================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
Commission file number 1-4987
SL INDUSTRIES, INC.
(Exact name of Company as specified in its charter)
NEW JERSEY 21-0682685
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
520 FELLOWSHIP ROAD, SUITE A114, 08054
MT. LAUREL, NJ (Zip Code)
(Address of principal executive offices)
Company's telephone number, including area code: 856-727-1500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED:
------------------- ------------------------------------------
Common stock, $.20 par value American Stock Exchange
Philadelphia Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is a large accelerated filer,
an accelerated filer or a non-accelerated filer. See definition of "accelerated
filer" and large accelerated filer in Rule 12b-2 of the Exchange Act).
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the Registrant is a shell Company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant based on the closing price of the Common Stock on the last
business day of the Registrant's most recently completed second fiscal quarter,
as reported by the American Stock Exchange was approximately $61,324,000.
The number of shares of common stock outstanding as of March 1, 2007,
was 5,634,605.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this report (Items 10, 11, 12, 13
and 14) is incorporated by reference from the Company's proxy statement to be
filed pursuant to Regulation 14A with respect to the registrant's 2007 annual
meeting of stockholders.
================================================================================
TABLE OF CONTENTS
PAGE
----
PART I
Item 1 Business ..................................................... 1
Item 1A Risk Factors.................................................. 8
Item 1B Unresolved Staff Comments..................................... 12
Item 2 Properties.................................................... 12
Item 3 Legal Proceedings............................................. 14
Item 4 Submission of Matters to a Vote of Security Holders........... 17
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities......... 17
Item 6 Selected Financial Data....................................... 19
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 19
Item 7A Quantitative and Qualitative Disclosures about Market Risk.... 35
Item 8 Financial Statements and Supplementary Data................... 36
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 36
Item 9A Controls and Procedures....................................... 36
Item 9B Other Information............................................. 36
PART III
Item 10 Directors, Executive Officers and Corporate Governance........ 37
Item 11 Executive Compensation........................................ 37
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters............................ 37
Item 13 Certain Relationships and Related Transactions and Director
Independence .............................................. 37
Item 14 Principal Accounting Fees and Services........................ 37
PART IV
Item 15 Exhibits and Financial Statement Schedules.................... 38
SIGNATURES............................................................... 39
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE........... F1
PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
The Company, through its subsidiaries, designs, manufactures and markets power
electronics, motion control, power protection and specialized communication
equipment that is used in a variety of medical, commercial and military
aerospace, computer, datacom, industrial, telecom, transportation and electric
power utility equipment applications. Its products are generally incorporated
into larger systems to increase operating safety, reliability and efficiency.
The Company's products are largely sold to Original Equipment Manufacturers
("OEMs"), the electric power utility industry and, to a lesser extent, to
commercial distributors. On March 29, 1956, the Company was incorporated as G-L
Electronics Company in the state of New Jersey. Its name was changed to G-L
Industries, Inc. in November 1963; SGL Industries, Inc. in November 1970; and
then to the present name of SL Industries, Inc. in September 1984.
On October 31, 2006, the Company completed the acquisition of MTE Corporation
("MTE") for $15,606,000, net of cash acquired. The acquisition was financed
under the Company's existing Revolving Credit Facility, as defined below. MTE
designs and manufactures power quality electromagnetic products used to protect
equipment from power surges, bring harmonics into compliance and improve the
efficiency of variable speed motor drives. MTE's product lines include:
three-phase AC reactors, DC link chokes and a series of harmonic, RFI/EMI and
motor protection filters. These products are typically used in industrial plants
and commercial buildings where non-linear loads and attendant harmonics produced
by these loads are present. MTE employs approximately 90 people in its corporate
headquarters and manufacturing plant in two leased facilities in Milwaukee,
Wisconsin. It also manufactures subassemblies through a contract manufacturer in
Juarez, Mexico.
On December 19, 2005, the Company announced that it had signed a definitive
agreement to acquire all of the outstanding shares of common stock of Ault
Incorporated ("Ault") for $2.90 per share in cash. On January 26, 2006, the
Company, through a wholly owned subsidiary, completed a tender offer for Ault.
The Company acquired approximately 86.9% of the outstanding common stock of Ault
at $2.90 per share. The Company had previously purchased in the open market
approximately 4.8% of the outstanding common stock of Ault for $567,000. On
January 26, 2006, the Company's wholly owned-subsidiary was merged with and into
Ault. As a result, Ault became a wholly-owned subsidiary of the Company, and the
shares not tendered were converted into the right to receive $2.90 per share in
cash, without interest. The total purchase price for the common stock of Ault
was approximately $13,986,000, which includes the shares already owned by the
Company. The Company also paid approximately $2,079,000 to acquire all of the
outstanding shares of Ault's preferred stock and incurred approximately
$2,604,000 in additional costs directly related to the acquisition. Ault is a
leading manufacturer of power conversion products and is a major supplier to
OEMs of wireless and wire line communications infrastructure, computer
peripherals and handheld devices, medical, industrial, and printing/scanning
equipment. Ault is headquartered in Minneapolis, Minnesota and has an
engineering and sales office in
Page 1
Norwood, Massachusetts, and an engineering and sales office and a manufacturing
facility in the People's Republic of China. (For additional information
regarding the acquisition of Ault see Note 14 in the notes to the Consolidated
Financial Statements included in Part IV of this Annual Report on Form 10-K).
On August 10, 2005, James C. Taylor was elected as Chief Executive Officer and
President of the Company.
On August 3, 2005, the Company entered into a revolving credit facility (the
"Revolving Credit Facility") with Bank of America, N.A. ("Bank of America") to
replace its previous credit facility. The Revolving Credit Facility (with a
standby and commercial letter of credit sub-limit of $5,000,000) provides for
borrowings up to $30,000,000. The Revolving Credit Facility expires on June 30,
2008. Borrowings under the Revolving Credit Facility bear interest, at the
Company's option, at the London interbank offering rate ("LIBOR") plus a margin
rate ranging from 0.9% to 1.9%, or the higher of a Base Rate plus a margin rate
ranging from 0% to 0.5%. The Base Rate is equal to the higher of (i) the Federal
Funds Rate plus 0.5%, or (ii) Bank of America's publicly announced prime rate.
The margin rates are based on certain leverage ratios, as defined. The Company
is subject to compliance with certain financial covenants set forth in the
Revolving Credit Facility, including but not limited to, capital expenditures,
consolidated net worth, and certain interest and leverage ratios, as defined.
On November 24, 2003, the Company sold substantially all of the assets of its
subsidiary, SL Surface Technologies, Inc. ("SurfTech"). The Company received
cash of $600,000 at closing. In addition, the purchaser assumed certain
liabilities and ongoing obligations of SurfTech. As a result of the transaction,
the Company recorded an after tax loss from the sale of discontinued operations
of approximately $442,000. The results of operations of SurfTech are presented
as discontinued operations for all periods presented in the Company's
consolidated statements of income.
On January 6, 2003, the Company sold all of the issued and outstanding shares of
capital stock of its indirect subsidiary, Elektro-Metall Export GmbH ("EME"),
for a purchase price of $8,000,000, which consisted of cash and purchaser notes.
In addition, a distribution of $2,000,000 was paid prior to closing by EME to a
subsidiary of the Company and the purchaser assumed EME's bank debt of
approximately $3,600,000 prior to closing. The purchaser notes included a
$3,000,000 secured note that bore interest at the prime rate plus 2%, which was
paid on March 14, 2003, and a $1,000,000 unsecured note that bore interest at an
annual rate of 12%, which was paid on April 2, 2004. All cash proceeds related
to the sale of EME have been received.
(B) FINANCIAL INFORMATION ABOUT SEGMENTS
Financial information about the Company's business segments is incorporated
herein by reference to Note 15 in the Notes to Consolidated Financial Statements
included in Part IV of this Annual Report on Form 10-K.
Page 2
(C) NARRATIVE DESCRIPTION OF BUSINESS
SEGMENTS
The Company currently operates under four business segments: SL Power
Electronics Corp., the High Power Group, SL Montevideo Technology, Inc.
("SL-MTI") and RFL Electronics Inc. ("RFL"). The Company acquired Ault on
January 26, 2006. In the period following the acquisition, the Company
consolidated the operations of Ault and the Company's subsidiary, Condor D.C.
Power Supplies, Inc. ("Condor"), into one company, which is reported as one
business segment. In accordance with the guidance provided in Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information," this segment is presented as SL Power
Electronics Corp. ("SLPE"). On October 31, 2006, the Company acquired MTE
Corporation ("MTE"). In the period following the acquisition, the operations of
MTE and Teal Electronics Corp. ("Teal") began the process of consolidation. In
accordance with SFAS No. 131, this segment is presented as the High Power Group.
Management refers to SLPE and the High Power Group as the Power Electronics
Group.
SLPE - SL Power Electronics Corp. produces a wide range of custom and standard
internal and external power supply products that convert AC or DC power to
direct electrical current to be used in customers' end products. Power supplies
closely regulate and monitor power outputs, using patented filter and other
technologies, resulting in little or no electrical interference. SLPE, which
sells products under two brand names (Condor and Ault), is a major supplier to
the OEMs of medical, wireless and wire line communications infrastructure,
computer peripherals, handheld devices and industrial equipment. For the years
ended December 31, 2006, December 31, 2005 and December 31, 2004, net sales of
SLPE, as a percentage of consolidated net sales from continuing operations, were
50%, 34% and 35%, respectively.
TEAL - Teal designs and manufactures custom power conditioning and power
distribution units. Products are developed and manufactured for custom
electrical subsystems for OEMs of semiconductor, medical imaging, graphics and
telecommunication systems. Outsourcing the AC power system helps OEMs reduce
cost and time to market while increasing system performance and customer
satisfaction. Customers are also aided by obtaining necessary agency approvals.
Custom products are often called "Power Conditioning and Distribution Units,"
which provide voltage conversion and stabilization, system control, and power
distribution for systems such as CT and MRI scanners, chip testers and
industrial systems. For the years ended December 31, 2006, December 31, 2005 and
December 31, 2004, net sales of Teal, as a percentage of consolidated net sales
from continuing operations, were 21%, 26% and 25%, respectively.
MTE - MTE designs and manufactures power quality electromagnetic products used
to protect equipment from power surges, bring harmonics into compliance and
improve the efficiency of variable
Page 3
speed motor drives. MTE's product lines include: three-phase AC reactors, DC
link chokes and a series of harmonic, RFI/EMI and motor protection filters.
These products are typically used in industrial plants and commercial buildings
where non-linear loads and attendant harmonics produced by these loads are
present. MTE's net sales for the two months ended December 31, 2006 were
$2,856,000, or 1%, of consolidated net sales from continuing operations.
SL-MTI - SL-MTI designs and manufactures high power density precision motors.
New motor and motion controls are used in numerous applications, including
military and commercial aerospace, medical and industrial products. For the
years ended December 31, 2006, December 31, 2005 and December 31, 2004, net
sales of SL-MTI, as a percentage of consolidated net sales from continuing
operations, were 15%, 22% and 21%, respectively.
RFL - RFL designs and manufactures communication and power protection
products/systems that are used to protect electric utility transmission lines
and apparatus by isolating faulty transmission lines from a transmission grid.
These products are sophisticated communication systems that allow electric
utilities to manage their high-voltage power lines more efficiently. RFL
provides customer service and maintenance for all of its products. For the years
ended December 31, 2006, December 31, 2005 and December 31, 2004, net sales of
RFL, as a percentage of consolidated net sales from continuing operations, were
13%, 18% and 19%, respectively.
DISCONTINUED OPERATIONS
SURFTECH - SurfTech produced industrial coatings and platings for equipment in
the corrugated paper and telecommunications industries. On November 24, 2003,
the Company sold substantially all of the assets of SurfTech. As a result,
SurfTech is reported as a discontinued operation for all periods presented.
EME - EME manufactured electromechanical actuation systems, power drive units
and complex wire harness systems for use in the aerospace and automobile
industries. EME was based in Ingolstadt, Germany with low cost manufacturing
operations in Paks, Hungary. On January 6, 2003, the Company sold all of the
issued and outstanding shares of capital stock of EME. As a result, EME is
reported as a discontinued operation for all periods presented.
SL WABER - SL Waber manufactured surge suppressors that protect computers,
audiovisual and other electronic equipment from sudden surges in power. These
products were sold to OEM customers, distributors and dealers of electronics and
electrical supplies and retailers and wholesalers of office, computer and
consumer products. In September 2001, the Company sold substantially all of the
assets of SL Waber, including its name and goodwill, as a going concern. As a
result, SL Waber is reported as a discontinued operation for all periods
presented.
Page 4
RAW MATERIALS
Raw material components are supplied by various domestic and international
vendors. In general, availability of materials is not a problem for the Company.
For additional information regarding raw materials components, (See Item "1A.
Risk Factors" included in Part I of this Annual Report on Form 10-K). In 2006,
the Company continued to experience sharp increases in the cost of certain
strategic raw materials, particularly copper. During 2006, there were no major
disruptions in the supply of raw materials.
Raw materials are purchased directly from the manufacturer whenever possible to
avoid distributor mark-ups. Average lead times generally run from immediate
availability to 26 weeks. Lead times can be substantially higher for strategic
components subject to industry shortages. In most cases, viable multiple sources
are maintained for flexibility and competitive leverage.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND CONCESSIONS
The Company has proprietary information that it has developed and uses in its
business. This proprietary information is protected by contractual agreements as
well as through patents and patents pending, to the extent appropriate. The
patents are protected by federal law. To protect its proprietary information,
the Company also enters into non-disclosure agreements with its employees,
vendors and customers. Where appropriate, the Company will take and has taken
all steps necessary to defend its intellectual property.
SEASONALITY
Generally, seasonality is not a significant factor in any of the Company's
segments.
SIGNIFICANT CUSTOMERS
The Company has no customer that accounts for 10% or more of its consolidated
net sales from continuing operations. Each of SLPE, the High Power Group, SL-MTI
and RFL has certain major customers, the loss of any of which could have a
material adverse effect on such segment or group.
BACKLOG
Backlog at March 4, 2007, March 5, 2006 and March 6, 2005 was $58,801,000,
$39,132,000 and $41,607,000, respectively. The backlog at March 4, 2007
increased by $19,669,000, or 50%, compared to March 5, 2006. Acquisitions
accounted for $13,847,000, or 70%, of the increased backlog, while the Company's
other operating entities account for $5,822,000, or 30%, of the increase. All of
the Company's other operating entities had an increase in backlog at March 4,
2007, compared to March 5, 2006.
COMPETITIVE CONDITIONS
The Company's businesses are in active competition with domestic and foreign
companies with national and international name recognition that offer similar
products or services and with companies producing alternative products
appropriate for the same uses. In addition, SLPE has experienced significant
offshore competition for certain products in certain markets. Each of the
Company's businesses seeks to gain an advantage from its competition by
concentrating on customized products based on customer needs. The Company's
businesses also seek a competitive advantage based on quality, service,
innovation, delivery and price.
Page 5
ENVIRONMENTAL
The Company (together with the industries in which it operates or has operated)
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 and the industry are also subject
to other federal, state and local environmental laws and regulations, including
those that require the Company to remediate or mitigate the effects of the
disposal or release of certain chemical substances at various sites, including
some where it has ceased operations. It is impossible to predict precisely what
effect these laws and regulations will have on the Company in the future.
It is the Company's policy to comply with all environmental, health and safety
regulations, as well as industry standards for maintenance. The Company's
domestic competitors are subject to the same environmental, health and safety
laws and regulations, and the Company believes that the compliance issues and
potential expenditures of its operating subsidiaries are comparable to those
faced by its major domestic competitors.
There are two sites on which the Company may incur material environmental costs
in the future as a result of past activities of its former subsidiary, SurfTech.
These sites include the Company's properties located in Pennsauken, New Jersey
(the "Pennsauken Site"), and in Camden, New Jersey (the "Camden Site"). The
Company's environmental contingencies with respect to the Pennsauken Site are
fully discussed in "Item 3. Legal Proceedings" included in Part I of this Annual
Report on Form 10-K.
The Company has reported a ground water contamination plume at the Camden Site.
In February 2006, the Company submitted to the NJDEP a plan to certify the
potential areas of concern for the Camden
Page 6
Site, which is currently under review. Based on the information so far, the
Company believes that the cost to remediate the Camden Site should not exceed
approximately $560,000, which has been fully reserved. These costs have been
recorded as a component of discontinued operations in previous years.
The Company has reported soil and ground water contamination on SL-MTI's
property in Montevideo, Minnesota. SL-MTI has conducted analysis of the
contamination and performed remediation at the site. Further remediation efforts
will be required and the Company is engaged in discussions with the Minnesota
Pollution Control Agency to develop a remediation plan. Based on the current
information, the Company believes it will incur remediation costs at this site
of approximately $188,000, which has been accrued at December 31, 2006. The
accrual for this site was $220,000 at December 31, 2005.
EMPLOYEES
As of December 31, 2006, the Company had approximately 1,900 employees. Of these
employees, 153 were subject to collective bargaining agreements.
FOREIGN OPERATIONS
In addition to manufacturing operations in California, Minnesota, New Jersey and
Wisconsin, the Company manufactures substantial quantities of products in
premises leased in Mexicali, Mexico, Matamoros, Mexico and Tecate, Mexico. The
Company has also outsourced the manufacture of some of its products with a
contract manufacturer located in Juarez, Mexico. With the acquisition of Ault,
the Company obtained significant manufacturing capabilities at facilities
located in Xianghe, China. These external and foreign sources of supply present
risks of interruption for reasons beyond the Company's control, including
political or economic instability and other uncertainties.
Generally, the Company's sales are priced in United States dollars and its costs
and expenses are priced in United States dollars, Mexican pesos and Chinese
yuan. Accordingly, the competitiveness of the Company's products relative to
locally produced products may be affected by the performance of the United
States dollar compared with that of its foreign customers' and competitors'
currencies. Foreign net sales comprised 17%, 13% and 13% of net sales from
continuing operations for the years ended December 31, 2006, December 31, 2005
and December 31, 2004, respectively.
Additionally, the Company is exposed to foreign currency exchange rate
fluctuations, which might result from adverse fluctuations in the value of the
Mexican peso and Chinese yuan. At December 31, 2006, the Company had net assets
of $485,000 subject to fluctuations in the value of the Mexican peso and Chinese
yuan. At December 31, 2005, the Company had net liabilities of $639,000 subject
to fluctuations in the value of the Mexican peso. Fluctuations in the value of
the foreign currencies were not significant in 2006. There can be no assurance
that the value of the Mexican peso and Chinese yuan will continue to remain
stable relative to the United States dollar.
SLPE manufactures most of its products in Mexico and China and incurs its labor
costs and supplies in Mexican pesos and Chinese yuan. Teal has transferred a
significant amount of its manufacturing to a wholly-owned subsidiary located in
Tecate, Mexico. SL-MTI manufactures a significant portion of its products in
Mexico and incurs related labor costs and supplies in Mexican pesos. MTE
utilizes a contract manufacturer located in Juarez, Mexico. SLPE, the High Power
Group and SL-MTI price and invoice substantially all of their sales in United
States dollars. The Chinese and Mexican subsidiaries of
Page 7
SLPE maintains its books and records in Mexican pesos and Chinese yuan,
respectively. The Mexican subsidiaries of SL-MTI and Teal maintain their books
and records in Mexican pesos. For additional information related to financial
information about foreign operations, see Notes 15 and 16 in the Notes to
Consolidated Financial Statements included in Part IV of this Annual Report on
Form 10-K.
ADDITIONAL INFORMATION
Additional information regarding the development of the Company's businesses
during 2006 and 2005 is contained in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Part II
and Notes 1 and 2 of the Notes to the Consolidated Financial Statements included
in Part IV of this Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS
THE COMPANY MAY BE ADVERSELY IMPACTED BY FLUCTUATIONS IN CASH FLOWS, LIQUIDITY
AND DEBT LEVELS.
