|
SL INDUSTRIES INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) The following section highlights significant factors impacting the consolidated
operations and financial condition of the Company and its subsidiaries. The
following discussion should be read in conjunction with the Consolidated
Financial Statements included in Part I of this Quarterly Report on Form 10-Q.
Forward-Looking Statements
In addition to other information in this Quarterly Report on Form 10-Q, this
Management's Discussion and Analysis of Financial Condition and Results of
Operations contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based on current
expectations and the current economic environment. These statements are not
guarantees of future performance. They involve a number of risks and
uncertainties that are difficult to predict, including, but not limited to, the
Company's ability to implement its business plan, retain key management,
anticipate industry and competitive conditions, realize operating efficiencies,
secure necessary capital facilities and obtain favorable determinations in
various legal and regulatory matters. Actual results could differ materially
from those expressed or implied in the forward-looking statements. Some
important assumptions and other critical factors that could cause actual results
to differ materially from those in the forward-looking statements are specified
in the Company's filings with the SEC, including the Company's Annual Report on
Form 10-K for the year ended December 31, 2011, and Current Reports on Form 8-K.
Overview
SL Industries, Inc., through its subsidiaries, designs, manufactures and markets
power electronics, motion control, power protection, power quality, and
specialized communication equipment that is used in a variety of medical,
commercial and military aerospace, solar, computer, datacom, industrial,
telecom, transportation, utility, rail and highway equipment applications. Its
products are generally incorporated into larger systems to increase operating
performance, safety, reliability and efficiency. The Company's products are
largely sold to original equipment manufacturers ("OEMs"), the utility industry
and, to a lesser extent, to commercial distributors. The Company is comprised of
four domestic business segments, three of which have significant manufacturing
operations in Mexico. SLPE has manufacturing, engineering and sales capability
in China. Most of the Company's sales are made to customers who are based in the
United States. The Company places an emphasis on highly engineered, well-built,
high quality, dependable products and is dedicated to continued product
enhancement and innovation.
The Company's business strategy has been to enhance the growth and profitability
of each of its businesses through the penetration of attractive new market
niches, further improvement of operations through the implementation of lean
manufacturing principles and expansion of global capabilities. The Company
intends to focus on improving efficiencies that better leverage the Company's
resources. Lean initiatives, both on the factory floor and throughout the
organization, are ongoing. The Company expects to pursue its goals during the
next twelve months principally through organic growth. The Company also
continues to pursue strategic alternatives to maximize shareholder value. Some
of these alternatives have included, and could continue to include, selective
acquisitions, divestitures and the sale of certain assets. The Company has
provided, and may from time to time in the future provide, information to
interested parties.
27
--------------------------------------------------------------------------------
Table of Contents
In the sections that follow, statements with respect to the quarter ended 2012
or nine months ended 2012 refer to the three month and nine month periods ended
September 30, 2012. Statements with respect to the quarter ended 2011 or nine
months ended 2011 refer to the three month and nine month periods ended
September 30, 2011. Also, statements with respect to operating costs refer to
engineering and product development costs, selling, general and administrative
costs and depreciation and amortization ("operating costs").
Significant Transactions and Financial Trends
Significant transactions during the nine months ended September 30, 2012 that
impacted the Company's financial results and cash flows include a net of tax
loss from discontinued operations of $902,000. The loss from discontinued
operations was primarily comprised of environmental remediation costs,
consulting fees, and legal charges associated with the past operations of the
Company's five environmental sites (See Note 12 - Commitments and Contingencies
for further information concerning the environmental sites).
The Company has reached an agreement in principle with the United States
Department of Justice ("DOJ") related to its liability for both OU-1 and OU-2,
subject to finalization and entry of the Consent Decree which governs the
agreement. The Company has agreed in principle to perform the remediation for
OU-2. Also, the Company in principle has agreed to pay a fixed sum for the
United States Environmental Protection Agency's (the "EPA") past cost for OU-2
and a portion of the EPA's past cost for OU-1. The payments are to be made
annually in five equal payments of $2,141,000 for a total $10,705,000, plus
interest. The first payment plus interest is to be made on or before the later
of January 2, 2013 or thirty days after the effective date of the Consent Decree
(day the judge signs and files the degree). The Company has also agreed in
principle to pay the EPA's costs for oversight of the OU-2 remediation. This
agreement is subject to the approval of both the DOJ and EPA's management who
are authorized to settle this matter. Also, the proposed agreement will be
subject to a public comment period and finally must be approved by the Federal
District Court which we expect to occur by the end of fiscal 2012 or the first
quarter of fiscal 2013. During the third quarter of 2012, the Company's legal
counsel had been notified by the Assistant Attorney General of the State of New
Jersey that they may file a claim for certain costs, however no official demand
has been received by the Company or its counsel. Any claim filed by the State of
New Jersey may impact the timing or completion of the agreement in principle
with the DOJ. Based on the current available information, the Company has
estimated a total combined potential liability for OU-1 and OU-2 to be in the
range of $20,118,000 to $31,448,000. The estimated OU-2 remediation liability is
based upon the EPA's plan for remediation, and data from our environmental
engineering consultants. The liability for past costs of OU-1 and OU-2 is based
upon the current terms of the agreement. The Company, in consultation with its
consultants and legal counsel, has agreed to a Statement of Work ("SOW") for the
implementation of the remedy selected in the September 26, 2011 ROD for OU-2.
The SOW will be incorporated into the Consent Decree and will be an enforceable
part of the Consent Decree.
The Company's management along with its counsel has met with the DOJ and EPA to
negotiate the terms and conditions of the Consent Decree. The discussion with
the DOJ and EPA are ongoing.
28
--------------------------------------------------------------------------------
Table of Contents
On February 27, 2012, the Company purchased certain assets of Astromec, a
subsidiary of Pro-Dex, for approximately $1,050,000, which includes the
assumption of liabilities for an estimated earn-out of $294,000. The earn-out is
comprised of quarterly payments based on the performance of the acquired
business over the three year period immediately following the date of
acquisition. SL-MTI recorded direct acquisition costs of approximately $432,000
during the first nine months of 2012, which are recorded within selling, general
and administrative expenses in the Consolidated Statements of Income. The
results from the acquisition date through September 30, 2012 are included in the
SL-MTI segment.
During 2012, the Company entered into a series of foreign currency forward
contracts to hedge its exposure to foreign exchange rate movements in its
forecasted expenses in China and Mexico. The foreign currency forwards are not
speculative and are being used to manage the Company's exposure to foreign
exchange rate movements. Foreign currency forward agreements involve fixing the
USD-MXN and USD-CNH exchange rates for delivery of a specified amount of foreign
currency on a specified date. The Company has elected not to apply hedge
accounting to these derivatives and they are marked to market through earnings.
Therefore, gains and losses resulting from changes in the fair value of these
contracts are recognized at the end of each reporting period directly in
earnings. During the nine months ended September 30, 2012, the Company
recognized a $142,000 gain associated with the foreign currency forward
contracts, which is included in other gain (loss), net on the Consolidated
Statements of Income. As of September 30, 2012, the fair value of the foreign
currency forward contracts was recorded as a $142,000 asset in other current
assets on the Consolidated Balance Sheets.
On November 16, 2010, the Board of Directors authorized a plan that allows for
the repurchase up to an aggregate of 470,000 shares of the Company's outstanding
common stock. Any repurchases pursuant to the 2010 Repurchase Plan would be made
in the open market or in negotiated transactions. During the first nine months
of 2012, the Company purchased approximately 140,000 shares of Company stock at
an average price of $17.59 a share. As a result, as of September 30, 2012,
approximately 330,000 shares remained available for purchase under the 2010
Repurchase Plan.
On May 30, 2012, the Company announced a modified "Dutch Auction" Tender Offer
to purchase up to $10 million of its common shares. The Company accepted for
purchase approximately 307,000 shares of its common stock at a purchase price of
$13.50 per share. These shares represented approximately 6.9% of the total
common stock outstanding as of June 27, 2012 prior to the purchase of shares
pursuant to the Tender Offer. With the completion of the Tender Offer, the
Company had approximately 4,121,000 shares of common stock outstanding at that
time. The aggregate purchase price paid by the Company in connection with the
Tender Offer was $4,147,000 excluding transaction costs. The Company paid for
the Tender Offer with available cash on hand.
On August 9, 2012, the Company entered into the 2012 Credit Facility with PNC
Bank to replace its 2008 Credit Facility. The 2012 Credit Facility provides for
borrowings up to $40,000,000 and under certain conditions maximum borrowings up
to $70,000,000. The 2012 Credit Facility includes a $5,000,000 sublimit for
letters of credit and provides for a separate $10,700,000 letter of credit which
expires one year from the date of closing, with annual extensions. The 2012
Credit Facility expires on August 9, 2016 (See Note 9 - Debt for the terms and
conditions of the 2012 Credit Facility).
29--------------------------------------------------------------------------------
Table of Contents
During the third quarter of 2012, the Company announced to its employees a
restructuring plan to align its costs with current and projected sales activity.
The cost reductions were primarily direct labor employees and engineering,
selling and administration employees at SLPE, RFL, and TEAL, which is part of
the High Power Group. As of September 30, 2012, there was a consolidated charge
to earnings of $852,000, which was comprised of a $727,000 charge at SLPE, a
$67,000 charge at RFL, and a $58,000 charge at TEAL. The charges are composed of
severance and other employee related charges. The total number of employees
affected by the restructuring plan to date is 67, all of which have been
terminated as of September 30, 2012.
