(in thousands of dollars)
|
|
2012
|
|
|
2011
|
|
Warranty reserves at beginning of year
|
|
|
89
|
|
|
|
96
|
|
Decrease in beginning balance for warranty obligations settled during the year
|
|
|
(38
|
)
|
|
|
(37
|
)
|
Other changes to pre-existing warranties
|
|
|
(8
|
)
|
|
|
(25
|
)
|
Foreign currency translation adjustment
|
|
|
1
|
|
|
|
(1
|
)
|
Net increase in warranty reserves for products sold during the year
|
|
|
45
|
|
|
|
56
|
|
Warranty reserves at end of year
|
|
$
|
89
|
|
|
$
|
89
|
|
The Company recognizes revenue in certain circumstances before delivery has occurred (commonly referred to as bill and hold transactions). In such circumstances, among other things, risk of ownership has passed to the buyer, the buyer has made a written fixed commitment to purchase the finished goods, the buyer has requested the finished goods be held for future delivery as scheduled and designated by them, and no additional performance obligations exist by the Company. For these transactions, the finished goods are segregated from inventory and normal billing and credit terms are granted.
Infrequently the Company enters into fixed-price non-recurring engineering contracts. Revenue from these contracts is recognized in accordance with the percentage-of-completion method of accounting.
C. Research and development
The cost of research and development programs is charged against income as incurred and amounted to approximately $3,545,000 in 2012 and $3,069,000 in 2011, net of U.K. government grants received. This expense is included in selling, research and administrative expense in the accompanying consolidated income statements. Research and development expense, net of grants received, was 10% of sales in both 2012 and 2011.
Over the past three years, the Company received awards of research and development grants by the Technology Strategy Board, a public body established by the U.K. government to stimulate technology-enabled innovation. In one of the awards, the Company is one of a consortium of organizations including Jaguar Landrover, GKN and Newcastle University in the U.K. participating in projects to research and design ultra-efficient systems for electric and hybrid vehicles. The Company recorded grant income from this Technology Strategy Board project of $191,000 in 2012 associated with research and development expense of $416,000. In 2011, the Company was awarded a research and development grant by the Technology Strategy Board to lead a collaborative project with Cummins Generator Technologies and Newcastle University in the U.K. to develop an innovative electric drive system for electric vehicles using advanced switched reluctance motor technology. The Company recorded grant income from this Technology Strategy Board project of $9,000 in 2012 associated with research and development expense of $25,000. The Company did not record any grant income or incur any research and development expense in respect of either of these Technology Strategy Board grants in 2011. The grant income in 2012 was recorded as a reduction of research and development expense.
The Company was awarded research and development grants in 2010 by One North East, the Regional Development Agency responsible for the support of business in the North East of England, to accelerate the development of two new products. These two projects were completed in March 2011 as required by the grant awards. The Company recorded grant income of $600,000 in 2011 associated with research and development expense of $1,714,000 in 2011 on these two projects. The grant income was recorded as a reduction of research and development expense. The Company did not record any grant income or incur any research and development expense in respect of either of these grants in 2012. The grant income is subject to audit through 2016 and may be subject to adjustment if it is determined that the costs incurred did not meet the specifications of the grant award.
D. Depreciation and maintenance
Property, plant and equipment are depreciated on a straight-line basis over their estimated useful lives, which are primarily fifty years for buildings, seven years for equipment and four years for computer equipment and software. Maintenance and repairs are charged to expense and renewals and betterments are capitalized.
E. Stock based compensation plans
The Company’s 1996 Equity Incentive Plan (the “Equity Plan”) provides for the granting of stock options, restricted stock and other equity-based awards to officers, key employees, consultants and non-employee directors of the Company.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The Company has not granted stock options since 2003.
Since 2004 the Company has granted restricted stock to certain officers, key employees and non- employee directors in exchange for services provided to the Company over the vesting period of the stock. The vesting period of the restricted stock (i.e. when the restrictions lapse) is normally five years in respect of officers and key employees and one year in respect of non-employee directors. For officers and key employees, the Company recognizes compensation expense in respect of restricted stock grants on a straight line basis over the vesting period of the restricted stock based on the closing stock price on the grant date and an expected forfeiture rate of awards of 4%. For non-employee directors, the Company recognizes compensation expense in respect of restricted stock grants on a straight line basis over the vesting period of the restricted stock based on the closing stock price on the grant date.
F. Income taxes
The Company uses the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured under enacted tax laws. A valuation allowance is required to offset any net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax asset will not be realized.
Sevcon, Inc. files tax returns in the respective countries in which it operates. The financial statements reflect the current and deferred tax consequences of all events recognized in the financial statements or tax returns. We account for income tax uncertainties according to guidance on the recognition, de-recognition and measurement of potential tax benefits associated with tax positions. We recognize interest and penalties relating to income tax matters as a component of income tax expense. See Note 4.
G. Inventories
Inventories are valued at the lower of cost or market. Inventory costs include materials, direct labor and overhead, and are relieved from inventory on a first-in, first-out basis. The Company’s reported financial condition includes a provision for estimated slow-moving and obsolete inventory that is based on a comparison of inventory levels with forecast future demand. Such demand is estimated based on many factors, including management judgments, relating to each customer’s business and to economic conditions. The Company reviews in detail all significant inventory items with holdings in excess of estimated normal requirements. It also considers the likely impact of changing technology. It makes an estimate of the provision for slow moving and obsolete stock on an item-by-item basis based on a combination of likely usage based on forecast customer demand, potential sale or scrap value and possible alternative use. This provision represents the difference between original cost and market value at the end of the financial period. In cases where there is no estimated future use for the inventory item and there is no estimated scrap or resale value, a 100% provision is recorded. Where the Company estimates that only part of the total holding of an inventory item will not be used, or there is an estimated scrap, resale or alternate use value, then a proportionate provision is recorded. Once an item has been written down, it is not subsequently revalued upwards. The reserve for slow moving and obsolete inventories at September 30, 2012 was $659,000 or 9% of gross inventory. At September 30, 2011 the reserve was $437,000, or 6% of gross inventory.
