UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2010
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 1-4987
SL INDUSTRIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
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New Jersey
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21-0682685
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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520 Fellowship Road, Suite A114, Mt. Laurel, NJ
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08054
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code:
856-727-1500
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check One):
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting Company
þ
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
The number of shares of common stock outstanding as of July 28, 2010 was 6,026,115.
Item 1. Financial Statements
SL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
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June 30,
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December 31,
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2010
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2009
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(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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6,679,000
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$
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9,967,000
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Receivables, net
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30,028,000
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22,388,000
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Inventories, net
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20,380,000
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18,815,000
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Prepaid expenses
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2,157,000
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685,000
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Deferred income taxes, net
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4,215,000
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4,058,000
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Total current assets
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63,459,000
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55,913,000
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Property, plant and equipment, net
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9,020,000
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9,274,000
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Deferred income taxes, net
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5,147,000
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5,331,000
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Goodwill
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22,766,000
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22,769,000
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Other intangible assets, net
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4,490,000
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4,939,000
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Other assets and deferred charges
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1,066,000
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1,225,000
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Total assets
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$
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105,948,000
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$
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99,451,000
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LIABILITIES
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Current liabilities:
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Accounts payable
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$
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12,777,000
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$
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10,208,000
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Accrued income taxes
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863,000
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830,000
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Accrued liabilities:
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Payroll and related costs
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4,738,000
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3,482,000
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Other
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7,863,000
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6,329,000
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Total current liabilities
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26,241,000
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20,849,000
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Deferred compensation and supplemental retirement benefits
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2,288,000
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2,365,000
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Other liabilities
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7,088,000
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7,137,000
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Total liabilities
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35,617,000
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30,351,000
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Commitments and contingencies
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SHAREHOLDERS EQUITY
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Preferred stock, no par value; authorized, 6,000,000 shares; none issued
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$
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$
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Common stock, $0.20 par value; authorized, 25,000,000 shares;
issued, 8,298,000 shares
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1,660,000
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1,660,000
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Capital in excess of par value
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43,276,000
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43,027,000
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Retained earnings
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44,211,000
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42,071,000
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Accumulated other comprehensive (loss)
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(150,000
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)
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(141,000
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)
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Treasury stock at cost, 2,272,000, and 2,166,000 shares, respectively
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(18,666,000
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)
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(17,517,000
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)
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Total shareholders equity
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70,331,000
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69,100,000
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Total liabilities and shareholders equity
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$
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105,948,000
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$
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99,451,000
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See accompanying notes to consolidated financial statements.
1
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2010
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2009
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2010
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2009
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Net sales
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$
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47,790,000
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$
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34,956,000
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$
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89,923,000
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$
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71,188,000
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Cost and expenses:
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Cost of products sold
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32,579,000
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23,559,000
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60,722,000
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47,904,000
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Engineering and product development
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3,201,000
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2,973,000
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6,181,000
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6,224,000
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Selling, general and administrative
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7,881,000
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7,420,000
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15,941,000
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14,777,000
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Depreciation and amortization
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798,000
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918,000
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1,572,000
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1,816,000
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Restructuring charges
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534,000
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534,000
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Total cost and expenses
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44,459,000
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35,404,000
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84,416,000
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71,255,000
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Income (loss) from operations
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3,331,000
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(448,000
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)
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5,507,000
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(67,000
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)
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Other income (expense):
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Amortization of deferred financing costs
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(60,000
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)
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(47,000
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)
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(121,000
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)
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(95,000
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)
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Fire related loss, net
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(70,000
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)
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(108,000
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)
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Interest income
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1,000
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2,000
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1,000
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6,000
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Interest expense
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(9,000
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)
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(13,000
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)
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(42,000
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)
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(47,000
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)
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Income (loss) from continuing operations before income taxes
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3,193,000
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(506,000
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)
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5,237,000
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(203,000
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)
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Income tax provision (benefit)
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1,130,000
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(159,000
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)
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1,898,000
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(101,000
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)
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Income (loss) from continuing operations
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2,063,000
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(347,000
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)
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3,339,000
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(102,000
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)
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(Loss) from discontinued operations, net of tax
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(1,049,000
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)
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(87,000
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)
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(1,199,000
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)
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(283,000
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)
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Net income (loss)
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$
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1,014,000
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$
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(434,000
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)
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$
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2,140,000
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$
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(385,000
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)
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Basic net income (loss) per common share
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Income (loss) from continuing operations
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$
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0.34
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$
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(0.06
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)
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$
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0.55
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$
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(0.02
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)
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(Loss) from discontinued operations, net of tax
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(0.17
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)
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(0.01
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)
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(0.20
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)
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(0.05
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)
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Net income (loss)
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$
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0.17
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$
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(0.07
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)
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$
|
0.35
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$
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(0.06
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)*
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Diluted net income (loss) per common share
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Income (loss) from continuing operations
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$
|
0.34
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|
$
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(0.06
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)
|
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$
|
0.55
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|
$
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(0.02
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)
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(Loss) from discontinued operations, net of tax
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(0.17
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)
|
|
|
(0.01
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)
|
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|
(0.20
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)
|
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(0.05
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)
|
|
|
|
|
|
|
|
|
|
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Net income (loss)
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$
|
0.17
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|
$
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(0.07
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)
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$
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0.35
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|
$
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(0.06
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)*
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Shares used in computing basic net income (loss)
per common share
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6,027,000
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6,002,000
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6,076,000
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5,968,000
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Shares used in computing diluted net income (loss)
per common share
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6,066,000
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6,002,000
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6,111,000
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5,968,000
|
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SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
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|
|
|
|
|
|
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Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
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|
$
|
1,014,000
|
|
|
$
|
(434,000
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)
|
|
$
|
2,140,000
|
|
|
$
|
(385,000
|
)
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
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|
30,000
|
|
|
|
(1,000
|
)
|
|
|
(9,000
|
)
|
|
|
(9,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
1,044,000
|
|
|
$
|
(435,000
|
)
|
|
$
|
2,131,000
|
|
|
$
|
(394,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
*
|
|
Earnings per share does not total due to rounding.
|
See accompanying notes to consolidated financial statements.