Business Trends
Demand for the Company's products and services decreased during 2012, compared
to 2011. Sales for the nine months ended September 30, 2012, decreased by
$11,827,000, or 7%, and income from operations decreased by $5,941,000, or 42%.
SL-MTI and MTE, which is part of the High Power Group, experienced increases in
both sales and income from operations during 2012 as compared to 2011. SLPE,
TEAL, which is part of the High Power Group, and RFL experienced decreases in
both sales and income from operations during 2012 as compared to 2011.
During the nine months ended September 30, 2012, the Company's backlog decreased
to $64,608,000, from $67,452,000 for the same period the prior year, for a
decrease of 4% on a comparative basis. The decrease in backlog in 2012 was
primarily attributable to SLPE and SL-MTI, who recorded a 12% and 3% decrease in
backlog, respectively. The decreases in backlog were partially offset by
increases at RFL and the High Power Group of 23% and 6%, respectively. The
Company's net new orders for the nine months ended September 30, 2012 decreased
by 5%, compared to the nine months ended September 30, 2011.
The Company's management is taking numerous actions to improve sales and income
from continuing operations with an emphasis on lean initiatives at all
facilities. The Company expects to expand product portfolios, enter new market
segments and penetrate selected geographic markets. The Company also continues
to pursue strategic alternatives to maximize shareholder value. Some of these
alternatives have included, and could continue to include, selective
acquisitions, divestitures and the sale of certain assets. During the third
quarter of 2012, the Company announced to its employees a restructuring plan to
align its costs with current and projected sales activity. The cost reductions
were primarily direct labor employees and engineering, selling and
administration employees at SLPE, RFL, and TEAL, which is part of the High Power
Group (See Note 20 - Restructuring Costs for further details about the
restructuring plan).
While these items are important in understanding and evaluating financial
results and trends, other transactions or events, which are disclosed in this
Management's Discussion and Analysis, may have a material impact on continuing
operations. A complete understanding of these transactions is necessary in order
to estimate the likelihood that these trends will continue.
Critical Accounting Policies
The Company's consolidated financial statements have been prepared in accordance
with Generally Accepted Accounting Principles in the United States ("GAAP").
GAAP requires management to make estimates and assumptions that affect the
amounts of reported and contingent assets and liabilities at the date of the
consolidated financial statements and the amounts of reported net sales and
expenses during the reporting period.
30--------------------------------------------------------------------------------
Table of Contents
The Securities and Exchange Commission (the "SEC") has issued disclosure
guidance for "critical accounting policies." The SEC defines "critical
accounting policies" as those that are most important to the portrayal of the
Company's financial condition and results, and that require application of
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods.
The Company's significant accounting policies are described in Note 1 of the
Notes to Consolidated Financial Statements included in Part IV of the Company's
Annual Report on Form 10-K for the year ended December 31, 2011. Not all of
these significant accounting policies require management to make difficult,
subjective or complex judgments or estimates. However, the following policies
are deemed to be critical within the SEC definition. The Company's senior
management has reviewed these critical accounting policies and estimates and the
related Management's Discussion and Analysis of Financial Condition and Results
of Operations with the Audit Committee of the Board of Directors.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the purchase price is
fixed or determinable and collectability is reasonably assured. Revenue is
recorded in accordance with Staff Accounting Bulletin ("SAB") No. 104 and in
certain circumstances in accordance with the guidance provided by ASC 605-25
"Revenue Recognition - Multiple-Element Arrangements." The major portion of the
Company's revenue is derived from equipment sales. The Company recognizes
equipment revenue upon shipment or delivery, depending upon the terms of the
order, and transfer of title. Generally, the revenue recognition criteria is met
at the time the product is shipped. Provisions are established for product
warranties, principally based on historical experience. At times the Company
establishes reserves for specific warranty issues known by management. Customer
service and installation revenue is recognized when completed. RFL has customer
service revenue, which accounted for less than one percent of consolidated net
revenue for the nine months ended 2012 and 2011.
SLPE has two sales programs with distributors, pursuant to which credits are
issued to distributors: (1) a re-stocking program and (2) a competitive discount
program. The distributor re-stocking program allows distributors to rotate up to
a pre-determined percentage of their purchases over the previous nine month
period. SLPE provides for this allowance as a decrease to revenue based upon the
amount of sales to each distributor and other historical factors. The
competitive discount program allows a distributor to sell a product out of its
inventory below net distribution price in order to meet certain competitive
situations. SLPE records this discount as a reduction to revenue based on the
distributor's eligible inventory. The eligible distributor inventory is reviewed
at least quarterly. No cash is paid under either distributor program. These
programs affected consolidated gross revenue for each of the nine month periods
ended 2012 and 2011 by approximately 0.7% and 0.5%, respectively.
Certain judgments affect the application of the Company's revenue policy, as
mentioned above. Revenue recognition is significant because net revenue is a key
component of results of operations. In addition, revenue recognition determines
the timing of certain expenses, such as commissions, royalties and certain
incentive programs. Revenue results are difficult to predict. Any shortfall in
revenue or delay in recognizing revenue could cause operating results to vary
significantly from year to year and quarter to quarter.
31--------------------------------------------------------------------------------
Table of Contents
Allowance For Doubtful Accounts
The Company's estimate for the allowance for doubtful accounts related to trade
receivables is based on two methods. The amounts calculated from each of these
methods are combined to determine the total amount reserved. First, the Company
evaluates specific accounts where it has information that the customer may have
an inability to meet its financial obligations (e.g., bankruptcy or insolvency).
In these cases, the Company uses its judgment, based on the best available facts
and circumstances, and records a specific reserve for that customer against
amounts due to reduce the receivable to the amount that is expected to be
collected. These specific reserves are reevaluated and adjusted as additional
information is received that impacts the amount reserved. Second, a general
reserve is established for all customers based on several factors, including
historical write-offs as a percentage of sales. If circumstances change (e.g.,
higher than expected defaults or an unexpected material adverse change in a
major customer's ability to meet its financial obligation), the Company's
estimates of the recoverability of amounts due could be reduced by a material
amount. Receivables are charged off against the reserve when they are deemed
uncollectible. The Company's allowance for doubtful accounts equaled 2.0% and
2.0% of gross trade receivables as of September 30, 2012 and December 31, 2011,
respectively.
Inventories
The Company values inventory at the lower of cost or market, and continually
reviews the book value of discontinued product lines to determine if these items
are properly valued. The Company identifies these items and assesses the ability
to dispose of them at a price greater than cost. If it is determined that cost
is less than market value, then cost is used for inventory valuation. If market
value is less than cost, then related inventory is adjusted to market value.
If a write down to the current market value is necessary, the market value
cannot be greater than the net realizable value, which is defined as selling
price less costs to complete and dispose, and cannot be lower than the net
realizable value less a normal profit margin. The Company also continually
evaluates the composition of its inventory and identifies slow-moving and excess
inventories. Inventory items identified as slow-moving or excess are evaluated
to determine if reserves are required. If the Company were not able to achieve
its expectations of the net realizable value of the inventory at current market
value, it would have to adjust its reserves accordingly. The Company attempts to
accurately estimate future product demand to properly adjust inventory levels.
However, significant unanticipated changes in demand could have a significant
impact on the value of inventory and of operating results.
Derivative Instruments and Hedging Activities
FASB ASC 815, "Derivatives and Hedging" ("ASC 815"), provides the disclosure
requirements for derivatives and hedging activities with the intent to provide
users of financial statements with an enhanced understanding of: (a) how and why
an entity uses derivative instruments, (b) how the entity accounts for
derivative instruments and related hedged items, and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. Further, qualitative disclosures are
required that explain the Company's objectives and strategies for using
derivatives, as well as quantitative disclosures about the fair value of and
gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative instruments.
32--------------------------------------------------------------------------------
Table of Contents
The Company is exposed to certain risks arising from both its business
operations and economic conditions. The Company principally manages its
exposures to a wide variety of business and operational risks through management
of its core business activities. Certain of the Company's foreign operations
expose the Company to fluctuations of foreign interest rates and exchange rates.
These fluctuations may impact the value of the Company's revenues, expenses,
cash receipts and payments in terms of the Company's functional currency. The
Company enters into derivative financial instruments to protect the value or fix
the amount of certain cash flows in terms of the functional currency of the
business unit with that exposure.
As required by ASC 815, the Company records all derivatives on the balance sheet
at fair value. The accounting for changes in the fair value of derivatives
depends on the intended use of the derivative, whether the Company has elected
to designate a derivative in a hedging relationship and apply hedge accounting
and whether the hedging relationship has satisfied the criteria necessary to
apply hedge accounting. The Company may enter into derivative contracts that are
intended to economically hedge certain of its risk, even though hedge accounting
does not apply or the Company elects not to apply hedge accounting. Currently,
the Company does not apply hedge accounting to any of its foreign currency
derivatives.