Working capital requirements and cash flows historically have been, and are
expected to continue to be, subject to quarterly and yearly fluctuations,
depending on such factors as levels of sales, timing and size of capital
expenditures, timing of deliveries and collection of receivables, inventory
levels, customer payment terms, customer financing obligations and supplier
terms and conditions. The inability to manage adverse cash flow fluctuations
resulting from such factors could have a material adverse effect on the
Company's business, results of operations and financial condition. In order to
finance the working capital requirements of the Company's business, the Company
entered into the Revolving Credit Facility, and subsequent to December 31, 2005
borrowed funds thereunder. At December 31, 2006, the Company had outstanding
borrowings under the Revolving Credit Facility of $19,800,000. In addition, at
December 31, 2006 the Company maintained a cash balance of $757,000. At December
31, 2005, there were no outstanding borrowed funds under the Revolving Credit
Facility, and total availability thereunder was $30,000,000, less $634,000
related to an outstanding letter of credit.
THE COMPANY'S OPERATING RESULTS MAY FLUCTUATE AND THERE MAY BE VOLATILITY IN
GENERAL INDUSTRY, ECONOMIC AND MARKET CONDITIONS.
The results of operations for any quarter or year are not necessarily indicative
of results to be expected in future periods. Future operating results may be
affected by various trends and factors that must be managed in order to achieve
favorable operating results. The inability to accurately forecast and manage
these trends and factors could have a material adverse effect on the Company's
business, results of operations and financial condition.
General economic conditions and specifically market conditions in the medical,
telecommunications, semiconductor and electric power utility equipment
industries in the United States and globally, affect the Company's business. In
addition, reduced capital spending and/or negative economic conditions in the
United States, Europe, Asia, Latin America and/or other areas of the world could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Page 8
Gross margins may be adversely affected by increased price competition, excess
capacity, higher material or labor costs, warranty costs, obsolescence charges,
loss of cost savings on future inventory purchases as a result of high inventory
levels, introductions of new products, increased levels of customer services,
changes in distribution channels and changes in product and geographic mix.
Lower than expected gross margins could have a material adverse effect on the
Company's business, results of operations and financial condition.
THE COMPANY'S OPERATING RESULTS AND STOCK PRICE MAY BE ADVERSELY AFFECTED BY
FLUCTUATIONS IN CUSTOMERS' BUSINESSES.
Business is dependent upon product sales to telecommunications, semiconductor,
medical imaging, commercial and military aerospace and other businesses, which
in turn are dependent for their business upon orders from their customers. Any
downturn in the business of any of these parties affects the Company. Moreover,
sales often reflect orders shipped in the same quarter in which they are
received, which makes sales vulnerable to short-term fluctuations in customer
demand and difficult to predict. In general, customer orders may be cancelled,
modified or rescheduled after receipt. Consequently, the timing of these orders
and any subsequent cancellation, modification or rescheduling of these orders
has affected, and will in the future affect, results of operations from quarter
to quarter. Also, as some of the Company's customers typically order in large
quantities, any subsequent cancellation, modification or rescheduling of an
individual large order may affect results of operations.
FAILURE TO REMAIN COMPETITIVE COULD ADVERSELY IMPACT THE COMPANY'S OPERATING
RESULTS.
The markets in which the Company sells its products are highly competitive and
characterized by rapidly changing and converging technologies. The Company faces
intense competition from established competitors and the threat of future
competition from new and emerging companies in all aspects of business. The
Company's future success will depend on its ability to enhance current products
and to develop new products that keep pace with technological developments and
respond to changes in customer requirements. Among its current competitors are
its customers, who are vertically integrated and either manufacture and/or are
capable of manufacturing some or all of the Company's products sold to them. In
addition to current competitors, new competitors providing niche, and
potentially broad, product solutions will likely increase in the future. To
remain competitive in both the current and future business climates, the Company
must maintain a substantial commitment to focused research and development,
improve the efficiency of its manufacturing operations and streamline its
marketing and sales efforts and attendant customer service and support. Among
other things, the Company may not be able to anticipate shifts in its markets or
technologies, may not have sufficient resources to continue to make the
investments necessary to remain competitive or may not make the technological
advances necessary to remain competitive. In addition, notwithstanding its
efforts, technological changes, manufacturing efficiencies or development
efforts by competitors may render the Company's products or technologies
obsolete or uncompetitive.
CONSOLIDATION IN THE INDUSTRY COULD INCREASE COMPETITIVE PRESSURES ON THE
COMPANY.
The industries in which the Company operates are consolidating and will continue
to consolidate in the future as companies attempt to strengthen or maintain
their market positions. Such consolidations may result in stronger competitors
that are better able to compete as sole-source vendors for customers. The
Page 9
Company's relatively small size may increase competitive pressure for customers
seeking single vendor solutions. Such increased competition would increase the
variability of the Company's operating results and could otherwise have a
material adverse effect on the Company's business, results of operations and
financial condition.
THE COMPANY IS DEPENDENT UPON THIRD PARTIES FOR PARTS AND COMPONENTS.
The ability to meet customer demand depends, in part, on the ability of the
Company to obtain timely and adequate delivery of parts and components from
suppliers and internal manufacturing capacity. The Company has experienced
significant shortages in the past, and although it works closely with its
suppliers to avoid shortages, there can be no assurance that it will not
encounter further shortages in the future. A further reduction or interruption
in component supplies or a significant increase in the price of one or more
components could have a material adverse effect on the Company's business,
results of operations and financial condition.
THE COMPANY MAY BE SUBJECT TO SIGNIFICANT COSTS IN COMPLYING WITH ENVIRONMENTAL
LAWS.
The Company's facilities are subject to a broad array of environmental laws and
regulations. The costs of complying with complex environmental laws and
regulations may be significant in the future. Present accruals for such costs
and liabilities may not be adequate in the future, as the estimates on which the
accruals are based depend on a number of factors, including the nature of the
problem, the complexity of the site, the nature of the remedy, the outcome of
discussions with regulatory agencies and the number and financial viability of
other PRPs at multiparty sites.
Further, the Company is the subject of various lawsuits and actions relating to
environmental issues, including being named by the EPA as a PRP in a Superfund
Site in Pennsauken, New Jersey (as discussed above). There can be no assurance
that the Company will be able to successfully defend itself against, or settle
at a reasonable cost, these or any other actions to which it is a party. For
additional information related to environmental risks, see "Item 3. Legal
Proceedings," included in Part I and Note 12 in the Notes to Consolidated
Financial Statements included in Part IV of this Annual Report on Form 10-K.
THE COMPANY MAY HAVE TO PAY SIGNIFICANT COSTS FOR REGULATORY COMPLIANCE AND
LITIGATION.
Rapid or unforeseen escalation of the cost of regulatory compliance and/or
litigation, including but not limited to, environmental compliance,
product-related liability, assertions related to intellectual property rights
and licenses, adoption of new accounting policies, or changes in current
accounting policies and practices and the application of such policies and
practices could have a material adverse effect on the Company's business.
Additionally, the Company is subject to certain legal actions involving
complaints by terminated employees and disputes with customers and suppliers.
There can be no assurance of the outcome in any litigation. An adverse
determination in any one or more significant legal actions could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Item 3. Legal Proceedings," included in Part I and Note 12 in
the Notes to the Consolidated Financial Statements included in Part IV of this
Annual Report on Form 10-K.
Page 10
THE COMPANY IS DEPENDENT UPON KEY PERSONNEL FOR THE MANAGEMENT OF ITS
OPERATIONS.
The Company's success depends in part upon the continued services of many of its
highly skilled personnel involved in management, engineering and sales, and upon
its ability to attract and retain additional highly qualified officers and
employees. The loss of service of any of these key personnel could have a
material adverse effect on business. In addition, future success will depend on
the ability of officers and key employees to manage operations successfully.
THE COMPANY'S OPERATING RESULTS AND COMMON STOCK ARE SUBJECT TO PRICE
FLUCTUATIONS.
Operating results for future periods are never perfectly predictable even in the
most certain of economic times, and the Company expects to continue to
experience fluctuations in its quarterly results. These fluctuations, which in
the future may be significant, could cause substantial variability in the market
price of the Company's stock. The market price for the Company's common stock
has been, and is likely to continue to be, highly volatile. The market for the
Company's common stock is subject to fluctuations as a result of a variety of
factors, including factors beyond its control. These include:
- additions or departures of key personnel;
- changes in market valuations of similar companies;
- announcements of new products or services by competitors or new
competing technologies;
- conditions or trends in medical equipment, medical imaging, military
and commercial aerospace and electric utility industries;
- general market and economic conditions; and
- other events or factors that are unforeseen.
OTHER FACTORS MAY AFFECT FUTURE RESULTS.
The risks and uncertainties described herein are not the only ones facing the
Company. Additional risks and uncertainties not presently known, or that may now
be deemed immaterial, may also impair business operations.
(D) FORWARD-LOOKING INFORMATION
From time to time, information provided by the Company, including written or
oral statements made by representatives, may contain forward-looking information
as defined in the Private Securities Litigation Reform Act of 1995. All
statements, other than statements of historical facts, contain forward-looking
information, particularly statements which address activities, events or
developments that the Company expects or anticipates will or may occur in the
future, such as expansion and growth of the Company's business, future capital
expenditures and the Company's prospects and strategy. In reviewing such
information, it should be kept in mind that actual results may differ materially
from those projected or suggested in such forward-looking information. This
forward-looking information is based on various factors and was derived
utilizing numerous assumptions. Many of these factors previously have been
identified in filings or statements made by or on behalf of the Company.
Important assumptions and other important factors that could cause actual
results to differ materially from those set forth in the forward-looking
information include changes in the general economy, changes in capital
investment and/or consumer spending, competitive factors and other factors
affecting the Company's business in or beyond the Company's control. These
factors include a change in the rate
Page 11
of inflation, a change in state or federal legislation or regulations, an
adverse determination with respect to a claim in litigation or other claims
(including environmental matters), the ability to recruit and develop employees,
the ability to successfully implement new technology and the stability of
product costs. These factors also include the timing and degree of any business
recovery in certain of the Company's markets that are currently experiencing a
cyclical economic downturn.
Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the forward-looking
information. The Company does not undertake to update forward-looking
information contained herein or elsewhere to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
information.
Future factors include the effectiveness of cost reduction actions undertaken by
the Company; the timing and degree of any business recovery in certain of the
Company's markets that are currently experiencing economic uncertainty;
increasing prices, products and services offered by U.S. and non-U.S.
competitors, including new entrants; rapid technological developments and
changes and the Company's ability to continue to introduce and develop
competitive new products and services on a timely, cost-effective basis;
availability of manufacturing capacity, components and materials; credit
concerns and the potential for deterioration of the credit quality of customers;
customer demand for the Company's products and services; U.S. and non-U.S.
governmental and public policy changes that may affect the level of new
investments and purchases made by customers; changes in environmental and other
U.S. and non-U.S. governmental regulations; protection and validity of patent
and other intellectual property rights; compliance with the covenants and
restrictions of bank credit facilities; and outcome of pending and future
litigation and governmental proceedings. These are representative of the future
factors that could affect the outcome of the forward-looking statements. In
addition, such statements could be affected by general industry and market
conditions and growth rates, general U.S. and non-U.S. economic conditions,
including economic instability in the event of a future terrorist attack or
sharp increases in the cost of energy and interest rate and currency exchange
rate fluctuations and other future factors.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Set forth below are the properties where the Company conducted business as of
December 31, 2006.
Approx.
Square Owned or Leased And
Location General Character Footage Expiration Date
-------- ---------------------------------------------------- ------- -------------------
Ventura, CA Administration, design and sales of power supply 31,200 Leased - 4/30/2011
products (SLPE)
Page 12
Mexicali, Mexico Manufacture and distribution of power supply 62,500 Leased - 4/30/2007
products (SLPE) 14,500 Leased - 4/30/2007
South Molton, United Kingdom Sales and distribution of power supply products 2,500 Leased - 6/30/2010
(SLPE)
Brooklyn Park, MN Design and sales of power supply products (SLPE) 13,000 Leased - 7/31/2007
Plymouth, MN Distribution of power supply products (SLPE) 5,000 Leased - 7/31/2007
Norwood, MA Design of power supply products (SLPE) 10,000 Leased - 3/31/2008
Xianghe, China Distribution of power supply products and employee 74,500 Leased - 8/12/2008
dormitory (SLPE)
Xianghe, China Manufacture and distribution of power supply 46,000 Owned - Building
products (SLPE) Land Rights - 2050
Shanghai, China Design and sales of power supply products (SLPE) 9,000 Leased - 7/31/2007
San Diego, CA Administration, sales, design and manufacture of 35,500 Leased - 12/31/2007
power distribution and conditioning units (High
Power Group)
Tecate, Mexico Manufacture of power distribution and conditioning 20,800 Leased - 4/30/2009
units (High Power Group)
Menomonee Falls, WI Design, sales, manufacture and distribution of power 25,000 Leased - 4/30/2008
quality electromagnetic products (High Power Group) 25,000 Leased - 7/31/2010
Montevideo, MN Administration, design, sales and manufacture of 30,000 Owned
precision motors and motion control systems (SL-MTI)
Matamoros, Mexico Manufacture of precision motors (SL-MTI) 28,500 Leased - 12/31/2007
Page 13
Boonton Twp., NJ Administration, design, sales and manufacture of 78,000 Owned
electric utility equipment protection systems (RFL)
Camden, NJ Industrial surface finishing (Other) (1) 15,800 Owned
Pennsauken, NJ Document warehouse (Other) (2) 6,000 Owned
Mt. Laurel, NJ Corporate office (Other) 4,200 Leased - 11/30/08
(1) Ownership retained by the Company after the sale of SurfTech on November
24, 2003.
(2) Formerly used for industrial surface finishing operations.
All manufacturing facilities are adequate for current production requirements.
The Company believes that its facilities are sufficient for future operations,
maintained in good operating condition and adequately insured. Of the owned
properties, none are subject to a major encumbrance material to the operations
of the Company.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is subject to loss
contingencies pursuant to foreign and federal, state and local governmental laws
and regulations and is also party to certain legal actions, frequently involving
complaints by terminated employees and disputes with customers and suppliers. In
the opinion of management, such claims are not expected to have a material
adverse effect on the financial condition or results of operations of the
Company.
In a November 1991 Administrative Directive, the NJDEP alleged that SurfTech,
formerly SL Modern Hard Chrome, Inc., and 20 other respondents are responsible
for a contamination plume which has affected the Puchack Wellfield in
Pennsauken, New Jersey (which supplies Camden, New Jersey). SurfTech is alleged
to have contributed to the groundwater contamination through its operations
conducted at the Pennsauken Site. Three other actions have been initiated from
the underlying directive. The first is Supplemental Directive No. 1 ("Directive
No. 1") issued by the NJDEP to the same parties in May 1992, which seeks a cost
reimbursement of $8,655,000 for the construction of a treatment system at the
Puchack site and an annual payment of $611,000 (a total of $9,266,000) for
ongoing operation and maintenance of the treatment system. The second matter is
a lawsuit initiated by one of the parties named in Directive No. 1 seeking to
have the remainder of those parties, and more than 600 others, pay some or all
of that party's cost of compliance with Directive No. 1 and any other costs
associated with its site. This second matter is a claim for indemnification of
potential damages. Accordingly, it is unspecified in amount. The third matter is
a Spill Act Directive by the NJDEP to SurfTech alone, regarding similar matters
at its site and consists of a claim for contribution towards potential damages
and is unspecified in amount. Both the second and third matters relate to the
payment of a portion of the damages set forth in the discussion of Directive No.
1. The state has not initiated enforcement action regarding any of its three
Directives. There also exists an outstanding enforcement issue regarding the
Company's compliance with state environmental laws at the same site.
Page 14
With regard to the $9,266,000 amount discussed in the preceding paragraph, in
the Company's view, it is not appropriate to consider that amount as "potential
cost reimbursements." The Pennsauken Site has undergone remedial activities
under NJDEP's supervision since 1983. The Company believes that it has a
significant defense against all or any part of the $9,266,000 claim since
technical data generated as part of previous remedial activities indicate that
there is no offsite migration of contaminants from the Pennsauken Site.
Moreover, the Company believes the recent action by the EPA, as discussed below,
should supersede the directives of the NJDEP and the other legal actions cited
above. Based on this and other technical factors, the Company has been advised
by its outside technical consultant, with the concurrence of its outside
counsel, that it has a significant defense to Directive No. 1 and any material
exposure is unlikely.
In late August 2006, the EPA notified the Company that it was a PRP, jointly and
severally liable, for the investigation and remediation of the Puchack Wellfield
Superfund Site under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA" or the "federal Superfund Law").
Thereafter, in September 2006, the EPA issued a Record of Decision for the
national priority listed Puchack Wellfield Superfund Site and selected a remedy
to address the first phase of groundwater contamination that the EPA
contemplates being conducted in two phases (known as operable units). The
estimated cost of the EPA selected remedy for the first groundwater operable
unit, to be conducted over a five to ten year timeframe, is approximately $17.6
million. Prior to the issuance of the EPA's Record of Decision, the Company had
retained an experienced environmental consulting firm to prepare technical
comments on the EPA's proposed remediation of the Puchack Wellfield Superfund
Site. In those comments, the Company's consultant, among other things,
identified flaws in the EPA's conclusions and the factual predicates for certain
of the EPA's decisions and for the proposed selected remedy.
Following the issuance of its Record of Decision, in early November 2006, the
EPA sent another letter to the Company encouraging the Company to either perform
or finance the remedial actions for operable unit 1 identified in the EPA's
Record of Decision. The Company has advised the EPA that it is willing to
investigate the existence of other PRPs and to undertake the activities
necessary to design a final remediation for the Superfund Site.
Notwithstanding the assertions of the EPA, based on discussions with its
attorneys and consultants, the Company believes the EPA analytical effort is far
from complete. Additionally, existing technical data in the EPA administrative
record does not demonstrate that offsite migration of hazardous substances from
the Pennsauken Site contributed to the contamination of the Puchack Wellfield.
The Company has been further advised that even if such a connection was made,
the evidence indicates that the Company could have contributed only a portion of
the total contamination delineated at the Superfund Site. There are other
technical factors and defenses that indicate that the remediation proposed by
the EPA is technically flawed. Based on the foregoing, the Company believes that
it has significant defenses against all or part of the EPA claim and that other
PRPs should be identified to support the ultimate cost of remediation.
Nevertheless, the Company's attorneys have advised it that some liability is
likely in this matter. Based on the information so far, the
Page 15
Company has estimated remediation liability for this matter of $4 million
($2,480,000, net of tax), which have been reserved and recorded as part of
discontinued operations in the fourth quarter of 2006. There can be no assurance
as to what will be the ultimate resolution or exposure to the Company for this
matter.
The Company filed claims with several of its insurers seeking reimbursement for
past and future environmental costs. In settlement of its claims, the Company
received aggregate cash payments of $2,800,000 prior to fiscal 2001, and
commitments from three insurers to pay for a portion of environmental costs
associated with the Pennsauken Site of 15% of costs up to $300,000, 15% of costs
up to $150,000 and 20% of costs up to $400,000, respectively. The Company has
received from these three insurers a total of $821,000, as payment of their
contingent commitments through 2006, which has been recorded as income, net of
tax, in discontinued operations.
Loss contingencies include potential obligations to investigate and eliminate or
mitigate the effects on the environment of the disposal or release of certain
chemical substances at various sites, such as Superfund sites and other
facilities, whether or not they are currently in operation. The Company is
currently participating in environmental assessments and cleanups at six sites
under these laws and may in the future be involved in additional environmental
assessments and cleanups. Based upon investigations completed by the Company and
its independent engineering consulting firms to date, management has provided an
estimated accrual for all known costs believed to be probable in the amount of
$5,188,000. Of this amount, the Company expects to spend approximately
$1,455,000 related to environmental matters in 2007. However, it is in the
nature of environmental contingencies that other circumstances might arise, the
costs of which are indeterminable at this time due to such factors as changing
government regulations and stricter standards, the unknown magnitude of defense
and cleanup costs, the unknown timing and extent of the remedial actions that
may be required, the determination of the Company's liability in proportion to
other responsible parties, and the extent, if any, to which such costs are
recoverable from other parties. Although these contingencies could result in
additional expenses or judgments, or offsets thereto, at present such expenses
or judgments are not expected to have a material effect on the consolidated
financial position or results of operations of the Company beyond the reserves
specified above.
It is management's opinion that the impact of legal actions brought against the
Company and its operations will not have a material adverse effect on its
financial position or results of operations beyond the reserves specified above.
However, the ultimate outcome of these matters, as with litigation generally, is
inherently uncertain, and it is possible that some of these matters may be
resolved adversely to the Company. The adverse resolution of any one or more of
these matters could have a material adverse effect on the business, operating
results, financial condition or cash flows of the Company. Additional
information pertaining to legal proceedings is found in Note 12 in the Notes to
the Consolidated Financial Statements included in Part IV of this Annual Report
on Form 10-K.
