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 27, 1998 / / 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.) One Beacon Street, Boston, Massachusetts, 02108 ---------------------------------------------------- (Address of principal executive offices and zip code) (617) 523-2030 --------------------------------------------------- (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 August 7, 1998 - ----------------------------- ------------------------------- Common stock, par value $.10 3,105,373 1 TECH/OPS SEVCON, INC. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets ASSETS (in thousands) June 27, Sept 30, 1998 1997 --------- ------------ (unaudited) (derived from audited statements) Current assets: Cash and cash equivalents $ 2,848 $ 2,361 Accounts receivable, less allowances of $158 at 6/27/98 and $150 at 9/30/97 6,914 5,637 Inventories: Raw materials 2,006 1,532 Work-in-process 745 903 Finished goods 526 691 ----- ----- 3,277 3,126 ------ ------ Total current assets 13,039 11,124 ----- ------ Property, plant and equipment, at cost 6,372 5,869 Less: Accumulated depreciation and amortization 3,634 3,249 ----- ----- Net property, plant and equipment 2,738 2,620 ----- ----- Cost of purchased businesses in excess of net assets acquired 1,435 1,435 Other assets 0 6 ----- ------ $17,212 $15,185 ====== ====== The accompanying notes are an integral part of these financial statements. 2 TECH/OPS SEVCON, INC. Consolidated Balance Sheets LIABILITIES AND STOCKHOLDERS' INVESTMENT (in thousands) June 27, Sept 30, 1998 1997 -------- ------------ (unaudited) (derived from audited statements) Current liabilities: Current portion of long-term debt $ - $ 235 Accounts payable 2,581 1,770 Dividend payable 466 463 Accrued expenses 2,830 2,694 Accrued taxes on income 848 482 ----- ----- Total current liabilities 6,725 5,644 ----- ----- Long-term debt, less current portion - 278 Deferred taxes on income 162 156 ----- ----- Stockholders' investment (Note 2) Preferred stock - - Common stock 311 310 Treasury stock, at cost - ( 85) Premium paid in on common stock 3,743 3,730 Retained earnings 6,832 5,786 Cumulative translation adjustment (561) (634) ------ ------ Total stockholders' investment $10,325 $ 9,107 ------ ------ $17,212 $15,185 ====== ====== The accompanying notes are an integral part of these financial statements. 3 TECH/OPS SEVCON, INC. Consolidated Statement of Income (Unaudited) (in thousands except per share data) Three Months Ended Nine Months Ended ------------------ ----------------- June 27 June 28 June 27 June 28 1998 1997 1998 1997 ------- ------ ------- ------ Net sales $ 8,472 $ 6,842 $24,146 $20,172 Costs and expenses: Cost of sales 5,151 4,830 14,662 13,193 Selling, general and administrative 1,802 1,661 5,546 4,935 ----- ----- ------ ------ 6,953 6,491 20,208 18,128 ----- ----- ------ ------ Operating income 1,519 351 3,938 2,044 Other income/(expense), net 52 ( 34) 14 ( 64) ----- ----- ----- ----- Income before income taxes 1,571 317 3,952 1,980 Income taxes 569 112 1,415 689 ----- --- ----- ----- Net income $ 1,002 $ 205 $2,537 $1,291 ===== === ===== ===== Basic income per share $ .32 $ .07 $ .82 $ .42 === === === === Diluted income per share $ .32 $ .07 $ .81 $ .41 === === === === Cash dividends per share $ .15 $ .15 $ .45 $ .45 ==== === === === The accompanying notes are an integral part of these financial statements. 4 TECH/OPS SEVCON, INC. Consolidated Statement of Cash Flows (Unaudited) Nine Months Ended ------------------- June 27, June 28, (in thousands) 1998 1997 -------- -------- Net cash flow from operating activities: Net income $2,537 $1,291 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 351 311 Deferred tax provision 6 13 Increase (decrease) in cash resulting from changes in operating assets and liabilities: Receivables (1,277) ( 161) Inventories (151) 220 Accounts payable 811 405 Accrued compensation and expenses 101 130 Accrued and deferred taxes on income 401 ( 154) Other assets 6 12 ----- ----- Net cash generated from operating activities 2,785 2,067 Cash flow used by investing activities: Acquisition of property, plant, and equipment, net ( 403) (1,659) ----- ----- Cash flow used by financing activities: Long-term debt incurred on purchase of building - 704 Payment of long-term debt ( 513) ( 120) Exercise of stock options 72 27 Purchase of common stock ( 71) ( 31) Dividends paid (1,391) (1,390) ----- ----- Net cash used by financing activities (1,903) ( 810) Effect of exchange rate changes on cash 8 25 ----- ----- Net increase/(decrease) in cash 487 ( 377) Opening balance - cash and cash equivalents 2,361 2,886 ----- ----- Ending balance - cash and cash equivalents $2,848 $2,509 ===== ===== Supplemental disclosure of cash flow information Cash paid for income taxes $1,051 $ 876 Cash paid for interest 38 21 --- --- Supplemental disclosure of non-cash financing activity: Dividend declared $ 466 $ 463 === === The accompanying notes are an integral part of these financial statements. 5 TECH/OPS SEVCON, INC. Notes to Consolidated Financial Statements - June 27, 1998 (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 June 27, 1998 and the results of operations and cash flows for the three months and nine months ended June 27, 1998 and June 28, 1997. The accounting policies followed by Tech/Ops Sevcon are set forth in Note 1 to the financial statements in the 1997 Tech/Ops Sevcon, Inc. Annual Report on Form 10-K. In June 1998 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.133, Accounting for Derivative Financial Instruments and Hedging Activities. The statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that the company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. Statement 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement the Statement as of the beginning of any fiscal quarter after issuance. Statement 133 cannot be applied retroactively. The Company does not hold any derivative instruments or engage in hedging activities and therefore the impact of adopting Statement 133 is expected to be immaterial. The Company plans to adopt Statement 133 on October 1, 1998, the start of the next fiscal year. The results of operations for the three-month and nine-month periods ended June 27, 1998 and June 28, 1997 are not necessarily indicative of the results to be expected for the full year. (2) Cash Dividends On June 5, 1998, the Company declared a quarterly dividend of $.15 per share for the third quarter of fiscal 1998, which was paid on July 2, 1998 to stockholders of record on June 18, 1998. The Company has paid regular quarterly cash dividends since the first quarter of fiscal 1990. 