2
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,140,000
|
|
|
$
|
(385,000
|
)
|
Adjustment for losses from discontinued operations
|
|
|
1,199,000
|
|
|
|
283,000
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
3,339,000
|
|
|
|
(102,000
|
)
|
|
|
|
|
|
|
|
Adjustments to reconcile income from continuing operations to net cash (used in) provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
949,000
|
|
|
|
1,111,000
|
|
Amortization
|
|
|
623,000
|
|
|
|
705,000
|
|
Amortization of deferred financing costs
|
|
|
121,000
|
|
|
|
95,000
|
|
Non-cash fire related loss
|
|
|
(346,000
|
)
|
|
|
|
|
Non-cash restructuring
|
|
|
|
|
|
|
332,000
|
|
Non-cash compensation expense (benefit)
|
|
|
157,000
|
|
|
|
(78,000
|
)
|
Stock-based compensation
|
|
|
180,000
|
|
|
|
124,000
|
|
Provisions for losses on accounts receivable
|
|
|
64,000
|
|
|
|
82,000
|
|
Deferred compensation and supplemental retirement benefits
|
|
|
196,000
|
|
|
|
203,000
|
|
Deferred compensation and supplemental retirement benefit payments
|
|
|
(269,000
|
)
|
|
|
(481,000
|
)
|
Deferred income taxes
|
|
|
46,000
|
|
|
|
(218,000
|
)
|
Loss on sale of equipment
|
|
|
2,000
|
|
|
|
38,000
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(7,705,000
|
)
|
|
|
4,012,000
|
|
Inventories
|
|
|
(1,724,000
|
)
|
|
|
800,000
|
|
Prepaid expenses
|
|
|
(440,000
|
)
|
|
|
146,000
|
|
Other assets
|
|
|
6,000
|
|
|
|
39,000
|
|
Accounts payable
|
|
|
2,568,000
|
|
|
|
(1,995,000
|
)
|
Accrued liabilities
|
|
|
540,000
|
|
|
|
(1,537,000
|
)
|
Accrued income taxes
|
|
|
803,000
|
|
|
|
196,000
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities from continuing operations
|
|
|
(890,000
|
)
|
|
|
3,472,000
|
|
Net cash (used in) operating activities from discontinued operations
|
|
|
(589,000
|
)
|
|
|
(868,000
|
)
|
|
|
|
|
|
|
|
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
|
|
|
(1,479,000
|
)
|
|
|
2,604,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(635,000
|
)
|
|
|
(496,000
|
)
|
Purchases of other assets
|
|
|
(152,000
|
)
|
|
|
(18,000
|
)
|
|
|
|
|
|
|
|
NET CASH (USED IN) INVESTING ACTIVITIES
|
|
|
(787,000
|
)
|
|
|
(514,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from Revolving Credit Facility
|
|
|
|
|
|
|
100,000
|
|
Payments of Revolving Credit Facility
|
|
|
|
|
|
|
(100,000
|
)
|
Proceeds from stock options exercised
|
|
|
429,000
|
|
|
|
|
|
Tax benefit from exercise of stock options
|
|
|
147,000
|
|
|
|
|
|
Treasury stock (purchases) sales, net
|
|
|
(1,656,000
|
)
|
|
|
297,000
|
|
|
|
|
|
|
|
|
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
|
|
|
(1,080,000
|
)
|
|
|
297,000
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
58,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(3,288,000
|
)
|
|
|
2,389,000
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
9,967,000
|
|
|
|
504,000
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
6,679,000
|
|
|
$
|
2,893,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
42,000
|
|
|
$
|
47,000
|
|
Income taxes
|
|
$
|
845,000
|
|
|
$
|
108,000
|
|
See accompanying notes to consolidated financial statements.
3
SL INDUSTRIES, INC.
Notes to Consolidated Financial Statements (Unaudited)
1. Basis Of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities
Exchange Act of 1934, as amended. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying financial statements contain all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair presentation.
Operating results for interim periods are not necessarily indicative of the results that may be
expected for the year ending December 31, 2010. These financial statements should be read in
conjunction with the Companys audited financial statements and notes thereon included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2009.
2. Receivables
Receivables consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
|
|
Trade receivables
|
|
$
|
30,409
|
|
|
$
|
22,607
|
|
Less: allowance for doubtful accounts
|
|
|
(715
|
)
|
|
|
(651
|
)
|
|
|
|
|
|
|
|
|
|
|
29,694
|
|
|
|
21,956
|
|
Other
|
|
|
334
|
|
|
|
432
|
|
|
|
|
|
|
|
|
|
|
$
|
30,028
|
|
|
$
|
22,388
|
|
|
|
|
|
|
|
|
3. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
|
|
Raw materials
|
|
$
|
16,205
|
|
|
$
|
15,234
|
|
Work in process
|
|
|
4,386
|
|
|
|
3,534
|
|
Finished goods
|
|
|
3,388
|
|
|
|
3,368
|
|
|
|
|
|
|
|
|
|
|
|
23,979
|
|
|
|
22,136
|
|
Less: allowances
|
|
|
(3,599
|
)
|
|
|
(3,321
|
)
|
|
|
|
|
|
|
|
|
|
$
|
20,380
|
|
|
$
|
18,815
|
|
|
|
|
|
|
|
|
4. Income (Loss) Per Share
The Company has presented net income (loss) per common share pursuant to Accounting Standards
Codification (ASC) 260 Earnings Per Share. Basic net income (loss) per common share is computed
by dividing reported net income (loss) available to common shareholders by the weighted average
number of shares outstanding for the period.
4
Diluted net income (loss) per common share is computed by dividing reported net income (loss)
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. For the three and six months ended June 30, 2009, stock equivalents were
not included in the computation of loss per share because to do so would be anti-dilutive.