Page 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 2006, no matter was submitted to a vote of
the Company's security holders.
PART II
ITEM 5. MARKET FOR REGISTANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is currently registered on both the American Stock
Exchange (the "AMEX") and the Philadelphia Stock Exchange under the symbol
"SLI." The Company moved from the New York Stock Exchange to the AMEX on April
30, 2003. The following table sets forth the high and low closing sales price
per share of the Company's common stock on the AMEX for the periods indicated:
Year Year
Ended December Ended December
31, 2006 31, 2005
-------------- --------------
HIGH LOW HIGH LOW
----- ----- ----- -----
Stock Prices
1st Quarter 16.50 14.53 14.09 12.45
2nd Quarter 18.00 14.70 18.14 14.03
3rd Quarter 19.40 15.31 18.33 13.93
4th Quarter 18.90 15.05 17.76 13.20
As of March 1, 2007, there were approximately 667 registered shareholders. The
Company suspended dividend payments during 2001 and has no present intention of
making dividend payments in the foreseeable future. The Revolving Credit
Facility restricts the payment of dividends. Additional information pertaining
to the Revolving Credit Facility is found in Note 9 in the Notes to the
Consolidated Financial Statements included in Part IV of this Annual Report on
Form 10-K.
For the "Equity Compensation Plan Information," please refer to the Company's
Proxy Statement for the 2007 Annual Meeting of Shareholders, which is
incorporated herein by reference.
On December 12, 2003, the Company announced that its Board of Directors had
authorized the repurchase of up to 10% of the outstanding shares of the common
stock of the Company. Any repurchases pursuant to the Company's stock repurchase
program would be made in the open market or in negotiated transactions. For the
twelve months ended December 31, 2006, the Company did not repurchase any shares
pursuant to its stock repurchase program; however, it did purchase 76,100 shares
through its deferred compensation plans. For the twelve months ended December
31, 2005, the Company did not repurchase any shares pursuant to its stock
repurchase program; however, it did purchase 25,000 shares through its deferred
compensation plans.
Page 17
ISSUER PURCHASES OF EQUITY SECURITIES
Maximum Number
Total Number of Shares That May
Total of Shares Purchased Yet Be Purchased
Number of Average as Part of Publicly under Publicly
Shares Price Paid Announced Plans Announced Plans or
Period Purchased per Share or Programs Programs
------ --------- ---------- ------------------- ------------------
January 2006 -- -- -- 48,024
February 2006 -- -- -- 48,024
March 2006 6,200 (1) $15.06 -- 48,024
April 2006 8,800 (1) $16.47 -- 48,024
May 2006 12,000 (1) $17.00 -- 48,024
June 2006 3,900 (1) $17.00 -- 48,024
July 2006 1,500 (1) $16.10 -- 48,024
August 2006 3,800 (1) $17.09 -- 48,024
September 2006 7,400 (1) $18.08 -- 48,024
October 2006 5,200 (1) $19.06 -- 48,024
November 2006 24,700 (1) $18.54 -- 48,024
December 2006 2,600 (1) $15.96 -- 48,024
------ ------ ---
Total 76,100 $17.48 --
====== ====== ===
(1) The Company purchased these shares other than through a publicly announced
plan or program.
Page 18
ITEM 6. SELECTED FINANCIAL DATA
Selected consolidated financial data with respect to the years ended December
31, 2006, 2005, 2004, 2003 and 2002 are presented below.
Years Ended December 31,
----------------------------------------------------
2006 (1) 2005 2004 2003 2002
-------- -------- -------- -------- --------
(amounts in thousands except per share data)
Net sales $176,773 $126,873 $118,804 $105,284 $107,912
Income from continuing operations $ 6,860 $ 7,620 $ 6,301 $ 3,742 $ 801
(Loss) income from discontinued operations (2) $ (3,307) $ (473) $ 2,371 $ (2,422) $ (1,271)
Net income (loss) (3) $ 3,553 $ 7,147 $ 8,672 $ 1,320 $ (470)
Diluted net income (loss) per common share $ 0.61 $ 1.25 $ 1.48 $ 0.22 $ (0.08)
Shares used in computing diluted net income
(loss) per common share 5,823 5,738 5,871 5,956 5,867
Cash dividend per common share $ -- $ -- $ -- $ -- $ --
YEAR-END FINANCIAL POSITION
Working capital $ 27,511 $ 25,807 $ 19,496 $ 16,612 $ 10,107
Current ratio (4) 1.94 2.40 2.05 1.98 1.03
Total assets $106,543 $ 70,314 $ 63,084 $ 58,421 $ 90,667
Long-term debt $ 19,800 $ -- $ 1,456 $ 2,015 $ --
Shareholders' equity $ 50,419 $ 46,645 $ 37,687 $ 34,581 $ 32,983
Book value per share $ 8.94 $ 8.33 $ 6.91 $ 5.82 $ 5.59
OTHER
Capital expenditures (5) $ 3,055 $ 1,904 $ 1,642 $ 1,616 $ 1,466
Depreciation and amortization $ 2,605 $ 1,986 $ 2,133 $ 1,851 $ 2,634
(1) On January 26, 2006, the Company completed the acquisition of Ault. On
October 31, 2006, the Company completed the acquisition of MTE. Sales and
operating results for both entities are included in fiscal year 2006 from
the date of acquisition.
(2) On November 24, 2003, the Company sold certain assets of SurfTech. On
January 6, 2003, effective for the year ended December 31, 2002, the
Company sold EME. Accordingly, the operations of SurfTech, EME, and SL
Waber have been accounted for as discontinued operations in all periods
presented.
(3) Fiscal 2006 includes a provision for environmental remediation of
$2,480,000, net of tax. Fiscal 2004 includes a settlement fee of
$2,516,000, net of tax, received by SL Waber and the recovery of certain
legal fees for environmental matters in the amount of $392,000, net of tax.
Fiscal 2003 includes an asset impairment of $275,000 recorded against the
carrying value of the Company's property located in Camden, New Jersey.
Fiscal 2002 includes $1,834,000 of special charges related to
change-of-control and proxy costs, $703,000 of impairment charges related
to the write-off of goodwill, $556,000 and $147,000 of asset impairment
charges at SurfTech.
(4) The current ratio for 2002 includes all debt classified as current, due to
the December 31, 2002 maturity date of the Company's previous revolving
credit facility. The current ratio calculations for all years exclude net
current assets and liabilities held for sale.
(5) Excludes assets acquired in business combinations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company, through its subsidiaries, designs, manufactures and markets power
electronics, motion control, power protection, power quality electromagnetic and
specialized communication equipment that is used in a variety of commercial and
military aerospace, computer, datacom, industrial, medical, telecom,
transportation and utility equipment applications. The Company is comprised of
four domestic
Page 19
business segments, three of which have significant manufacturing operations in
Mexico. With the acquisition of Ault on January 26, 2006, the Company added
manufacturing, engineering and sales capability in the People's Republic of
China. Most of the Company's sales are made to customers who are based in the
United States. However, over the years the Company has increased its presence in
international markets. The Company places an emphasis on high quality,
well-built, dependable products and continues its dedication to product
enhancement and innovations.
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 and expansion of global capabilities.
The Company expects to achieve these goals through organic growth and strategic
acquisitions. The Company also continues to pursue strategic alternatives to
maximize the value of its businesses. Some of these alternatives have included,
and will continue to include, selective acquisitions, divestitures and sales of
certain assets. The Company has provided, and may from time to time in the
future provide, information to interested parties regarding portions of its
businesses for such purposes.
ORGANIZATION OF FINANCIAL INFORMATION
The Company's Management Discussion and Analysis provides material historical
and prospective disclosures intended to enable investors and other users to
assess the Company's financial condition and results of operations. Statements
that are not historical are forward-looking and involve risks and uncertainties,
as discussed under the caption "Forward-Looking Statements" in Item 1 of this
Annual Report on Form 10-K. The consolidated financial statements and notes are
presented in Part IV of this Annual Report on Form 10-K. Included in the
consolidated financial statements are the Consolidated Balance Sheets,
Consolidated Statements of Income, Consolidated Statements of Comprehensive
Income, Consolidated Statements of Shareholders' Equity and Consolidated
Statements of Cash Flows. The notes, which are an integral part of the
consolidated financial statements, provide additional information required to
fully understand the nature of amounts included in the consolidated financial
statements. Additionally, in Note 15, the Company provides a summary of net
sales, income from continuing operations before income taxes, total assets and
depreciation and amortization by industry segment. The Company's Management
Discussion and Analysis provides a more detailed discussion related to the
operations of business segments.
In the sections that follow, statements with respect to 2006 or fiscal 2006
refer to the twelve month period ending December 31, 2006. Statements with
respect to 2005 or fiscal 2005 refer to the twelve month period ending December
31, 2005, unless otherwise stated.
SIGNIFICANT TRANSACTIONS AND FINANCIAL TRENDS
Included in the financial sections of this Annual Report on Form 10-K is a
description of significant transactions or events that have materially affected
earnings, cash flow and business trends. The Company's Management Discussion and
Analysis for fiscal 2006 also includes income and charges related to
discontinued operations. Significant transactions in 2006 that impacted the
Company's financial results and cash flows included two acquisitions. On January
26, 2006, the Company acquired Ault for $17,194,000, net of cash acquired. The
acquisition was financed with available cash and bank debt of approximately
$5,900,000 under the Revolving Credit Facility. Ault's operating results are
included in SLPE from the date of acquisition. On October 31, 2006, the Company
completed the
Page 20
acquisition of MTE for $15,606,000, net of cash acquired. The acquisition was
financed under the Revolving Credit Facility. MTE's operating results are
included in the High Power Group from the date of acquisition. In addition, as a
result of recent communications received from the EPA with respect to the
remediation of a Superfund Site, as discussed above, the Company recorded an
increase in its environmental reserve of $4,000,000 in the fourth quarter. This
reserve is recorded as part of discontinued operations, net of tax, in the
amount of $2,480,000. Significant transactions in 2005 that impacted the
Company's financial results and cash flows included: 1) the repayment of the
Company's previous credit facility in the amount of $2,015,000; 2) the receipt
of proceeds from stock options exercised during the year in the amount of
$1,399,000; 3) the recording of foreign tax credits, which increased income from
continuing operations by approximately $1,035,000, or $0.18 per diluted share;
and 4) the purchase of approximately 4.8% of the outstanding shares of Ault for
$567,000, which was recorded at market value as Investments Available For Sale
at December 31, 2005. The Company completed a tender offer for Ault on January
26, 2006, as mentioned above.
While these items are important in understanding and evaluating financial
results and trends, other transactions or events, which are disclosed in this
Management Discussion and Analysis, 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
In December 2001, the Securities and Exchange Commission (the "SEC") issued
disclosure guidance for "critical accounting policies." The SEC defines
"critical accounting policies" as those 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 in the
Notes to Consolidated Financial Statements included in Part IV of this Annual
Report on Form 10-K. 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 from product sales is recognized at the time the product is shipped,
with provisions established for estimated product returns and returns related to
one business segment's stock scrap program with distributors. Upon shipment, the
Company provides for the estimated cost that may be incurred for product
warranties. Rebates and other sales incentives offered by the Company are
recorded as a reduction of sales at the time of shipment. Revenue recognition is
significant because net sales are a key component of results of operations. In
addition, revenue recognition determines the timing of certain expenses, such as
commissions and royalties. The Company follows generally accepted guidelines in
measuring revenue. Revenue is recorded in accordance with Staff Accounting
Bulletin ("SAB") No. 104 and in certain circumstances in accordance with the
guidance provided by the Emerging Issues Task Force ("EITF") "Revenue
Arrangements with Multiple Deliverables" 00-21. However, certain
Page 21
judgments affect the application of its revenue policy. For a discussion of the
Company's revenue recognition policies, see Note 1 in the Notes to Consolidated
Financial Statements included in Part IV in this Annual Report on Form 10-K.
Revenue results are difficult to predict, and any shortfall in revenue or delay
in recognizing revenue could cause operating results to vary significantly from
quarter to quarter and could result in future operating losses.
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.
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.
ACCOUNTING FOR INCOME TAXES
Under its income tax policy, the Company records estimated future tax effects of
temporary differences between the tax basis of assets and liabilities and
amounts reported in the accompanying consolidated balance sheets, as well as
operating loss and tax credit carryforwards. The Company follows the guidelines
under SFAS No. 109 in determining the recoverability of any tax assets recorded
on the balance sheet and provides any necessary allowances as required. As part
of the process of preparing its consolidated financial statements, the Company
is required to estimate its income taxes in each of the jurisdictions in which
it operates. This process involves estimating the actual current tax exposure,
together with assessing temporary differences resulting from the differing
treatment of certain items for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are
Page 22
included within the consolidated balance sheet. Management must then assess the
likelihood that deferred tax assets will be recovered through future taxable
income. To the extent management believes that recovery is not likely, the
Company must establish a valuation allowance. To the extent the Company
establishes a valuation allowance or increases or decreases this allowance in a
period, it must include expense or income, as the case may be, within the tax
provision in the consolidated statement of income.
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. As of December 31, 2006 and
December 31, 2005, the Company had recorded total valuation allowances of
$3,967,000 and $3,650,000, respectively. Such valuation allowances were
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 research and development tax credits, loss carryforwards
and foreign tax credits. 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.
The net deferred tax assets as of December 31, 2006 and December 31, 2005 were
$8,530,000 and $5,980,000, respectively, net of valuation allowances of
$3,967,000 and $3,650,000, 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, based on estimates and
assumptions to utilize these assets. If these estimates and related assumptions
change in the future, the Company may be required to record additional valuation
allowances against its deferred tax assets resulting in additional income tax
expense in the consolidated statement of income. Each quarter, management
evaluates the ability to realize the deferred tax assets and assesses the need
for additional valuation allowances.
In accordance with SFAS 109 and SFAS No. 141, as of the date of the acquisition
of Ault, the Company recorded, separate from goodwill, deferred taxes related to
Ault's federal and state net operating loss carryforwards. At the date of
acquisition, Ault's net operating loss carryforwards were $8,783,000. The
Company believes that it is more likely than not that these deferred tax assets
will be realized.
The Company has made a provision for federal and state income taxes for the
anticipated repatriation of the profits of its Mexican subsidiaries. The Company
considers the undistributed earnings of its subsidiaries operating in China and
the United Kingdom to be permanently reinvested. As of December 31, 2006,
$425,000 of such undistributed earnings were expected to be permanently
reinvested.
LEGAL CONTINGENCIES
The Company is currently involved in certain legal proceedings. As discussed in
Note 12 in the Notes to the Consolidated Financial Statements included in Part
IV to this Annual Report on Form 10-K, 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, assuming a combination of litigation and settlement strategies.
Management does not believe these proceedings will
Page 23
have a further material adverse effect on the Company's consolidated financial
position. 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 purchase method of accounting for business combinations requires the use of
estimates and judgments to allocate the purchase price paid for acquisitions to
the fair value of the net tangible and identifiable intangible assets. Goodwill
represents the excess of the aggregate purchase price over the fair value of net
assets acquired in business combinations and is separately disclosed in the
Company's consolidated balance sheets. As of December 31, 2006 and December 31,
2005, goodwill totaled $22,548,000 and $10,303,000, representing 21% and 15% of
total assets, respectively.
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. SFAS No. 142 "Goodwill and Other
Intangible Assets" requires that goodwill be tested for impairment at the
reporting unit level (operating segment or one level below an operating segment)
on an annual basis and between annual tests in certain circumstances.
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 rates and other assumptions. Changes in these estimates and assumptions
could materially affect the determination of fair value for each reporting unit.
Effective January 1, 2002, the Company adopted SFAS 142 and performed a
transitional test of its goodwill and intangible assets. No impairment charges
were recorded as a result of the initial impairment test. Impairment losses
recorded in the future could have a material adverse impact on the Company's
financial condition and results of operations.
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. There were no asset impairment changes for fiscal years 2004 through
2006.
ENVIRONMENTAL EXPENDITURES
The Company is subject to United States, Mexican and Chinese environmental laws
and regulations concerning emissions to the air, discharges to surface and
subsurface waters, and generation, handling,
Page 24
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, including some 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. Expenditures include costs of remediation and legal
fees to defend against claims for environmental liability. 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 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 the fourth quarter of fiscal 2006, the Company recorded a $4,000,000
reserve in response to an EPA letter related to remediation of a designated
Superfund Site. Additional information pertaining to environmental matters is
found in Note 12 in the Notes to the Consolidated Financial Statements included
in Part IV of this Annual Report on Form 10-K.
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 generally accepted accounting
principles with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternatives would not produce a materially different result. See the Company's
audited Consolidated Financial Statements and Notes thereto included in Part IV
of this Annual Report on Form 10-K, which contain accounting policies and other
disclosures required by generally accepted accounting principles.
LIQUIDITY AND CAPITAL RESOURCES
December 31, December 31,
2006 2005 $ Variance % Variance
------------ ------------ ---------- ----------
(in thousands)
Cash and cash equivalents $ 757 $ 9,985 $(9,228) (92)%
Bank debt $19,800 $ - $19,800 100%
Working capital (less cash) $26,754 $15,822 $10,932 69%
Shareholders' equity $50,419 $46,645 $3,774 8%
At December 31, 2006, the Company maintained a cash balance of $757,000, and
outstanding bank debt of $19,800,000. During fiscal 2006, the net cash provided
by continuing operating activities was $6,327,000, as compared to net cash
provided by continuing operating activities of $11,208,000 during fiscal 2005.
The primary sources of cash provided by continuing operating activities for 2006
were income from continuing operations of $6,860,000, a increase in accrued
income taxes of $2,895,000 and the add back of depreciation and amortization to
income from continuing operations of $2,605,000.
Page 25
These sources of cash and add backs were partially offset by an increase in
accounts receivable of $5,104,000, a decrease in accounts payable of $1,320,000
and deferred compensation and supplemental retirement payments of $1,397,000.
The increase in accounts receivable was primarily due to sales increases at SLPE
of approximately $2,948,000 related to Ault, as well as slower collections. RFL
recorded increased receivables of $807,000, primarily due to the shipment of two
large orders in the fourth quarter of 2006. Teal reported an increase in
receivables of $461,000 due to higher sales in the fourth quarter of fiscal
2006, compared to 2005. SL-MTI recorded a $372,000 decrease in accounts
receivable, in comparison to 2005 (discussed more fully below). Accounts payable
decreased primarily due to a $522,000 decrease of inventory purchased at SL-MTI.
To a lesser extent, accounts payable also decreased at Teal, in comparison to
the end of fiscal 2005. The decrease in deferred compensation and supplemental
retirement payments was primarily related to payments of approximately $814,000
made to two individuals who have left the Company. The primary sources of cash
provided by continuing operating activities for 2005 were income from continuing
operations of $7,620,000, a decrease in inventories of $1,269,000 and an
increase in accounts payable of $2,026,000. These sources of cash were partially
offset by a decrease in other accrued liabilities of $1,487,000. The decreases
in inventories were primarily attributable to activities at RFL and SLPE, which
recorded decreases of $1,202,000 and $790,000, respectively, offset by an
increase at SL-MTI of $914,000. The inventory decreases at RFL and SLPE were due
to the timing of sales in the fourth quarter of 2006, compared to 2005. SL-MTI's
inventory increase was primarily due to increased volume, postponement of
customer orders and redesign of some products that were rescheduled for the
first quarter of fiscal 2006. The decrease in other accrued liabilities is
primarily related to payments made by the Company to settle certain litigation,
fees and claims, which were accrued at December 31, 2005.
During 2006, net cash used in investing activities was $34,803,000, primarily
related to the acquisitions of Ault and MTE in the amount of $31,766,000, net of
cash acquired. Current year acquisition costs for Ault were $16,160,000 and for
MTE were $15,606,000 (additional information pertaining acquisitions is found in
Note 14 in the Notes to the Consolidated Financial Statements included in Part
IV of this Annual Report on Form 10-K). Purchases of machinery, building
improvements and manufacturing equipment amounted to $3,055,000. During 2005,
net cash used in investing activities was $2,936,000, primarily related to the
purchases of machinery, building improvements and manufacturing equipment in the
amount of $1,904,000 and the purchases of Ault common stock in the amount of
$567,000, which had been classified as investments available for sale and
recorded at current market value at December 31, 2004.