Inventories were comprised of:
(in thousands of dollars)
|
|
2012
|
|
|
2011
|
|
Raw materials
|
|
$
|
2,391
|
|
|
$
|
1,281
|
|
Work-in-process
|
|
|
76
|
|
|
|
99
|
|
Finished goods
|
|
|
3,879
|
|
|
|
6,098
|
|
|
|
$
|
6,346
|
|
|
$
|
7,478
|
|
H. Accounts receivable
In the normal course of business, the Company provides credit to customers, performs credit evaluations of these customers, monitors payment performance, and maintains reserves for potential credit losses in the allowance for doubtful accounts which, when realized, have historically been within the range of the Company’s reserves.
I. Translation of foreign currencies
Sevcon, Inc. translates the assets and liabilities of its foreign subsidiaries at the current rate of exchange, and income statement accounts at the average exchange rates in effect during the period. Gains or losses from foreign currency translation are credited or charged to the cumulative translation adjustment included in the statement of comprehensive (loss) income and as a component of accumulated other comprehensive loss in stockholders' equity in the consolidated balance sheets. Foreign currency transaction gains and losses are shown in the consolidated income statements.
J. Derivative instruments and hedging
The Company sells to customers throughout the industrialized world. In the controls segment the majority of the Company’s product is produced in three separate plants in Poland, Mexico and China. Approximately 49% of the Company’s sales are made in U.S. Dollars, 18% are made in British Pounds and 33% are made in Euros. Approximately 25% of the Company’s cost of sales is incurred in British Pounds and 61% is incurred in Euros. This results in the Company’s sales and margins being exposed to fluctuations due to the change in the exchange rates of U.S. Dollar, the British Pound and the Euro.
The Company had no foreign currency derivative financial instruments during the years ended September 30, 2012 and 2011.
K. Cash equivalents and short-term investments
The Company considers all highly liquid investments with a maturity of 90 days or less to be cash equivalents. Highly liquid investments with maturities greater than 90 days and less than one year are classified as short-term investments.
Such investments are generally money market funds, bank certificates of deposit, U.S. Treasury bills and short-term bank deposits in Europe.
L. Earnings per share
Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased for the assumed exercise of dilutive options and other potentially dilutive securities using the treasury stock method unless the effect is anti-dilutive.
Basic and diluted net incomes per common share for the two years ended September 30, 2012 are calculated as follows:
(in thousands except per share data)
|
|
2012
|
|
|
2011
|
|
Net income
|
|
$
|
1,195
|
|
|
$
|
712
|
|
Weighted average shares outstanding
|
|
|
3,329
|
|
|
|
3,303
|
|
Basic income per share
|
|
$
|
.36
|
|
|
$
|
.22
|
|
Common stock equivalents
|
|
|
51
|
|
|
|
34
|
|
Average common and common equivalent shares outstanding
|
|
|
3,380
|
|
|
|
3,337
|
|
Diluted income per share
|
|
$
|
.35
|
|
|
$
|
.21
|
|
M. Use of estimates in the preparation of financial statements
The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting periods. The most significant estimates and assumptions made by management include bad debt, inventory and warranty reserves, goodwill impairment assessment, pension plan assumptions and income tax assumptions. Operating results in the future could vary from the amounts derived from management's estimates and assumptions.
N. Fair value measurements
The FASB has issued authoritative guidance, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This guidance does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. In accordance with this guidance, financial assets and liabilities have been categorized, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as set forth below. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The three levels of the hierarchy are defined as follows:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for substantially the full term of the asset or liability. The Company currently does not have any Level 2 financial assets or liabilities.
Level 3 - Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability. The Company currently does not have any Level 3 financial assets or liabilities.
At September 30, 2012, the fair value measurements affect only the Company’s consideration of pension plan assets as disclosed in Note 7, Employee Benefit Plans.
O. Fair value of financial instruments
The Company's financial instruments consist mainly of cash and cash equivalents, short-term investments, accounts receivable and accounts payable. The carrying amount of these financial instruments as of September 30, 2012 approximates fair value due to the short-term nature of these instruments. The fair value of the Company’s long term debt at September 30, 2012 approximated $1,774,000 (the carrying value on the consolidated balance sheet at September 30, 2012) based on recent financial market pricing. The long term debt represented a level 2 liability in accordance with the fair value hierarchy outlined above.
P. Goodwill
The amount by which the cost of purchased businesses included in the accompanying financial statements exceeded the fair value of net assets at the date of acquisition has been recorded as "goodwill".
In accordance with FASB accounting guidance regarding goodwill and other intangible assets, the Company performs an assessment of goodwill impairment annually or more frequently if events or changes in circumstances indicate that the value has been impaired. The Company has designated September 30 as the date it performs the annual review of goodwill impairment. Goodwill impairment testing is performed at the segment (or “reporting unit”) level.
