TECH/OPS SEVCON, INC. Consolidated Balance Sheets LIABILITIES AND STOCKHOLDERS' INVESTMENT (in thousands) Mar 31, Sept 30, 2001 2000 --------- ------------ (unaudited) (derived from audited statements) Current liabilities: Accounts payable $ 2,896 $ 2,385 Dividend payable 560 561 Accrued expenses 2,700 2,347 Accrued taxes on income 287 509 ------- ------- Total current liabilities 6,443 5,802 ------- ------- Deferred taxes on income 129 135 ------- ------- Stockholders' investment Preferred stock - - Common stock 311 311 Treasury stock (49) - Premium paid in on common stock 3,925 3,925 Retained earnings 7,521 8,37 Cumulative other comprehensive income (loss) (1,781) (1,339) ------- ------- Total stockholders' investment $ 9,927 $11,272 ------- ------- $16,499 $17,209 ======= ======= The accompanying notes are an integral part of these financial statements. TECH/OPS SEVCON, INC. Consolidated Statements of Income (Unaudited) (in thousands except per share data) Three Months Ended Six Months Ended ------------------ ------------------ Mar 31, Mar 31, Mar 31, Mar 31, 2001 2000 2001 2000 ------- ------- ------- ------- Net sales $ 7,658 $ 8,138 $13,426 $15,485 Costs and expenses: Cost of sales 4,632 4,865 8,907 9,393 Selling, research and administrative 2,141 2,087 4,157 4,053 ------- ------- ------- ------- 6,773 6,952 13,064 13,376 ------- ------- ------- ------- Operating income 885 1,186 362 2,109 Other income (expense), net - 6 45 25 ------- ------- ------- ------- Income before income taxes 885 1,192 407 2,134 Income taxes 310 386 142 714 ------- ------- ------- ------- Net income $ 575 $ 806 265 1,420 ======= ======= ======= ======= Basic income per share $ .18 $ .26 $ .09 $ .46 ======= ======= ======= ======= Fully diluted income per share $ .18 $ .26 $ .08 $ .45 ======= ======= ======= ======= Consolidated Statement of Comprehensive Income (Unaudited) (in thousands) Three Months Ended Six Months Ended ------------------ ------------------ Mar 31, Mar 31, Mar 31, Mar 31, 2001 2000 2001 2000 ------- ------- ------- ------- Net income $ 575 $ 806 $ 265 $ 1,420 Foreign currency translation adjustment (314) (113) (250) (324) Change in fair market value of cash flow hedge (140) - (192) - ------- ------- ------- ------- Comprehensive income (loss) $ 121 $ 693 $ (177) $ 1,096 ======= ======= ======= ======= The accompanying notes are an integral part of these financial statements. TECH/OPS SEVCON, INC. Consolidated Statement of Cash Flows (Unaudited) (in thousands) Six Months Ended ------------------ Mar 31, Mar 31, 2001 2000 ------- ------- Net cash flow from operating activities: Net income $ 265 $ 1,420 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 269 183 Deferred tax provision (6) (4) Increase (decrease) in cash resulting from changes in operating assets & liabilities: Receivables (136) (2,416) Inventories (386) (108) Pre-paid expenses and other current assets 350 133 Accounts payable 511 1,248 Accrued compensation and expenses 353 32 Accrued and deferred taxes on income (222) 100 ------- ------- Net cash generated from operating activities 998 588 Cash flow used by investing activities: Acquisition of property, plant, and equipment, net (242) (236) Disposal of short-term investments 591 - ------- ------- Net cash generated from (used by) investing activities 349 (236) ------- ------- Cash flow (used by) financing activities: Dividends paid (1,120) (1,121) Exercise of stock options - - Purchase of common stock (49) - ------- ------- Net cash used by financing activities (1,169) (1,121) Effect of exchange rate changes on cash (340) (264) ------- ------- Net increase (decrease) in cash (162) (1,032) Opening balance - cash and cash equivalents 1,542 3,675 ------- ------- Ending balance - cash and cash equivalents $ 1,380 $ 2,644 ======= ======= Supplemental disclosure of cash flow information Cash paid for income taxes $ 126 $ 592 Cash paid for interest 4 - ------- ------- Supplemental disclosure of non-cash financing activity: Dividend declared $ 560 $ 561 ======= ======= The accompanying notes are an integral part of these financial statements. TECH/OPS SEVCON, INC. Notes to Consolidated Financial Statements - March 31, 2001 (Unaudited) (1) Basis of Presentation In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normally recurring accruals) necessary to present fairly the financial position of Tech/Ops Sevcon as of March 31,2001, the results of operations three months and six months ended March 31, 2001 and cash flows for the three months ended March 31, 