During 2006, net cash provided by financing activities was $20,045,000,
primarily due to borrowings of $19,800,000 to fund the acquisitions of Ault and
MTE, partially offset by the proceeds from the exercise of stock options of
$930,000. During 2005, net cash used in financing activities was $529,000,
primarily due to the repayment of the Company's previous credit facility in the
amount of $2,015,000, partially offset by the proceeds from the exercise of
stock options of $1,399,000
During 2005 and until August 2, 2005, the Company was a party to a three-year
senior secured credit facility with LaSalle Business Credit LLC, which was
secured by all of the Company's assets. On August 2, 2005, the Company repaid
the outstanding balances under such senior credit facility in the
Page 26
amount of $1,641,000. The Company also paid $212,000 in early termination and
legal fees. On August 3, 2005, the Company entered into the Revolving Credit
Facility (see Note 9 in the Notes to the Consolidated Financial Statements
included in Part IV to this Annual Report on Form 10-K).
The Company's current ratio was 1.94 to 1 at December 31, 2006 and 2.40 to 1 at
December 31, 2005. This ratio decreased mainly due to the increased accounts
payable, warranty accruals and other current accruals primarily related to the
Ault and MTE acquisitions. Also, the Company increased its current portion of
its accrual for environmental remediation by approximately $1,162,000 in 2006,
compared to 2005.
As a percentage of total capitalization, consisting of debt and shareholders'
equity, total borrowings by the Company were 28% at December 31, 2006 and 0% at
December 31, 2005. At December 31, 2006, total borrowings increased by
$19,800,000, compared to zero borrowings at December 31, 2005.
Capital expenditures of $3,055,000 were made in 2006, primarily for machinery,
building improvements and manufacturing equipment. Also, SLPE spent
approximately $1,200,000 on facility costs related to its move to its new
corporate office. The capital expenditures of $1,904,000 made in 2005 primarily
related to machinery and equipment purchases.
The Company has been able to generate adequate amounts of cash to meet its
operating needs and expects to do so in the future.
With the exception of the segment reported as "Other" (which consists primarily
of corporate office expenses, financing activities, public reporting costs and
accruals not specifically allocated to the reportable business segments) all of
the Company's operating segments recorded income from operations in 2006 and
2005.
CONTRACTUAL OBLIGATIONS
The following is a summary of the Company's contractual obligations at December
31, 2006 for the periods indicated:
Less Than 1 to 3 4 to 5 After
1 Year Years Years 5 Years Total
--------- ------- ------ ------- -------
(in thousands)
Operating Leases $1,907 $ 1,458 $187 $-- $ 3,552
Debt -- 19,800 -- -- 19,800
Capital Leases 12 -- -- -- 12
Other Obligations 55 186 145 89 475
------ ------- ---- --- -------
$1,974 $21,444 $332 $89 $23,839
====== ======= ==== === =======
Other obligations include the Company's withdrawal liability to a
union-administered defined benefit multi-employer pension plan to which SurfTech
had made contributions (see Note 2 in the Notes to the Consolidated Financial
Statements included in Part IV of this Annual Report on Form 10-K).
Page 27
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, except for operating lease commitments
disclosed in the table above, 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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2006 COMPARED WITH YEAR ENDED DECEMBER 31, 2005
Years Ended December 31,
---------------------------------------------
2006 2005 $ Variance % Variance
-------- -------- ---------- ----------
(in thousands)
NET SALES
Power Electronics Group:
SLPE $ 87,949 $ 43,233 $44,716 103%
High Power Group 39,993 32,777 7,216 22%
-------- -------- ------- ---
Total 127,942 76,010 51,932 68%
-------- -------- ------- ---
SL-MTI 25,704 28,085 (2,381) (8%)
RFL 23,127 22,778 349 2%
-------- -------- ------- ---
Total $176,773 $126,873 $49,900 39%
======== ======== ======= ===
Years Ended December 31,
---------------------------------------------
2006 2005 $ Variance % Variance
-------- -------- ---------- ----------
(in thousands)
INCOME FROM OPERATIONS
Power Electronics Group:
SLPE $ 6,316 $ 4,543 $ 1,773 39%
High Power Group 5,836 4,911 925 19%
------- ------- ------- ---
Total 12,152 9,454 2,698 29%
------- ------- ------- ---
SL-MTI 1,555 3,371 (1,816) (54%)
RFL 2,217 2,284 (67) (3%)
Other (4,871) (4,911) 40 1%
------- ------- ------- ---
Total $11,053 $10,198 $ 855 8%
======= ======= ======= ===
Consolidated net sales for 2006, compared to 2005, increased by $49,900,000, or
39%. The Power Electronics Group recorded a sales increase of $51,932,000, or
68%. This increase was primarily due to the acquisition of Ault, which
contributed $48,347,000 to sales in 2006. In addition, an increase of $2,856,000
was related to the recent acquisition of MTE, which is reported in the results
of the High Power Group. Without the acquisitions completed during the year,
sales within this Group would have increased by $729,000 in 2006. SL-MTI
recorded a sales decrease of $2,381,000, compared to 2005. Net sales at RFL
increased by $349,000 in 2006, compared to 2005. SL-MTI and RFL both recorded
their highest quarterly levels of sales for the year during the fourth quarter.
Page 28
The Company's income from operations increased to $11,053,000, or 8%, in 2006,
compared to $10,198,000 in 2005. All of the Company's operating business
segments recorded income from operations in 2006 and 2005.
Income from continuing operations in 2006 was $6,860,000, or $1.18 per diluted
share, compared to income from continuing operations in 2005 of $7,620,000, or
$1.33 per diluted share. Income from continuing operations benefited by
approximately $513,000, or $0.09 per diluted share, due to research and
development tax credits recorded during 2006. In 2005 income from continuing
operations benefited by approximately $1,035,000, or $0.18 per diluted share,
due to foreign tax credits and by approximately $470,000, or $0.08 per diluted
share, due to research and development tax credits. The Company's business
segments and the components of operating expenses are discussed in the following
sections.
SLPE (a combination of Condor and Ault) recorded net sales of $87,949,000, or
50% of consolidated net sales, for 2006, compared to $43,233,000, or 34% of
consolidated net sales, in 2005. At SLPE, the net sales of the Condor product
line decreased $3,631,000, or 8%. International sales, which represent
approximately 22% of total net sales of the Condor product line, increased
approximately 10%. SLPE reported income from operations of $6,316,000 in 2006,
which represented an increase of 39%, compared to 2005. The High Power Group (a
combination of Teal and MTE) reported net sales of $39,993,000, or 23% of
consolidated net sales, compared to $32,777,000, or 26% of consolidated net
sales, in 2005. Not including MTE, net sales of the High Power Group increased
by $4,360,000, or 13%, primarily attributable to sales of its medical imaging
equipment. Sales of the Teal semiconductor product line increased by
approximately $1,422,000, or 31%. The High Power Group reported income from
operations of $5,836,000 in 2006, which was an increase of 19% from 2005,
primarily due to increased sales, partially offset by higher cost of products
sold and higher operating costs. Since being acquired, MTE recorded net sales of
$2,856,000 and income from operations of $389,000.
SL-MTI's net sales in 2006 decreased approximately $2,381,000, or 8%, while
income from operations decreased by $1,816,000, or 54%, compared to prior year.
These results were driven by a sales decrease of $3,759,000, or 20%, to
customers in the defense industry. This decrease was partially offset by a sales
increase of $1,507,000, or 23%, to customers in the commercial aerospace
industry. The decline in income from operations is primarily due to lower sales
of high-volume programs, which decreased factory productivity, and severance
costs of $483,000, which were charged and paid in 2006. Engineering and product
development expenses increased by 13%, primarily due to an increase in ongoing
development programs and a decrease in customer funded programs. In 2006, SL-MTI
decreased its selling, general and administrative expenses by 15% from prior
year.
Page 29
RFL's net sales in 2006 increased approximately $349,000, or 2%, while income
from operations decreased approximately $67,000, or 3%, compared to prior year.
Sales of RFL's communications product line increased by $1,617,000, or 14%.
Sales of the teleprotection product line decreased by $696,000, or 7%, and
customer service sales decreased by $572,000, or 40%. RFL's domestic sales
decreased by $689,000, or 4%, while export sales increased by $1,038,000, or
19%, primarily due to the sale of its new product line to an international
customer. Income from operations decreased primarily due to higher selling,
general and administrative costs incurred in 2006, compared to 2005.
COST OF PRODUCTS SOLD
As a percentage of net sales, cost of products sold was approximately 68% in
2006, compared to 65% in 2005. Not including Ault operations, the comparable
percentages were similar. SLPE cost of products sold percentage increased to 69%
in 2006, from 64% in 2005. This increase was due to increases in the cost of raw
materials, labor inefficiencies and severance costs incurred at the plant in
Mexicali, Mexico that manufactures the Condor product line. Additionally, the
percentage cost of products sold for the Ault product line has been
traditionally higher than for Condor products. The cost of products sold
percentage for the High Power Group increased slightly primarily due to
increases in raw material costs, particularly prices for copper, and to a lesser
extent the start-up cost associated with establishing manufacturing operations
in Tecate, Mexico. Approximately 60% of Teal products are manufactured at the
Tecate facility. SL-MTI experienced an increase in its cost of products sold
percentage to 75% in 2006, from 71% in 2005. This increase is primarily due to
lower plant productivity, higher overhead cost and severance costs of
approximately $426,000. RFL's cost of products sold percentage remained the same
in 2006, compared to 2005.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES
Engineering and product development expenses in 2006 remained at approximately
7% of net sales. Engineering and product development expenses increased by
approximately $2,933,000, or 31%, compared to 2005. Engineering and product
development expenses for the Ault product line amounted to $2,680,000. SL-MTI's
engineering and product development costs increased by 13%. Engineering and
product development expenses for the Condor and Teal product lines increased by
minor amounts. RFL decreased engineering and product development costs by 9%,
compared to 2005.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for 2006 were approximately 17% of
net sales, compared to 19% in 2005. These expenses increased by $7,144,000, or
30%, while sales increased 39% from prior year. Selling, general and
administrative costs associated with Condor products decreased by 10% from prior
year, while sales decreased by 8% over the period. The acquisitions of Ault and
MTE added approximately $7,675,000 of selling, general and administrative costs.
Without the acquisitions of Ault and MTE, selling, general and administrative
costs would have decreased by $531,000. Selling, general and administrative
expenses of the High Power Group, without the acquisition of MTE, increased by
7%, on a sales increase of 13%. RFL reported increased expenses of 6% from prior
year. SL-MTI decreased expenses by 15% on an 8% reduction in sales. Expense
related to certain stock based compensation arrangements with key executives
were $39,000, compared to $268,000 in 2005, a decrease of $229,000.
Page 30
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses in 2006 were $2,605,000, an increase of
approximately $619,000, or 31%, compared to 2005. Approximately $102,000 of the
increase in amortization expense relates to the amortization of intangibles
recorded due to the Ault acquisition. Depreciation expense was approximately 2%
of sales for each of 2006 and 2005.
AMORTIZATION OF DEFERRED FINANCING COSTS
In connection with entering into the Revolving Credit Facility, on August 3,
2005, the Company incurred costs of approximately $258,000. These costs have
been deferred and are being amortized over the three-year term of the Revolving
Credit Facility. For 2006, amortization of deferred financing costs was $88,000.
For 2005, amortization of deferred financing costs was $485,000, which included
the write-off of the deferred financing costs related to the previous credit
facility and the amortization of the deferred financing costs related to the
Revolving Credit Facility.
INTEREST INCOME (EXPENSE)
In 2006, interest income was $35,000, compared to $216,000 in 2005. Interest
expense in 2006 was $744,000, compared to $522,000 in 2005. The increase in
interest expense for 2006 is primarily related to an increase in interest rates
and increased debt levels due to the acquisitions of Ault and MTE.
TAXES
The effective tax rate for 2006 was approximately 33%, compared to 19% in 2005.
The effective tax rate for both periods reflects the statutory rate after
adjustments for state and international tax provisions, offset by the recording
of benefits from research and development tax credits, foreign tax credits and
certain income exclusion benefits. The benefit rate related to the recording of
research and development tax credit was 5% for 2006 and 2005. The effective tax
rate was nominally affected by foreign tax credits in 2006, while the Company
recorded a benefit of 11% in 2005.
DISCONTINUED OPERATIONS
In 2006, the Company recorded a loss from discontinued operations, net of tax,
of $3,307,000. This amount consists primarily of estimated environmental
remediation liabilities of $2,480,000, net of tax, related to the Pennsauken
Site. For a discussion of potential environmental liabilities, see "Item 3.
Legal Proceedings" included in Part I of this Annual Report on Form 10-K. Other
costs are related to ongoing environmental and legal charges incurred during the
year, partially offset by insurance recoveries related to discontinued
operations. In 2005, the Company recorded a loss from discontinued operations,
net of tax, of $473,000. This amount consists primarily of the cost related to
environmental and legal charges, partially offset by insurance recoveries
related to discontinued operations.
Page 31
YEAR ENDED DECEMBER 31, 2005 COMPARED WITH YEAR ENDED DECEMBER 31, 2004
Years Ended December 31,
---------------------------------------------
2005 2004 $ Variance % Variance
-------- -------- ---------- ----------
(in thousands)
NET SALES
Power Electronics Group:
Condor $ 43,233 $ 41,457 $1,776 4%
Teal 32,777 30,265 2,512 8%
-------- -------- ------ ---
Total 76,010 71,722 4,288 6%
-------- -------- ------ ---
SL-MTI 28,085 24,497 3,588 15%
RFL 22,778 22,585 193 1%
-------- -------- ------ ---
Total $126,873 $118,804 $8,069 7%
======== ======== ====== ===
Years Ended December 31,
---------------------------------------------
2005 2004 $ Variance % Variance
-------- -------- ---------- ----------
(in thousands)
INCOME FROM OPERATIONS
Power Electronics Group:
Condor $ 4,543 $ 3,789 $ 754 20%
Teal 4,911 4,635 276 6%
------- ------- ------ ---
Total 9,454 8,424 1,030 12%
------- ------- ------ ---
SL-MTI 3,371 2,827 544 19%
RFL 2,284 2,091 193 9%
Other (4,911) (5,033) 122 2%
------- ------- ------ ---
Total $10,198 $ 8,309 $1,889 23%
======= ======= ====== ===
Consolidated net sales for 2005, compared to 2004, increased by $8,069,000, or
7%. All of the Company's business segments contributed to the increase in net
sales. SL-MTI, which recorded a sales increase of $3,588,000, or 15%,
experienced sales increases in all of its major markets. Teal reported an
increase in net sales of $2,512,000, or 8%, primarily due to increases in its
medical imaging product line. Condor recorded an increase in net sales of
$1,776,000, or 4%, and RFL recorded an increase in net sales of $193,000, or 1%.
The Company's income from operations increased to $10,198,000 in 2005, compared
to $8,309,000 in 2004, or 23%. All of the Company's operating business segments
had increases in income from operations in 2005, as compared to 2004. These
increases ranged from 20% to 6%.
Income from continuing operations in 2005 was $7,620,000, or $1.33 per diluted
share, compared to income from continuing operations in 2004 of $6,301,000, or
$1.08 per diluted share. Income from continuing operations benefited by
approximately $1,035,000, or $0.18 per diluted share, and by approximately
$470,000, or $0.08 per diluted share, due to foreign and research and
development tax credits recorded during 2005. In 2004 income from continuing
operations benefited by approximately $152,000, or $0.03 per diluted share, and
by approximately $1,295,000, or $0.22 per diluted share, due to foreign and
research and development tax credits. The Company's business segments and the
components of operating expenses are discussed more fully in the following
sections.
Page 32
The Power Electronics Group, which was comprised of Condor and Teal, recorded a
sales increase of $4,288,000, or 6%, and an increase in income from operations
of $1,030,000, or 12%. Condor experienced an increase in net sales of
$1,776,000, or 4%, and an increase in income from operations of $754,000, or
20%, over the prior year. Condor reported a sales increase in its medical
product line of $3,843,000, or 17%, while sales to manufacturers of industrial
equipment decreased $1,945,000, or 12%. Net sales of telecommunications products
also decreased by $502,000, or 14%. International sales, which represent
approximately 18% of Condor's total net sales, increased 62%, aided by sales to
two international customers. Also in August 2005 Condor opened a European sales
office to increase its presence in the European market. Domestic sales decreased
by $1,224,000, or 3%, primarily due to decreased sales to the industrial market.
Condor's increase in income from operations was primarily due to its increase in
sales and a slight reduction in costs of products sold. Teal experienced a sales
increase of $2,512,000, or 8%, primarily due to increased sales of its medical
imaging product line of $4,691,000. Sales of its semiconductor product line
decreased by approximately $2,589,000. Teal's increase in income from operations
was primarily due to increased sales and decreased operating costs.
SL-MTI's net sales in 2005 increased approximately $3,588,000, or 15%, while
income from operations increased by $544,000, or 19%, compared to net sales and
income from operations in 2004. Contributing to the increase in net sales was
significant increases in the DC Brush and Brushless Motor product lines, which
increased by $3,491,000, or 21%, compared to 2004. By market segment, the
largest contributor to the net sales increases was the military market of
$2,852,000, or 18%. The increase in net sales was the primary reason that income
from operations increased, which was partially offset by increases in cost of
products sold. Operating costs at SL-MTI remained relatively constant.
RFL's net sales in 2005 increased approximately $193,000, or 1%, and income from
operations increased approximately $193,000, or 9%, compared to net sales and
income from operations in 2004. Sales of RFL's communications product line
increased by $120,000, or 1%, and customer service sales increased $420,000, or
41%, while its teleprotection product line decreased by $347,000, or 4%. RFL's
domestic sales increased by $1,415,000, or 9%, while export sales decreased by
$1,222,000, or 18%. The decrease in international sales was partially due to a
labor strike encountered at one of RFL's largest customers. Income from
operations increased due to the increase in sales and a reduction in the cost of
products sold, which was partially offset by a modest increase in operating
costs.
COST OF PRODUCTS SOLD
As a percentage of net sales, cost of products sold was approximately 65% in
2005, compared to 64% in 2004. Although aggregate cost of products sold, as a
percentage of net sales, remained relatively constant year-to-year, there were
differences among the operating business segments. The Power Electronics Group
cost of products sold percentage increased to 66% in 2005, from 65% in 2004.
This increase was due to increases in the cost of raw materials at Teal, and to
a lesser extent the start-up cost associated with transferring a portion of its
manufacturing operations to Mexico. Condor's cost of
Page 33
products sold percentage improved slightly in 2005, compared to 2004. SL-MTI
experienced an increase in its cost of products sold percentage to 71% in 2005,
from 69% in 2004. This increase was primarily due to additional training costs,
increased cost of quality and higher manufacturing inefficiencies, primarily
related to the transfer of new programs to its manufacturing facility in
Matamoros, Mexico. RFL's cost of products sold percentage improved to 53%,
compared to 54% in 2004. This improvement was attributable to product mix and
process improvements in its assembly and test areas.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES
Engineering and product development expenses in 2005 were $9,367,000, an
increase of approximately $416,000, or 5%, compared to 2004. As a percentage of
net sales, engineering and product development expenses in 2005 and 2004
remained relatively constant. Condor and Teal increased engineering and product
development expenses, with annual increases of $214,000, or 7%, and $206,000, or
12%, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for 2005 were approximately 19% of
net sales, compared to 20% in 2004. These expenses decreased by $283,000, or 1%,
over the comparative periods as sales increased 7%. Included in selling, general
and administrative costs were compensation expense related to certain stock
based compensation arrangements with key executives. These expenses were
non-cash charges. For 2005, these charges were $268,000, compared to $809,000 in
2004, a decrease of $541,000. Without these charges, selling, general and
administrative costs would have increased by $258,000, or less than one percent
of sales.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses in 2005 were $1,986,000, a decrease of
approximately $147,000, or 7%, compared to 2004. Depreciation expense was
approximately 2% of sales for each of 2005 and 2004.
AMORTIZATION OF DEFERRED FINANCING COSTS
In connection with entering into its previous credit facility on January 6,
2003, the Company incurred costs of approximately $1,342,000. These costs had
been deferred and were being amortized over the three-year term of the facility.