Accounting For Income Taxes
The Company has reported gross unrecognized tax benefits, excluding interest and
penalties, of $595,000 and $722,000 as of September 30, 2012 and December 31,
2011, respectively. These amounts represent unrecognized tax benefits, which, if
ultimately recognized, will reduce the Company's effective tax rate. The Company
reported accrued interest and penalties related to unrecognized tax benefits of
$97,000 as of September 30, 2012, and $80,000 as of December 31, 2011. For
additional disclosures related to ASC 740, see Note 3 of the Notes to the
Consolidated Financial Statements included in Part IV of the Company's Annual
Report on Form 10-K for the year ended December 31, 2011.
Significant management judgment is required in determining the provision for
income taxes, the deferred tax assets and liabilities and any valuation
allowance recorded against deferred tax assets. The net deferred tax assets as
of September 30, 2012 and December 31, 2011 were $13,726,000 and $13,314,000,
respectively, net of valuation allowances of $1,995,000 and $1,926,000,
respectively. The carrying value of the Company's net deferred tax assets
assumes that the Company will be able to generate sufficient future taxable
income in certain tax jurisdictions. Valuation allowances are attributable to
uncertainties related to the Company's ability to utilize certain deferred tax
assets prior to expiration. These deferred tax assets primarily consist of loss
carryforwards. The valuation allowance is based on estimates of taxable income,
expenses and credits by the jurisdictions in which the Company operates and the
period over which deferred tax assets will be recoverable. In the event that
actual results differ from these estimates or these estimates are adjusted in
future periods, the Company may need to establish an additional valuation
allowance that could materially impact its consolidated financial position and
results of operations. Each quarter, management evaluates the ability to realize
the deferred tax assets and assesses the need for additional valuation
allowances.
33
--------------------------------------------------------------------------------
Table of Contents
Legal Contingencies
The Company is currently involved in certain legal proceedings. As discussed in
Note 12 of the Notes to the Consolidated Financial Statements included in Part I
of this Quarterly Report on Form 10-Q, the Company has accrued an estimate of
the probable costs for the resolution of these claims. This estimate has been
developed after investigation and is based upon an analysis of potential
results, including a combination of litigation and settlement strategies.
Management does not believe these proceedings will have a further material
adverse effect on the Company's consolidated financial position. As with
litigation, generally the outcome is inherently uncertain. It is possible,
however, that future results of operations for any particular quarterly or
annual period could be materially affected by changes in these assumptions, or
the effectiveness of these strategies, related to these proceedings.
Goodwill
The Company has allocated its adjusted goodwill balance to its reporting units.
The Company tests goodwill for impairment annually at fiscal year-end and in
interim periods if certain events occur indicating that the carrying value of
goodwill may be impaired, such as a significant adverse change in business
climate, an adverse action or assessment by a regulator or the decision to sell
a business, that would make it more likely than not that an impairment may have
occurred. The goodwill impairment test is a two-step process. The first step of
the impairment analysis compares the fair value to the net book value. In
determining fair value, the accounting guidance allows for the use of several
valuation methodologies, although it indicates that quoted market prices are the
best evidence of fair value. The Company uses a combination of expected present
values of future cash flows and comparative market multiples. It has also
performed a review of market capitalization with estimated control premiums at
December 31, 2011. If the fair value of a reporting unit is less than its net
book value, the Company would perform a second step in its analysis, which
compares the implied fair value of goodwill to its carrying amount. If the
carrying amount of goodwill exceeds its implied fair value, the Company
recognizes an impairment loss equal to that excess amount. Application of the
goodwill impairment test requires judgment, including the identification of
reporting units, assigning assets and liabilities to reporting units, assigning
goodwill to reporting units and determining the fair value of each reporting
unit. Significant judgments required to estimate the fair value of reporting
units include estimating future cash flows, determining appropriate discount and
growth rates, operating margins and working capital requirements, selecting
comparable companies within each reporting unit and market and determining
control premiums. Changes in these estimates and assumptions could materially
affect the determination of fair value for each reporting unit. There were no
impairment charges for the nine months ended 2012 and 2011. As of September 30,
2012 and December 31, 2011, goodwill totaled $22,736,000 and $22,738,000
(representing 21% and 20% of total assets), respectively.
As of the testing conducted as of December 31, 2011, the Company concluded that
no impairment charge was warranted. However, there can be no assurance that the
economic conditions currently affecting the world economy or other events may
not have a negative material impact on the long-term business prospects of any
of the Company's reporting units. In such case, the Company may need to record
an impairment loss, as stated above. The next annual impairment test will be
conducted as of December 31, 2012, unless management identifies a triggering
event in the interim.
Management has not identified any triggering events, as defined by ASC 350
"Intangibles - Goodwill and Other," during 2012. Accordingly, no interim
impairment test has been performed.
34--------------------------------------------------------------------------------
Table of Contents
Impairment Of Long-Lived And Intangible Assets
The Company's long-lived and intangible assets primarily consist of fixed
assets, goodwill and other intangible assets. The Company periodically reviews
the carrying value of its long-lived assets held and used, other than goodwill
and intangible assets with indefinite lives, and assets to be disposed of
whenever events or circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company assesses the recoverability of the asset by
estimated cash flows and at times by independent appraisals. It compares
estimated cash flows expected to be generated from the related assets, or the
appraised value of the asset, to the carrying amounts to determine whether
impairment has occurred. If the estimate of cash flows expected to be generated
changes in the future, the Company may be required to record impairment charges
that were not previously recorded for these assets. If the carrying value of a
long-lived asset is considered impaired, an impairment charge is recorded for
the amount by which the carrying value of the long-lived asset exceeds its fair
value. Asset impairment evaluations are by nature highly subjective.
Environmental Expenditures
The Company is subject to United States, Mexican, Chinese and United Kingdom
environmental laws and regulations concerning emissions to the air, discharges
to surface and subsurface waters, and generation, handling, storage,
transportation, treatment and disposal of waste materials. The Company is also
subject to other federal, state and local environmental laws and regulations,
including those that require it to remediate or mitigate the effects of the
disposal or release of certain chemical substances at various sites, mostly at
sites where the Company has ceased operations. It is impossible to predict
precisely what effect these laws and regulations will have in the future.
Expenditures that relate to current operations are charged to expense or
capitalized, as appropriate. Expenditures that relate to an existing condition
caused by formerly owned operations are expensed and recorded as part of
discontinued operations, net of tax. Expenditures include costs of remediation,
consulting, legal fees to defend against claims for environmental liability and
for certain administrative matters. Liabilities are recorded when remedial
efforts are probable and the costs can be reasonably estimated. The liability
for remediation expenditures includes, as appropriate, elements of costs such as
site investigations, consultants' fees, feasibility studies, outside contractor
expenses and monitoring expenses. Estimates are not discounted and they are not
reduced by potential claims for recovery from insurance carriers. The Company
does not currently have any outstanding claims against insurance carriers
related to remediation expenditures. The liability is periodically reviewed and
adjusted to reflect current remediation progress, prospective estimates of
required activity and other relevant factors, including changes in technology or
regulations. During fiscal 2011, the Company recorded additional reserves of
$8,300,000 related to environmental matters at its Pennsauken, New Jersey site.
No significant adjustments were made to reserves recorded during the first nine
months of 2012 for the Pennsauken, New Jersey site. For additional information
related to environmental matters, see Note 14 of the Notes to the Consolidated
Financial Statements included in Part IV of the Company's Annual Report on Form
10-K for the year ended December 31, 2011 and Note 12 to this Quarterly Report.
The above listing is not intended to be a comprehensive list of all of the
Company's accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by GAAP with no need for
management's judgment in its application. There are also areas in which
management's judgment in selecting any available alternatives would not produce
a materially different result. For a discussion of accounting policies and other
disclosures required by GAAP, see the Company's audited Consolidated Financial
Statements and Notes thereto included in Part IV of the Company's Annual Report
on Form 10-K for the year ended December 31, 2011 and Part 1 to this Quarterly
Report.
35
--------------------------------------------------------------------------------
Table of Contents
Liquidity And Capital Resources
September 30, December 31,
2012 2011 $Variance % Variance
(in thousands)
Cash and cash equivalents $ 1,783 $ 5,632 $ (3,849 ) (68 %)
Working capital $ 32,778 $ 34,404 $ (1,626 ) (5 %)
Shareholders' equity $ 55,757 $ 56,857 $ (1,100 ) (2 %)
The Company's liquidity needs have related to, and are expected to continue to
relate to, capital investments, product development costs, acquisitions, working
capital requirements, and certain environmental and legal remediation costs. The
Company has met its liquidity needs primarily through cash generated from
operations and, to a lesser extent, through bank borrowings. The Company
believes that cash provided by operating activities from continuing operations
and funding available under the 2012 Credit Facility will be adequate to service
debt and meet working capital needs, capital investment requirements, and
product development requirements for the next twelve months.
On August 9, 2012, the Company entered into the 2012 Credit Facility with PNC
Bank to replace its 2008 Credit Facility. The 2012 Credit Facility, which
consists of a new $40,000,000 four year senior revolving credit facility with a
$5,000,000 sublimit for letters of credit and provides for a separate
$10,700,000 letter of credit. The senior revolving credit facility can be
increased up to $70,000,000 under certain conditions. (See Note 9 - Debt for the
terms and conditions of the 2012 Credit Facility).