The tables below set forth the computation of basic and diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands, except per share amounts)
|
|
|
|
Net
|
|
|
|
|
|
|
Per Share
|
|
|
Net
|
|
|
|
|
|
|
Per Share
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Loss
|
|
|
Shares
|
|
|
Amount
|
|
Basic net income (loss) per
common share
|
|
$
|
1,014
|
|
|
|
6,027
|
|
|
$
|
0.17
|
|
|
$
|
(434
|
)
|
|
|
6,002
|
|
|
$
|
(0.07
|
)
|
Effect of dilutive
securities
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss)
per common share
|
|
$
|
1,014
|
|
|
|
6,066
|
|
|
$
|
0.17
|
|
|
$
|
(434
|
)
|
|
|
6,002
|
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands, except per share amounts)
|
|
|
|
Net
|
|
|
|
|
|
|
Per Share
|
|
|
Net
|
|
|
|
|
|
|
Per Share
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Loss
|
|
|
Shares
|
|
|
Amount
|
|
Basic net income (loss) per
common share
|
|
$
|
2,140
|
|
|
|
6,076
|
|
|
$
|
0.35
|
|
|
$
|
(385
|
)
|
|
|
5,968
|
|
|
$
|
(0.06
|
)
|
Effect of dilutive
securities
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss)
per common share
|
|
$
|
2,140
|
|
|
|
6,111
|
|
|
$
|
0.35
|
|
|
$
|
(385
|
)
|
|
|
5,968
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six-month periods ended June 30, 2010 and June 30, 2009, approximately 328,000 and
364,000 stock options, respectively, were excluded from the dilutive computations because the
option exercise prices were greater than the average market price of the Companys common stock.
Stock-Based Compensation
The Company maintains two shareholder approved stock option plans that have expired: the
Non-Employee Director Nonqualified Stock Option Plan (the Director Plan) and the Long-Term
Incentive Plan (the 1991 Incentive Plan). Stock options issued under each plan remain
outstanding.
5
The Director Plan provided for the granting of nonqualified options to purchase up to 250,000
shares of the Companys common stock to non-employee directors of the Company in lieu of paying
quarterly retainer fees and regular quarterly meeting attendance fees. Stock options granted under
the Director Plan stipulated an exercise price per share of the fair market value of the Companys
common stock on the date of grant. Each option granted under the Director Plan is exercisable at
any time and expires 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 Compensation Committee (the Compensation Committee) of the
Companys Board of Directors (the Board), or incentive stock options, with an exercise price per
share not less than the fair market value of the Companys common stock on the date of grant. Each
option granted under the 1991 Incentive Plan is exercisable at any time and expires ten years from
date of grant. The 1991 Incentive Plan expired on September 25, 2001.
On May 14, 2008, the shareholders approved the 2008 Incentive Stock Plan (the 2008 Plan). The
2008 Plan was proposed to create an additional incentive to retain directors, key employees and
advisors of the Company. The 2008 Plan provides up to 315,000 shares of the Companys common stock
that may be subject to options and stock appreciation rights. Options granted under the 2008 Plan
are required to stipulate an exercise price per share of not less than the fair market value of the
Companys common stock on the business day immediately prior to the date of the grant. Options
granted under the 2008 Plan are exercisable no later than ten years after the grant date.
On September 29, 2008, the Company granted 155,000 incentive options to select executives and a key
employee under the 2008 Plan. The options issued vest in three equal installments, with the first
installment vesting on the date of the grant and the remaining two installments each vesting on the
second and third anniversary of the grant. During the three-month period ended June 30, 2010, two
sets of options were issued to executives of the Company. One set of options was for 15,000 shares.
The other set of options was for 100,000 shares. Vesting periods range from a portion vesting upon
issue to three years. Compensation expense is recognized over the vesting period of the options. In
recognition of such grants, the Company recorded $115,000 in compensation expense for the
three-month period ended June 30, 2010 and $63,000 for the three-month period ended June 30, 2009.
The Company recorded $180,000 in compensation expense for the six-month period ended June 30, 2010
and $124,000 for the six-month period ended June 30, 2009.
As of June 30, 2010, there was a total of $746,000 of total unrecognized compensation expense
related to the unvested stock options. Such unrecognized cost will be recorded over the next three
years. Also, the Company has recognized an expense of $122,000 and an expense of $67,000 in the
three-month periods ended June 30, 2010 and June 30, 2009, respectively, and an expense of $157,000
and a benefit of $78,000 in the six-month periods ended June 30, 2010 and June 30, 2009,
respectively, related to certain stock-based compensation arrangements.
6
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, 2009
|
|
|
380
|
|
|
$
|
10.13
|
|
|
|
3.48
|
|
|
|
|
|
Granted
|
|
|
115
|
|
|
$
|
11.89
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(67
|
)
|
|
$
|
6.40
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(28
|
)
|
|
$
|
11.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2010
|
|
|
400
|
|
|
$
|
11.19
|
|
|
|
4.49
|
|
|
$
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of June 30, 2010
|
|
|
241
|
|
|
$
|
10.57
|
|
|
|
3.24
|
|
|
$
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the six-month periods ended June 30, 2010 and June 30, 2009, the total intrinsic value
of options exercised was $365,000 and zero, respectively, and the actual tax benefit realized for
the tax deduction from these option exercises was $147,000 and zero, respectively. During the
six-month period ended June 30, 2010, options to purchase approximately 67,000 shares of common
stock with an aggregate exercise price of $429,000 were exercised by option holders. During the
six-month period ended June 30, 2009, no options to purchase common stock were exercised by option
holders.
5. Income Tax
The Company calculates its interim tax provision in accordance with the provisions of ASC 740-270
Income Taxes Interim Reporting. For each interim period the Company estimates its annual
effective income tax rate and applies the estimated rate to its year-to-date income or loss before
income taxes. The Company also computes the tax provision or benefit related to items separately
reported, such as discontinued operations, and recognizes the items net of their related tax effect
in the interim periods in which they occur. The Company also recognizes the effect of changes in
enacted tax laws or rates in the interim periods in which the changes occur.
For the six-month periods ended June 30, 2010 and June 30, 2009, the estimated income tax rate for
continuing operations was 36% and a benefit of 50%, respectively.