On August 2, 2005 the Company terminated its previous credit facility and
accordingly wrote off the remaining deferred financing costs related thereto. In
connection with entering into the Revolving Credit Facility on August 3, 2005,
the Company incurred costs of approximately $258,000. These costs have been
deferred and are being amortized over the three-year term of the Revolving
Credit Facility. For 2005, amortization of deferred financing costs was
$485,000, which included the write-off of the deferred financing costs related
to the previous credit facility and the amortization of the deferred financing
costs related to the Revolving Credit Facility. For 2004, amortization of
deferred financing costs was $447,000.
Page 34
INTEREST INCOME (EXPENSE)
In 2005, interest income was $216,000, compared to $102,000 in 2004. Interest
expense in 2005 was $522,000, compared to $347,000 in 2004. The increase in
interest expense for 2005 was primarily related to $185,000 in early termination
fees related to the repayment of the previous credit facility, which occurred in
the third quarter of 2005.
TAXES
The effective tax rate for 2005 was approximately 19%, compared to 17% in 2004.
The effective tax rate for both periods reflected the statutory rate after
adjustments for state and international tax provisions, offset by the recording
of benefits from research and development tax credits, foreign tax credits and
certain income exclusion benefits. The benefit rate related to the recording of
foreign tax credits was 11% in 2005 and 2% in 2004. The benefit rate related to
the recording research and development tax credit was 5% in 2005, compared to
17% in 2004.
DISCONTINUED OPERATIONS
In 2005, the Company recorded a loss from discontinued operations, net of tax,
of $473,000. This amount consisted primarily of the cost related to environ-
mental and legal charges, partially offset by insurance recoveries related to
discontinued operations. In 2004, the Company recorded income from discontinued
operations, net of tax, of $2,371,000. This amount was primarily related to a
settlement fee received by SL Waber, in the amount of $2,516,000, net of tax,
the reversal of certain tax reserves related to EME, in the amount of $225,000,
net of expenses, and insurance proceeds related to environmental matters, in the
amount of $392,000, net of tax. These income amounts were partially offset by
environmental, legal and litigation charges related to discontinued operations.
INFLATION
Management does not believe that inflation has had a material effect on the
Company's operations and financial condition. Management cannot be sure that
operations will not be affected by inflation in the future.
NEW ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED
For a discussion on the impact of recently issued accounting pronouncements, see
"Item 8. Financial Statements and Supplementary Data" in Part IV of this Annual
Report on Form 10-K.
ENVIRONMENTAL
See "Item 3. Legal Proceedings" in Part I of this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest and foreign
currency exchange rates. Changes in the market interest rate affect both
interest paid and earned by the Company. The Company manufactures a significant
portion of its products in Mexico and China and purchases some components in
foreign markets. All other foreign market component purchases are primarily
invoiced in U.S. dollars. Changes in interest and foreign currency exchange
rates did not have a material impact on earnings for 2006, and are not expected
to have a material impact on earnings in 2007. Borrowings under the
Page 35
Revolving Credit Facility bear interest, at the Company's option, at the London
interbank offering rate ("LIBOR") plus a margin rate ranging from 0.9% to 1.9%,
or the higher of a Base Rate plus a margin rate ranging from 0% to 0.5%. The
Base Rate is equal to the higher of (i) the Federal Funds Rate plus 0.5%, or
(ii) Bank of America's publicly announced prime rate. The margin rates are based
on certain leverage ratios, as defined.
See generally, "Item 1A. Business - Risk Factors" and "Item 1. Business -
Foreign Operations" in Part I of this Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements and supplementary data, together with the
report of Grant Thornton LLP, independent registered public accounting firm, are
included in Part IV of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES: The Company, under the
supervision and with the participation of its management, including the Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the design and operation of the Company's "disclosure controls and
procedures," as such term is defined in Rules 13a-15e and 15d-15e promulgated
under the Securities Exchange Act of 1934, as amended, (the "Exchange Act").
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that the Company's disclosure controls and procedures
were effective as of the end of the period covered by this Annual Report on Form
10-K, and provide reasonable assurance that information required to be disclosed
by the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms.
CHANGES IN INTERNAL CONTROLS: There have been no changes in internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
It should be noted that any control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected.
ITEM 9B. OTHER INFORMATION
None.
Page 36
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Apart from certain information concerning the Company's executive officers,
which is set forth in Part I of this Annual Report on Form 10-K, the information
required under this Item is incorporated herein by reference to the applicable
information in the Proxy Statement for the Company's 2007 Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item is incorporated by reference to the
Proxy Statement for the Company's 2007 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required under this Item is incorporated by reference to the
Proxy Statement for the Company's 2007 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information required under this Item is incorporated by reference to the
Proxy Statement for the Company's 2007 Annual Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding the Company's independent auditor fees and services and
other information required by Item 14 of Part III of this Report is incorporated
herein by reference to the Proxy Statement for the Company's 2007 Annual Meeting
of Shareholders.
Page 37
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) (1) FINANCIAL STATEMENTS
The information required by this Item is included in this Annual Report on Form
10-K. Consolidated financial statements and supplementary data, together with
the report of Grant Thornton LLP, independent registered public accounting firm,
are filed as part of this Report. See Index at page F-1 to Consolidated
Financial Statements included in Part IV of this Annual Report on Form 10-K.
(A) (2) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule for the years ended December 31,
2006, December 31, 2005, and December 31, 2004 are submitted herewith:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because (a) the required information is shown
elsewhere in this Annual Report on Form 10-K, or (b) they are inapplicable, or
(c) they are not required.
See Index at page F-1 to Consolidated Financial Statements included in Part IV
of this Annual Report on Form 10-K.
(A) (3) EXHIBITS
The information required by this Item is listed in the Exhibit Index of this
Annual Report on Form 10-K.
Page 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SL INDUSTRIES, INC.
(Company)
By /s/ James C. Taylor Date March 21, 2007
----------------------------------
James C. Taylor
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the date indicated.
By /s/ Warren G. Lichtenstein Date March 21, 2007
----------------------------------
Warren G. Lichtenstein - Chairman
of the Board
By /s/ Glen M. Kassan Date March 21, 2007
----------------------------------
Glen M. Kassan - Vice Chairman
By /s/ James C. Taylor Date March 21, 2007
----------------------------------
James C. Taylor - President and
Chief Executive Officer
(Principal Executive Officer)
By /s/ David R. Nuzzo Date March 21, 2007
----------------------------------
David R. Nuzzo - Vice President,
Chief Financial Officer, Treasurer
and Secretary (Principal Financial
and Accounting Officer)
By /s/ J. Dwane Baumgardner Date March 21, 2007
----------------------------------
J. Dwane Baumgardner - Director
By /s/ Avrum Gray Date March 21, 2007
----------------------------------
Avrum Gray - Director
By /s/ James R. Henderson Date March 21, 2007
----------------------------------
James R. Henderson - Director
By /s/ James A. Risher Date March 21, 2007
----------------------------------
James A. Risher - Director
By /s/ Mark E. Schwarz Date March 21, 2007
----------------------------------
Mark E. Schwarz - Director
Page 39
INDEX TO EXHIBITS
The exhibit number, description and sequential page number in the original copy
of this document where exhibits can be found as follows:
Exhibit # Description
--------- --------------------------------------------------------------------
2.1 Securities Purchase Agreement by and among SL Industries, Inc., SL
Industries Vertrieb GmbH, and DCX-Chol Holding GmbH, DCX-Chol
Enterprises, Inc. and Chol Enterprises, Inc. dated as of January 3,
2003. Incorporated by reference to Exhibit 2.1 to the Company's
report on Form 8-K filed with the Securities and Exchange Commission
on January 17, 2003.
2.2 Agreement and Plan of Merger, dated December 16, 2005, by and among
SL Industries, Inc., Lakers Acquisition Corp. and Ault Incorporated.
Incorporated by reference to Exhibit 2.1 to the Company's report on
Form 8-K filed with the Securities and Exchange Commission on
December 16, 2005.
2.3 Stock Purchase Agreement, dated October 31, 2006 by and among SL
Industries, Inc., Norbert D. Miller, Revocable Living Trust of Fred
A. Lewis and Margaret Lange-Lewis U/A dated January 28, 1993, as
Amended and Restated as of October 31, 2001 and the Einhorn Family
Foundation. Incorporated by reference to Exhibit 10.1 to the
Company's report of Form 8-K/A filed with the Securities and
Exchange Commission on December 21, 2006.
3.1 Restated Articles of Incorporation. Incorporated by reference to
Exhibit 3.1 to the Company's report on Form 10-K for the fiscal year
ended December 31, 2000.
3.2 Restated By-Laws. Incorporated by reference to Exhibit 3.2 to the
Company's report on Form 10-K for the fiscal year ended December 31,
2000.
10.1* Supplemental Compensation Agreement for the Benefit of Byrne
Litschgi. Incorporated by reference to Exhibit 10.1 to the Company's
report on Form 8 dated November 9, 1990.
10.2* 1988 Deferred Compensation Agreement with a Certain Officer.
Incorporated by reference to Exhibit 10.6 to the Company's report on
Form 8 dated November 9, 1990.
10.3* 1991 Long Term Incentive Plan of SL Industries, Inc., as amended, is
incorporated by reference to Appendix to the Company's Proxy
Statement for its 1995 Annual Meeting held November 17, 1995,
previously filed with the Securities and Exchange Commission.
10.4* Capital Accumulation Plan. Incorporated by reference to the
Company's report on Form 10K/A for the fiscal period ended July 31,
1994.
10.5* Change-in-Control Agreement dated May 1, 2001 between the Company
and James C. Taylor. Incorporated by reference to Exhibit 10.9 to
the Company's report on Form 10-K for the fiscal year ended December
31, 2003.
10.6* Bonus Agreement dated August 5, 2002 between the Company and James
C. Taylor. Incorporated by reference to Exhibit 10.10 to the
Company's report
Page 40
on Form 10-K for the fiscal year ended December 31, 2003.
10.7* Management Agreement dated as of January 23, 2002 between the
Company and Steel Partners, Ltd. Incorporated by reference to
Exhibit 10.12 to the Company's report on Form 10-K for the fiscal
year ended December 31, 2003.
10.8 Revolving Credit Agreement dated as of August 3, 2005, among Bank of
America, N.A., as Agent and Lender, SL Industries, Inc., as parent
borrower and Cedar Corporation, Condor D.C. Power Supplies, Inc.,
Condor Holdings, Inc., RFL Electronics, Inc., SL Auburn, Inc., SL
Delaware, Inc., SL Surface Technologies, Inc., SL Montevideo
Technology, Inc., SLW Holdings, Inc., Teal Electronics Corporation
and Waber Power Ltd., collectively, as subsidiary borrowers.
Incorporated by reference to Exhibit 10.8 to the Company's report on
Form 10-K for the fiscal year ended December 31, 2005.
14 Code of Conduct and Ethics. Incorporated by reference to Exhibit 14
to the Company's report on Form 10-K for the fiscal year ended
December 31, 2003.
21 Subsidiaries of the Company (transmitted herewith).
23 Consent of Independent Registered Public Accounting Firm
(transmitted herewith).
31.1 Certification by Principal Executive Officer pursuant to Rule
13a-15(e) or 15(d)-15(e) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (transmitted herewith).
31.2 Certification by Principal Financial Officer pursuant to Rule
13a-15(e) or 15(d)-15(e) of the Securities and Exchange Act of 1934,
as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act (transmitted herewith).
32 Certification by Principal Executive Officer and Principal Financial
Officer pursuant to Rule 13a or 15d of the Securities Exchange Act
of 1934, as amended, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 (transmitted herewith).
* Indicates a management contract or compensatory plan or arrangement.
Page 41
SL Industries, Inc.
Index to Financial Statements and Financial Statement Schedule
Page number in
this report
--------------
Report of Independent Registered Public Accounting Firm F2
Consolidated Balance Sheets F3
Consolidated Statements of Income F4
Consolidated Statements of Comprehensive Income F4
Consolidated Statements of Shareholders' Equity F5
Consolidated Statements of Cash Flows F6
Notes to Consolidated Financial Statements F7 to F36
Financial Statement Schedule:
II. Valuation and Qualifying Accounts F37
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
SL Industries, Inc.
We have audited the accompanying consolidated balance sheets of SL
Industries, Inc. and its subsidiaries (the Company) as of December 31, 2006 and
2005 and the related consolidated statements of income and comprehensive income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2006. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SL Industries, Inc. and its subsidiaries at December 31, 2006 and 2005, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2006, in conformity with accounting
principles generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole. Schedule II, Valuation
and Qualifying Accounts, is presented for purposes of additional analysis and is
not a required part of the basic consolidated financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic consolidated financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic consolidated financial
statements taken as a whole.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
March 22, 2007
F-2
Item 1. Financial Statements
SL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2006 2005
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 757,000 $ 9,985,000
Receivables, net 30,621,000 16,436,000
Note receivable 563,000 --
Inventories, net 21,090,000 14,570,000
Prepaid expenses 1,576,000 632,000
Deferred income taxes, net 2,190,000 2,571,000
------------ ------------
Total current assets 56,797,000 44,194,000
------------ ------------
Property, plant and equipment, net 12,132,000 8,754,000
Deferred income taxes, net 6,340,000 3,409,000
Goodwill 22,548,000 10,303,000
Investments available for sale -- 670,000
Other intangible assets, net 7,472,000 1,085,000
Other assets and deferred charges 1,254,000 1,899,000
------------ ------------
Total assets $106,543,000 $ 70,314,000
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 13,902,000 $ 7,648,000
Accrued income taxes 1,347,000 417,000
Accrued liabilities
Payroll and related costs 6,742,000 6,229,000
Other 7,295,000 4,093,000
------------ ------------
Total current liabilities 29,286,000 18,387,000
------------ ------------
Debt 19,800,000 --
Deferred compensation and supplemental retirement benefits 2,884,000 3,829,000
Other liabilities 4,154,000 1,453,000
------------ ------------
Total liabilities 56,124,000 23,669,000
------------ ------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, no par value; authorized, 6,000,000 shares; none issued $ -- $ --
Common stock, $.20 par value; authorized, 25,000,000 shares;
issued, 8,298,000 shares 1,660,000 1,660,000
Capital in excess of par value 40,889,000 40,136,000
Retained earnings 28,390,000 24,837,000
Accumulated other comprehensive (loss) income (29,000) 67,000
Treasury stock at cost, 2,658,000 and 2,701,000 shares, respectively (20,491,000) (20,055,000)
------------ ------------
Total shareholders' equity 50,419,000 46,645,000
------------ ------------
Total liabilities and shareholders' equity $106,543,000 $ 70,314,000
============ ============
See accompanying notes to consolidated financial statements.
F-3
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
2006 2005 2004
------------ ------------ ------------
Net sales $176,773,000 $126,873,000 $118,804,000
Cost and expenses:
Cost of products sold 120,125,000 81,776,000 75,582,000
Engineering and product development 12,300,000 9,367,000 8,951,000
Selling, general and administrative 30,690,000 23,546,000 23,829,000
Depreciation and amortization 2,605,000 1,986,000 2,133,000
------------ ------------ ------------
Total cost and expenses 165,720,000 116,675,000 110,495,000
------------ ------------ ------------
Income from operations 11,053,000 10,198,000 8,309,000
Other income (expense):
Amortization of deferred financing costs (88,000) (485,000) (447,000)
Interest income 35,000 216,000 102,000
Interest expense (744,000) (522,000) (347,000)
------------ ------------ ------------
Income from continuing operations before income taxes 10,256,000 9,407,000 7,617,000
Income tax provision 3,396,000 1,787,000 1,316,000
------------ ------------ ------------
Income from continuing operations 6,860,000 7,620,000 6,301,000
(Loss) income from discontinued operations (net of tax) (3,307,000) (473,000) 2,371,000
------------ ------------ ------------
Net income $ 3,553,000 $ 7,147,000 $ 8,672,000
============ ============ ============
BASIC NET INCOME (LOSS) PER COMMON SHARE
Income from continuing operations $ 1.22 $ 1.37 $ 1.10
(Loss) income from discontinued operations (net of tax) (0.59) (0.09) 0.41
------------ ------------ ------------
Net income $ 0.63 $ 1.29* $ 1.51
============ ============ ============
DILUTED NET INCOME (LOSS) PER COMMON SHARE
Income from continuing operations $ 1.18 $ 1.33 $ 1.08
(Loss) income from discontinued operations (net of tax) (0.57) (0.08) 0.40
------------ ------------ ------------
Net income $ 0.61 $ 1.25 $ 1.48
============ ============ ============
Shares used in computing basic net income (loss)
per common share 5,632,000 5,544,000 5,760,000
Shares used in computing diluted net income (loss)
per common share 5,823,000 5,738,000 5,871,000
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
2006 2005 2004
------------ ------------ ------------
Net income $ 3,553,000 $ 7,147,000 $ 8,672,000
Other comprehensive income (net of tax):
Foreign currency translation (19,000) -- --
Investments available for sale (67,000) 67,000 --
------------ ------------ ------------
Comprehensive income $ 3,467,000 $ 7,214,000 $ 8,672,000
============ ============ ============
* Earnings per share for 2005 does not total due to rounding.
See accompanying notes to consolidated financial statements.
F-4
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
Common Stock
-------------------------------------------------- Accumulated
Issued Held In Treasury Capital in Other
---------------------- ------------------------- Excess of Retained Comprehensive
Shares Amount Shares Amount Par Value Earnings Income (Loss)
--------- ---------- ---------- ------------ ----------- ----------- -------------
BALANCE DECEMBER 31, 2003 8,298,000 $1,660,000 (2,356,000) $(14,960,000) $38,863,000 $ 9,018,000 $ --
Net income 8,672,000
Other, including exercise of
employee stock options and
related income tax benefits 73,000 497,000 170,000
Treasury stock sold 41,000 277,000 177,000
Stock repurchase plan (546,000) (6,101,000)
Treasury stock purchased (56,000) (586,000)
--------- ---------- ---------- ------------ ----------- ----------- --------
BALANCE DECEMBER 31, 2004 8,298,000 $1,660,000 (2,844,000) $(20,873,000) $39,210,000 $17,690,000 $ --
========= ========== ========== ============ =========== =========== ========
Net income 7,147,000
Unrealized gain on securities 67,000
Other, including exercise of
employee stock options and
related income tax benefits 136,000 1,005,000 394,000
Treasury stock sold 32,000 233,000 532,000
Treasury stock purchased (25,000) (420,000)
--------- ---------- ---------- ------------ ----------- ----------- --------
BALANCE DECEMBER 31, 2005 8,298,000 $1,660,000 (2,701,000) $(20,055,000) $40,136,000 $24,837,000 $ 67,000
========= ========== ========== ============ =========== =========== ========
Net income 3,553,000
Foreign currency translation (29,000)
Investments available for sale (67,000)
Other, including exercise of
employee stock options and
related income tax benefits 92,000 691,000 515,000
Treasury stock sold 27,000 203,000 238,000
Treasury stock purchased (76,000) (1,330,000)
--------- ---------- ---------- ------------ ----------- ----------- --------
BALANCE DECEMBER 31, 2006 8,298,000 $1,660,000 (2,658,000) $(20,491,000) $40,889,000 $28,390,000 $(29,000)
========= ========== ========== ============ =========== =========== ========
See accompanying notes to consolidated financial statements.