At September 30, 2012, the Company reported $1,783,000 of cash, compared to
$5,632,000 of cash and cash equivalents as of December 31, 2011. Cash and cash
equivalents decreased in 2012 primarily due to $7,046,000 of cash used in
financing activities and $2,390,000 of cash used in investing activities, which
was partially offset by $6,351,000 of cash provided by operating activities from
continuing operations. The decrease in cash in 2012 was also partially due to
$780,000 of cash used in operating activities from discontinued operations.
Net cash provided by operating activities from continuing operations during the
nine month period ended September 30, 2012 was $6,351,000 as compared to net
cash provided by operating activities from continuing operations of $10,904,000
during the nine month period ended September 30, 2011. The sources of cash from
operating activities for the nine month period ended September 30, 2012 were
income from continuing operations of $5,719,000, the add-back of depreciation
and amortization expense of $2,038,000, and the add-back of non-cash stock
compensation expense of $909,000. These sources of cash from operating
activities were partially offset by an increase in accounts receivable of
$1,237,000 and an increase in other assets of $542,000. The largest increases in
accounts receivable occurred at SL-MTI and at the High Power Group, which were
partially offset by a large decrease at RFL. The increase at SL-MTI was due to
increased sales during the third quarter of 2012 coupled with a large customer
payment which was not received until October 2012. The increase at the High
Power Group was primarily due to an increase at TEAL due to increased sales
during the third quarter of 2012 coupled with two large customer payments which
were not received until October 2012. The decrease at RFL was primarily due to
decreased sales during 2012. The increase in other assets was due primarily to
the capitalization of financing costs to replace the 2008 Credit Facility with
the new 2012 Credit Facility and the renewal of certain insurance policies
during the first half of 2012.
36--------------------------------------------------------------------------------
Table of Contents
Net cash provided by operating activities from continuing operations during the
nine-month period ended September 30, 2011 was $10,904,000. The sources of cash
from operating activities for the nine-month period ended September 30, 2011
were income from continuing operations of $9,755,000, an increase in accounts
payable of $2,903,000, a decrease in deferred income taxes of $1,425,000, and
the add-back of depreciation and amortization expense of $2,201,000. All
operating entities experienced increases in accounts payable, except for RFL,
due primarily to increased inventory purchases to meet customer demand and
extended payment terms from suppliers. Deferred income taxes decreased during
the first nine months of 2011 due to the utilization of certain foreign tax
credits, research and development tax credits, and net operating loss
carryforwards. These sources and add-backs were partially offset by an increase
in inventories of $2,505,000, an increase in other assets of $1,624,000, and an
increase in accounts receivable of $1,453,000. The increase in inventory was due
to an increase in inventory at SLPE in order to meet the increase in demand from
customers. The increase in inventory was also due to an increase at TEAL due to
the rescheduling of existing customer orders until the fourth quarter of 2011
and the first quarter of 2012. These increases were partially offset by a
decrease in inventory at MTE due to lean initiatives to reduce inventory levels.
All operating entities experienced increases in other current assets due
primarily to the renewal of certain insurance policies during the first half of
2011. The increase in other current assets was also due to an increase in
payments related to inventory purchase agreements for copper at Teal and MTE.
The increase in other current assets was partially offset by the collection of a
fire loss insurance claim related to the Company's former leased manufacturing
facility in Mexicali, Mexico, which was received on July 15, 2011 in the amount
of $610,000. The largest increases in accounts receivable occurred at SLPE, MTE,
and SL-MTI primarily due to increased sales during the third quarter of 2011.
The increase in accounts receivable at SL-MTI was also due to relatively low
accounts receivable balances as of December 31, 2010 due to significant
collections during December 2010.
Net cash used in investing activities during the nine month period ended
September 30, 2012 was $2,390,000 as compared to net cash used in investing
activities of $2,485,000 during the nine month period ended September 30, 2011.
Cash used in investing activities during 2012 was for the purchases of property,
plant and equipment of $1,432,000, the acquisition of certain assets of a
business of $756,000, and for the purchase of other assets of $202,000.
Purchases of property, plant and equipment were primarily used to upgrade
production capabilities and technology. Purchases of other assets were primarily
related to the purchase of software and the capitalization of legal fees related
to a new patent application at MTE. Cash used in investing activities during
2011 was for the purchases of property, plant and equipment of $2,348,000 and
for the purchase of other assets of $137,000. During the nine months ended
September 30, 2011, SLPE incurred approximately $1,125,000 in tenant
improvements related to its relocation to a more modern facility in Mexicali,
Mexico. The remaining cash used in investing activities was primarily used to
upgrade production capabilities and upgrade technology. The purchase of other
assets was primarily related to the purchase of software.
37--------------------------------------------------------------------------------
Table of Contents
On February 27, 2012, the Company purchased certain assets of Astromec, a
subsidiary of Pro-Dex, for approximately $1,050,000, which includes the
assumption of liabilities for an estimated earn-out of $294,000. The earn-out is
comprised of quarterly payments based on the performance of the acquired
business over the three year period immediately following the date of
acquisition. The acquisition was paid in cash. SL-MTI recorded direct
acquisition costs of approximately $432,000 during the first nine months of 2012
within selling, general and administrative expenses in the Consolidated
Statements of Income. The results from the acquisition date through
September 30, 2012 are included in the SL-MTI segment.
Net cash used in financing activities during the nine month period ended
September 30, 2012 was $7,046,000 as compared to net cash used in investing
activities of $6,246,000 during the nine month period ended September 30, 2011.
Cash used in financing activities during 2012 was primarily related to the
repurchase and retirement of common stock pursuant to the Company's Tender Offer
and the purchase of Company stock pursuant to the Company's 2010 Repurchase
Plan. Cash used in financing activities during 2012 was also due to payments of
deferred financing costs primarily associated with costs to replace the 2008
Credit Facility with the new 2012 Credit Facility. Cash used in financing
activities during 2011 was primarily related to $7,300,000 in net payments to
the 2008 Credit Facility, which was partially offset by $817,000 of proceeds
from stock option exercises and $291,000 from the tax benefit on the exercise of
stock options.
On May 30, 2012, the Company announced a modified "Dutch Auction" Tender Offer
to purchase up to $10 million of its common shares. The Company accepted for
purchase 307,000 shares of its common stock at a purchase price of $13.50 per
share. These shares represented approximately 6.9% of the total common stock
outstanding as of June 27, 2012 prior to the purchase of shares pursuant to the
Tender Offer. With the completion of the Tender Offer, the Company had
approximately 4,121,000 shares of common stock outstanding at that time. The
aggregate purchase price paid by the Company in connection with the Tender Offer
was $4,147,000 excluding transaction costs. The Company paid for the Tender
Offer with available cash on hand.
On November 16, 2010, the Board of Directors authorized a plan that allows for
the repurchase up to an aggregate of 470,000 shares of the Company's outstanding
common stock. Any repurchases pursuant to the 2010 Repurchase Plan would be made
in the open market or in negotiated transactions. During the first nine months
of 2012, the Company purchased 140,000 shares of Company stock at an average
price of $17.59 a share, for a total purchase price of $2,468,000 excluding
transaction costs. As a result, as of September 30, 2012, 330,000 shares
remained available for purchase under the 2010 Repurchase Plan.
As of September 30, 2012, the Company had no outstanding balance under the 2012
Credit Facility. At September 30, 2012, the Company had total availability under
the 2012 Credit Facility of $38,995,000. As of December 31, 2011, the Company
had no outstanding balance under the 2008 Credit Facility. At December 31, 2011,
the Company had total availability under the 2008 Credit Facility of
$39,527,000.
38
--------------------------------------------------------------------------------
Table of Contents
The Company's current ratio was 2.01 to 1 at September 30, 2012 and 2.09 to 1 at
December 31, 2011. Current assets decreased by $943,000 from December 31, 2011,
while current liabilities increased by $683,000 during the same period.
Capital expenditures were $1,432,000 in 2012, which represented a decrease of
$916,000 from the capital expenditure levels of 2011. The decrease in capital
expenditures was primarily due to $1,125,000 in tenant improvements related to
its relocation to a more modern facility in Mexicali, Mexico during 2011.
With the exception of the segment reported as "Unallocated Corporate Expenses"
(which consists primarily of corporate office expenses, financing activities,
certain treasury, risk management, legal, litigation, public reporting costs,
legacy costs and costs not specifically allocated to the reportable business
segments), all of the Company's operating segments recorded income from
operations for the nine months ended September 30, 2012.
Contractual Obligations
The following is a summary of the Company's contractual obligations at
September 30, 2012 for the periods indicated:
Less Than 1 to 3 4 to 5 After
1 Year Years Years 5 Years Total
(in thousands)
Operating Leases $ 1,482 $ 3,660 $ 1,377 $ 838 $ 7,357
The table above excludes the Company's gross liability for uncertain tax
positions, including accrued interest and penalties, which totaled $97,000 as of
September 30, 2012, since the Company cannot predict with reasonable reliability
the timing or certainty of cash settlements to the respective taxing
authorities.
Off-Balance Sheet Arrangements
It is not the Company's usual business practice to enter into off-balance sheet
arrangements such as guarantees on loans and financial commitments,
indemnification arrangements and retained interests in assets transferred to an
unconsolidated entity for securitization purposes. Consequently, the Company has
no off-balance sheet arrangements which have, or are reasonably likely to have,
a material current or future effect on its financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources, except for operating lease
commitments disclosed in the table above and inventory purchase commitments. In
an attempt to stabilize copper costs, the Company has in the past, and may in
the future, enter into purchase agreements for copper. As of September 30, 2012,
the Company has no material inventory purchase agreements for copper.