The Company has recorded gross unrecognized tax benefits, excluding interest and penalties, as of
June 30, 2010 and December 31, 2009 of $2,466,000 and $2,526,000, respectively. Tax benefits are
recorded pursuant to the provisions of ASC 740 Income Taxes. If such unrecognized tax benefits
are ultimately recorded in any period, the Companys effective tax rate would be reduced
accordingly for such period.
The Company has been examined by the Internal Revenue Service (the IRS) for periods up to and
including the calendar year 2004. In addition, a foreign tax authority is examining the Companys
transfer pricing policies. It is possible that this examination may be resolved within twelve
months. In addition, it is reasonably possible that the balance of the Companys unrecognized tax
benefits may change within the next twelve months by an amount ranging from zero to $439,000. The
Company records such unrecognized tax benefits upon the expiration of the applicable statute of
limitations. The Company recorded a liability for unrecognized benefits of $933,000, $877,000 and
$656,000 for federal, foreign and state taxes, respectively. Such benefits relate primarily to
expenses incurred in those jurisdictions.
7
The Company classifies interest and penalties related to unrecognized tax benefits as income tax
expense. At June 30, 2010, the Company has accrued approximately $534,000 for the payment of
interest and penalties.
During the six-month period ended June 30, 2010, the Company recorded additional benefits from
research and development tax credits of $92,000. As of June 30, 2010, the Companys gross research
and development tax credit carryforwards totaled approximately $1,809,000. Of these credits,
approximately $1,170,000 can be carried forward for 15 years and will expire between 2013 and 2025,
and approximately $639,000 can be carried forward indefinitely. As of June 30, 2010, the Companys
gross foreign tax credits totaled approximately $2,537,000. These credits can be carried forward
for ten years and will expire between 2017 and 2020.
6. Recently Adopted and Issued Accounting Pronouncements
In May 2009, the Financial Accounting Standards Board (the FASB) issued ASC 855 Subsequent
Events. ASC 855 incorporates guidance into accounting literature that was previously addressed
only in auditing standards. The statement refers to subsequent events that provide additional
evidence about conditions that existed at the balance-sheet date as recognized subsequent events.
Subsequent events that provide evidence about conditions arising after the balance-sheet date, but
prior to the issuance of the financial statements, are referred to as non-recognized subsequent
events. It also required companies to disclose the date through which subsequent events have been
evaluated and whether this date is the date the financial statements were issued or the date the
financial statements were available to be issued. In February 2010, ASC 855 was amended to
eliminate the requirement to disclose the date through which subsequent events have been evaluated.
The Company adopted this new standard, as amended. The Company evaluates subsequent events through
the date of filing and applies the guidance found in ASC 855 to its disclosures regarding such
events.
In June 2009, the FASB issued ASC 860 Transfers and Servicing. ASC 860 terminates the concept of
a qualifying special-purpose entity and removes any exceptions from applying Consolidation of
Variable Interest Entities to qualifying special-purpose entities. This statement must be applied
as of the beginning of each reporting entitys first annual reporting period that begins after
November 15, 2009 and for interim periods within that first annual reporting period and interim and
annual reporting periods thereafter. Earlier application was prohibited. The adoption of ASC 860
did not have an impact on the Companys consolidated financial statements.
In June 2009, the FASB issued ASC 810-10 Consolidation Overall to require a reporting entity to
perform an analysis of existing investments to determine whether such investments provide a
controlling financial interest in a variable interest entity. This analysis defines the primary
beneficiary of a variable interest entity as the enterprise that has both (1) the power to direct
the activities of significant impact on a variable interest entity, and (2) the obligation to
absorb losses or receive benefits from the variable interest entity that could potentially be
significant to the variable interest entity. ASC 810-10 also requires ongoing reassessments of
whether an enterprise is the primary beneficiary of a variable interest entity. ASC 810-10 is
effective as of the beginning of each reporting entitys first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting period and for
interim and annual reporting periods thereafter. Earlier application was prohibited. Under its
current operations, the adoption of ASC 810-10 does not have an impact on the Company.
8
In October 2009, the FASB issued Accounting Standards Update No. 2009-13 Multiple-Deliverable
Revenue Arrangements (ASU No. 2009-13). ASU No. 2009-13 amends guidance included within ASC
605-25 to require an entity to use an estimated selling price when vendor specific objective
evidence or acceptable third party evidence does not exist for any products or services included in
a multiple-element arrangement. The arrangement consideration should be allocated among the
products and services based upon their relative selling prices, thus eliminating the use of the
residual method of allocation. ASU No. 2009-13 also requires expanded qualitative and quantitative
disclosures regarding significant judgments made and changes in applying this guidance. ASU No.
2009-13 is effective prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption and retrospective application are
also permitted. The Company has one minor contract related to Multiple-Deliverable Revenue
Arrangements and infrequently enters into such arrangements. The Company believes that adopting the
provisions of ASU No. 2009-13 will not have a material impact on its consolidated financial
statements.
In October 2009, the FASB issued Accounting Standards Update No. 2009-14 Certain Revenue
Arrangements That Include Software Elements (ASU No. 2009-14). ASU No. 2009-14 amends guidance
included within ASC 985-605 to exclude tangible products containing software components and
non-software components that function together to deliver the products essential functionality.
Entities that sell joint hardware and software products that meet this scope exception will be
required to follow the guidance of ASU No. 2009-13. ASU No. 2009-14 is effective prospectively for
revenue arrangements entered into or materially modified in fiscal years beginning on or after June
15, 2010. Early adoption and retrospective application are also permitted. The Company believes
that the adoption of the provisions of ASU No. 2009-14 will not have a material impact on its
consolidated financial statements.
