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 April 3, 1999 ------------- / / 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 May 5, 1999 - ----------------------------- ------------------------------- Common stock, par value $.10 3,110,781 1 TECH/OPS SEVCON, INC. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets ASSETS Apr 3, Sept 30, 1999 1998 --------- ------------ (unaudited) (derived from audited statements) Current assets: Cash and cash equivalents $ 3,305,000 $ 3,439,000 Short-term investments - 549,000 Accounts receivable, less allowances of $185,000 at 4/3/99 and $197,000 at 9/30/98 6,941,000 6,091,000 Inventories: Raw materials 1,872,000 1,702,000 Work-in-process 757,000 713,000 Finished goods 895,000 645,000 --------- --------- 3,524,000 3,060,000 --------- --------- Total current assets 13,770,000 13,139,000 --------- ---------- Property, plant and equipment, at cost 6,793,000 6,952,000 Less: Accumulated depreciation and amortization 3,774,000 3,742,000 --------- --------- Net property, plant and equipment 3,019,000 3,210,000 --------- --------- Cost of purchased businesses in excess of net assets acquired 1,435,000 1,435,000 ---------- ---------- $18,224,000 $17,784,000 ========== ========== The accompanying notes are an integral part of these financial statements. 2 TECH/OPS SEVCON, INC. Consolidated Balance Sheets LIABILITIES AND STOCKHOLDERS' INVESTMENT Apr 3, Sept 30, 1999 1998 -------- ------------ (unaudited) (derived from audited statements) Current liabilities: Accounts payable $2,202,000 $2,166,000 Dividend payable 560,000 559,000 Accrued expenses 2,952,000 3,126,000 Accrued taxes on income 1,238,000 976,000 --------- --------- Total current liabilities 6,952,000 6,827,000 --------- --------- Deferred taxes on income 153,000 164,000 --------- --------- Stockholders' investment Preferred stock - - Common stock 311,000 311,000 Premium paid in on common stock 3,866,000 3,848,000 Retained earnings 7,697,000 6,970,000 Cumulative translation adjustment (755,000) (336,000) ---------- ---------- Total stockholders' investment $11,119,000 $10,793,000 ---------- ---------- $18,224,000 $17,784,000 ========== ========== 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 Six Months Ended ------------------ ---------------- April 3 March 28 April 3 March 28 1999 1998 1999 1998 ------- ------ ------- ------ Net sales $ 8,005 $ 8,625 $16,009 $15,674 Costs and expenses: Cost of sales 4,653 5,249 9,393 9,511 Selling, general and administrative 1,886 1,916 3,775 3,744 ----- ----- ----- ----- 6,539 7,165 13,168 13,255 ----- ----- ----- ----- Operating income 1,466 1,460 2,841 2,419 Other income/(expense), net 5 ( 17) 60 ( 38) ---- ---- ----- --- Income before income taxes 1,471 1,443 2,901 2,381 Income taxes 512 513 1,012 846 ----- --- ----- --- Net income $ 959 $ 930 $1,889 $1,535 ===== === ===== ===== Basic income per share $ .31 $ .30 $ .61 $ .50 === === === === Fully diluted income per share $ .31 $ .30 $ .61 $ .49 === === === === Cash dividends per share $ .18 $ .15 $ .36 $ .30 ==== === === === Consolidated Statement of Comprehensive Income (Unaudited) (in thousands) Three Months Ended Six Months Ended ------------------ ---------------- April 3 March 28 April 3 March 28 1999 1998 1999 1998 ------- ------ ------- ------ Net income $ 959 $ 930 $ 1,889 $ 1,535 Foreign currency translation adjustment (297) 3 (419) 127 ---- --- ----- ----- Comprehensive income $ 662 $ 933 $ 1,470 $ 1,662 ==== ==== ===== ===== The accompanying notes are an integral part of these financial statements. 4 TECH/OPS SEVCON, INC. Consolidated Statement of Cash Flows (Unaudited) Six Months Ended --------------------- Apr 3, Mar 28, (in thousands) 1999 1998 -------- -------- Net cash flow from operating activities: Net income $1,889 $1,535 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 253 179 Deferred tax provision ( 11) 8 Increase (decrease) in cash resulting from changes in operating assets and liabilities: Receivables (850) (1,989) Inventories (464) ( 461) Accounts payable 36 1,282 Accrued compensation and expenses (174) ( 9) Accrued and deferred taxes on income 262 409 Other assets - 6 ---- --- Net cash generated from operating activities 941 960 Cash flow used by investing activities: Acquisition of property, plant, and equipment, net ( 247) ( 292) ----- ----- Cash flow used by financing activities: Repayment of long-term debt - ( 98) Exercise of stock options 22 5 Purchase of common stock ( 49) ( 9) Dividends paid (1,118) (927) ----- ----- Net cash used by financing activities (1,145) (1,029) Effect of exchange rate changes on cash ( 232) 30 ----- ----- Net (decrease) in cash ( 683) ( 331) Opening balance - cash and cash equivalents 3,988 2,361 ----- ----- Ending balance - cash and cash equivalents $3,305 $2,030 ===== ===== Supplemental disclosure of cash flow information Cash paid for income taxes $ 692 $ 535 Cash paid for interest 4 29 --- --- Supplemental disclosure of non-cash financing activity: Dividend declared $ 560 $ 464 === === The accompanying notes are an integral part of these financial statements. 5 TECH/OPS SEVCON, INC. Notes to Consolidated Financial Statements - April 3, 1999 (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 April 3, 1999 and the results of operations and cash flows for the three months and six months ended April 3, 1999 and March 28, 1998. The accounting policies followed by Tech/Ops Sevcon are set forth in Note 1 to the financial statements in the 1998 Tech/Ops Sevcon, Inc. Annual Report on Form 10-K. The Company recognizes revenues in its financial statements when the product is shipped to the customer. The results of operations for the three-month and six-month periods ended April 3, 1999 and March 28, 1998 are not necessarily indicative of the results to be expected for the full year. (2) Cash Dividends On March 5, 1999, the Company declared a quarterly dividend of $.18 per share for the second quarter of fiscal 1999, which was paid on April 6, 1999 to stockholders of record on March 19, 1998. 