39--------------------------------------------------------------------------------
Table of Contents
Restructuring Costs
Restructuring activity for the period ended September 30, 2012 was as follows:
Accrual at Accrual at
Beginning of Charged to Cash September 30,
the Year Earnings Payments 2012
(in thousands)
Severance and other
employee-related charges $ - $ 852 $ 852 $ -
During the third quarter of 2012, the Company announced to its employees a
restructuring plan to align its costs with current and projected sales activity.
The costs reductions were primarily direct labor employees and engineering,
selling and administration employees at SLPE, RFL, and TEAL, which is part of
the High Power Group. As of September 30, 2012, there was a consolidated charge
to earnings of $852,000, which was comprised of a $727,000 charge at SLPE, a
$67,000 charge at RFL, and a $58,000 charge at TEAL. The charges are composed of
severance and other employee related charges. The total number of employees
affected by the restructuring plan to date is 67, all of which have been
terminated as of September 30, 2012. Annual savings in connection with the
restructuring plan are anticipated to be approximately $3,227,000.
Results of Operations
Three months ended September 30, 2012, compared with three months ended
September 30, 2011
The tables below show the comparisons of net sales and income from operations
for the quarter ended September 30, 2012 ("2012") and the quarter ended
September 30, 2011 ("2011"):
Net Sales
Three Months Three Months $ Variance % Variance
Ended Ended From From
September 30, September 30, Same Quarter Same Quarter
2012 2011 Last Year Last Year
(in thousands)
SLPE $ 21,194 $ 24,314 $ (3,120 ) (13 %)
High Power Group 15,620 14,057 1,563 11
SL-MTI 9,490 8,498 992 12
RFL 4,582 5,223 (641 ) (12 )
Net sales $ 50,886 $ 52,092 $ (1,206 ) (2 %)
40
--------------------------------------------------------------------------------
Table of Contents
Income from Operations
Three Months Three Months $ Variance % Variance
Ended Ended From From
September 30, September 30, Same Quarter Same Quarter
2012 2011 Last Year Last Year
(in thousands)
SLPE $ 1,144 $ 1,954 $ (810 ) (41 %)
High Power Group 1,499 1,086 413 38
SL-MTI 1,875 1,361 514 38
RFL 153 639 (486 ) (76 )
Unallocated Corporate Expenses (1,138 ) (1,502 ) 364 24
Income from operations $ 3,533 $ 3,538 $ (5 ) 0 %
During 2012, consolidated net sales decreased by $1,206,000, or 2%. When
compared to 2011, net sales of SLPE decreased by $3,120,000, or 13%; net sales
of the High Power Group increased by $1,563,000, or 11%; net sales of SL-MTI
increased by $992,000, or 12%; and net sales at RFL decreased by $641,000, or
12%. SL-MTI benefited from $798,000 of sales related to the Astromec acquisition
which was completed on February 27, 2012.
In 2012, the Company's income from operations decreased by $5,000 from
$3,538,000 in 2011 to $3,533,000 in 2012. Income from operations was 7% of net
sales in 2012 and 2011, respectively. All of the Company's operating entities
recorded income from operations in 2012 and 2011.
Income from continuing operations in 2012 was $2,865,000, or $0.69 per diluted
share, compared to income from continuing operations in 2011 of $2,537,000, or
$0.55 per diluted share. Income from continuing operations was approximately 6%
of net sales in 2012, compared to income from continuing operations of 5% of net
sales in 2011.
The Company's business segments and the components of operating expenses are
discussed in the following sections.
SLPE
SLPE recorded net sales of $21,194,000 or 42% of consolidated net sales in 2012,
compared to $24,314,000, or 47% of consolidated net sales in 2011. At SLPE, net
sales of its medical equipment product line decreased by $1,161,000, or 7%,
sales of the industrial product line decreased by $1,046,000, or 24%, sales of
the data communications product line decreased by $472,000, or 14%, and sales of
other products decreased by $441,000, or 71%. The decrease in sales of the
medical equipment product line was primarily due to decreased distributor sales
to medical customers, including decreased sales volumes to one large
international distributor during 2012. The decrease in sales in the industrial
product line was primarily due to decreased distributor sales to several
domestic industrial customers and decreased volumes to a large international
customer. The decrease was also due to a general decline in demand in both the
domestic and international markets. The decrease in sales of the data
communications product line was primarily due to decreased sales volumes to two
large domestic customers, which was partially offset by sales to a new large
domestic customer. The decrease in sales of other products was primarily due to
a decrease in volumes as a result of a shift in focus to standard platform
products and services. Returns and distributor credits also negatively affected
net sales, which represented approximately 2% and 1% of gross sales in 2012 and
2011, respectively. Domestic sales decreased by 6% and international sales
decreased by 28% during 2012.
41
--------------------------------------------------------------------------------
Table of Contents
SLPE reported income from operations of $1,144,000 in 2012, compared to income
from operations of $1,954,000 in 2011. Income from operations decreased in 2012
due to a 13% decrease in sales and an increase in operating expenses, which was
partially offset by an improvement in cost of products sold as a percentage of
net sales. Cost of products sold decreased by approximately 1% as a percentage
of net sales during 2012. Operating costs increased by approximately 2% during
2012 primarily due to restructuring charges of $727,000. Excluding restructuring
charges, all other categories of operating expense decreased in 2012 as compared
to 2011.
High Power Group
The High Power Group reported net sales of $15,620,000, or 31% of consolidated
net sales in 2012, compared to $14,057,000, or 27% of consolidated net sales in
2011. The increase in net sales during 2012 was due to an increase in net sales
at TEAL of $1,109,000, or 17%, and an increase in net sales at MTE of $454,000,
or 6%.
Teal's sales increase was primarily attributable to an increase in sales to the
medical imaging equipment market of $917,000, and an increase in sales to
customers in the solar market of $486,000, which was partially offset by a
decrease in sales to the military and aerospace markets of $177,000, and a
decrease in sales to the semi-conductor market of $92,000. The increase in sales
to the medical imaging equipment market was primarily due to increased orders
from a large domestic customer. Teal's sales to customers in the solar market
increased primarily due to a large order from a domestic customer, which is the
result of a new focus for expansion and growth in the solar market. Sales to
military and aerospace customers decreased during 2012 primarily due to
decreased volumes to a large domestic customer. The decrease in the
semi-conductor market was primarily driven by a decrease in sales to a large
international customer. Domestic sales increased by 19% while international
sales decreased by 5% during 2012.
MTE's sales increase is primarily attributable to an increase in filter sales,
especially in the oil and gas industry, during 2012. The increase in filter
sales during 2012 was primarily due to the introduction of a new product and
strong sales from existing products. International sales increased by 7%
primarily due to increased sales to customers in the commercial facilities
markets, including increased sales to a large customer in Mexico and a large
customer in Canada. Domestic sales increased by 6% due to increased filter
sales, primarily in the oil and gas market.
The High Power Group reported income from operations of $1,499,000 in 2012,
which represented an increase of 38% from 2011. The increase in income from
operations during 2012 was due to an increase at TEAL of $281,000 and an
increase at MTE of $132,000. The increase in the High Power Group's income from
operations was due to an increase in sales and a decrease in cost of products
sold as a percentage of net sales, partially offset by an increase in operating
expenses. Cost of products sold as a percentage of net sales improved by
approximately 2% during 2012. Operating costs increased by $412,000 during 2012
primarily due to increases in selling, general and administrative expenses. The
increase in selling, general and administrative expenses costs were primarily
due to certain litigation costs related to settlement proceedings which has been
resolved. Operating costs also increased due to $58,000 of restructuring charges
incurred during 2012 at TEAL.
42--------------------------------------------------------------------------------
Table of Contents
SL-MTI
SL-MTI recorded net sales of $9,490,000, or 18% of consolidated net sales in
2012, compared to $8,498,000, or 16% of consolidated net sales in 2011. SL-MTI
recorded $798,000 of sales related to the Astromec acquisition during the third
quarter of 2012. As a result, comparable sales, net of the acquisition,
increased by $194,000, or 2%, during 2012 as compared to 2011. Sales to
customers in the commercial aerospace industry, excluding Astromec sales,
increased by $159,000, or 5%, and sales of other commercial products, excluding
Astromec sales, increased by $124,000, or 30%, which were partially offset by a
decrease in sales to the defense industry, excluding Astromec sales, of $93,000,
or 2%. Sales of medical products, excluding Astromec sales, remained relatively
flat in 2012. Domestic sales increased by 11% and international sales increased
by 16% during 2012. The increase in domestic sales was primarily due to sales
related to the Astromec acquisition, a general increase in the commercial
aerospace business, and an increase in down hole exploration sales in the oil
and gas market. The increase in international sales was primarily related to
increased volumes to a military customer located in Canada.
SL-MTI reported income from operations of $1,875,000 in 2012, which represented
an increase of 38% from 2011. The increase was primarily due to a 12% increase
in sales and a decrease in cost of products sold as a percentage of net sales.