7. Goodwill And Intangible Assets
Goodwill and intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Gross Value
|
|
|
Amortization
|
|
|
Net Value
|
|
|
Gross Value
|
|
|
Amortization
|
|
|
Net Value
|
|
|
|
(in thousands)
|
|
Goodwill
|
|
$
|
22,766
|
|
|
$
|
|
|
|
$
|
22,766
|
|
|
$
|
22,769
|
|
|
$
|
|
|
|
$
|
22,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
3,700
|
|
|
|
1,825
|
|
|
|
1,875
|
|
|
|
3,700
|
|
|
|
1,570
|
|
|
|
2,130
|
|
Patents
|
|
|
1,273
|
|
|
|
1,080
|
|
|
|
193
|
|
|
|
1,271
|
|
|
|
1,053
|
|
|
|
218
|
|
Trademarks
|
|
|
1,672
|
|
|
|
|
|
|
|
1,672
|
|
|
|
1,672
|
|
|
|
|
|
|
|
1,672
|
|
Developed technology
|
|
|
1,700
|
|
|
|
1,092
|
|
|
|
608
|
|
|
|
1,700
|
|
|
|
940
|
|
|
|
760
|
|
Licensing fees
|
|
|
355
|
|
|
|
213
|
|
|
|
142
|
|
|
|
355
|
|
|
|
196
|
|
|
|
159
|
|
Covenant-not-to-compete
|
|
|
100
|
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
|
|
100
|
|
|
|
|
|
Other
|
|
|
51
|
|
|
|
51
|
|
|
|
|
|
|
|
51
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
|
8,851
|
|
|
|
4,361
|
|
|
|
4,490
|
|
|
|
8,849
|
|
|
|
3,910
|
|
|
|
4,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,617
|
|
|
$
|
4,361
|
|
|
$
|
27,256
|
|
|
$
|
31,618
|
|
|
$
|
3,910
|
|
|
$
|
27,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
In accordance with ASC 350 Intangibles Goodwill and Other, goodwill and other indefinite-lived
intangible assets are not amortized, but are tested for impairment. Such impairment testing is
undertaken annually, or more frequently upon the occurrence of some indication that an impairment
has taken place. The Company conducted an annual impairment test as of December 31, 2009.
A two-step process is utilized to determine if goodwill has been impaired. In the first step, the
fair value of each reporting unit is compared to the net asset value recorded for such unit. If the
fair value exceeds the net asset value, the goodwill of the reporting unit is not adjusted.
However, if the recorded net asset value exceeds the fair value, the Company performs a second step
to measure the amount of impairment loss, if any. In the second step, the implied fair value of the
reporting units goodwill is compared with the goodwill recorded for such unit. If the recorded
amount of goodwill exceeds the implied fair value, an impairment loss is recognized in the amount
of the excess.
For the testing conducted as of December 31, 2009, the Company concluded that no impairment charge
was warranted. Going forward there can be no assurance that economic conditions or other events may
not have a negative material impact on the long-term business prospects of any of the Companys
reporting units. In such case, the Company may need to record an impairment loss, as stated above.
The next annual impairment test will be conducted as of December 31, 2010.
Management has not identified any triggering events, as defined by ASC 350, during 2010.
Accordingly, no interim impairment test has been performed.
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 a range from five to 20 years; developed
technology is amortized over approximately five years and six years; and licensing fees are
amortized over approximately 10 years. Covenants-not-to-compete were amortized over approximately
one and two-thirds years, prior to their expiration. Trademarks are not amortized. Amortization
expense for intangible assets for each of the three-month periods ended June 30, 2010 and June 30,
2009 was $226,000 and $229,000, respectively. Amortization expense for intangible assets for each
of the six-month periods ended June 30, 2010 and June 30, 2009 was $451,000 and $454,000,
respectively. Amortization expense for intangible assets subject to amortization in each of the
next five fiscal years is estimated to be: $900,000 in 2010, $864,000 in 2011, $714,000 in 2012,
$385,000 in 2013 and $346,000 in 2014. Intangible assets subject to amortization have a weighted
average life of approximately seven years.
10
Changes in goodwill balances by segment (defined below) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
Balance
|
|
|
|
December 31,
|
|
|
Change in
|
|
|
June 30,
|
|
|
|
2009
|
|
|
Goodwill
|
|
|
2010
|
|
|
|
(in thousands)
|
|
SL Power Electronics Corp.
|
|
$
|
4,276
|
|
|
$
|
(3
|
)
|
|
$
|
4,273
|
|
High Power Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
MTE Corporation
|
|
|
8,189
|
|
|
|
|
|
|
|
8,189
|
|
Teal Electronics Corp.
|
|
|
5,055
|
|
|
|
|
|
|
|
5,055
|
|
RFL Electronics Inc.
|
|
|
5,249
|
|
|
|
|
|
|
|
5,249
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,769
|
|
|
$
|
(3
|
)
|
|
$
|
22,766
|
|
|
|
|
|
|
|
|
|
|
|
8. Debt
On October 23, 2008, the Company and certain of its subsidiaries entered into an Amended and
Restated Revolving Credit Facility (the 2008 Credit Facility) with Bank of America, N.A., a
national banking association, individually, as agent, issuer and a lender thereunder, and the other
financial institutions party thereto. The 2008 Credit Facility was reset and amended during the
third quarter of 2009.
The 2008 Credit Facility, as amended, provides for maximum borrowings of up to $40,000,000 and
includes a standby and commercial letter of credit sub-limit of $10,000,000. The 2008 Credit
Facility is scheduled to expire on October 1, 2011, unless earlier terminated by the agent
thereunder following an event of default. Borrowings under the 2008 Credit Facility bear interest,
at the Companys option, at the British Bankers Association LIBOR rate plus 1.75% to 3.25%, or an
alternative rate, which is the higher of (i) the Federal Funds rate plus 0.5%, or (ii) Bank of
America, N.A.s publicly announced prime rate, plus a margin rate ranging from 0% to 1.0%. The
margin rates are based on certain leverage ratios, as provided in the facility documents. The
Company is subject to compliance with certain financial covenants set forth in the 2008 Credit
Facility, including a maximum ratio of total funded indebtedness to EBITDA (as defined), minimum
levels of interest coverage and net worth and limitations on capital expenditures, as defined.
Availability under the 2008 Credit Facility is based upon the Companys trailing twelve month
EBITDA, as defined.