F-5
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
2006 2005 2004 *
------------ ----------- -----------
OPERATING ACTIVITIES:
Net income $ 3,553,000 $ 7,147,000 $ 8,672,000
Adjustment for losses (income) from discontinued operations 3,307,000 473,000 (2,371,000)
------------ ----------- -----------
Income from continuing operations 6,860,000 7,620,000 6,301,000
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation 2,129,000 1,605,000 1,848,000
Amortization 476,000 381,000 285,000
Amortization of deferred financing costs 88,000 485,000 447,000
Stock-based compensation 71,000 -- --
Non-cash compensation expense 39,000 268,000 959,000
Provisions for losses on accounts receivable (173,000) 72,000 136,000
Cash surrender value of life insurance policies 11,000 (26,000) (17,000)
Deferred compensation and supplemental retirement benefits 452,000 510,000 348,000
Deferred compensation and supplemental retirement benefit payments (1,397,000) (529,000) (502,000)
Deferred income taxes (942,000) 107,000 (651,000)
Loss on sales of equipment 16,000 12,000 3,000
Changes in operating assets and liabilities, excluding effects of business
combinations and dispositions:
Accounts receivable (5,104,000) (731,000) (2,714,000)
Note receivable 1,125,000 -- --
Inventories 305,000 1,269,000 (4,830,000)
Prepaid expenses (87,000) 533,000 353,000
Other assets 451,000 (580,000) (512,000)
Accounts payable (1,320,000) 2,026,000 1,921,000
Other accrued liabilities 432,000 (1,487,000) (137,000)
Accrued income taxes 2,895,000 (327,000) 1,305,000
------------ ----------- -----------
Net cash provided by operating activities from continuing operations 6,327,000 11,208,000 4,543,000
Net cash (used in) provided by operating activities from discontinued operations (768,000) (417,000) 1,851,000
------------ ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,559,000 10,791,000 6,394,000
------------ ----------- -----------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired (31,766,000) -- --
Purchases of property, plant and equipment (3,055,000) (1,904,000) (1,642,000)
Purchases of investments available for sale -- (567,000) --
Purchases of other assets -- (465,000) --
Proceeds from sale of subsidiary (cash and notes receivable) -- -- 1,000,000
Proceeds from sale of equipment 18,000 -- 9,000
------------ ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (34,803,000) (2,936,000) (633,000)
------------ ----------- -----------
FINANCING ACTIVITIES:
Proceeds from Revolving Credit Facility 55,163,000 -- --
Payments of Revolving Credit Facility (35,363,000) -- --
Payments of deferred financing costs -- (258,000) --
Payments of term loans -- (2,015,000) (887,000)
Proceeds from stock options exercised 930,000 1,399,000 517,000
Tax benefit from exercise of stock options 204,000 -- --
Treasury stock sales (purchases), net (889,000) 345,000 (6,233,000)
------------ ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 20,045,000 (529,000) (6,603,000)
------------ ----------- -----------
Effect of exchange rate changes on cash (29,000) -- --
------------ ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (9,228,000) 7,326,000 (842,000)
------------ ----------- -----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,985,000 2,659,000 3,501,000
------------ ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 757,000 $ 9,985,000 $ 2,659,000
============ =========== ===========
* Revised from prior presentation (see Note 1).
See accompanying notes to consolidated financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND: SL Industries, Inc. (the "Company"), a New Jersey corporation,
through its subsidiaries, designs, manufactures and markets power electronics,
motion control, power protection, power quality electromagnetic products and
specialized communication equipment that is used in a variety of medical,
commercial and military aerospace, computer, datacom, industrial, telecom,
transportation and electric power utility equipment applications. Its products
are incorporated into larger systems to increase operating safety, reliability
and efficiency. The Company's products are largely sold to original equipment
manufacturers, the electric utility industry, and, to a lesser extent,
commercial distributors. The Company's customer base is primarily located in the
United States. The Company's operating subsidiaries are described and defined in
Notes 14 and 15. The Company's discontinued operations are described and defined
in Note 2.
BASIS OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
CASH FLOW REVISION: Beginning in 2005, the Company has separately disclosed cash
flows attributable to discontinued operations (all of which are operating
activities), which in 2004 were reported on a combined basis as a single amount
outside of operating, investing and financing activities. The Company had no
cash flows attributable to discontinued operations related to investing and
financing activities for all periods presented.
RECLASSIFICATIONS: Reclassifications, when applicable, are made to the prior
year consolidated financial statements and notes to conform with the current
year presentation.
CASH EQUIVALENT The Company considers all highly liquid debt instruments with
an original maturity date of three months or less and investments in money
market accounts to be cash equivalents. At December 31, 2006 and December 31,
2005, cash and cash equivalents held in the United States are held principally
at one financial institution.
REVENUE RECOGNITION: Revenue is recognized when persuasive evidence of an
arrangement exists, when title and risk of ownership passes, the sales price is
fixed or determined and collectibility is reasonably assured. Generally, those
criteria are met at the time the product is shipped. Provisions are made at the
time the related revenue is recognized for product returns, product warranties,
rebates, certain stock scrap programs with distributors and other sales
incentives offered by the Company to its customers. Freight revenues billed to
customers are included in net sales and expenses for shipping products are
included in cost of sales.
ACCOUNTS RECEIVABLE: The Company's accounts receivable primarily consist of
trade receivables and are reported net of allowances for doubtful accounts of
approximately $830,000 and $569,000 as of December 31, 2006 and December 31,
2005, respectively. 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
F-7
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 and anticipated returns related
to customer receivables. 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.
INVENTORIES: Inventories are valued at the lower of cost or market. Cost is
primarily determined using the first-in, first-out ("FIFO") method. Cost for
certain inventories is determined using the last-in, first-out ("LIFO") method.
The Company ensures inventory is valued 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 set to that value.
If a write down to the current market value is necessary, the market value
cannot be greater than the net realizable value, 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 is not able to achieve its expectations
of the net realizable value of the inventory at current value, it would adjust
its reserves accordingly.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are carried at cost
and include expenditures for new facilities and major renewals and betterments.
Maintenance, repairs and minor renewals are charged to expense as incurred. When
assets are sold or otherwise disposed of, any gain or loss is recognized
currently. Depreciation is provided primarily using the straight-line method
over the estimated useful lives of the assets, which range from 25 to 40 years
for buildings, 3 to 15 years for equipment and other property, and the lesser of
the lease term or life of the asset for leasehold improvements.
GOODWILL AND OTHER INTANGIBLES: In June 2001, the Financial Accounting Standards
Board (the "FASB") issued Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"), which requires that
goodwill and certain other intangible assets having indefinite lives will no
longer be amortized to earnings, but instead be subject to periodic testing for
impairment. Intangible assets determined to have definitive lives will continue
to be amortized over their estimated useful lives.
LONG-LIVED ASSETS: As of January 1, 2002, the Company adopted Statement of
Financial Accounting Standard No. 144 ("SFAS No. 144"), "Accounting for the
Impairment or Disposal of Long Lived Assets" ("SFAS No. 144"), which supersedes
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of."
Accordingly, whenever events or circumstances indicate that the carrying amount
of an asset may not be recoverable, the Company assesses the recoverability of
the asset either by estimated cash flows or independent appraisals.
F-8
ENVIRONMENTAL EXPENDITURES: Environmental expenditures that relate to current
operations are charged to expense or capitalized, as appropriate. Environmental
expenditures that relate to former business units are reported as part of
discontinued operations. Liabilities are recorded when remedial efforts are
probable and the costs can be reasonably estimated. The liability for
remediation expenditures includes elements of costs such as site investigations,
consultants' fees, feasibility studies, outside contractor expenses and
monitoring expenses. Estimates are not discounted, nor are they reduced by
potential claims for recovery from the Company's insurance carriers. 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.
DEBT ISSUANCE COSTS: Costs incurred in securing long-term debt are deferred and
amortized over the term of the related debt.
PRODUCT WARRANTY COSTS: The Company offers various warranties on its products.
The Company provides for its estimated future warranty obligations in the period
in which the related sale is recognized primarily based on historical
experience. For 2006, 2005 and 2004, these expenses were $642,000, $273,000 and
$326,000, respectively.
ADVERTISING COSTS: Advertising costs are expensed as incurred. For 2006, 2005
and 2004, these costs were $529,000, $289,000 and $268,000, respectively.
RESEARCH AND DEVELOPMENT COSTS: Research and development costs are expensed as
incurred. For 2006, 2005 and 2004, these costs were $3,040,000, $3,319,000 and
$3,811,000, respectively.
INCOME TAXES: The Company utilizes the asset and liability method of accounting
for income taxes. Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of assets and liabilities. A
valuation allowance is established, as needed, to reduce the net deferred tax
assets to the amount for which recovery is more likely than not.
FOREIGN CURRENCY CONVERSION: The Company's Mexican subsidiaries' functional
currency is U.S. dollars. Conversion gains or losses resulting from foreign
currency transactions are included in the accompanying consolidated statements
of income. The Company's other international operations have the local currency
as their functional currency. These operations translate into U.S. dollars at
the current, historic or average exchange rates, as appropriate. Foreign
currency translation adjustments are included as part of accumulated other
comprehensive (loss) or income on the Company's consolidated balance sheet.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant areas which require the use of management estimates relate to
product warranty costs, accrued liabilities related to litigation, allowance for
doubtful accounts, allowance for inventory obsolescence and environmental costs.
F-9
NET INCOME PER COMMON SHARE: The Company has presented net income per common
share pursuant to the FASB Statement of Financial Accounting Standard No. 128,
"Earnings per Share." Basic net income per common share is computed by dividing
reported net income available to common shareholders by the weighted average
number of shares outstanding for the period.
Diluted net income per common share is computed by dividing reported net income
available to common shareholders by the weighted average shares outstanding for
the period, adjusted for the dilutive effect of common stock equivalents, which
consist of stock options, using the treasury stock method.
The table below sets forth the computation of basic and diluted net income per
share:
Per Share
Net Income Shares Amount
---------- ------ ---------
(in thousands, except
per share amounts)
For the Year Ended December 31, 2006:
Basic net income per common share $3,553 5,632 $ 0.63
Effect of dilutive securities -- 191 (0.02)
------ ----- ------
Diluted net income per common share $3,553 5,823 $ 0.61
====== ===== ======
For the Year Ended December 31, 2005:
Basic net income per common share $7,147 5,544 $ 1.29
Effect of dilutive securities -- 194 (0.04)
------ ----- ------
Diluted net income per common share $7,147 5,738 $ 1.25
====== ===== ======
For the Year Ended December 31, 2004:
Basic net income per common share $8,672 5,760 $ 1.51
Effect of dilutive securities -- 111 (0.03)
------ ----- ------
Diluted net income per common share $8,672 5,871 $ 1.48
====== ===== ======
For the years ended December 31, 2006 and December 31, 2005, 13,000 and 6,000
stock options were excluded from the dilutive computations because the option
exercise prices were greater than the average market price of the Company's
common stock.
STOCK BASED COMPENSATION: Effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standard No. 123(R), "Share-Based Payment"
("SFAS No. 123(R)"), using the modified prospective application method. Prior to
adopting SFAS No. 123(R), the Company followed the intrinsic value method of
accounting for stock-based employee compensation in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations.
The Company maintains two shareholder approved stock option plans: the
Non-Employee Director Nonqualified Stock Option Plan (the "Director Plan") and
the Long-Term Incentive Plan (the "1991 Incentive Plan"). Both plans have
expired, however, stock options issued under each plan remain outstanding.
The Director Plan provided for the granting of nonqualified options to purchase
up to 250,000 shares of the Company's common stock to non-employee directors of
the Company in lieu of paying quarterly
F-10
retainer fees and regular quarterly meeting attendance fees, when elected. The
Director Plan enabled the Company to grant options, with an exercise price per
share not less than fair market value of the Company's common stock on the date
of grant, which are exercisable at any time. Each option granted under the
Director Plan expires no later than ten years from date of grant. The expiration
date of the Director Plan was May 31, 2003. The 1991 Incentive Plan enabled the
Company to grant either nonqualified options, with an exercise price per share
established by the Board's Compensation Committee, or incentive stock options,
with an exercise price per share not less than the fair market value of the
Company's common stock on the date of grant, which are exercisable at any time.
Each option granted under the 1991 Incentive Plan expires no later than ten
years from date of grant. The Plan expired on September 25, 2001 and no future
options can be granted under the Plan.
During 2005, the Company issued 25,000 options of the Company in accordance with
the rules and regulations of the Securities and Exchange Commission.
For the twelve months ended December 31, 2006, the Company recognized
stock-based employee compensation expense of $71,000, less a related income tax
benefit of approximately $28,000 under the provisions of the SFAS No. 123(R).
Also under the new standard, excess income tax benefits related to share-based
compensation expense that must be recognized directly in equity are treated as
cash flow from financing rather than operating activities. For the twelve months
ended December 31, 2005, no compensation expense was recognized for stock option
awards granted at fair market value under the provisions of APB No. 25. However,
the Company has recognized an expense of approximately $39,000 and $268,000 in
the years ended December 31, 2006 and December 31, 2005, respectively, in
compensation expense related to certain stock-based compensation arrangements.
The following table illustrates the pro forma effect on earnings per share if
the Company had accounted for its stock option plans prior to January 1, 2006,
using the fair value method of accounting under Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation," as
amended by Statement of Financial Accounting Standard No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure."
F-11
Years Ended
December 31,
---------------
2005 2004
------ ------
(in thousands,
except per
share amounts)
Net income, as reported $7,147 $8,672
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects 170 534
------ ------
7,317 9,206
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for awards granted,
modified, or settled, net of related tax effects (280) (761)
------ ------
Pro forma net income $7,037 $8,445
====== ======
Earnings per common share:
Basic - as reported $ 1.29 $ 1.51
Basic - pro forma $ 1.27 $ 1.47
Diluted - as reported $ 1.25 $ 1.48
Diluted - pro forma $ 1.23 $ 1.44
F-12
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
Years Ended
December 31,
-----------------
2005 2004
------- -------
Expected dividend yield 0% 0%
Expected stock price volatility 36.87% 46.73%
Risk-free interest rate 4.35% 2.81%
Expected life of stock option 5 years 5 years
The following table summarizes stock option activity for all plans:
Outstanding Weighted Average Weighted Average Aggregate Intrinsic
Options Exercise Price Remaining Life Value
-------------- ---------------- ---------------- -------------------
(in thousands) (in thousands)
Outstanding as of December 31, 2005 633 $10.41 4.78
Granted -- --
Exercised (92) $10.11
Forfeited (13) $17.01
Expired -- --
--- ------ ---- ------
Outstanding as of December 31, 2006 528 $10.30 3.80 $3,141
=== ====== ==== ======
Exercisable as of December 31, 2006 528 $10.30 3.80 $3,141
=== ====== ==== ======
At December 31, 2006, there was no unrecognized compensation expense associated
with unvested stock options. During the twelve month periods ended December 31,
2006 and December 31, 2005, the total intrinsic value of options exercised was
$588,000 and $777,000, respectively, and the actual tax benefit realized for the
tax deduction from these option exercises was $204,000 and $352,000,
respectively. During the twelve months ended December 31, 2005, options to
purchase 137,000 shares of common stock with an aggregate exercise price of
$1,399,000 were exercised by option holders.
There were no options granted during the twelve months ended December 31, 2006.
There were 25,000 options granted during the twelve months ended December 31,
2005.
F-13
STOCK OPTIONS: The following table summarizes the Company's Director Plan for
fiscal years 2004 through 2006.
Shares Weighted Average
(in thousands) Option Price Exercise Price
-------------- ------------------ ----------------
Outstanding and exercisable as of December 31, 2003 140 $3.5625 to $14.625 $7.23
Granted 39 $6.00 to $6.00 $6.00
Exercised (32) $3.5625 to $6.00 $5.41
Cancelled (2) $7.27 to $7.31 $7.30
---- -----
Outstanding and exercisable as of December 31, 2004 145 $4.75 to $14.625 $7.31
Exercised (11) $4.75 to $8.5625 $6.15
---- -----
Outstanding and exercisable as of December 31, 2005 134 $6.00 to $14.625 $7.40
Exercised (11) $6.875 to 10.50 $8.26
---- -----
Outstanding and exercisable as of December 31, 2006 123 $6.00 to $14.625 $7.32
==== =====
As of December 31, 2006, there are no shares available for grant.
The following table summarizes information for fiscal years 2004 through 2006
related to the 1991 Incentive Plan and the options issued in 2005:
Shares Weighted Average
(in thousands) Option Price Exercise Price
-------------- ------------------ ----------------
Outstanding as of December 31, 2003 672 $3.50 to $13.50 $10.62
Exercised (33) $5.75 to $12.175 $ 7.04
Cancelled (39) $3.50 to $13.50 $ 9.66
---- ------
Outstanding as of December 31, 2004 600 $5.75 to $13.50 $10.84
Granted 25 $17.01 to $17.01 $17.01
Exercised (126) $5.75 to $13.50 $10.58
---- ------
Outstanding as of December 31, 2005 499 $5.75 to $17.01 $11.21
Exercised (81) $5.75 to $13.50 $10.36
Cancelled (13) $17.01 to $17.01 $17.01
---- ------
Outstanding as of December 31, 2006 405 $5.75 to $17.01 $11.20
==== ======
The number of shares exercisable as of December 31, 2006, was 405,000.
F-14
Transactions from December 31, 2003 through December 31, 2006, under the above
plans, were as follows:
Weighted
Average Life
Shares Weighted Average Remaining
(in thousands) Option Price Exercise Price (years)
-------------- ------------------ ---------------- ------------
Outstanding as of December 31, 2003 812 $3.50 to $14.625 $10.037 6.44
Granted 39 $6.00 to $6.00 $ 6.00
Exercised (65) $3.5625 to $12.175 $ 6.24
Cancelled (41) $3.50 to $13.50 $ 9.57
---- -------
Outstanding as of December 31, 2004 745 $4.75 to $14.625 $10.154 5.52
Granted 25 $17.01 to $17.01 $ 17.01
Exercised (137) $4.75 to $13.50 $ 10.24
---- -------
Outstanding as of December 31, 2005 633 $5.75 to $17.01 $10.406 4.78
Exercised (92) $5.75 to $13.50 $ 10.11
Cancelled (13) $17.01 to $17.01 $ 17.01
---- -------
Outstanding as of December 31, 2006 528 $5.75 to $17.01 $10.302 3.80
---- -------
Exercisable as of December 31, 2006 528 $5.75 to $17.01 $10.302
==== =======
The following tables segregate the outstanding options and exercisable options
as of December 31, 2006, into three ranges:
Weighted Average
Options Outstanding Range of Option Prices per Weighted Average Life Remaining
(in thousands) Share Exercise Price (years)
------------------- -------------------------- ---------------- ----------------
164 $5.75 to $8.20 $ 5.975 5.45
243 $8.9375 to $12.175 $11.601 3.15
121 $12.25 to $17.01 $13.570 2.85
---
528
===
Options Exercisable Range of Option Prices per Weighted Average
(in thousands) Share Exercise Price
------------------- -------------------------- ----------------
164 $5.75 to $8.20 $ 5.975
243 $8.9375 to $12.175 $11.601
121 $12.25 to $17.01 $13.570
---
528
===
RECENT ACCOUNTING PRONOUNCEMENTS: In June 2006, the FASB issued Interpretation
48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with Statement of Financial Accounting
Standard No. 109, "Accounting for Income Taxes" ("SFAS 109"). This
Interpretation defines the minimum recognition threshold a tax position is
required to meet before being recognized in the financial statements. FIN 48 is
effective for fiscal years beginning after December 15, 2006. Any cumulative
effect of the change from this accounting principle will be recorded in the
opening balance in retained earnings. The Company is evaluating the adoption of
FIN 48 for the first quarter of fiscal 2007 and the potential impact on its
financial position or results of operations.
F-15
In September 2006, the Securities and Exchange Commission ("SEC"), staff issued
Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements" ("SAB No. 108"). SAB No. 108 was issued to provide consistency
between how registrants quantify financial statement misstatements and requires
the Company to quantify financial statement misstatements based on their impact
on each of its consolidated financial statements and related disclosure. SAB No.
108 is effective as of the end of the Company's 2006 fiscal year, allowing a
one-time transitional cumulative effect adjustment to retained earning as of
January 1, 2006 for errors that were not previously deemed material, but are
material under the guidance in SAB No. 108. The adoption of this SAB did not
have any impact on the Company's consolidated financial position or results of
operations.
In September 2006, the FASB issued Statement of Financial Accounting Standard
No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. The
statement does not require new fair value measurements, but is applied to the
extent that other accounting pronouncements require or permit fair value
measurements. The statement emphasizes that fair value is a market-based
measurement that should be determined based on the assumptions that market
participants would use in pricing an asset or liability. Companies will be
required to disclose the extent to which fair value is used to measure assets
and liabilities, the inputs used to develop the measurements, and the effect of
certain of the measurements on earnings (or changes in net assets) for the
period. SFAS 157 is effective for fiscal years beginning after November 15,
2007. The Company is evaluating the potential effects that SFAS 157 will have on
its financial position or results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standard
No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans - and amendment of FASB Statements No. 87, 88, 106 and
132R," ("SFAS 158"), which requires an employer to recognize the over-funded or
under-funded status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which the
changes occur through comprehensive income of a business entity. FAS 158 also
requires an employer to measure the funded status of a plan as of the date of
its year-end statement of financial position, with limited exceptions. This
statement is effective for fiscal years ending after December 15, 2006. The
Company does not currently provide for a defined benefit pension but does have
supplemental retirement agreements with certain active and retired directors,
officers and key employees. Adoption of SFAS 158 did not have an impact on the
Company's financial position and results of operations.