Cost of products sold as a percentage of net sales improved by approximately 4%
during 2012 primarily due to a more favorable sales mix and improved lean
initiatives implemented at its manufacturing facilities in Matamoros, Mexico and
Montevideo, Minnesota. Operating costs were relatively flat during 2012.
RFL
RFL recorded net sales of $4,582,000, or 9% of consolidated net sales in 2012,
compared to $5,223,000, or 10% of consolidated net sales in 2011. Sales of RFL's
protection products decreased by $679,000, or 22%, and customer service sales
decreased by $26,000, or 13%, which were partially offset by an increase in
sales of communications products of $64,000, or 3%. The decrease in protection
products was primarily due to a large domestic customer project delivered in
2011 without a comparable project of that size in 2012. The decrease in
protection products was also due to decreased legacy product sales to domestic
customers. Customer service sales, which are a relatively minor component of
RFL's sales, decreased primarily due to reduced spare parts sales to a domestic
customer. The increase in the communications product line during 2012 was
primarily due to a large domestic project and a large international project in
2012, partially offset decreased legacy product sales. Domestic sales decreased
by $891,000, or 21%, while international sales increased by $250,000, or 26%.
RFL reported income from operations of $153,000 in 2012, which represented a
decrease of 76% from 2011. Income from operations decreased in 2012 due
primarily to a 12% decrease in sales and a 4% increase in cost of products sold
as a percentage of net sales due to an unfavorable change in customer and sales
mix. Operating costs decreased by $11,000 primarily due to an $82,000 decrease
in selling, general and administrative expenses which was partially offset by
$67,000 of restructuring costs.
Cost of Products Sold
Cost of products sold was approximately 68% of net sales in 2012, compared to
69% for the quarter ended 2011. Cost of products sold as a percentage of net
sales decreased 1% on a decrease in net sales of 2%.
43--------------------------------------------------------------------------------
Table of Contents
SL-MTI, the High Power Group, and SLPE each recorded a decrease in cost of
products sold as a percentage of net sales, while RFL recorded an increase in
cost of products sold as a percentage of sales. During 2012, SL-MTI recorded a
4% decrease in its cost of products sold as a percentage of net sales primarily
due to a more favorable sales mix and improved lean initiatives implemented at
its manufacturing facilities in Matamoros, Mexico and Montevideo, Minnesota. The
High Power Group recorded a 2% decrease in its cost of products sold as a
percentage of net sales due to a 5% decrease at MTE, which was partially offset
by a 1% increase at TEAL. The decrease in cost of products sold as a percentage
of net sales at MTE was primarily due to increased sales levels, which improved
overhead absorption. The decrease at MTE was also due to lower commodity costs
and increased product pricing. The increase in cost of products sold as a
percentage of net sales at TEAL was primarily due to increased raw materials
costs and unfavorable sales mix. SLPE's cost of products sold as a percentage of
net sales decreased by approximately 1% primarily due to improved product mix as
the result of the introduction of new products into the market. The decrease in
SLPE's cost of products sold as a percentage of net sales was negatively
impacted by an increase in social security tax in China as well as an increase
in SLPE's inventory reserve and warranty reserve; these charges increased SLPE's
cost of products sold as a percentage of net sales by approximately 3%. Cost of
products sold as a percentage of net sales increased by 4% at RFL primarily due
to an unfavorable change in customer and sales mix. All operating entities are
at various stages of emphasizing lean initiatives throughout the factory floor
in an attempt to improve future margins. During the third quarter of 2012, the
management of SLPE, RFL, and TEAL, which is part of the High Power Group,
announced to its employees a restructuring plan to align its costs with current
and projected sales activity (See Note 20 - Restructuring Costs for further
details about the restructuring plan).
Engineering and Product Development Expenses
Engineering and product development expenses were approximately 6% of net sales
in 2012 compared to 7% in 2011. Engineering and product development expenses
decreased by $265,000, or 8%, during the third quarter of 2012 primarily due to
a $309,000 decrease at SLPE.
The decrease in engineering and product development costs at SLPE was primarily
due to a reduction in engineering staff in 2012.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were approximately 16% of net sales
for 2012 and 2011, respectively. During 2012, selling, general and
administrative expenses decreased by $359,000, or 4%, on a 2% decrease in sales.
Selling, general and administrative expenses at SLPE decreased by $331,000 in
2012 primarily due to a decrease in commissions expenses as a result of reduced
sales volumes, a reduction in staffing levels, and a decrease in executive bonus
expense. The High Power Group recorded an increase in selling, general and
administrative expenses of $367,000 primarily due to litigation costs related to
settlement proceedings which have been resolved at MTE, and increased selling
expenses related to new product growth. The increase at the High Power Group was
partially offset by a decrease in executive bonus expense at TEAL. Selling,
general and administrative expenses at SL-MTI were relatively flat between
periods. Selling, general and administrative expenses at RFL decreased by
$82,000 primarily due to a reduction in staffing levels, partially offset by
increased consulting fees for marketing services. Unallocated Corporate expenses
decreased by $364,000 primarily due to a decrease in executive bonus expense.
Unallocated Corporate expenses also decreased due to reduced professional fees,
primarily related to consulting and audit fees, and due to a decrease in stock
compensation expense. The decrease in stock compensation expense was due to
1,000 restricted shares granted to each Director on July 29, 2011, without a
comparable grant during the third quarter of 2012. During the third quarter of
2012, the management of SLPE, RFL, and TEAL, which is part of the High Power
Group, announced to its employees a restructuring plan to align its costs with
current and projected sales activity (See Note 20 - Restructuring Costs for
further details about the restructuring plan).
44--------------------------------------------------------------------------------
Table of Contents
Depreciation And Amortization Expenses
Depreciation and amortization expenses in 2012 were $666,000, an increase of
$10,000, or 2%, compared to depreciation and amortization expenses in 2011.
Restructuring Charges
Restructuring charges were $852,000 in 2012 and consisted of severance costs and
other employee related charges. During the third quarter of 2012, the Company
announced to its employees a restructuring plan to align its costs with current
and projected sales activity. The cost reductions were primarily direct labor
employees and engineering, selling and administration employees at SLPE, RFL,
and TEAL, which is part of the High Power Group. No restructuring costs were
incurred during 2011.
Amortization of Deferred Financing Costs
In connection with entering into the 2012 Credit Facility, the Company incurred
deferred financing costs which will be amortized over the term of the 2012
Credit Facility. In connection with entering into the 2008 Credit Facility and
related waivers and amendments, the Company incurred deferred financing costs
which were amortized over the term of the 2008 Credit Facility. During 2012 and
2011, the amortization of deferred financing costs equaled $46,000 and $32,000,
respectively.
Interest Expense
Interest expense in 2012 was $8,000, compared to $33,000 in 2011. The decrease
in interest expense in 2012 was primarily due to decreased borrowings under the
Company's new 2012 Credit Facility and under the Company's 2008 Credit Facility,
which expired on August 9, 2012. The Company had no outstanding balance as of
September 30, 2012 under the 2012 Credit Facility compared to $2,500,000 in
outstanding debt as of September 30, 2011, under the 2008 Credit Facility.
Other gain (loss), net
Other gain (loss), net in 2012 was a net gain of $312,000 while no gain or loss
was recorded in 2011. During 2012, the Company entered into a series of foreign
currency forward contracts to hedge its exposure to foreign exchange rate
movements in its forecasted expenses in China and Mexico. The gain recognized in
2012 represents the unrealized gain on foreign currency forward contracts that
are marked to market. The Company did not enter into foreign exchange contracts
during 2011.
45
--------------------------------------------------------------------------------
Table of Contents
Taxes (Continuing Operations)
The effective tax rate from continuing operations for the third quarter ended
2012 was approximately 24%. For the third quarter ended 2011, the effective tax
rate was approximately 27%. The decrease in the effective tax rate was primarily
due to an increase in foreign tax credits of approximately 8% and research and
development tax credits from a prior period recorded in 2012 of approximately
4% as well as the recognition a previously unrecognized tax position due to the
expiration of the statute of limitations of approximately 3%. These favorable
adjustments to the effective tax rate were partially offset by permanent
adjustments of approximately 6%.
Discontinued Operations
During 2012, the Company recorded a loss from discontinued operations, net of
tax, of $464,000, compared to a loss of $261,000, net of tax, in 2011. Loss from
discontinued operations during 2012 and 2011 primarily related to environmental
remediation costs, consulting fees, and legal charges associated with the past
operations of the Company's five environmental sites. During 2012, $339,000 of
the total net of tax loss from discontinued operations was related to the Wayne,
New Jersey site (See Note 12 - Commitments and Contingencies for further
information concerning the environmental sites).
Net Income
Net income was $2,401,000, or $0.58 per diluted share, for 2012 compared to
$2,276,000, or $0.50 per diluted share, for 2011. The weighted average number of
shares used in the diluted earnings per share computation was 4,133,000 and
4,591,000 for 2012 and 2011, respectively.