In evaluating goodwill for impairment, the reporting unit’s fair value was first compared to its carrying value. The fair value of the reporting unit was estimated by considering (1) market capitalization, (2) market multiple and recent transaction values of similar companies and (3) projected discounted future cash flows, if reasonably estimable. Key assumptions in the estimation of projected discounted future cash flows include the use of an appropriate discount rate, estimated future cash flows and estimated run rates of sales, gross profit and operating expenses. In estimating future cash flows, the Company incorporates expected growth rates, as well as other factors into its revenue and expense forecasts. If the reporting unit’s fair value exceeds its carrying value, no further testing is required. If, however, the reporting unit’s carrying value exceeds its fair value, the amount of the impairment charge is determined, if any. An impairment charge is recognized if the carrying value of the reporting unit’s goodwill exceeds its implied fair value. At each of September 30, 2012 and 2011, there was $1,435,000 of goodwill on the
balance sheet of the Company which related wholly to one business segment, the controls segment, and the estimated fair value of the reporting unit significantly exceeded its carrying value under each method of calculation performed.
Q. New Accounting Pronouncements
In May 2011, the FASB issued authoritative guidance in respect of the accounting guidance for fair value measurement and disclosure. The Accounting Standards Update (“ASU”) is, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). Among other things, the guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for measurement of the fair value of financial assets and liabilities as well as instruments classified in shareholders’ equity. The guidance is effective for interim and annual periods beginning after December 15, 2011. The adoption of this accounting pronouncement did not have a material impact on our financial statements.
In June 2011, the FASB issued authoritative guidance for the presentation of comprehensive income. The ASU is, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Under the amended guidance, a company may present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In either case, a company is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. For public companies, the amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and shall be applied retrospectively. The implementation of this accounting pronouncement did not have a material impact on our financial statements.
On September 15, 2011, the FASB issued authoritative guidance in respect of the simplification of the testing of goodwill impairment. The ASU is, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This ASU gives an entity the option in its annual goodwill impairment test to first assess revised qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In certain cases this will allow an entity to forego the existing two-step goodwill impairment test. This guidance is applicable for fiscal years beginning after December 15, 2011. The implementation of this accounting pronouncement did not have a material impact on our financial statements.
R. Employee Benefit Plans
Sevcon, Inc. recognizes its pension plans’ over-funded or under-funded status in its balance sheets and recognizes the change in a plan’s funded status in comprehensive income in the year which the changes occur.
(2) CAPITAL STOCK
Sevcon, Inc. has two classes of authorized capital stock, preferred and common. There are authorized 1,000,000 shares of preferred stock, $.10 par value and 8,000,000 shares of common stock, $.10 par value.
(3) STOCK-BASED COMPENSATION PLANS
Under the Company’s 1996 Equity Incentive Plan there were 122,800 shares reserved and available for grant at September 30, 2012. There were 238,000 shares reserved and available for grant at September 30, 2011. There were no options exercised in 2012 or in 2011.
Recipients of grants or options must execute a standard form of non-competition agreement. The plan provides for the grant of Restricted Stock, Restricted Stock Units, Options, and Stock Appreciation Rights (“SAR”s). SARs may be awarded either separately, or in relation to options granted, and for the grant of bonus shares. Options granted are exercisable at a price not less than fair market value on the date of grant.
Option transactions under the plans for the two years ended September 30, 2012 were as follows:
|
|
Shares under option
|
|
|
Weighted average
exercise price
|
|
|
Weighted average remaining contractual life (years)
|
|
|
Aggregate Intrinsic value
|
|
Outstanding at September 30, 2010
|
|
|
46,000
|
|
|
$
|
5.62
|
|
|
2 years
|
|
|
$
|
25,400
|
|
Exercised in 2011
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled in 2011
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at September 30, 2011
|
|
|
46,000
|
|
|
$
|
5.62
|
|
|
1 year
|
|
|
$
|
65,500
|
|
Exercisable at September 30, 2011
|
|
|
41,000
|
|
|
$
|
5.75
|
|
|
1 year
|
|
|
$
|
56,700
|
|
Exercised in 2012
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled in 2012
|
|
|
(10,000
|
)
|
|
$
|
9.60
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at September 30, 2012
|
|
|
36,000
|
|
|
$
|
4.51
|
|
|
0.6 years
|
|
|
$
|
11,800
|
|
Exercisable at September 30, 2012
|
|
|
33,500
|
|
|
$
|
4.51
|
|
|
0.6 years
|
|
|
$
|
11,100
|
|
The aggregate intrinsic value included in the table above represents the difference between the exercise price of the options and the market price of the Company’s common stock for the options that had exercise prices that were lower than the $4.75 market price of the Company’s common stock at September 30, 2012.
Details of options outstanding at September 30, 2012 were as follows:
Price range
|
|
|
Shares under option
|
|
Weighted average remaining contractual life
|
$
|
4.37 - $ 6.56
|
|
|
|
36,000
|
|
0.6 years
|
In December 2011, the Company granted 110,000 shares of restricted stock to seven employees, which will vest in five equal annual installments so long as the employee is then employed by the Company or as determined by the Compensation Committee. The estimated fair value of the stock on the date of grant was $561,000 based on the fair market value of stock on the date of issue. Compensation expense is being charged to income on a straight line basis over five years. The charge to income for these restricted stock grants in 2012 was $84,000 and the subsequent charge will be approximately $28,000 on a quarterly basis.
In January 2012, the Company granted 15,200 shares of restricted stock to eight non-employee directors, which will vest on the day before the 2013 annual meeting providing that the grantee remains a director of the Company, or as otherwise determined by the Compensation Committee. The aggregate fair value of the stock measured on the date of grant was $80,000, based on the closing sale price of the stock on the date of grant. Compensation expense is being charged to income on a straight line basis over the twelve month period during which the forfeiture conditions lapse. The charge to income for these restricted stock grants in 2012 was $53,000 and the subsequent charge will be approximately $20,000 on a quarterly basis.