F-16
In February 2007, the FASB issued Statement of Financial Accounting Standard No.
159 "The Fair Value Option for Financial Assets and Financial Liabilities,"
("SFAS 159"). The Statement provides companies an option to report certain
financial assets and liabilities at fair value. The intent of SFAS 159 is to
reduce the complexity in accounting for financial instruments and the volatility
in earnings caused by measuring related assets and liabilities differently. SFAS
159 is effective for financial statements issued for fiscal years after November
15, 2007. The Company is evaluating the impact this new standard will have on
its financial position and results of operations.
NOTE 2. DISCONTINUED OPERATIONS
SL WABER, INC.
Effective August 27, 2001, the Company sold substantially all of the assets of
SL Waber, Inc. ("SL Waber") and stock of Waber de Mexico S.A. de C.V. SL Waber
was a producer of surge suppression devices and power strips. As part of this
transaction, the purchaser acquired the rights to the SL Waber name and assumed
certain liabilities and obligations of SL Waber. Subsequent to the sale, the
Company changed the name of SL Waber to SLW Holdings, Inc. ("SLW Holdings"). The
net income or losses of this subsidiary are included in the consolidated
statements of income under discontinued operations for all periods presented.
ELEKTRO-METALL EXPORT GMBH
On January 6, 2003, the Company sold its wholly-owned, indirect German
subsidiary, Elektro-Metall Export GmbH ("EME"). EME was a producer of electronic
actuation devices and cable harness systems sold to original equipment
manufacturers in the aerospace and automotive industries. Its operations were
located in Ingolstadt, Germany and Paks, Hungary. The net income or losses of
this subsidiary are included in the consolidated statements of income under
discontinued operations for all periods presented.
SL SURFACE TECHNOLOGIES, INC.
On November 24, 2003, the Company sold the operating assets of SL Surface
Technologies, Inc. ("SurfTech"). SurfTech produced industrial coatings and
platings for equipment in the corrugated paper and telecommunications
industries. The Company continues to own the land and buildings on which
SurfTech's operations were conducted. As a result of the sale, the Company
recorded an after tax loss of $442,000, which included severance, closing costs
and a required contribution to a union pension plan discussed more fully below.
During the fourth quarter of 2006, the Company recorded a $4,000,000 reserve
related to estimated environmental remediation liabilities associated with the
past operations of SurfTech (See Note 12). The losses of this subsidiary
including the reserve noted above in the amount of $2,480,000, net of tax, are
included in the consolidated statements of income under discontinued operations
for all periods presented.
SurfTech had made contributions, based on rates per hour, as specified in two
union agreements, to two union-administered defined benefit multi-employer
pension plans. Under the multi-employer Pension Plan Amendments Act of 1980, an
employer is liable upon withdrawal from or termination of a multi-employer plan
for its proportionate share of the plan's unfunded vested benefits liability. At
December 31, 2006, the Company's liability related to withdrawal from this plan
was approximately $475,000.
F-17
NOTE 3. INCOME TAXES
Income tax provision (benefit) for the fiscal years 2006, 2005 and 2004 is as
follows:
Years Ended December 31,
-------------------------
2006 2005 2004
------- ------ ------
(in thousands)
Income tax from continuing operations $ 3,396 $1,787 $1,316
Income tax (benefit) provision from
discontinued operations (1,986) (295) 892
------- ------ ------
Total $ 1,410 $1,492 $2,208
======= ====== ======
Income from continuing operations before provision for income taxes consists of
the following:
Years Ended December 31,
-------------------------
2006 2005 2004
------- ------ ------
(in thousands)
U.S. $10,241 $9,378 $7,504
Non-U.S. 15 29 113
------- ------ ------
$10,256 $9,407 $7,617
======= ====== ======
The provision (benefit) for income taxes from continuing operations consists of
the following:
Years Ended December 31,
------------------------
2006 2005 2004
------ ------ ------
(in thousands)
Current:
Federal $2,455 $1,276 $1,367
International 163 152 110
State 212 121 (24)
Deferred:
Federal 643 10 (5)
International (251) -- --
State 174 228 (132)
------ ------ ------
$3,396 $1,787 $1,316
====== ====== ======
The benefit for income taxes related to discontinued operations for 2006 was
$1,986,000. The benefit for income taxes related to discontinued operations for
2005 was $295,000.
F-18
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 2006 and December 31, 2005 are as follows:
December 31,
-----------------
2006 2005
------- -------
(in thousands)
Deferred tax assets:
Deferred compensation $ 1,191 $ 1,683
Inventory valuation 782 531
Tax loss carryforward 4,712 1,871
Foreign tax credit carryforward 1,569 1,113
R&D tax credit carryforward 1,811 2,707
Other 969 1,506
------- -------
11,034 9,411
------- -------
Less: valuation allowance (3,967) (3,650)
------- -------
7,067 5,761
------- -------
Deferred tax liabilities:
Accelerated depreciation and amortization 1,426 954
------- -------
1,426 954
------- -------
5,641 4,807
------- -------
Assets & Liabilities Related to Discontinued Operations, net 2,889 1,173
------- -------
$ 8,530 $ 5,980
======= =======
As of December 31, 2006 and December 31, 2005, the Company's gross foreign tax
credits totaled approximately $1,569,000 and $1,113,000, respectively. These
credits can be carried forward for ten years and expire between 2009 and 2016.
As of December 31, 2006 and December 31, 2005, the Company's research and
development tax credits totaled approximately $1,811,000 and $2,707,000,
respectively. Of these credits approximately $1,370,000 can be carried forward
for fifteen years and expire between 2013 and 2020, while $441,000 will carry
over indefinitely.
The Company has assessed its past earnings history and trends, sales backlog,
budgeted sales, and expiration dates of tax carryforwards and has determined
that it is more likely than not that the $8,530,000 of the net deferred tax
assets as of December 31, 2006 will be realized. The Company has an allowance of
$3,967,000 provided against the gross deferred tax asset with respect to
research and development tax credits and state net operating loss carryforwards,
which relates to discontinued operations. During the year, the Company acquired
the net operating loss carryforwards of Ault in the amount of $3,215,000. While
the acquired net operating loss carryforwards are subject to certain annual
limitations due to the change in ownership, the Company does not expect these
limitations to reduce its ability to ultimately use such carryforwards. The tax
benefit of the acquired net operating loss carryforwards was recorded under the
purchase method of accounting.
F-19
The following is a reconciliation of income tax expense (benefit) related to
continuing operations at the applicable federal statutory rate and the effective
rates from continuing operations:
Years Ended December 31,
------------------------
2006 2005 2004
---- ---- ----
Statutory rate 34% 34% 34%
Tax rate differential on extraterritorial income exclusion/
domestic manufacturing deduction benefit (2) (1) (2)
International rate differences (1) 2 1
State income taxes, net of federal income tax 4 4 5
Foreign tax credits 1 (11) (2)
Research and development credits (5) (5) (17)
Other 2 (4) (2)
--- --- ---
33% 19% 17%
=== === ===
NOTE 4. RECEIVABLES
Receivables consist of the following:
December 31,
-----------------
2006 2005
-------- -------
(in thousands)
Trade receivables $31,044 $16,638
Less: allowance for doubtful accounts (830) (569)
------- -------
30,214 16,069
Recoverable income taxes -- 2
Other 407 365
------- -------
$30,621 $16,436
======= =======
NOTE 5. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and trade
receivables. The Company places its temporary cash investments with high credit
quality financial institutions. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers comprising
the Company's customer base, and their dispersion across many industries and
geographic regions. The Company seeks to limit its exposure of credit risks in
any single country or region. All financial investments inherently expose
holders to market risks, including changes in currency and interest rates. The
Company manages its exposure to these market risks through its regular operating
and financing activities.
F-20
NOTE 6. INVENTORIES
Inventories consist of the following:
December 31,
-----------------
2006 2005
------- -------
(in thousands)
Raw materials $15,307 $ 9,774
Work in process 4,213 4,699
Finished goods 4,442 1,926
------- -------
23,962 16,399
Less: allowances (2,872) (1,829)
------- -------
$21,090 $14,570
======= =======
The above includes certain inventories which are valued using the LIFO method,
which aggregated $4,697,000 and $4,746,000 as of December 31, 2006 and December
31, 2005, respectively. The excess of FIFO cost over LIFO cost as of December
31, 2006 and December 31, 2005 was approximately $738,000 and $502,000,
respectively.
NOTE 7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31,
-------------------
2006 2005
-------- --------
(in thousands)
Land $ 1,170 $ 1,170
Buildings and leasehold improvements 9,127 6,956
Equipment and other property 25,738 18,585
-------- --------
36,035 26,711
Less: accumulated depreciation (23,903) (17,957)
-------- --------
$ 12,132 $ 8,754
======== ========
F-21
NOTE 8. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following:
December 31, 2006 December 31, 2005
-------------------------------- --------------------------------
Gross Accumulated Net Gross Accumulated Net
Value Amortization Value Value Amortization Value
------- ------------ ------- ------- ------------ -------
(in thousands)
Goodwill $22,548 $ -- $22,548 $10,303 $ -- $10,303
------- ------ ------- ------- ---- -------
Other intangible assets:
Customer relationships 3,300 45 3,255 -- -- --
Patents 1,219 805 414 919 723 196
Trademarks 1,772 -- 1,772 572 -- 572
Developed technology 1,700 30 1,670 -- -- --
Licensing fees 355 89 266 355 53 302
Covenant-not-to-compete 100 15 85 -- -- --
Other 51 41 10 51 36 15
------- ------ ------- ------- ---- -------
Total other intangible assets 8,497 1,025 7,472 1,897 812 1,085
------- ------ ------- ------- ---- -------
$31,045 $1,025 $30,020 $12,200 $812 $11,388
======= ====== ======= ======= ==== =======
The Company conducted its initial test for impairment of goodwill and other
intangible assets in the second quarter of 2002. The Company allocated its
adjusted goodwill balance to its reporting units and conducted the transitional
impairment tests required by SFAS No. 142. The fair values of the reporting
units were estimated using a combination of the expected present values of
future cash flows and an assessment of comparable market values. No impairment
charges were recorded as a result of the initial impairment test. There were no
impairment charges related to goodwill and intangible assets recorded during
2006, 2005 and 2004.
The other intangible assets that have definite lives are all amortizable and
have original estimated useful lives as follows: customer relationships are
amortized over approximately six years and eight years; patents are amortized
over approximately 13 years, seven years or five years; developed technology is
amortized over approximately five years and six years; licensing fees over
approximately 10 years; covenants-not-to-compete are amortized over
approximately one and two-thirds years. Trademarks are not amortized.
Amortization expense for intangible assets subject to amortization in each of
the next five fiscal years is estimated to be: $980,000 in 2007, $901,000 in
2008, $849,000 in each of 2009 and 2010 and $813,000 in 2011.
Amortization expense related to intangible assets for 2006, 2005 and 2004 was
$213,000, $112,000 and $126,000, respectively. Intangible assets subject to
amortization have a weighted average life of approximately seven years.
F-22
NOTE 9. DEBT
Debt consists of the following:
December 31,
--------------
2006 2005
------- ----
(in thousands)
Prime rate loan $ -- $--
LIBOR rate loan 19,800 --
------- ---
19,800 --
Less: current portion -- --
------- ---
Total long-term debt $19,800 $--
======= ===
On August 3, 2005, the Company entered into a revolving credit facility (the
"Revolving Credit Facility") with Bank of America, N.A. ("Bank of America") to
replace its former senior credit facility. The Revolving Credit Facility (with a
standby and commercial letter of credit sub-limit of $5,000,000) provides for
borrowings up to $30,000,000. The Revolving Credit Facility expires on June 30,
2008. Borrowings under the Revolving Credit Facility bear interest, at the
Company's option, at the London interbank offering rate ("LIBOR") plus a margin
rate ranging from 0.9% to 1.9%, or the higher of a Base Rate plus a margin rate
ranging from 0% to 0.5%. The Base Rate is equal to the higher of (i) the Federal
Funds Rate plus 0.5%, or (ii) Bank of America's publicly announced prime rate.
The margin rates are based on certain leverage ratios, as defined. The Company
is subject to compliance with certain financial covenants set forth in the
Revolving Credit Facility, including but not limited to, capital expenditures,
consolidated net worth and certain interest and leverage ratios, as defined. As
of December 31, 2006, the Company had an outstanding balance of $19,800,000
under the Revolving Credit Facility, which bore interest at 6.25%. As of
December 31, 2005, the Company did not have any outstanding balances under the
Revolving Credit Facility.
The weighted average interest rate on borrowings during 2006 and 2005 was 6.47%
and 6.33%, respectively.
F-23
NOTE 10. ACCRUED LIABILITIES - OTHER
Accrued liabilities - other consist of the following:
December 31,
---------------
2006 2005
------ ------
(in thousands)
Taxes (other than income) and insurance $ 430 $ 483
Commissions 892 451
Accrued litigation and legal fees 476 558
Other professional fees 741 484
Environmental 1,455 293
Warranty 1,197 851
Deferred revenue 690 --
Other 1,414 973
------ ------
$7,295 $4,093
====== ======
Included in the environmental accrual are estimates for all known costs believed
to be probable for sites, which the Company currently operates or had operated
at one time and that are explained more fully under Environmental (Note 12).
A summary of the Company's warranty reserve is as follows:
December 31,
--------------
2006 2005
------ -----
(in thousands)
Liability, beginning of year $ 851 $ 921
Acquired liability 181 --
Expense for new warranties issued 455 434
Expense related to accrual revisions for prior year 187 (161)
Warranty claims paid (477) (343)
------ -----
Liability, end of period $1,197 $ 851
====== =====
NOTE 11. RETIREMENT PLANS AND DEFERRED COMPENSATION
The Company maintains five defined contribution pension plans covering all of
its full-time, US employees. The Company's contributions to these plans are
based on a percentage of employee contributions and/or plan year gross wages, as
defined. All of the Company's subsidiaries, except RFL, provide contributions to
their plans based on a percentage of employee contributions. Condor, SL-MTI, RFL
and the corporate office also provide profit sharing contributions annually,
based on plan year gross wages. Costs incurred under these plans during 2006,
2005 and 2004 amounted to approximately $960,000, $1,049,000 and $976,000,
respectively.
F-24
The Company has agreements with certain active and retired directors, officers
and key employees providing for supplemental retirement benefits. The liability
for supplemental retirement benefits is based on the most recent mortality
tables available and discount rates of 6% to 12%. The amount charged to income
in connection with these agreements amounted to $386,000, $422,000 and $358,000,
for 2006, 2005 and 2004, respectively.
The Company is the owner and beneficiary of life insurance policies on the lives
of some of the participants having a deferred compensation or supplemental
retirement agreement. As of December 31, 2006, the aggregate death benefit
totaled $586,000, with the corresponding cash surrender value of all policies
totaling $308,000.
As of December 31, 2006, certain agreements restrict the Company from utilizing
cash surrender value of certain life insurance policies totaling approximately
$308,000 for purposes other than the satisfaction of the specific underlying
deferred compensation agreements, if benefits are not paid by the Company. The
Company nets the dividends realized from the life insurance policies with
premium expenses. Net expenses recorded in connection with these policies
amounted to $20,000, $17,000 and $9,000 for 2006, 2005 and 2004, respectively.
NOTE 12. COMMITMENTS AND CONTINGENCIES
LEASES: The Company is a party to certain leases for facilities, equipment and
vehicles from third parties, which expire through 2011. The minimum rental
commitments as of December 31, 2006 are as follows:
Operating Capital
--------- -------
(in thousands)
2007 $1,907 $15
2008 783 --
2009 393 --
2010 282 --
2011 187 --
Thereafter -- --
------ ---
Total minimum payments $3,552 $15
------ ---
Less: interest (3)
---
Total principal payable $12
===
For 2006, 2005 and 2004, rental expense applicable to continuing operations
aggregated approximately $2,386,000, $1,456,000 and $1,393,000, respectively.
LETTERS OF CREDIT: As of December 31, 2006 and December 31, 2005, the Company
was contingently liable for $620,000 and $634,000, respectively, under an
outstanding letter of credit issued for casualty insurance requirements.
LITIGATION: In the ordinary course of its business, the Company is subject to
loss contingencies pursuant to foreign and domestic federal, state and local
governmental laws and regulations and is also party to certain legal actions,
which may occur in the normal operations of the Company's business.
F-25
The Company, through its wholly-owned subsidiary SLW Holdings, Inc., has been a
party to an arbitration proceeding brought by Niles Audio, Inc. SLW Holdings,
Inc., formerly known as SL Waber, Inc., sold all of its assets in August 2001.
Niles Audio, Inc. was a former customer of SLW Holdings. The parties are
currently in discussions to settle this dispute. The Company believes that
neither the results of arbitration nor the terms of a potential settlement, as
the case may be, will have a material adverse impact on its consolidated
financial position or results of operations of the Company.
On June 12, 2002, the Company and SurfTech (a wholly owned subsidiary, the
operating assets of which were sold in November 2003), were served with a class
action complaint by twelve individual plaintiffs (the "Complaint") filed in
Superior Court of New Jersey for Camden County (the "Private Action"). The
Company and SurfTech are currently two of approximately 39 defendants named in
the Private Action. The Complaint alleges, among other things, that the
plaintiffs may suffer personal injuries as a result of consuming water
distributed from the Puchack Wellfield located in Pennsauken Township, New
Jersey (which supplied Camden, New Jersey).
The Private Action arises from similar factual circumstances as current
environmental litigation and administrative actions involving the Pennsauken
Landfill and Puchack Wellfield, with respect to which the Company has been
identified as a potentially responsible party. These actions are discussed
below. These actions and the Private Action both allege that SurfTech and other
defendants contaminated ground water through the disposal of hazardous
substances at facilities in the area. SurfTech once operated a chrome-plating
facility in Pennsauken Township, New Jersey.
In early 2006, the Superior Court dismissed the claims of eleven plaintiffs on
statute of limitations grounds. The Superior Court is scheduled to hear
arguments for the remaining plaintiff in April 2007.
It is management's opinion that the impact of legal actions brought against the
Company and its operations will not have a material adverse effect on its
consolidated financial position or results of operations. However, the ultimate
outcome of these matters, as with litigation generally, is inherently uncertain,
and it is possible that some of these matters may be resolved adversely to the
Company. The adverse resolution of any one or more of these matters could have a
material adverse effect on the business, operating results, financial condition
or cash flows of the Company.
ENVIRONMENTAL: Loss contingencies include potential obligations to investigate
and eliminate or mitigate the effects on the environment of the disposal or
release of certain chemical substances at various sites, such as Superfund sites
and other facilities, whether or not they are currently in operation. The
Company is currently participating in environmental assessments and cleanups at
a number of sites under these laws and may in the future be involved in
additional environmental assessments and cleanups. Based upon investigations
completed by the Company and its independent engineering-consulting firms to
date, management has provided an estimated accrual for all known costs believed
to be probable in the amount of $5,188,000, of which $3,733,000 is included as
other long-term liabilities. However, it is the nature of environmental
contingencies that other circumstances might arise, the costs of which are
indeterminable at this time due to such factors as changing government
regulations and stricter standards, the unknown magnitude of defense and cleanup
costs, the unknown timing and extent of the remedial actions that may be
required, the determination of the Company's liability in proportion to other
responsible parties, and the extent, if any, to which such costs are recoverable
from other parties or from insurance. Although these contingencies could result
in additional expenses or judgments, or offsets thereto; however, at the present
time such expenses or judgments are not expected
F-26
to have a material adverse effect on the Company's consolidated financial
position or results of operations, beyond the amount already reserved. Most of
the Company's environmental costs relate to discontinued operations and such
costs have been recorded in discontinued operations.