Results of Operations
Nine months ended September 30, 2012, compared with nine months ended
September 30, 2011
The tables below show the comparisons of net sales and income from operations
for the nine months ended September 30, 2012 ("2012") and the nine months ended
September 30, 2011 ("2011"):
Net Sales
Nine Months Nine Months $ Variance % Variance
Ended Ended From From
September 30, September 30, Same Period Same Period
2012 2011 Last Year Last Year
(in thousands)
SLPE $ 58,361 $ 68,620 $ (10,259 ) (15 %)
High Power Group 47,091 48,943 (1,852 ) (4 )
SL-MTI 28,166 26,916 1,250 5
RFL 15,507 16,473 (966 ) (6 )
Net sales $ 149,125 $ 160,952 $ (11,827 ) (7 %)
46
--------------------------------------------------------------------------------
Table of Contents
Income from Operations
Nine Months Nine Months $ Variance % Variance
Ended Ended From From
September 30, September 30, Same Period Same Period
2012 2011 Last Year Last Year
(in thousands)
SLPE $ 1,412 $ 6,324 $ (4,912 ) (78 %)
High Power Group 4,449 5,584 (1,135 ) (20 )
SL-MTI 5,019 4,612 407 9
RFL 1,789 1,972 (183 ) (9 )
Unallocated Corporate Expenses (4,419 ) (4,301 ) (118 ) (3 )
Income from operations $ 8,250 $ 14,191 $ (5,941 ) (42 %)
During 2012, consolidated net sales decreased by $11,827,000 or 7%. When
compared to 2011, net sales of SLPE decreased by $10,259,000 or 15%; net sales
of the High Power Group decreased by $1,852,000, or 4%; net sales of SL-MTI
increased by $1,250,000, or 5%; and net sales at RFL decreased by $966,000, or
6%. SL-MTI benefited from $1,866,000 of sales related to the Astromec
acquisition which was completed on February 27, 2012.
In 2012, the Company's income from operations was $8,250,000, compared to
$14,191,000 in 2011, representing a decrease of $5,941,000, or 42%. Income from
operations was 6% of net sales in 2012, compared to income from operations of 9%
of net sales in 2011. All of the Company's operating entities recorded income
from operations in 2012 and 2011. SL-MTI incurred $432,000 of direct acquisition
costs related to the Astromec acquisition.
Income from continuing operations in 2012 was $5,719,000, or $1.30 per diluted
share, compared to income from continuing operations in 2011 of $9,755,000, or
$2.14 per diluted share. Income from continuing operations was approximately 4%
of net sales in 2012, compared to income from continuing operations of 6% of net
sales in 2011.
The Company's business segments and the components of operating expenses are
discussed in the following sections.
SLPE
SLPE recorded net sales of $58,361,000 or 39% of consolidated net sales in 2012,
compared to $68,620,000, or 43% of consolidated net sales in 2011. At SLPE, the
net sales of its medical equipment product line decreased by $5,317,000, or 12%,
sales of the industrial product line decreased by $2,871,000, or 23%, sales of
the data communications product line decreased by $1,203,000, or 12%, and sales
of other products decreased $868,000, or 66%. The decrease in sales of the
medical equipment product line was primarily due to decreased distributor sales
to medical customers, including decreased sales volumes to several large
domestic distributors and one large international distributor during 2012. The
decrease was also due to a general decline in demand in both the domestic and
international markets. The decrease in sales in the industrial product line was
primarily due to decreased distributor sales to industrial customers, including
decreased sales volumes to one large domestic distributor. The decrease was also
due to a decrease in sales volumes to a large international customer during
2012. The decrease in sales of the data communications product line was
primarily due to decreased sales volumes to two large domestic customers, which
was partially offset by sales to a new large domestic customer. The decrease in
sales of other products was primarily due a decrease in volumes as a result of a
shift in focus to standard platform products and services. Returns and
distributor credits also negatively affected net sales, which represented
approximately 2% and 1% of gross sales in 2012 and 2011, respectively. Domestic
sales decreased by 8% and international sales decreased by 30% during 2012.
47--------------------------------------------------------------------------------
Table of Contents
SLPE reported income from operations of $1,412,000 in 2012, compared to income
from operations of $6,324,000 in 2011. Income from operations decreased in 2012
due to a 15% decrease in sales, an increase in cost of products sold as a
percentage of net sales, and an increase in operating expenses. Cost of products
sold increased by approximately 3% as a percentage of net sales during 2012.
Operating costs increased by approximately 1% during 2012, or $80,000, primarily
due to restructuring charges of $727,000 and an increase in selling, general and
administrative expenses of $568,000, which was partially offset by a decrease in
engineering and product development costs of $1,007,000 and a decrease in
depreciation and amortization expense of $208,000.
High Power Group
The High Power Group reported net sales of $47,091,000 or 32% of consolidated
net sales in 2012, compared to $48,943,000, or 30% of consolidated net sales in
2011. The decrease in net sales during 2012 was due to a decrease in net sales
at TEAL of $2,777,000, or 11%, which was partially offset by an increase in net
sales at MTE of $925,000 or 4%.
Teal's sales decrease was primarily attributable to a decrease in sales to the
military and aerospace markets of $1,357,000, a decrease in sales to the medical
equipment market of $1,237,000, and a decrease in sales to the semi-conductor
market of $944,000, which were partially offset by an increase in sales to
customers in the solar market of $844,000. Sales to military and aerospace
customers decreased during 2012 primarily due to decreased volumes to a large
domestic customer. The decrease in sales to the medical imaging equipment market
was primarily due to a decrease in demand and a shift to lower average selling
price units, which was partially offset by an increase in orders from a large
domestic customer. The decrease in the semi-conductor market was almost entirely
driven by a decrease in sales to international customers. Teal's sales to
customers in the solar market increased primarily due to a large order from a
large domestic customer during 2012, which is the result of a new focus for
expansion and growth in the solar market. Domestic sales decreased by 10% and
international sales decreased by 17% during 2012.
MTE's sales increase is primarily attributable to an increase in sales in the
natural resource markets, especially the oil and gas industry, as well as the
commercial facilities market during 2012. International sales increased by 7%
while domestic sales increased by 3%. The increase in international sales is
primarily due to increased sales to distributors in the industrial automation
market and commercial facilities market. The increase in domestic sales is due
to increased sales to several customers in the oil and gas market and commercial
facilities market.
The High Power Group reported income from operations of $4,449,000 in 2012,
which represented a decrease of 20% from 2011. The decrease in income from
operations during 2012 was due to a decrease at TEAL of $1,496,000, which was
partially offset by an increase at MTE of $361,000. The decrease in the High
Power Group's income from operations was due to a decrease in sales and an
increase in operating expenses, which was partially offset by an improvement in
cost of products sold as a percentage of net sales. Cost of products sold as a
percentage of net sales improved by approximately 1% at the High Power Group.
Operating expenses increased by approximately 10% during 2012 primarily due to
an increase in engineering and product development costs of $167,000, an
increase in selling, general and administrative expenses of $624,000, and
restructuring charges of $58,000.
48--------------------------------------------------------------------------------
Table of Contents
SL-MTI
SL-MTI recorded net sales of $28,166,000 or 19% of consolidated net sales in
2012, compared to $26,916,000, or 17% of consolidated net sales in 2011. SL-MTI
recorded $1,866,000 of sales related to the Astromec acquisition during the
2012. As a result, comparable sales, net of the acquisition, decreased by
$617,000, or 2%, during 2012 as compared to 2011. Sales to customers in the
defense industry, excluding the acquisition, decreased by $1,436,000, or 9%,
which was partially offset by an increase in sales to customers in the
commercial aerospace industries, excluding Astromec sales, of $625,000, or 7%,
an increase in sales of medical products, excluding Astromec sales, of $140,000,
or 27%, and an increase in other commercial products, excluding Astromec sales,
of $54,000, or 4%. Domestic sales increased by 8% and international sales
decreased by 16% during 2012. The increase in domestic sales was primarily due
to $1,866,000 of sales related to the Astromec acquisition previously mentioned
and a general increase in the commercial aerospace business, which was partially
offset by a decrease in military sales. The decrease in international sales was
primarily related to lower volumes to two large military customers.
SL-MTI reported income from operations of $5,019,000 in 2012, which represented
an increase of 9% from 2011. SL-MTI recorded $432,000 of direct costs related to
the Astromec acquisition during 2012. Excluding the one-time acquisition costs,
income from operations increased by $839,000, or 18%, in 2012. The increase was
due to an improvement in cost of products sold as a percentage of net sales,
which was partially offset by an increase in operating expenses. Cost of
products sold improved by approximately 2% as a percentage of net sales during
2012. Operating expenses increased by 5%, excluding acquisition costs, primarily
due to an increase in selling, general and administrative expenses of $139,000
and an increase in depreciation and amortization expense of $77,000.
RFL
RFL recorded net sales of $15,507,000, or 10% of consolidated net sales in 2012,
compared to $16,473,000, or 10% of consolidated net sales in 2011. Sales of
RFL's protection products decreased by $1,067,000, or 12%, sales of
communication products decreased $40,000, or 1%, which was partially offset by
an increase in customer service sales of $141,000, or 21%. The decrease in
protection products was primarily due to decreased legacy product sales and a
large domestic customer project in 2011 without a comparable project of that
size in 2012. The decrease in the communications product line was primarily due
to decreased sales to a large domestic customer and decreased sales to an
international customer located in Venezuela, partially offset by increased sales
to a large domestic customer in the rail industry. Customer service sales
increased primarily due to higher spare parts sales to a domestic customer.
Domestic sales decreased by $406,000 or 3%, while international sales decreased
by $560,000, or 16%.