For the purposes of calculating average issued shares for basic earnings per share these shares are only considered to be outstanding when the forfeiture conditions lapse and the shares vest.
Restricted stock transactions under the plans for the two years ended September 30, 2012 were as follows:
(in thousands of shares)
|
|
2012
|
|
|
2011
|
|
Beginning Balance – Non-vested
|
|
|
50.0
|
|
|
|
60.0
|
|
Granted to employees – 5 year vesting
|
|
|
110.0
|
|
|
|
-
|
|
Granted to non-employee directors – 1 year vesting
|
|
|
15.2
|
|
|
|
20.0
|
|
Vested
|
|
|
(31.0
|
)
|
|
|
(30.0
|
)
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Ending Balance – Non-vested
|
|
|
144.2
|
|
|
|
50.0
|
|
Weighted-average fair value for shares granted during the year
|
|
$
|
5.69
|
|
|
$
|
8.75
|
|
Weighted-average fair value for shares vested during the year
|
|
$
|
7.10
|
|
|
$
|
3.56
|
|
Weighted-average fair value for ending balance - non-vested
|
|
$
|
5.22
|
|
|
$
|
5.21
|
|
As of September 30, 2012, there was $531,000 of compensation expense related to non-vested awards not yet recognized, which is expected to be recognized over a weighted average period of 3.9 years.
Stock-based compensation expense was $242,000 and $186,000 for the years ended September 30, 2012 and 2011, respectively.
(4) INCOME TAXES
The domestic and foreign components of income before income taxes are as follows:
(in thousands of dollars)
|
|
2012
|
|
|
2011
|
|
Domestic
|
|
$
|
220
|
|
|
$
|
(250
|
)
|
Foreign
|
|
|
1,376
|
|
|
|
1,219
|
|
|
|
$
|
1,596
|
|
|
$
|
969
|
|
The components of the provision for income taxes and deferred taxes for the years ended September 30, 2012 and 2011 are as follows:
(in thousands of dollars)
|
|
2012
|
|
|
|
Current
|
|
|
|
|
Federal
|
|
$
|
23
|
|
|
$
|
53
|
|
Domestic
|
|
$
|
14
|
|
|
$
|
66
|
|
Foreign
|
|
|
51
|
|
|
|
194
|
|
|
|
$
|
88
|
|
|
$
|
313
|
|
|
|
2011
|
|
|
|
Current
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
(222
|
)
|
Domestic
|
|
$
|
17
|
|
|
$
|
(60
|
)
|
Foreign
|
|
|
141
|
|
|
|
381
|
|
|
|
$
|
158
|
|
|
$
|
99
|
|
The provision (benefit) for income taxes in each period differs from that which would be computed by applying the statutory U.S. Federal income tax rate to the income before income taxes. The following is a summary of the major items affecting the provision:
(in thousands of dollars)
|
|
2012
|
|
|
2011
|
|
Statutory Federal income tax rate
|
|
|
34
|
%
|
|
|
34
|
%
|
Computed tax provision at statutory rate
|
|
$
|
532
|
|
|
$
|
322
|
|
Increases (decreases) resulting from:
|
|
|
|
|
|
|
|
|
Foreign tax rate differentials
|
|
|
(118
|
)
|
|
|
(82
|
)
|
State taxes net of federal tax benefit
|
|
|
54
|
|
|
|
8
|
|
Change in deferred tax valuation allowance
|
|
|
-
|
|
|
|
(177
|
)
|
Foreign research incentives
|
|
|
(322
|
)
|
|
|
(230
|
)
|
U.K. rate change
|
|
|
225
|
|
|
|
370
|
|
Other
|
|
|
30
|
|
|
|
46
|
|
Income tax provision in the consolidated income statements
|
|
$
|
401
|
|
|
$
|
257
|
|
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize the benefit, or that future deductibility is uncertain. The significant items comprising the domestic and foreign deferred tax accounts at September 30, 2012 and 2011 are as follows:
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
Domestic current
|
|
|
Domestic long-term
|
|
|
Foreign current
|
|
|
Foreign
long-term
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension accruals
|
|
$
|
-
|
|
|
$
|
439
|
|
|
$
|
-
|
|
|
$
|
2,147
|
|
|
$
|
2,586
|
|
Inventory basis differences
|
|
|
54
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54
|
|
Warranty reserves
|
|
|
19
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19
|
|
Foreign tax credit carry forwards
|
|
|
-
|
|
|
|
277
|
|
|
|
-
|
|
|
|
-
|
|
|
|
277
|
|
Accrued compensation expense
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58
|
|
|
|
72
|
|
Net operating losses
|
|
|
308
|
|
|
|
-
|
|
|
|
627
|
|
|
|
-
|
|
|
|
935
|
|
Other (net)
|
|
|
-
|
|
|
|
252
|
|
|
|
4
|
|
|
|
-
|
|
|
|
256
|
|
|
|
|
395
|
|
|
|
968
|
|
|
|
631
|
|
|
|
2,205
|
|
|
|
4,199
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property basis differences
|
|
|
-
|
|
|
|
33
|
|
|
|
-
|
|
|
|
(44
|
)
|
|
|
(11
|
)
|
Net asset
|
|
|
395
|
|
|
|
1,001
|
|
|
|
631
|
|
|
|
2,161
|
|
|
|
4,188
|
|
Valuation allowance
|
|
|
-
|
|
|
|
(159
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(159
|
)
|
Net deferred tax asset
|
|
$
|
395
|
|
|
$
|
842
|
|
|
$
|
631
|
|
|
$
|
2,161
|
|
|
$
|
4,029
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
Domestic current
|
|
|
Domestic long-term
|
|
|
Foreign current
|
|
|
Foreign
long-term
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension accruals
|
|
$
|
-
|
|
|
$
|
449
|
|
|
$
|
-
|
|
|
$
|
1,668
|
|
|
$
|
2,117
|
|
Inventory basis differences
|
|
|
49
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
49
|
|
Warranty reserves
|
|
|
19
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19
|
|
Foreign tax credit carry forwards
|
|
|
-
|
|
|
|
275
|
|
|
|
-
|
|
|
|
-
|
|
|
|
275
|
|
Accrued compensation expense
|
|
|
33
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