2001. The accounting policies followed by Tech/Ops Sevcon are set forth in Note 1 to the financial statements in the 2000 Tech/Ops Sevcon, Inc. Annual Report filed on Form 10-K. The results of operations for the three-month and six-month periods ended March 31, 2001 are not necessarily indicative of the results to be expected for the full year. (2) Cash Dividends On March 15, 2001, the Company declared a quarterly dividend of $.18 per share for the second quarter of fiscal 2001, which was paid on April 12, 2001 to stockholders of record on March 28, 2001. The Company has paid regular quarterly cash dividends since the first quarter of fiscal 1990. (3) Calculation of Earnings Per Share and Weighted Average Shares Outstanding Basic and fully diluted earnings per share were calculated as follows: (in thousands, except for per share amounts) Three Months Ended Six Months Ended ------------------ ---------------- Mar 31 Mar 31 Mar 31 Mar 31 2001 2000 2001 2000 ------ ------ ------ ------ Net income $ 575 $ 806 $ 265 $1,420 Basic income per share $ .18 $ .26 $ .09 $ .46 Average shares outstanding 3,110 3,115 3,111 3,115 Options outstanding - common stock equivalents 16 19 16 18 Average common and common equivalent shares outstanding 3,126 3,134 3,127 3,133 Fully diluted income per share $ .18 $ .26 $ .08 $ .45 ====== ====== ====== ====== (4) Segment information The Company has two reportable segments: electronic controls and capacitors. The electronic controls segment produces control systems for battery powered vehicles. The capacitor segment produces electronic components for sale to electronic equipment manufacturers. Each segment has its own management team, manufacturing facilities and sales force. The accounting policies of the segments are the same as those described in note 1 to the 2000 Annual Report filed on Form 10-K. Inter-segment revenues are accounted for at current market prices. The Company evaluates the performance of each segment principally based on operating income. The Company does not allocate income taxes, interest income and expense or foreign currency translation gains and losses to segments. Information concerning operations of these businesses is as follows: - --------------------------------------------------------------------- (in thousands) - --------------------------------------------------------------------- Three months ended March 31, 2001 - --------------------------------------------------------------------- Controls Capacitors Corporate Total - --------------------------------------------------------------------- Sales to external customers $ 7,081 $ 577 - $ 7,658 Inter-segment revenues - 92 - 92 Operating income 760 183 (58) 885 Identifiable assets 15,082 1,323 154 16,499 - --------------------------------------------------------------------- - --------------------------------------------------------------------- Three months ended March 31, 2000 - --------------------------------------------------------------------- Controls Capacitors Corporate Total - --------------------------------------------------------------------- Sales to external customers $ 7,616 $ 522 - $ 8,138 Inter-segment revenues - 98 - 98 Operating income 1,081 145 (40) 1,186 Identifiable assets 17,413 1,404 652 19,469 - --------------------------------------------------------------------- - --------------------------------------------------------------------- Six months ended March 31, 2001 - --------------------------------------------------------------------- Controls Capacitors Corporate Total - --------------------------------------------------------------------- Sales to external customers $12,358 $ 1,068 - $13,426 Inter-segment revenues - 177 - 177 Operating income 193 288 (119) 362 - --------------------------------------------------------------------- - --------------------------------------------------------------------- Six months ended March 31, 2000 - --------------------------------------------------------------------- Controls Capacitors Corporate Total - --------------------------------------------------------------------- Sales to external customers $14,495 $ 990 - $15,485 Inter-segment revenues - 170 - 170 Operating income 1,981 230 (102) 2,109 - --------------------------------------------------------------------- TECH/OPS SEVCON, INC. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Three months ended March 31, 2000 Sales in the second fiscal quarter ended March 31, 2001 were $7,658,000 compared to $8,138,000 in the same quarter of the previous year, a decrease of $480,000, or 6%. Foreign currency fluctuations reduced reported sales by $380,000, or 5%. Second quarter volumes were 1% below last year. Revenues in the U.S. controller business increased by 11% mainly due to higher demand in the mining and airport ground support markets, partially offset by a decrease in the aerial lift market. Volumes in the European controller markets were 13% lower than last year, mainly due to weakness in the aerial lift and fork lift truck markets. Capacitor sales were 11% higher than last year due to a continuation of the recovery from the difficult conditions in the European capacitor market. Second quarter gross profit was 39.5% of sales, a decrease from 40.2% in the second quarter of fiscal 2000. Gross profit of $3,026,000 was $247,000 lower than last year. The decrease in gross profit percentage was attributable to increased electronic component prices, lower labor efficiency during the period of workforce reductions and higher product rectification costs. Selling, research and administrative expenses for the quarter increased by $54,000, or 3%, compared to fiscal 2000. In the controller business the plan to reorganize and refocus manufacturing facilities on their core competencies, reduce manufacturing costs and improve quality is ongoing. During the second quarter the company implemented its plan to reduce its workforce announced last quarter. The workforce reductions during the second quarter resulted in a charge of $390,000 or $.08 per share. At the end of the second quarter the number of employees was 209, a decrease of 21% compared with the beginning of fiscal 2001. A reserve for the estimated costs of dealing with a litigation claim was recorded during the second quarter. This litigation is discussed in Part II, item 1, Legal Proceedings. Operating income was $885,000, a decrease of $301,000, or 25%, compared to the second quarter of fiscal 2000. Before the $390,000 charge relating to the reduction in the workforce, operating income increased by $89,000, or 8% compared to last year. Operating income in the capacitor business segment increased by $38,000, or 26%, mainly due to increased volumes. Operating income in the controller business was $321,000 lower than in fiscal 2000, mainly due to the $390,000 charge in the second quarter of fiscal 2001 relating to workforce reductions. Income before income taxes was $885,000, compared to $1,192,000 last year, a decrease of $307,000, or 26%. Income taxes were 35.0% of pre-tax income compared to 32.4% in the same quarter of fiscal 2000. This increase in the average tax rate was due to a greater proportion of the Company's income being earned in the United States, where the tax rate is higher than in the Company's European businesses. Net income was $575,000 compared to $806,000 last year, a decrease of 29%. Basic and fully diluted income per share decreased by 31%, from $.26 in the second quarter of fiscal 2000, to $.18 in the current year. Six months ended March 31, 2001 Sales in the first six months of fiscal 2001 were $13,426,000, compared to $15,485,000 in the same period last year, a decrease of $2,059,000, or 13%. Foreign currency fluctuations accounted for an $800,000, or 5%, decrease in reported sales. Volumes were 8% lower than last year. In the first quarter of fiscal 2001 there was a technical problem with a major product line. The technical problem resulted in production of this major product line being suspended during December. It was subsequently determined that this problem only impacted one major fork lift truck customer, but shipments of that product line were severely curtailed to all customers for that product line during the first quarter. This problem has now been resolved and shipments have recommenced. Revenues in the US controller business decreased by $74,000, or 1%. This was mainly due to decreased demand in the aerial lift market partially offset by higher sales to the mining and airport ground support markets. Controller volumes in foreign markets decreased by $1,390,000, or 17%, mainly due to lower demand in the European aerial lift and fork lift truck markets and the first quarter technical problem. Capacitor volumes increased by $200,000, or 20% compared to the first half of last year. Gross profit was 35.3% of sales in the first half of fiscal 20001 compared to 39.8% in 2000. Gross profit decreased by $1,582,000 compared to the first six months of last year. Lower volumes accounted for $700,000 of the decrease in gross profit. Product