49
--------------------------------------------------------------------------------
Table of Contents
RFL reported income from operations of $1,789,000 in 2012, which represented a
decrease of 9% from 2011. Income from operations decreased in 2012 due to a
decrease in net sales and an increase operating expenses, which was partially
offset by an improvement in cost products sold as a percentage of net sales.
Cost of products sold as a percentage of net sales improved by approximately 3%
in 2012. Operating expenses increased by approximately 2% due to an increase in
engineering and product development costs of $88,000 and restructuring charges
of $67,000.
Cost of Products Sold
Cost of products sold was approximately 68% of net sales in 2012 and 2011. Cost
of products sold as a percentage of net sales remained flat on a decrease in net
sales of 7%.
SLPE recorded an increase in cost of products sold as a percentage of net sales,
while the High Power Group, SL-MTI and RFL each recorded a decrease in cost of
products sold as a percentage of sales. SLPE's cost of products sold as a
percentage of net sales increased approximately 3% primarily due to unabsorbed
manufacturing overhead related to reduced sales. SLPE's cost of products sold as
a percentage of net sales also increased due to increases in their inventory
reserve and an increase in social security tax in China. The High Power Group
recorded a 1% decrease in its cost of products sold as a percentage of net sales
due to a 4% decrease at MTE, which was partially offset by a 3% increase at
TEAL. The decrease in cost of products sold as a percentage of net sales at MTE
was primarily due to increased sales levels, which improved overhead absorption.
The decrease at MTE was also due to lower commodity costs, increased product
pricing, and a more favorable product mix. The increase in cost of products sold
as a percentage of net sales at TEAL was primarily due to an increase in raw
materials costs and unfavorable sales mix. During 2012, SL-MTI recorded a 2%
decrease in its cost of products sold as a percentage of net sales primarily due
to improved sales mix and lean initiatives implemented at its manufacturing
facilities in Matamoros, Mexico and Montevideo, Minnesota. The decrease in
SL-MTI's cost of products sold as a percentage of net sales was partially offset
by an increase in cost of products sold as a percentage of net sales due to the
integration of Astromec operations during the first half of the year. Cost of
products sold as a percentage of net sales decreased by approximately 3% at RFL
due to a favorable change in customer and sales mix during the first half of
2012. All operating entities are at various stages of emphasizing lean
initiatives throughout the factory floor in an attempt to improve future
margins. During the third quarter of 2012, the management of SLPE, RFL, and
TEAL, which is part of the High Power Group, announced to its employees a
restructuring plan to align its costs with current and projected sales activity
(See Note 20 - Restructuring Costs for further details about the restructuring
plan).
Engineering and Product Development Expenses
Engineering and product development expenses were approximately 6% of net sales
in 2012 and 2011, respectively. Engineering and product development expenses
decreased by $776,000, or 8% during 2012 primarily due to a decrease of
$1,007,000 at SLPE, which was partially offset by an increase of $167,000 at the
High Power Group and $88,000 at RFL. The decrease in engineering and product
development costs at SLPE was primarily due to a reduction in engineering staff
in 2012. The increase in engineering and product development costs at the High
Power Group was primarily due to a $152,000 increase at TEAL due to increased
compensation costs and a decrease in customer funded projects in 2012.
Engineering and product development costs at RFL increased primarily due to an
increase in engineering staff in 2012.
50--------------------------------------------------------------------------------
Table of Contents
Selling, General and Administrative Expenses
Selling, general and administrative expenses were approximately 19% of net sales
for 2012 and 16% of net sales for 2011. During 2012, selling, general and
administrative expenses increased by $1,821,000 or 7%, on a 7% decrease in
sales.
SLPE's expenses increased by $568,000 in 2012 primarily due to an increase in
consulting and legal fees related to the China Investigation. The increase at
SLPE was partially offset by lower commission expenses due to reduced sales
volumes in 2012 and due to a decrease in executive bonus expense. The High Power
Group recorded an increase in selling, general and administrative expenses of
$624,000 primarily due to litigation costs related to settlement proceedings at
MTE mentioned previously, and increased selling expenses related to new product
growth. The increase at the High Power Group was partially offset by a decrease
in executive bonus expense at TEAL. SL-MTI increased by $571,000 primarily due
to direct costs related to the Astromec acquisition of $432,000. Selling,
general and administrative expenses at RFL decreased by $16,000 primarily due to
decreased salaries and other employee compensation expenses, which were
partially offset by increased consulting costs for marketing services.
Unallocated Corporate expenses increased by $118,000 primarily due to increased
stock compensation expense related to restricted shares granted to Directors on
April 2, 2012. The increase was partially offset by a decrease in executive
bonus expense and reduced professional fees, primarily related to consulting and
audit fees. During the third quarter of 2012, the management of SLPE, RFL, and
TEAL, which is part of the High Power Group, announced to its employees a
restructuring plan to align its costs with current and projected sales activity
(See Note 20 - Restructuring Costs for further details about the restructuring
plan).
Depreciation And Amortization Expenses
Depreciation and amortization expenses in 2012 were $2,038,000, a decrease of
$162,000, or 7%, compared to depreciation and amortization expenses in 2011.
Restructuring Charges
Restructuring charges were $852,000 in 2012 and consisted of severance costs and
other employee related charges. During the third quarter of 2012, the Company
announced to its employees a restructuring plan to align its costs with current
and projected sales activity. The cost reductions were primarily direct labor
employees and engineering, selling and administration employees at SLPE, RFL,
and TEAL, which is part of the High Power Group. No restructuring costs were
incurred during 2011.
Amortization of Deferred Financing Costs
In connection with entering into the 2012 Credit Facility, the Company incurred
deferred financing costs which will be amortized over the term of the 2012
Credit Facility. In connection with entering into the 2008 Credit Facility and
related waivers and amendments, the Company incurred deferred financing costs
which were amortized over the term of the 2008 Credit Facility. During 2012 and
2011, the amortization of deferred financing costs equaled $118,000 and
$185,000, respectively.
Interest Expense
Interest expense in 2012 was $39,000, compared to $171,000 in 2011. The decrease
in interest expense in 2012 was primarily due to decreased borrowings under the
Company's new 2012 Credit Facility and under the Company's 2008 Credit Facility,
which expired on August 9, 2012. The Company had no outstanding balance as of
September 30, 2012 under the 2012 Credit Facility compared to $2,500,000 in
outstanding debt as of September 30, 2011 under the 2008 Credit Facility.
51--------------------------------------------------------------------------------
Table of Contents
Other gain (loss), net
Other gain (loss), net in 2012 was a net gain of $142,000 while no gain or loss
was recorded in 2011. During 2012, the Company entered into a series of foreign
currency forward contracts to hedge its exposure to foreign exchange rate
movements in its forecasted expenses in China and Mexico. The gain recognized in
2012 represents the unrealized gain on foreign currency forward contracts that
are marked to market. The Company did not enter into foreign exchange contracts
during 2011.
Fire Related Gain
On March 24, 2010, the Company sustained fire damage at its then leased
manufacturing facility in Mexicali, Mexico. This facility manufactured products
for both SLPE and MTE. The fire was contained to an area that manufactured MTE
products. The Company was fully insured for the replacement of the assets
damaged in the fire and for the loss of profits due to business interruption and
changed conditions caused by the fire. The Company's fire related loss includes
the destruction of property and equipment, damaged inventory, cleanup costs and
increased operating expenses incurred as a result of the fire.
During June 2011, the Company settled the fire damage claims with its insurance
carriers for $810,000 and as a result the Company recorded a gain related to the
fire of $277,000. No additional material gains, losses or recoveries were
recognized in subsequent periods related to the fire loss.
Taxes (Continuing Operations)
The effective tax rate from continuing operations for the nine months ended 2012
and 2011 was approximately 31%. Effective January 1, 2011, the Company's
statutory federal income tax rate increased from 34% to 35%. The effective tax
rate in 2011 reflects the statutory rate after adjustments for state and
international tax provisions and the recording of benefits primarily related to
federal and state research and development tax credits and foreign tax credits,
as well as the effect of applying a higher statutory tax rate to deferred taxes
that existed as of the first day of the year.
Discontinued Operations
During 2012, the Company recorded a loss from discontinued operations, net of
tax, of $902,000, compared to income of $142,000, net of tax, in 2011. Loss from
discontinued operations during 2012 primarily related to environmental
remediation costs, consulting fees, and legal charges associated with the past
operations of the Company's five environmental sites (See Note 12 - Commitments
and Contingencies for further information concerning the environmental sites).
Income from discontinued operations in 2011 related to the $787,000 favorable
settlement with a foreign tax authority, primarily offset by environmental and
legal expenses.
Net Income
Net income was $4,817,000, or $1.10 per diluted share, for 2012 compared to
$9,897,000, or $2.17 per diluted share, for 2011. The weighted average number of
shares used in the diluted earnings per share computation was 4,390,000 and
4,570,000 for 2012 and 2011, respectively.
52--------------------------------------------------------------------------------
Table of Contents
[ LatinAmerica.tmcnet.com's Homepage 's Homepage ]
|
Internet Telephony Magazine
Click here to read latest issue
CUSTOMER 
Cloud Computing Magazine
Click here to read latest issue
M2M Evolution Magazine
Call Center/CRM
Info Tech 
IP Communications 
Mobile 
Green 
Satellite 
Robotics 