Net operating losses
|
|
|
130
|
|
|
|
239
|
|
|
|
522
|
|
|
|
-
|
|
|
|
891
|
|
Other (net)
|
|
|
1
|
|
|
|
241
|
|
|
|
56
|
|
|
|
51
|
|
|
|
349
|
|
|
|
|
232
|
|
|
|
1,204
|
|
|
|
578
|
|
|
|
1,719
|
|
|
|
3,733
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property basis differences
|
|
|
-
|
|
|
|
31
|
|
|
|
-
|
|
|
|
(98
|
)
|
|
|
(67
|
)
|
Net asset
|
|
|
232
|
|
|
|
1,235
|
|
|
|
578
|
|
|
|
1,621
|
|
|
|
3,666
|
|
Valuation allowance
|
|
|
-
|
|
|
|
(157
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(157
|
)
|
Net deferred tax asset
|
|
$
|
232
|
|
|
$
|
1,078
|
|
|
$
|
578
|
|
|
$
|
1,621
|
|
|
$
|
3,509
|
|
The valuation allowance at September 30, 2012 relates to the realizability of foreign tax credit carryforwards in the U.S. In assessing the continuing need for a valuation allowance the Company has assessed the available means of recovering its deferred tax assets, including the ability to carryback net operating losses, the existence of reversing temporary differences, the availability of tax planning strategies, and available sources of future taxable income, including a revised estimate of future sources of pre-tax income.
The Company has generated domestic federal and state net operating losses of $813,000 which will expire in 2028 and 2013, respectively. The Company has generated foreign net operating losses of approximately $2,531,000 which have an indefinite carry forward period.
At September 30, 2012, the Company has not provided United States income taxes or foreign withholding taxes on unremitted
foreign earnings of approximately $11.0 million, as those amounts are considered indefinitely invested in light of the Company’s substantial non-U.S. operations. Due to the complexities of the U.S. tax law, including the effect of U.S. foreign tax credits, it is not practicable to estimate the amount of tax that might be payable on these earnings in the event they no longer are indefinitely reinvested.
Uncertain tax positions
Effective October 1, 2007, the Company adopted FASB authoritative guidance regarding the recognition and measurement of all tax positions taken or to be taken by the Company and its subsidiaries. The adoption of this guidance followed a review by the Company of all potential uncertain tax positions. As a consequence of that review, it was concluded that no provision was required in respect of the adoption of this guidance and consequently the Company has not recorded a liability for uncertain tax positions and the Company has recorded no cumulative effect to retained earnings pursuant to the adoption of this guidance. The Company’s tax returns are open to audit from 2009 and forward.
(5) ACCRUED EXPENSES
The analysis of accrued expenses at September 30, 2012 and 2011 showing separately any items in excess of 5% of total current liabilities was as follows:
(in thousands of dollars)
|
|
2012
|
|
|
2011
|
|
Accrued compensation and related costs
|
|
$
|
1,021
|
|
|
$
|
1,090
|
|
Other accrued expenses
|
|
|
782
|
|
|
|
1,016
|
|
|
|
$
|
1,803
|
|
|
$
|
2,106
|
|
(6) COMMITMENTS AND CONTINGENCIES
Sevcon, Inc. is involved in various legal proceedings in the ordinary course of business but believes that it is remote that the outcome will be material to operations.
The Company maintains a directors' retirement plan which provides for certain retirement benefits to non-employee directors. Effective January 1997 the plan was frozen and no further benefits are being accrued. While the cost of the plan has been fully charged to expense, the plan is not separately funded. The estimated maximum liability which has been recorded based on the cost of buying deferred annuities at September 30, 2012 was $173,000.
Minimum rental commitments under all non-cancelable leases are as follows for the years ended September 30: 2013 - $188,000; 2014 - $95,000; 2015 - $95,000; 2016 - $87,000; 2017 - $87,000 and $3,096,000 thereafter. Net rentals of certain land, buildings and equipment charged to expense were $241,000 in 2012 and $243,000 in 2011.
The U.K. subsidiaries of the Company have given to a bank a security interest in certain leasehold and freehold property assets as security for overdraft facilities of $1,452,000. There were no amounts outstanding on the overdraft facilities at September 30, 2012 or 2011. The obligations under a secured revolving credit facility entered into in 2011 by the U.S. subsidiary of the Company, are guaranteed by the Company and are secured by all of the assets and a pledge of all of the capital stock, of Sevcon USA, Inc. As at September 30, 2012 and 2011 there was $1,700,000 outstanding under the revolving credit facility.
(7) EMPLOYEE BENEFIT PLANS
Sevcon, Inc. has defined contribution plans covering the majority of its U.S. and U.K. employees in the controls business. There is also a small defined contribution plan covering senior managers in the capacitor business. The Company has frozen U.K. and U.S. defined benefit plans for which no future benefits are being earned by employees. The Company uses a September 30 measurement date for its defined benefit pension plans.