rectification costs in the first quarter in connection with a technical problem with a major product line amounted to $450,000, or $.09 per share. Difficult material supply conditions, due to a worldwide shortage of electronic components, the start-up of the Company's outsourcing program and lower labor efficiency during the period of workforce reduction resulted in increased manufacturing costs of $430,000 during the first half of fiscal 2001. Operating expenses for the six-month period were $4,157,000 compared to $4,053,000 last year, an increase of 3%. As mentioned above the Company incurred a charge of $390,000 relating to workforce reductions in the second quarter. Prior to this charge, operating expenses were 7% lower than in Fiscal 2000. Operating income for the first half year was $362,000, a decrease of $1,747,000 compared to last year. Operating income for the controller business decreased by $1,788,000 to $193,000. The main causes of this decrease were lower volumes, which reduced operating income by $816,000, the first quarter product rectification charge of $450,000 and the second quarter workforce reduction charge of $390,000. In the capacitor business segment operating income increased by $58,000, or 25%, to $288,000, mainly due to increased volumes. Income before income taxes was $407,000, compared to $2,134,000 last year, a decrease of $1,727,000. Other income was $45,000 compared to $25,000 in the first half of fiscal 2000. Income taxes were 34.9% of pre-tax income, compared to 33.5% last year, mainly due to a higher proportion of US income in fiscal 2001 at a higher average tax rate. Net income was $265,000, a decrease of $1,155,000 compared to the same period last year. Basic income per share was $.09 per share compared to $.46 per share in the first half of fiscal 2000. Fully diluted net income was $.08 per share, a decrease of $.37 per share compared to 2000. Financial Condition The Company has, since January 1990, maintained a program of regular cash dividends, which, for the most recent quarter, amounted to $560,000. Tech/Ops Sevcon's resources, in the opinion of management, are adequate for projected operations and capital spending programs, as well as continuation of the cash dividend. The Company has no current plan to change its dividend policy. This discussion and analysis contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected, including the following: ability of the Company to successfully implement its plan to reorganize and refocus the Company, to reduce manufacturing costs and successfully implement its outsourcing program in a timely manner; ability to produce products meeting technical requirements of customers and acceptance of those products by customers; level of demand for controls; impact of the variability of foreign exchange rates on sales and earnings; availability of electronic components at reasonable prices; availability of earnings and capital resources to permit continuation of dividend payments; the outcome of litigation against the company, as well as other factors that may be described from time to time in the Company's filings with the Securities and Exchange Commission, including on Form 10-K. TECH/OPS SEVCON, INC. PART II. OTHER INFORMATION Item 1. Legal Proceedings On April 4,2001 an Indian electronics manufacturer commenced an action against the Company's UK subsidiary for damages of approximately $1.4 million. The claim is for loss of profits and expenses relating to an alleged contract to supply the Company's requirements for certain products for a 5-year period. The Company filed a defense denying the existence of such a contract and does not anticipate any material liability in this action. Item 4. Submission of Matters to a Vote of Security Holders At the Company's Annual Meeting held on January 23, 2001, the shareholders voted to re-elect as directors for three year terms the following persons: David R. A. Steadman and Marvin G. Schorr. Mr. Steadman received 2,690,197 votes for and 6,620 withheld, and Dr. Schorr received 2,690,797 votes for and 6,020 withheld. There were no abstentions or broker non-votes. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits filed with this report. None (b) Reports on Form 8-K - There were no reports on Form 8-K during the quarter for which this report is filed. 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. TECH/OPS SEVCON, INC. Date: May 11, 2001 By: /s/ Paul A. McPartlin --------------------- Paul A. McPartlin Chief Financial and Accounting Officer