As of the date hereof, June 30, 2010 and December 31, 2009, the Company had no outstanding balance
under the 2008 Credit Facility. At June 30, 2010, the Company had a total availability thereunder
of $38,000,000.
The Companys obligations under the 2008 Credit Facility are secured by the grant of security
interests in substantially all of its assets.
11
9. Accrued Liabilities Other
Accrued liabilities other consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Taxes (other than income) and insurance
|
|
$
|
346
|
|
|
$
|
209
|
|
Commissions
|
|
|
680
|
|
|
|
744
|
|
Litigation and legal fees
|
|
|
218
|
|
|
|
96
|
|
Other professional fees
|
|
|
450
|
|
|
|
674
|
|
Environmental
|
|
|
2,550
|
|
|
|
1,355
|
|
Warranty
|
|
|
1,313
|
|
|
|
1,373
|
|
Deferred revenue
|
|
|
121
|
|
|
|
28
|
|
Other
|
|
|
2,185
|
|
|
|
1,850
|
|
|
|
|
|
|
|
|
|
|
$
|
7,863
|
|
|
$
|
6,329
|
|
|
|
|
|
|
|
|
A liability is established for estimated future warranty and service claims that relate to current
and prior period sales. The Company estimates warranty costs based on historical claim experience
and other factors including evaluating specific product warranty issues. The following is a summary
of activity in accrued warranty and service liabilities:
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30, 2010
|
|
|
|
(in thousands)
|
|
Liability, beginning of year
|
|
$
|
1,373
|
|
Expense for new warranties issued
|
|
|
246
|
|
Expense related to prior year warranties
|
|
|
128
|
|
Warranty claims
|
|
|
(434
|
)
|
|
|
|
|
Liability, end of period
|
|
$
|
1,313
|
|
|
|
|
|
10. Commitments And Contingencies
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 Companys business.
It is managements 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.
12
Environmental Matters:
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 to date by the Company
and its independent engineering-consulting firms, management has provided an estimated accrual for
all known costs believed to be probable in the amount of $7,078,000, of which $4,528,000 is
included as other long-term liabilities as of June 30, 2010. 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 Companys liability in proportion
to other responsible parties, and the extent, if any, to which such costs are recoverable from
other parties or from insurance. These contingencies could result in additional expenses or
judgments, or offsets thereto. At the present time such expenses or judgments are not expected to
have a material adverse effect on the Companys consolidated financial position or results of
operations, beyond the amount already reserved. Most of the Companys environmental costs relate to
discontinued operations and such costs have been recorded in discontinued operations.
The Company is the subject of administrative actions that arise from its ownership of SL Surface
Technologies, Inc. (SurfTech), a wholly-owned subsidiary, the assets of which were sold in
November 2003. SurfTech once operated chrome-plating facilities in Pennsauken Township, New Jersey
(the Pennsauken Site) and Camden, New Jersey (the Camden Site).
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 has been designated as a Superfund Site. The EPA has alleged that hazardous substances
generated at the Pennsauken Site contaminated the Puchack Wellfield. As a PRP, the Company is
potentially liable, jointly and severally, 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).
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 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 $17,600,000 (excludes past costs of $11,500,000 mentioned below).
Prior to the issuance of the EPAs Record of Decision, the Company had retained an experienced
environmental consulting firm to prepare technical comments on the EPAs proposed remediation of
the Puchack Wellfield Superfund Site. In those comments, the Companys consultant, among other
things, identified flaws in the EPAs conclusions and the factual predicates for certain of the
EPAs decisions and for the proposed selected remedy.
Following the issuance of its Record of Decision, in November 2006, the EPA sent another letter to
the Company encouraging the Company to either perform or finance the remedial actions for operable
unit one identified in the EPAs Record of Decision. In February 2007, the EPA sent another letter
to the Company demanding reimbursement for past costs of approximately $11,500,000, which has been
contested by the Company. The Company responded to 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. In July 2007, the EPA refused the Companys offer to perform the work necessary
to design the remediation plan without first agreeing to assume responsibility for the full
remediation of the Superfund Site. The EPA did encourage the Company to investigate the existence
of other PRPs and to submit evidence thereof, if appropriate. In January 2008, the Company
submitted to the EPA evidence demonstrating the existence of several other PRPs.
13
The EPA is performing investigations relating to the second operable unit of the Puchack Wellfield
Superfund Site. The second operable unit pertains to sites that are allegedly the sources of
contamination for the first operable unit. The EPA has not adopted a Record of Decision for the
second operable unit. The Company is currently engaged in discussions with representatives of the
EPA and the Department of Justice with respect to the Puchack Wellfield 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. Further, technical data has
not established that offsite migration of hazardous substances from the Pennsauken Site caused the
contamination of the Puchack Wellfield Superfund Site. In any event, the Company believes the
evidence establishes that hazardous substances from the Pennsauken Site could have, at most,
constituted only a small portion of the total contamination delineated in the vicinity of the
Puchack Wellfield 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 the EPA claims and that other PRPs should be
identified to support the ultimate cost of remediation. Nevertheless, the Companys 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 $4,000,000
($2,480,000, net of tax), which was reserved and recorded as part of discontinued operations in the
fourth quarter of 2006. This amount is included in the total environmental accrual stated below. In
addition, the Companys attorneys have advised it that based on statutory and regulatory changes
and the second operable unit investigations, the Pennsauken Site may have to undergo additional
remediation. The Company has retained environmental consultants to determine what, if any, measures
must be undertaken to achieve full compliance. There can be no assurance as to what will be the
ultimate resolution or exposure to the Company for this matter.