There are two sites on which the Company may incur material environmental costs
in the future as a result of past activities of SurfTech. These sites are the
Company's properties located in Pennsauken, New Jersey (the "Pennsauken Site"),
and in Camden, New Jersey (the "Camden Site"). With respect to the Pennsauken
Site, the Company is the subject of various lawsuits and administrative actions
relating to environmental issues concerning the Pennsauken Landfill and the
Puchack Wellfield. In 1991 and 1992, the New Jersey Department of Environmental
Protection (the "NJDEP") served directives that would subject the Company to,
among other things, $9,266,000 in collective reimbursements (with other parties)
for the remediation of the Puchack Wellfield. In addition, in 2006 the United
States Environmental Protection Agency (the "EPA") named the Company as a
potential responsible party (a "PRP") in connection with the remediation of the
Puchack Wellfield, which it designated a Superfund Site. The EPA has estimated
that it will cost approximately $17.6 million to remediate the Puchack
Wellfield. The Company believes the recent action by the EPA has effectively
superseded the NJDEP directives.
Notwithstanding these assertions, based on discussions with its attorneys and
consultants, the Company believes the EPA analytical effort is far from
complete. Further, technical data has not established that offsite migration of
hazardous substances from the Pennsauken Site contributed to the contamination
of the Puchack Wellfield. In any event, the evidence establishes that hazardous
substances from the Pennsauken Site could have contributed only a portion of the
total contamination delineated at the Puchack Wellfield. There are other
technical factors and defenses that indicate that the remediation proposed by
the EPA is technically flawed. Based on the foregoing, the Company believes that
it has significant defenses against all or part of the EPA claim and that other
PRPs should be identified to support the ultimate cost of remediation.
Nevertheless, the Company's attorneys have advised that it is likely that it
will incur some liability in this matter. Based on the information so far, the
Company has estimated remediation liability for this matter of $4 million
($2,480,000, net of tax), which has been reserved and recorded as part of
discontinued operations in the fourth quarter of 2006.
The Company has reported a ground water contamination plume at the Camden Site.
In February 2006, the Company submitted to the NJDEP a plan to certify the
potential areas of concern for the Camden Site, which is currently under review.
Based on the information so far, the Company believes that the cost to remediate
the Camden Site should not exceed $560,000, which has been fully reserved. These
costs have been recorded as a component of discontinued operations in previous
years.
The Company is investigating soil and ground water contamination on SL-MTI's
property in Montevideo, Minnesota. SL-MTI has conducted analysis of the
contamination and performed remediation at the site. Further remediation efforts
will be required and the Company is engaged in discussions with the Minnesota
Pollution Control Agency to develop a remediation plan. Based on the current
information, the Company believes it will incur remediation costs at this site
of approximately $188,000, which has been accrued at December 31, 2006. These
costs are recorded as a component of continuing operations.
The Company filed claims with several of its insurers seeking reimbursement for
past and future environmental costs. In settlement of its claims, the Company
received aggregate cash payments of
F-27
$2,800,000 prior to fiscal 2001 and contingent commitments from three insurers
to pay a portion of environmental costs associated with the SurfTech Site equal
to: 15% of costs up to $300,000, 15% of costs up to $150,000 and 20% of costs up
to $400,000, respectively. The Company has received from these three insurers a
total of $821,000 as payment of their contingent commitments through 2006. These
payments have been recorded as income, net of tax, in discontinued operations.
As of December 31, 2006 and December 31, 2005, environmental accruals of
$5,188,000 and $1,220,000, respectively, have been recorded by the Company.
EMPLOYMENT AGREEMENTS: The Company entered into severance agreements with
certain key employees in 2001 that provide for one-time payments in the event
the employee is terminated within twelve months of a change-of-control, as
defined. These payments range from three to 24 months of the employee's base
salary as of the termination date, as defined. If a triggering event had taken
place in 2006 and if these employees had been terminated during the year, the
payments would have aggregated approximately $3,327,000 under such
change-of-control agreements.
NOTE 13. CASH FLOW INFORMATION
Supplemental disclosures of cash flow information:
Years Ended December 31,
------------------------
2006 2005 2004
------ ------ ----
(in thousands)
Interest paid $ 604 $ 489 $321
Income taxes paid $1,671 $1,480 $407
NOTE 14. ACQUISITIONS
AULT INCORPORATED: On January 26, 2006, the Company, through a wholly owned
subsidiary, acquired approximately 86.9% of the outstanding common stock of Ault
Incorporated ("Ault") at $2.90 per share. The Company had previously purchased
in the open market approximately 4.8% of the outstanding common stock of Ault
for an average price of $2.39 per share, which was recorded as investments
available for sale at December 31, 2005. Immediately after acquiring the Ault
shares, the Company's wholly owned subsidiary was merged with and into Ault. As
a result, Ault became a wholly owned subsidiary of the Company, and the shares
not tendered were converted into the right to receive $2.90 per share in cash,
without interest. The total purchase price for the common stock of Ault was
approximately $13,986,000, which includes the shares already owned by the
Company. The Company also paid approximately $2,079,000, including interest, to
acquire all of the outstanding shares of Ault's preferred stock and incurred
additional acquisition related costs of $2,604,000 primarily related to legal
and investment banking fees, due diligence expenses and the payment of certain
pre-acquisition contingencies. The source of funds for the acquisition was a
combination of the Company's available cash and borrowings of approximately
$5,900,000 from the Revolving Credit Facility.
F-28
Ault is headquartered in Minneapolis, Minnesota, maintains an engineering and
sales office in Norwood, Massachusetts and operates an engineering and sales
office and manufacturing facilities in the People's Republic of China. Ault's
operating results are reported in the segment SLPE (Note 15) from the date of
acquisition.
The following table summarizes the estimated fair values of the net assets
acquired. A third party appraiser was used to value certain tangible and
intangible assets. The purchase price (in thousands) of the Ault acquisition was
allocated as follows:
Accounts receivable, net $ 6,716
Inventory, net 3,871
Note receivable - short term 1,125
Other current assets 701
Deferred income taxes, net 3,141
Plant and equipment, net 2,449
Goodwill 3,999
Intangible assets 2,400
Note receivable - long term 563
Other assets 111
Accounts payable (6,895)
Accrued compensation (656)
Other current liabilities (331)
-------
Total purchase price, net of cash acquired $17,194
Acquisition costs incurred in 2005 (1,034)
-------
Acquisition costs for the twelve months
ended December 31, 2006 $16,160
=======
Of the $2,400,000 of intangible assets, $1,100,000 was allocated to customer
relationships, $600,000 was allocated to developed technology and $700,000 to
other intangibles. The Company estimates the amortization period for the
customer relationships and the developed technology to be six years and five
years, respectively. The amortization period for the other intangible assets
that are subject to amortization range from approximately one and two-thirds
years to seven years.
MTE CORPORATION: On October 31, 2006, the Company completed the acquisition of
MTE Corporation ("MTE") for $15,606,000, net of cash acquired. The acquisition
was financed under the Revolving Credit Facility.
MTE maintains its headquarters and manufacturing in two leased facilities in
Milwaukee, Wisconsin. It also manufactures subassemblies through a contract
manufacturer in Juarez, Mexico. MTE's operating results are reported in the
Power Electronics Group segment (Note 15) from the date of acquisition. MTE was
a privately held company with its fiscal year ending October 31. For the twelve
months ended October 31, 2006, MTE recorded net sales of $17,016,000 (unaudited)
and income from operations of $1,815,000 (unaudited).
F-29
The following table summarizes the initial estimated fair value of the net
assets acquired. A third party appraiser was used to value certain tangible and
intangible assets. The purchase price (in thousands) of the MTE acquisition was
allocated as follows:
Accounts receivable, net $ 2,768
Inventory, net 2,954
Other current assets 11
Deferred income taxes, net (1,663)
Plant and equipment, net 156
Goodwill 8,245
Intangible assets 4,200
Accounts payable (680)
Accrued compensation (304)
Other current liabilities (81)
-------
Total purchase price, net of cash acquired $15,606
=======
Of the $4,200,000 of intangible assets, $2,200,000 was allocated to customer
relationships, $1,100,000 was allocated to developed technology and $900,000 to
trademarks. The Company estimates the amortization period for the customer
relationships and the developed technology to be eight years and six years,
respectively. Trademarks are considered to have an indefinite life and are not
amortized.
Upon closing an acquisition, the Company, with the assistance of a third party
appraiser estimates the fair values of assets and liabilities acquired and
consolidates the acquisition as quickly as possible. Given the time it takes to
obtain all pertinent information to finalize the acquired firm's balance sheet,
then to adjust the acquired firm's accounting policies, procedures, books and
records to the Company's standards, it can take several quarters before the
initial fair value estimates are finalized. We may adjust our initial estimates
in subsequent periods.
The following unaudited pro forma financial information combines the
consolidated statements of income as if the acquisition of MTE had occurred as
of the beginning of the periods presented. The pro forma adjustments include
only the effects of events directly attributed to the transaction that are
factually supportable. The pro forma adjustments contained in the table below
include interest expense on the acquisition debt and the amortization of
intangibles. All pro forma adjustments have been tax effected at the statutory
rate.
Years Ended
December 31,
-------------------
2006 2005
-------- --------
(in thousands,
except per share
amounts)
(unaudited)
Net sales $191,106 $140,548
Income from continuing operations before taxes 10,300 9,766
Income from continuing operations 6,829 7,777
Basic net income per common share $ 1.21 $ 1.40
Diluted net income per common share $ 1.17 $ 1.36
F-30
The pro forma financial information is presented for informational purposes only
and is not necessarily indicative of the operating results that would have
occurred had the acquisition of MTE been consummated as of the beginning of the
periods presented. Such information is not indicative of future operating
results.
NOTE 15. INDUSTRY SEGMENTS
The Company currently operates under four business segments: SL Power
Electronics Corp., the High Power Group, SL Montevideo Technology, Inc.
("SL-MTI") and RFL Electronics Inc. ("RFL"). Following its acquisition, the
Company consolidated the operations of Ault and its subsidiary, Condor D.C.
Power Supplies, Inc. ("Condor"), into SL Power Electronics Corp. ("SLPE"). In
accordance with the guidance provided in Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information," ("SFAS No. 131") this subsidiary is reported as one business
segment. Following the acquisition of MTE, the Company combined MTE with its
subsidiary, Teal Electronics Corp. ("Teal") into one business segment, which is
reported as the High Power Group. Management has combined SLPE and the High
Power Group into one business unit classified as the Power Electronics Group.
The Company aggregates operating business subsidiaries into a single segment for
financial reporting purposes if aggregation is consistent with the objectives of
SFAS No. 131 and if the segments have similar characteristics in each of the
following areas:
- nature of products and services
- nature of production process
- type or class of customer
- methods of distribution
The Other segment includes corporate related items, financing activities and
other costs not allocated to reportable segments, which includes but is not
limited to certain legal, litigation and public reporting charges and the
results of insignificant operations. The accounting policies of these business
units are the same as those described in the summary of significant accounting
policies (see Note 1 for additional information).
Business segment operations are conducted through domestic subsidiaries. For all
periods presented, sales between business segments were not material. No single
customer accounted for more than 10% of consolidated net sales during 2006, 2005
and 2004. Each of the segments has certain major customers, the loss of any of
which would have a material adverse effect on such segment.
F-31
Years Ended December 31,
------------------------------
2006 2005 2004
-------- -------- --------
(in thousands)
NET SALES
Power Electronics Group:
SLPE $ 87,949 $ 43,233 $ 41,457
High Power Group 39,993 32,777 30,265
-------- -------- --------
Total 127,942 76,010 71,722
-------- -------- --------
SL-MTI 25,704 28,085 24,497
RFL 23,127 22,778 22,585
-------- -------- --------
Consolidated $176,773 $126,873 $118,804
======== ======== ========
Years Ended December 31,
------------------------------
2006 2005 2004
-------- -------- --------
(in thousands)
INCOME FROM OPERATIONS
Power Electronics Group:
SLPE $ 6,316 $ 4,543 $ 3,789
High Power Group 5,836 4,911 4,635
------- ------- -------
Total 12,152 9,454 8,424
------- ------- -------
SL-MTI 1,555 3,371 2,827
RFL 2,217 2,284 2,091
Other (4,871) (4,911) (5,033)
------- ------- -------
Income from operations 11,053 10,198 8,309
------- ------- -------
Amortization of deferred
financing costs (88) (485) (447)
Interest income 35 216 102
Interest expense (744) (522) (347)
------- ------- -------
Income from continuing operations
before income taxes $10,256 $ 9,407 $ 7,617
======= ======= =======
December 31,
------------------
2006 2005
-------- -------
(in thousands)
TOTAL ASSETS
Power Electronics Group:
SLPE $ 41,809 $13,330
High Power Group 29,606 12,574
-------- -------
Total 71,415 25,904
-------- -------
SL-MTI 12,035 12,495
RFL 16,271 15,825
Other 6,822 16,090
-------- -------
Consolidated $106,543 $70,314
======== =======
F-32
December 31,
-----------------
2006 2005
------- -------
(in thousands)
INTANGIBLE ASSETS, NET
Power Electronics Group:
SLPE $ 6,298 $ --
High Power Group 18,197 5,822
------- -------
Total 24,495 5,822
------- -------
SL-MTI 10 15
RFL 5,515 5,551
------- -------
Consolidated $30,020 $11,388
======= =======
Years Ended December 31,
------------------------
2006 2005 2004
------ ------ ------
(in thousands)
CAPITAL EXPENDITURES
Power Electronics Group:
SLPE $2,207 $ 606 $ 542
High Power Group 113 156 189
------ ------ ------
Total 2,320 762 731
------ ------ ------
SL-MTI 307 515 476
RFL 428 627 410
Other -- -- 25
------ ------ ------
Consolidated $3,055 $1,904 $1,642
====== ====== ======
Years Ended December 31,
------------------------
2006 2005 2004
------ ------ ------
(in thousands)
DEPRECIATION AND AMORTIZATION
Power Electronics Group:
SLPE $1,268 $ 706 $ 978
High Power Group 309 298 291
------ ------ ------
Total 1,577 1,004 1,269
------ ------ ------
SL-MTI 382 355 289
RFL 610 577 532
Other 36 50 43
------ ------ ------
Consolidated $2,605 $1,986 $2,133
====== ====== ======
Financial information relating to the Company's segments by geographic area is
as follows:
F-33
Years Ended December 31,
------------------------------
2006 2005 2004
-------- -------- --------
(in thousands)
NET SALES (1)
United States $147,263 $109,941 $103,141
Foreign 29,510 16,932 15,663
-------- -------- --------
Consolidated $176,773 $126,873 $118,804
======== ======== ========
LONG-LIVED ASSETS
United States $ 39,399 $ 19,281 $ 18,637
Foreign 2,753 861 1,384
-------- -------- --------
Consolidated $ 42,152 $ 20,142 $ 20,021
======== ======== ========
(1) Net sales are attributed to countries based on location of customer.
NOTE 16. FOREIGN OPERATIONS
In addition to manufacturing operations in California, Minnesota, New Jersey and
Wisconsin, the Company manufactures substantial quantities of products in
premises leased in Mexicali, Mexico, Matamoros, Mexico and Tecate, Mexico. The
Company has outsourced some of its products with a contract manufacturer located
in Juarez, Mexico. With the acquisition of Ault, the Company obtained
manufacturing facilities in Xianghe, China. These external and foreign sources
of supply present risks of interruption for reasons beyond the Company's
control, including political or economic instability and other uncertainties.
Generally, the Company's sales are priced in U.S. dollars and its costs and
expenses are priced in U.S. dollars, Mexican pesos and Chinese yuan.
Accordingly, the competitiveness of the Company's products relative to locally
produced products may be affected by the performance of the U.S. dollar compared
with that of its foreign customers' and competitors' currencies. Foreign net
sales comprised 17%, 13% and 13% of net sales from continuing operations for
2006, 2005 and 2004, respectively.
Additionally, the Company is exposed to foreign currency exchange rate
fluctuations, which might result from fluctuations in the value of the Mexican
peso and Chinese yuan versus the U.S. dollar. At December 31, 2006, the Company
had net assets of $485,000 subject to fluctuations in the value of the Mexican
peso and Chinese yuan. At December 31, 2005, the Company had net liabilities of
$639,000 subject to fluctuations in the value of the Mexican peso. Fluctuations
in the value of the foreign currencies were not significant in 2006. There can
be no assurance that the value of the Mexican peso and Chinese yuan will
continue to remain stable.
SLPE manufactures most of its products in Mexico and China. Teal has transferred
a significant portion of its manufacturing to a wholly-owned subsidiary located
in Tecate, Mexico. SL-MTI manufactures a significant portion of its products in
Mexico. MTE utilizes a contract manufacturer in Juarez, Mexico. SLPE, the High
Power Group and SL-MTI price and invoice their sales in U.S. dollars. The
Mexican subsidiaries of SLPE, SL-MTI and Teal maintain their books and records
in Mexican pesos. SLPE's subsidiaries in China maintain their books and records
in Chinese yuan, however, most of their sales are invoiced in U.S. dollars.
Business operations conducted in Mexico or China incur their respective labor
F-34
costs and supply expenses in Mexican pesos and Chinese yuan, as the case may be.
For additional information related to financial information about foreign
operations, see Note 15 above.
NOTE 17. RELATED PARTY TRANSACTIONS
RFL has an investment of $15,000 in RFL Communications PLC, ("RFL
Communications"), representing 4.5% of the outstanding equity thereof. RFL
Communications is a distributor of teleprotection and communication equipment
located in the United Kingdom. It is authorized to sell RFL products in
accordance with an international sales agreement. Sales to RFL Communications
for 2006, 2005 and 2004 were $767,000, $954,000 and $1,156,000, respectively.
Accounts receivable due from RFL Communications at December 31, 2006 and
December 31, 2005 were $43,000 and $168,000, respectively.
As a result of certain services being provided to the Company by Steel Partners,
Ltd. ("SPL"), a company controlled by the Chairman of the Board of the Company,
Warren Lichtenstein, the Compensation Committee has approved fees for services
provided by SPL. These fees are the only consideration for the services of the
Chairman of the Board, Warren Lichtenstein and the Company's Vice Chairman, Glen
Kassan (effective August 10, 2005, Messrs. Lichtenstein and Kassan relinquished
their roles as Chief Executive Officer and President, respectively) and other
assistance from SPL. The services provided include management and advisory
services with respect to operations, strategic planning, finance and accounting,
merger, sale and acquisition activities and other aspects of the businesses of
the Company. Fees of $475,000 were expensed by the Company for SPL's services in
2006, 2005 and 2004 pursuant to the Management Agreement dated as of January 23,
2002 by and between the Company and SPL. Approximately $40,000 and $40,000 were
payable at December 31, 2006 and December 31, 2005, respectively. An additional
payment of $250,000 was also awarded to SPL by the Compensation Committee on
account of SPL's significant services in 2004.
F-35
NOTE 18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
March 31, 2006 June 30, 2006 September 30, 2006 December 31, 2006
-------------- ------------- ------------------ -----------------
(in thousands, except per share data)
Net sales $39,285 $43,114 $45,165 $49,209
Gross margin $13,152 $14,111 $14,356 $15,029
Income from continuing operations
before income taxes $ 1,802 $ 2,917 $ 2,609 $ 2,928
Net income (loss) (a) $ 1,121 $ 1,922 $ 1,658 ($1,148)
Diluted net income (loss) per common share $ 0.19 $ 0.33 $ 0.28 ($0.20)
(a)Includes (loss) from discontinued
operations, net of tax ($112) ($185) ($148) ($2,862)
Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
March 31, 2005 June 30, 2005 September 30, 2005 December 31, 2005
-------------- ------------- ------------------ -----------------
(in thousands, except per share data)
Net sales $32,456 $31,259 $32,098 $31,060
Gross margin $11,861 $11,429 $11,167 $10,640
Income from continuing operations
before income taxes $ 2,566 $ 1,955 $ 2,931 $ 1,955
Net income (a) $ 1,899 $ 1,127 $ 2,454 $ 1,667
Diluted net income per common share $ 0.34 $ 0.20 $ 0.42 $ 0.29
(a) (Loss) from discontinued operations,
net of tax ($70) ($231) ($98) ($74)
F-36
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Additions
---------------------------
Balance at Charged to
Beginning of Costs and Charged to Balance at End
Description Period Expenses Other Accounts Deductions of Period
----------- ------------ ---------- -------------- ---------- --------------
(in thousands)
YEAR ENDED DECEMBER 31, 2006
Allowance for:
Doubtful accounts $569 $ 96 $853 $688 $830
YEAR ENDED DECEMBER 31, 2005
Allowance for:
Doubtful accounts $472 $ 86 $ 38 $ 27 $569
YEAR ENDED DECEMBER 31, 2004
Allowance for:
Doubtful accounts $365 $136 $ 3 $ 32 $472
F-37