The following table sets forth the estimated funded status of these frozen defined benefit plans and the amounts recognized by Sevcon, Inc.:
(in thousands of dollars)
|
|
2012
|
|
|
2011
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
23,191
|
|
|
$
|
23,637
|
|
Service cost
|
|
|
263
|
|
|
|
331
|
|
Interest cost
|
|
|
1,263
|
|
|
|
1,268
|
|
Plan participants contributions
|
|
|
211
|
|
|
|
198
|
|
Actuarial loss (gain)
|
|
|
3,639
|
|
|
|
(202
|
)
|
Prior service credit
|
|
|
-
|
|
|
|
(1,133
|
)
|
Gains on curtailments
|
|
|
(907
|
)
|
|
|
-
|
|
Benefits paid
|
|
|
(325
|
)
|
|
|
(689
|
)
|
Foreign currency exchange rate changes
|
|
|
810
|
|
|
|
(219
|
)
|
Benefit obligation at end of year
|
|
|
28,145
|
|
|
|
23,191
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
15,557
|
|
|
|
15,434
|
|
Return on plan assets
|
|
|
1,295
|
|
|
|
233
|
|
Employer contributions
|
|
|
626
|
|
|
|
545
|
|
Plan participants contributions
|
|
|
211
|
|
|
|
198
|
|
Benefits paid
|
|
|
(325
|
)
|
|
|
(689
|
)
|
Foreign currency exchange rate changes
|
|
|
517
|
|
|
|
(164
|
)
|
Fair value of plan assets at end of year
|
|
|
17,881
|
|
|
|
15,557
|
|
Funded status
|
|
|
(10,264
|
)
|
|
|
(7,634
|
)
|
Liability for pension benefits recorded in the balance sheet
|
|
$
|
(10,264
|
)
|
|
$
|
(7,634
|
)
|
The funded status of the Company’s defined benefit pension plans deteriorated from a deficit of $7,634,000 at September 30, 2011 to a deficit of $10,264,000 at September 30, 2012. The increase in the deficit of $2,630,000 was due to several factors. The most significant factor was an actuarial loss of $3,639,000 of which $3,360,000 related to the Company’s U.K. defined benefit plan and $279,000 related to the Company’s U.S. defined benefit plan. The actuarial losses were largely the result of a reduction in the discount rate of the U.K. pension plan from 5.45% at September 30, 2011 to 4.70% at September 30, 2012 and a reduction in the discount rate of the U.S. pension plan from 4.55% at September 30, 2011 to 4.00% at September 30, 2012. The increase in the pension liability deficit was partially offset by a curtailment gain of $907,000 arising from the freezing of the U.K. defined benefit plan at September 30, 2012.
Amounts recognized in the balance sheets consist of:
(in thousands of dollars)
|
|
2012
|
|
|
2011
|
|
Non current liabilities
|
|
|
10,264
|
|
|
$
|
7,634
|
|
Amounts recognized in other comprehensive loss consist of:
(in thousands of dollars)
|
|
2012
|
|
|
2011
|
|
Actuarial loss, net of $706,000 tax benefit (2011: net of $188,000 tax benefit)
|
|
$
|
(2,344
|
)
|
|
$
|
(194
|
)
|
Prior service (loss) gain, net of $5,000 tax benefit (2011: net of $279,000 tax provision)
|
|
|
(18
|
)
|
|
|
836
|
|
|
|
$
|
(2,362
|
)
|
|
$
|
642
|
|
The Sevcon, Inc. net pension cost included the following components:
(in thousands of dollars)
|
|
2012
|
|
|
2011
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
Service cost
|
|
$
|
263
|
|
|
$
|
331
|
|
Interest cost
|
|
|
1,263
|
|
|
|
1,268
|
|
Expected return on plan assets
|
|
|
(1,158
|
)
|
|
|
(1,126
|
)
|
Amortization of prior service gain
|
|
|
(24
|
)
|
|
|
(18
|
)
|
Amortization of net actuarial loss
|
|
|
332
|
|
|
|
310
|
|
Net periodic benefit cost
|
|
$
|
676
|
|
|
$
|
765
|
|
Net cost of defined contribution plans
|
|
$
|
160
|
|
|
$
|
77
|
|
The weighted average assumptions used to determine plan obligations and net periodic benefit cost for the years ended September 30, 2012 and 2011 were as set out below:
|
|
2012
|
|
|
2011
|
|
Plan obligations:
|
|
|
|
|
|
|
Discount rate
|
|
|
4.61
|
%
|
|
|
5.34
|
%
|
Rate of compensation increase
|
|
|
0.0
|
%
|
|
|
2.79
|
%
|
Net periodic benefit cost:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.61
|
%
|
|
|
5.34
|
%
|
Expected long term return on plan assets
|
|
|
6.67
|
%
|
|
|
7.26
|
%
|
Rate of compensation increase
|
|
|
0.0
|
%
|
|
|
2.79
|
%
|
The changes in these assumptions reflect actuarial advice and changing market conditions and experience. There is no compensation increase assumed in 2013 and in future years as both the U.K. and the U.S. defined benefit pension plans have been frozen and therefore there will be no future benefits earned by employees under these benefit arrangements.
The Company’s investment strategy is to build an efficient, well-diversified portfolio based on a long-term strategic outlook of the investment markets. The investment markets outlook utilizes both historical-based and forward-looking return forecasts to establish future return expectations for various asset classes. These return expectations are used to develop a core asset allocation based on the specific needs of the plan. The core asset allocation utilizes multiple investment managers to maximize the plan’s return while minimizing risk.