With respect to the Camden Site, the Company has reported soil contamination and a groundwater
contamination plume emanating from the site. The Company has been conducting tests and taking other
actions to identify and quantify the contamination and to confirm areas of concern. In the third
quarter of 2009, pursuant to an Interim Response Action (IRA) Workplan approved by the New Jersey
Department of Environmental Protection, the Company completed building demolition and excavated and
disposed of some of the contaminated soil underlying the buildings foundation. Treatability
studies for in-situ remediation of the remaining unsaturated contaminated soil were completed in
2009. Implementation of a pilot study to remediate contaminated soils in-situ based on the
treatability studies is scheduled to commence in 2010. Treatability studies for the in-situ
remediation of the groundwater contamination at the Site were also conducted in 2009, with another
one scheduled to be completed in 2010. Implementation of a pilot study to remediate contaminated
groundwater is scheduled to commence in 2010. The Company reserved $2,250,000 during the last two
quarters of 2008 to meet the anticipated expenses of implementing the IRA Workplan and field pilot
studies and conducting routine groundwater monitoring. During the second quarter of 2010, the
Company reviewed the most recent cost studies prepared by its environmental consultants and
recorded an additional $1,273,000 reserve related to the Camden site. At June 30, 2010, the Company
had an accrual of $2,464,000 to remediate the Camden Site.
14
As of June 30, 2010 and December 31, 2009, the Company had recorded environmental accruals of
$7,078,000 and $5,883,000, respectively.
11. Segment Information
The Company currently operates under four business segments: SL Power Electronics Corp. (SLPE),
the High Power Group, SL Montevideo Technology, Inc. (SL-MTI) and RFL Electronics Inc. (RFL).
Teal Electronics Corp. (Teal) and MTE Corporation (MTE) are combined 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 ASC 280 Segment Reporting. Business units are also combined if
they 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
|
SLPE produces a wide range of custom and standard internal and external AC/DC and DC/DC power
supply products to be used in customers end products. The Companys power supplies closely
regulate and monitor power outputs, resulting in stable and highly reliable power. SLPE, which
sells products under three brand names (SL Power Electronics, Condor and Ault), is a major supplier
to the original equipment manufacturers (OEMs) of medical, wireless and wire line communications
infrastructure, computer peripherals, military, handheld devices and industrial equipment. The High
Power Group sells products under two brand names (Teal and MTE). Teal designs and manufactures
custom power conditioning and distribution units. Products are developed and manufactured for
custom electrical subsystems for OEMs of semiconductor, medical imaging, military and
telecommunication systems. 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. 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 equipment, medical devices and industrial products. RFL designs and
manufactures communication and power protection products/systems that are used to protect utility
transmission lines and apparatus by isolating faulty transmission lines from a transmission grid.
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 certain legacy costs. The accounting policies for the business
units are the same as those described in the summary of significant accounting policies. For
additional information, see Note 1 of the Notes to the Consolidated Financial Statements included
in Part IV of the Companys Annual Report on Form 10-K for the year ended December 31, 2009.
Business segment operations are conducted through domestic subsidiaries. For all periods presented,
sales between business segments were not material. Each of the segments has certain major
customers, the loss of any of which would have a material adverse effect on such segment.
15
The unaudited comparative results for the three-month periods and the six-month periods ended June
30, 2010 and June 30, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power Electronics Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SLPE
|
|
$
|
21,100
|
|
|
$
|
13,448
|
|
|
$
|
37,433
|
|
|
$
|
26,314
|
|
High Power Group
|
|
|
13,225
|
|
|
|
10,166
|
|
|
|
26,335
|
|
|
|
21,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
34,325
|
|
|
|
23,614
|
|
|
|
63,768
|
|
|
|
48,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SL-MTI
|
|
|
7,859
|
|
|
|
6,968
|
|
|
|
14,869
|
|
|
|
13,358
|
|
RFL
|
|
|
5,606
|
|
|
|
4,374
|
|
|
|
11,286
|
|
|
|
9,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
47,790
|
|
|
$
|
34,956
|
|
|
$
|
89,923
|
|
|
$
|
71,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power Electronics Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SLPE
|
|
$
|
1,557
|
|
|
$
|
(396
|
)
|
|
$
|
2,374
|
|
|
$
|
(577
|
)
|
High Power Group
|
|
|
1,135
|
|
|
|
312
|
|
|
|
2,243
|
|
|
|
1,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,692
|
|
|
|
(84
|
)
|
|
|
4,617
|
|
|
|
656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SL-MTI
|
|
|
1,232
|
|
|
|
997
|
|
|
|
2,030
|
|
|
|
1,778
|
|
RFL
|
|
|
776
|
|
|
|
202
|
|
|
|
1,717
|
|
|
|
639
|
|
Other
|
|
|
(1,369
|
)
|
|
|
(1,563
|
)
|
|
|
(2,857
|
)
|
|
|
(3,140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
3,331
|
|
|
$
|
(448
|
)
|
|
$
|
5,507
|
|
|
$
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Total assets
|
|
|
|
|
|
|
|
|
Power Electronics Group:
|
|
|
|
|
|
|
|
|
SLPE
|
|
$
|
33,447
|
|
|
$
|
27,255
|
|
High Power Group
|
|
|
29,648
|
|
|
|
27,192
|
|
|
|
|
|
|
|
|
Total
|
|
|
63,095
|
|
|
|
54,447
|
|
|
|
|
|
|
|
|
SL-MTI
|
|
|
11,531
|
|
|
|
11,520
|
|
RFL
|
|
|
14,798
|
|
|
|
15,096
|
|
Other
|
|
|
16,524
|
|
|
|
18,388
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
105,948
|
|
|
$
|
99,451
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Goodwill and intangible
assets, net
|
|
|
|
|
|
|
|
|
Power Electronics Group:
|
|
|
|
|
|
|
|
|
SLPE
|
|
$
|
5,253
|
|
|
$
|
5,433
|
|
High Power Group
|
|
|
16,612
|
|
|
|
16,866
|
|
|
|
|
|
|
|
|
Total
|
|
|
21,865
|
|
|
|
22,299
|
|
|
|
|
|
|
|
|
SL-MTI
|
|
|
|
|
|
|
|
|
RFL
|
|
|
5,391
|
|
|
|
5,409
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
27,256
|
|
|
$
|
27,708
|
|
|
|
|
|
|
|
|
12. Retirement Plans And Deferred Compensation
During the six-month periods ended June 30, 2010 and June 30, 2009, the Company maintained a
defined contribution pension plan covering all full-time, U.S. employees of SLPE, Teal, MTE,
SL-MTI, RFL and the corporate office. The Companys contributions to this plan are based on a
percentage of employee contributions and/or plan year gross wages, as defined.