6 TECH/OPS SEVCON, INC. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Three months ended June 27, 1998 Sales in the third fiscal quarter ended June 27, 1998 were $8,472,000, compared to $6,842,000 in the same quarter of the previous year, an increase of $1,630,000, or 24%. Revenues in the US increased by 20%, mainly due to increased demand across all main market segments. Sales in foreign markets increased by 26%. The sales growth in foreign markets was to both fork lift truck and aerial lift markets. Gross profit was 39.2% of sales compared to 29.4% in the third quarter of fiscal 1997. In the third quarter of last year the company recorded a charge of $600,000 to reflect the costs of product improvement and changes in the organization. Over 95% of this charge was reflected in cost of sales. Prior to this charge, the gross profit percentage in last year's third quarter was 38%. The increase in gross profit percentage, after adjusting for the charge, was mainly attributable to higher volumes, and to lower material costs. Operating expenses for the quarter were $141,000, or 8%, higher than in 1997. Operating income was $1,519,000, an increase of $1,168,000 compared to the third quarter of last year. A significant portion of this increase was due to the $600,000 charge for product improvement and changes in the organization recorded last year. The remaining increase of $568,000, or 60%, was mainly due to higher volumes and lower material costs. This was an all-time record for quarterly operating income. Other income was $52,000, compared to other expense of $34,000 last year, this improvement was mainly due to foreign currency translation gains. Income before income taxes was $1,571,000, compared to $317,000 last year, an increase of $654,000, or 71%, after adjusting for the $600,000 charge last year. Income taxes were 36.2% of pre-tax income, compared to 35.3% last year, mainly due to higher foreign tax rates. Net income for the quarter was an all-time record at $1,002,000, or $.32 per share. On a comparable basis, after adjusting for the pre- tax charge in 1997 of $.13 per share, both basic and fully diluted net income per share increased by $.12 per share, or 60%. 7 TECH/OPS SEVCON, INC. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued): Results of Operations (continued): Nine months ended June 27, 1998 Sales in the first nine months of fiscal 1998 were $24,146,000, compared to $20,172,000 in the same period last year, an increase of $3,974,000, or 20%. Revenues in the US increased by $1,116,000,or 16%, mainly due to increased demand in the fork lift truck and aerial lift markets. Sales in foreign markets increased by $2,858,000, or 22%, with higher sales to both fork lift truck and aerial lift markets, but lower sales of capacitors. Gross profit was 39.3% of sales compared to 34.6% in 1997, or 37.5% after adjusting for the impact of the $600,000 charge recorded in the third quarter of fiscal 1997. The improvement in gross profit percentage was mainly attributable to increased volumes, and lower material costs. Operating expenses for the six month period were $5,546,000, an increase of $611,000, or 12%, compared to last year. Operating income for the first nine months was $3,938,000, compared to $2,044,000 last year, an increase of $1,294,000, or 49%, after adjusting for the $600,000 charge last year. An increase in sales volumes of 20% and reduced material costs were the main reasons for this increase in operating income. Income before income taxes was $3,952,000, compared to $1,980,000 last year, an increase of $1,372,000, or 53% after adjusting for the impact of the $600,000 charge on last year's results. Income taxes were 35.8% of pre-tax income, compared to 34.8% last year, mainly due to higher foreign tax rates. Net income was $2,537,000, an increase of $1,246,000, or 97%, compared to the same period last year. Basic income per share was 95% higher than last year at $.82 per share compared to $.42 per share in 1997. Fully diluted net income was $.81 per share, an increase of 96% compared to 1997. After adjusting for the impact of the charge for product improvement and changes in the organization in 1997 of $.13 per share, basic net income increased by $.27 per share, or 49%. Financial Condition The Company has, since January 1990, maintained a program of regular cash dividends, which, for the most recent quarter, amounted to $466,000. 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. 8 TECH/OPS SEVCON, INC. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits filed with this report. (11) Calculation of Earnings Per Share (27) Financial Data Schedule (EDGAR Filing only) (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: August 10, 1998 By: /s/ Paul A. McPartlin --------------------- Paul A. McPartlin Chief Financial and Accounting Officer 9 EXHIBIT 11 TECH/OPS SEVCON, INC. Calculation of Earnings Per Share and Weighted Average Shares Outstanding (In thousands, except for per share amounts) Three Months Ended Nine Months Ended ------------------ ----------------- Jun 27 Jun 28 Jun 27 Jun 28 1998 1997 1998 1997 ------- ------ ------- ------ Net income $1,002 $ 205 $2,537 $1,291 Basic income per share $ .32 $ .07 $ .82 $ .42 Average shares outstanding 3,103 3,090 3,099 3,090 Options outstanding - common stock equivalents 44 48 44 47 Average common and common equivalent shares outstanding 3,147 3,138 3,143 3,137 Diluted income per share $ .32 $ .07 $ .81 $ .41 === === === === 10