The assumed rate of return on plan assets represents an estimate of long-term returns on an investment portfolio consisting of a mixture of equities, fixed income and alternative investments. In determining the expected return on plan assets, the Company considers long-term rates of return on the asset classes (historically and forecasted) in which the Company expects the pension funds to be invested.
At September 30, 2012, the assets of the U.S. plan were invested 88% in mutual funds and 12% in cash and cash equivalents. The U.S. plan had a deficit of $930,000, or 29% of the total U.S. benefit obligation, as at September 30, 2012. The Company has committed to future annual contributions to the defined benefit plan to pay down this deficit within the next seven years. The Company established a 401(k) defined contribution plan for current and future U.S. employees effective October 1, 2010.
At September 30, 2012, the assets of the U.K. plan were invested 79% in equity securities, 10% in U.K. government bonds, 10% in U.K. corporate bonds and 1% in cash and cash equivalents. The U.K. plan was frozen effective September 30, 2012 and in consequence there will be no future accrual earned by U.K. employees under this defined benefit arrangement. The U.K. plan had a deficit of $9,334,000, or 38% of the total U.K. benefit obligation, as at September 30, 2012. The Company has committed to future annual contributions to the defined benefit plan to pay down this deficit within the next ten years. The Company has established a defined contribution pension plan for current and future U.K. employees effective October 1, 2012.
As a result of the September 30, 2012 amendment to freeze future pension benefits in the U.K pension plan, the Company recognized a pre-tax pension curtailment gain of $794,000 which was credited to operating income in the fourth quarter of 2012. This curtailment gain represents the unamortized prior service credit from a 2011 plan amendment to change the inflation index for deferred pension plan members from the Retail Prices Index to the Consumer Prices Index.
The overall expected long-term rate of return on plan assets has been based on the expected returns on equities, bonds and real estate based broadly on the current and proposed future asset allocation.
The table below presents information about our plan assets measured and recorded at fair value as of September 30, 2012, and indicates the fair value hierarchy of the inputs utilized by the Company to determine the fair values (see Fair value measurements in Note 1).
(in thousands of dollars)
|
|
Level 1*
(Quoted prices in active markets)
|
|
|
Level 2**
(Significant observable inputs)
|
|
|
Level 3***
(Unobservable inputs)
|
|
Mutual Funds
|
|
|
|
|
|
|
|
|
|
Standard Life Pension Global Absolute Returns Strategies Fund
|
|
|
6,148
|
|
|
|
-
|
|
|
|
-
|
|
Standard Life UK Indexed Linked Fund
|
|
|
1,576
|
|
|
|
-
|
|
|
|
-
|
|
Standard Life Long Corporate Bond Fund
|
|
|
1,581
|
|
|
|
-
|
|
|
|
-
|
|
CF Ruffer Absolute Return Fund
|
|
|
6,168
|
|
|
|
-
|
|
|
|
-
|
|
U.S. Mutual Funds
|
|
|
2,060
|
|
|
|
-
|
|
|
|
-
|
|
U.S. Exchange Traded Funds
|
|
|
185
|
|
|
|
-
|
|
|
|
-
|
|
Other Types of Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
163
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
17,881
|
|
|
|
-
|
|
|
|
-
|
|
*
|
Level 1 investments represent mutual funds for which a quoted market price is available on an active market. These investments primarily hold stocks or bonds, or a combination of stocks and bonds.
|
**
|
The Company currently does not have any Level 2 pension plan financial assets.
|
***
|
The Company currently does not have any Level 3 pension plan financial assets.
|
The following estimated benefit payments, which reflect future service, as appropriate, are expected to be paid:
(in thousands of dollars)
2013
|
|
$
|
390
|
|
2014
|
|
|
535
|
|
2015
|
|
|
689
|
|
2016
|
|
|
757
|
|
2017
|
|
|
765
|
|
2018 – 2022
|
|
|
4,252
|
|
In 2013 it is estimated that the Company will make contributions to the U.K. and U.S. defined benefit pension plans of $510,000. Actual payment obligations with respect to the pension plan liability come due over an extended period of time and will depend on changes in the assumptions described above.
(8) SEGMENT INFORMATION
The Company has two reportable segments: electronic controls and capacitors. The electronic controls segment produces microprocessor based control systems for zero emission and hybrid electric vehicles. The capacitor segment produces special metalized film capacitors 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. Intersegment sales 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 of dollars)
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
Controls
|
|
|
Capacitors
|
|
|
Corporate
|
|
|
Total
|
|
Sales to external customers
|
|
$
|
33,825
|
|
|
$
|
1,690
|
|
|
$
|
-
|
|
|
$
|
35,515
|
|
Inter-segment revenues
|
|
|
-
|
|
|
|
19
|
|
|
|
-
|
|
|
|
19
|
|
Operating income (loss)
|
|
|
1,584
|
|
|
|
(86
|
)
|
|
|
2
|
|
|
|
1,500
|
|
Depreciation
|
|
|
507
|
|
|
|
89
|
|
|
|
2
|
|
|
|
598
|
|
Identifiable assets
|
|
|
21,855
|
|
|
|
1,270
|
|
|
|
436
|
|
|
|
23,561
|
|
Capital expenditures
|
|
|
340
|
|
|
|
86
|
|
|
|
-
|
|
|
|
426
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
Controls
|
|
|
Capacitors
|
|
|
Corporate
|
|
|
Total
|
|
Sales to external customers
|
|
$
|
30,039
|
|
|
$
|
2,247
|
|
|
$
|
-
|
|
|
$
|
32,286
|
|
Inter-segment revenues
|
|
|
-
|
|
|
|
26
|
|
|
|
-
|
|
|
|
26
|
|
Operating income (loss)
|
|
|
1,232
|
|
|
|
392
|
|
|
|
(555
|
)
|
|
|
1,070
|
|
Depreciation
|
|
|
574
|
|
|
|
78
|
|
|
|
2
|
|
|
|
654
|
|
Identifiable assets
|
|
|
21,382
|
|
|
|
1,291
|
|
|
|
274
|
|
|
|
22,947
|
|
Capital expenditures
|
|
|
571
|
|
|
|
64
|
|
|
|
-
|
|
|
|
635
|
|
The Company has businesses located in the United States, the United Kingdom, France, Korea and Japan. The analysis of revenues set out below is by the location of the business selling the products rather than by destination of the products.