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 (in thousands, except for per share amounts) Three Months Ended Six Months Ended ------------------ ---------------- Apr 3 Mar 28 Apr 3 Mar 28 1999 1998 1999 1998 ------- ------ ------- ------ Net income $ 959 $ 930 $1,889 $1,535 Basic income per share $ .31 $ .30 $ .61 $ .50 Average shares outstanding 3,110 3,094 3,109 3,093 Options outstanding - common stock equivalents 32 45 30 45 Average common and common equivalent shares outstanding 3,142 3,139 3,139 3,138 Fully diluted income per share $ .31 $ .30 $ .61 $ .49 === === === === 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 April 3, 1999 Sales in the second fiscal quarter ended April 3, 1999 were $8,005,000, compared to $8,625,000 in the same quarter of the previous year, a decrease of $620,000, or 7%. Revenues in the US increased by 9%, mainly due to increased demand in the mining market. Sales in foreign markets decreased by 12%. Approximately $80,000, or 1%, of the decrease in sales was due to foreign currency fluctuations; the balance was the result of lower physical volumes. The main reasons for this volume decrease were depressed conditions in the European capacitor and aerial lift markets. Gross profit was 41.9% of sales compared to 39.1% in the second quarter of fiscal 1998. Gross profit was $24,000 lower than last year. The improvement in gross profit percentage was mainly due to lower material costs and better manufacturing efficiency. Operating expenses for the quarter were $30,000, or 2%, lower than in 1998. Despite the $620,000 decrease in sales, operating income increased by $6,000 to $1,466,000, compared to $1,460,000 in the second quarter of last year, due to increased gross profitability. Income before income taxes was $1,471,000, compared to $1,443,000 last year, an increase of $28,000, or 2%. Income taxes were 34.8% of pre-tax income, compared to 35.6% last year mainly due to higher foreign tax credits. Despite lower sales, net income increased by $29,000, or 3%, to $959,000. Six months ended April 3, 1999 Sales in the first six months of fiscal 1998 were $16,009,000, compared to $15,674,000 in the same period last year, an increase of $335,000, or 2%. Revenues in the US increased by $495,000, or 9%, mainly due to increased demand in the mining, fork lift truck and aerial lift markets. Sales in foreign markets increased by $160,000, or 2%, mainly due to foreign currency fluctuations Gross profit was 41.3% of sales compared to 39.3% in 1998. Gross profit increased by $453,000 compared to the first six months of last year. The higher gross profit was mainly attributable to lower material costs, improved manufacturing efficiency, and increased volumes. Operating expenses for the six month period were $3,775,000 compared to $3,744,000 last year, an increase of 1%. 7 Operating income for the first half year was $2,841,000, an increase of $422,000, or 17%, compared to last year. Lower material costs, improved manufacturing efficiency and increased sales volumes were the main reasons for the increase in operating income. Income before income taxes was $2,901,000, compared to $2,381,000 last year, an increase of $520,000, or 22%. Other income was $60,000 compared to other expense of $38,000 in the first half of fiscal 1998. This improvement was mainly due to foreign currency transactions. Income taxes were 34.9% of pre- tax income, compared to 35.5% last year, mainly due to higher foreign tax credits. Net income was $1,889,000, an increase of $354,000, or 23%, compared to the same period last year. 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. Year 2000 Issues The Company has completed the review of its state of readiness with respect to Year 2000 issues and is in the process of conducting an ongoing review of that of its key suppliers and customers. This review indicates that the Company's products do not include date- sensitive technology and therefore do not present a Year 2000 exposure. The review of the Company's internal systems, including Information Technology (IT) and non IT systems, indicated certain issues related to Year 2000. The Company currently has resolved each of these issues at a total cost of approximately $35,000. The Company's circularization of vendors and customers indicates that while the majority of respondents are not currently compliant, all respondents have plans in place to become compliant. The Company's contingency planning to date has focused on cash availability and both raw material and finished goods inventory planning to ensure that the critical elements of the Company's operations will not be impacted by any potential short-term disruption which may occur in January 2000. Due to the nature of the Company's business, and based on the results of the review performed to date, management does not believe that Year 2000 issues will have a material effect on its results of operations, liquidity or financial condition. 8 This discussion of Year 2000 issues is based upon management's best estimates of future events and conditions, and actual results could differ materially from those currently projected. Specific factors that could adversely affect the Company include failure by significant customers and suppliers to achieve Year 2000 compliance and external forces that might generally affect business, such as utility or transportation company Year 2000 compliance failures. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders At the Company's Annual Meeting held on January 27, 1999, the shareholders voted to re-elect as directors for three year terms the following persons: Matthew Boyle and C. Vincent Vappi. Mr. Boyle received 2,768,866 votes for and 5,823 withheld, and Mr. Vappi received 2,766,432 votes for and 8,257 withheld. There were no abstentions or broker non-votes. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits filed with this report. (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: May 13, 1999 By: /s/ Paul A. McPartlin --------------------- Paul A. McPartlin Chief Financial and Accounting Officer 9