(in thousands of dollars)
|
|
2012
|
|
|
2011
|
|
Sales:-
|
|
|
|
|
|
|
U.S. sales
|
|
$
|
15,516
|
|
|
$
|
15,178
|
|
Foreign sales:
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
10,137
|
|
|
|
8,787
|
|
France
|
|
|
9,862
|
|
|
|
8,321
|
|
Total Foreign
|
|
|
19,999
|
|
|
|
17,108
|
|
Total sales
|
|
$
|
35,515
|
|
|
$
|
32,286
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
U.S.A.
|
|
$
|
2,342
|
|
|
$
|
2,617
|
|
Foreign:
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
4,192
|
|
|
|
3,744
|
|
France
|
|
|
76
|
|
|
|
75
|
|
Korea and Japan
|
|
|
2
|
|
|
|
3
|
|
Total Foreign
|
|
|
4,270
|
|
|
|
3,822
|
|
Total
|
|
$
|
6,612
|
|
|
$
|
6,439
|
|
In the controls business segment the revenues were derived from the following products and services:
(in thousands of dollars)
|
|
2012
|
|
|
2011
|
|
Electronic controls for zero emission and hybrid electric vehicles
|
|
$
|
25,199
|
|
|
$
|
22,394
|
|
Accessory and aftermarket products and services
|
|
|
8,626
|
|
|
|
7,645
|
|
Total controls segment revenues
|
|
$
|
33,825
|
|
|
$
|
30,039
|
|
The business located in the United States services customers in North and South America. The business located in France services customers in France, Spain, Portugal, Belgium, Germany, Netherlands and North Africa. The businesses located in Korea and Japan support customers in Asia, however, sales to these customers are made from the United Kingdom. The businesses located in the United Kingdom service customers in the rest of the world, principally Europe and the Far East.
In 2012 Sevcon, Inc.'s largest customer, Renault Spain, accounted for 10% of sales and, at September 30, 2012 0% of receivables. In 2011 the largest customer accounted for 9% of sales and, at September 30, 2011, 7% of receivables.
(9) DEBT
At September 30, 2012 the Company had $117,000 outstanding under a U.K. bank loan entered into in April 2010, with a fixed interest rate of 6.8%. The loan, which was entered into by the U.K. metalized film capacitor subsidiary to purchase an item of capital equipment, is denominated in British Pounds. The loan agreement provides for equal monthly installments comprising interest and principal for a five year period commencing in May 2010. Of the total amount outstanding at September 30, 2012, $43,000 is shown in the current liabilities section of the accompanying consolidated balance sheet under current debt, representing the principal element of the loan installments in the year ending September 30, 2013. Included in other long term liabilities at September 30, 2012, is $74,000 which represents the principal element of the loan installments for the years 2013 and 2015. The fair market value of the debt at September 30, 2012 was $117,000.
On June 15, 2011, the Company’s wholly owned subsidiary, Sevcon USA, Inc., entered into a $3,500,000 secured revolving credit facility with RBS Citizens, National Association for working capital and general corporate purposes. The loan and security agreement will expire on June 14, 2014 when all outstanding principal and unpaid interest will be due and payable in full. The facility may be paid before maturity in whole or in part at the option of Sevcon USA, Inc., without penalty or premium. Interest on the loan is payable monthly, and in 2012, was calculated at a margin over LIBOR. Upon entering into the revolving credit facility, Sevcon USA, Inc. drew down $1,700,000, which was the total amount outstanding at September 30, 2012. This $1,700,000 is shown in the accompanying consolidated balance sheet under long-term debt. The carrying value of the debt approximated to fair value based on current interest rates.
In July 2012, the Company’s U.K. bank renewed the overdraft facilities of the Company’s U.K. controls and capacitor subsidiaries. The Company’s U.K. controls and capacitor subsidiaries each have multi-currency overdraft facilities which together total $1,452,000 and which are secured against real estate owned by those companies. In common with bank overdrafts in Europe, the renewal of the facilities is for a twelve month period although in line with normal practice in Europe, they can be withdrawn on demand by the bank. The facilities were unused at September 30, 2012.
Annual principal payments on long term debt at September 30, 2012 are as follows:
(in thousands of dollars)
2013
|
|
$
|
43
|
|
2014
|
|
|
1,746
|
|
2015
|
|
|
28
|
|
Total
|
|
|
1,817
|
|
(10) SUBSEQUENT EVENTS
In preparing these consolidated financial statements, the Company has evaluated, for the potential recognition or disclosure, events or transactions subsequent to the end of the fiscal year and through the date these financial statements were available to be issued. No material subsequent events were identified that require recognition or disclosure in these financial statements.