Costs incurred under these plans amounted to $624,000 during the six-month period ended June 30,
2010 and $398,000 for the six-month period ended June 30, 2009.
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 ranging from 6% to 12%.
The amount charged to expense in connection with these agreements amounted to $189,000 and $187,000
for the six-month periods ended June 30, 2010 and June 30, 2009, respectively.
13. Fire Related Loss And Insurance Recovery
On March 24, 2010, the Company sustained fire damage at its leased manufacturing facility in
Mexicali, Mexico. This facility manufactures products for both SLPE and MTE. The fire was contained
to an area that manufactures MTE products. The Company is fully insured for the replacement of the
assets damaged in the fire and for the loss of profits due to the business interruption and changed
conditions caused by the fire. Details of the net fire related loss are as follows:
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30, 2010
|
|
|
|
(in thousands)
|
|
Fire related loss
|
|
$
|
(663
|
)
|
Insurance recovery
|
|
|
555
|
|
|
|
|
|
Net fire related loss
|
|
$
|
(108
|
)
|
|
|
|
|
17
The Companys fire related loss includes the destruction of property and equipment, damaged
inventory, cleanup costs and increased operating expenses incurred as a result of the fire. The
Companys insurance recovery represents the replacement cost of property and equipment damaged as a
result of the fire, the fair market value of inventory damaged in the fire, cleanup costs and
increased business expenses, net of applicable adjustments and deductibles.
Any additional gains, losses and recoveries will be recognized in subsequent periods as amounts are
determined and finalized with the Companys insurance companies.
14. 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 each of the
six-month periods ended June 30, 2010 and June 30, 2009 were $329,000 and $456,000, respectively.
Accounts receivable due from RFL Communications at June 30, 2010 were $122,000.
The Company was a party to a Management Agreement (the Agreement) dated April 1, 2002 with Steel
Partners Ltd. (Steel Partners). Steel Partners is a management company controlled by Warren G.
Lichtenstein. Glen M. Kassan and John H. McNamara are employed by Steel Partners. Messrs.
Lichtenstein, Kassan and McNamara are directors of the Company. As previously reported, Mr.
Lichtenstein was elected to the Board on March 30, 2010 to fill the vacancy created by the
resignation of James R. Henderson. On May 18, 2010, the parties terminated the Agreement. Under the
Agreement, Steel Partners provided certain management services to the Company in consideration for
an annual fee of $475,000, paid monthly. The Agreement was terminated, effective January 31, 2010,
for a one-time payment of $150,000. Fees of approximately $190,000 were expensed for the six-month
period ended June 30, 2010. Fees of approximately $237,000 were expensed for the six-month period
ended June 30, 2009.
ITEM 2. MANAGEMENTS 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 business segments, three of which have significant manufacturing operations in
Mexico. SLPE has manufacturing, engineering and sales capability in the Peoples Republic of China.
Most of the Companys 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 highly engineered, well-built, high quality, dependable products and is dedicated to
continued product enhancement and innovations.
The Companys business strategy has been to enhance the growth and profitability of each of its
businesses through the penetration of attractive new market niches, further improvement of
operations through the implementation of lean manufacturing principles and expansion of global
capabilities. The Company expects to achieve these goals through organic growth and strategic
acquisitions. The Company also continues to pursue strategic alternatives to maximize shareholder
value. 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.
18
On June 29, 2010, the Board appointed William T. Fejes, Jr. to serve as the Companys President and
Chief Executive Officer. Mr. Fejes replaced James Taylor, whose employment with the
Company ended June 14, 2010. Glen Kassan, the Companys Chairman of the Board, was appointed
Interim Chief Financial Officer on June 14, 2010 to replace David Nuzzo, whose employment with the
Company ended June 14, 2010. Mr. Fejes was most recently the Chief Operating Officer of Seakeeper,
Inc., a company that designs, manufactures and markets motion stabilization equipment for boats
under 50 meters in length, from 2007 until April 2010. Prior to joining Seakeeper, Inc., Mr. Fejes
was the President and Chief Executive Officer of TB Woods Corporation, a public company that
designs, manufactures and markets industrial power transmission components, with plants in the
United States, Mexico and Italy, from 2004 to 2007. Mr. Fejes also held various executive and
management roles at Danaher Corporation, a public company that designs, manufactures and markets
industrial and consumer products, for 18 years. Mr. Fejes is a director of Broadwind Energy, a
public company for which he also serves as the Chairman of the Governance / Nominating Committee
and as a member of the Audit Committee. Mr. Fejes received both his Bachelor of Science degree and
Master of Science degree in electrical engineering from the Massachusetts Institute of Technology.
Business Trends
Demand for the Companys products and services increased during the second quarter of 2010,
compared to the second quarter of 2009. At June 30, 2010, the Companys backlog increased to
$73,976,000, from $51,525,000 at June 30, 2009 and $54,695,000 at December 31, 2009, for an
increase of 44% on a comparative basis. All of the Companys operating segments recorded increases
in backlog, which ranged from 17% to 86%. The Companys net new orders for the second quarter of
2010 increased by 83%, compared to 2009.
During 2009, the Company experienced a significant decrease of sales and income due to the macro
economic downturn. Given the nature of the global economic weakness and its effects on the
Companys end markets, contingency plans were implemented to reduce costs and align capacity with
lower business levels. Capital investment was postponed, where feasible, during 2009.
In the sections that follow, statements with respect to the quarter ended 2010 or six months ended
2010 refer to the three-month and six-month periods ended June 30, 2010. Statements with respect to
the quarter ended 2009 or six months ended 2009 refer to the three-month and six-month periods
ended June 30, 2009. Also, statements that refer to operating
costs are engineering and product development costs, selling, general
and administrative costs and depreciation and amortization
(operating costs).
Critical Accounting Policies
The Companys consolidated financial statements have been prepared in accordance with Generally
Accepted Accounting Principles in the United States (GAAP). GAAP requires management to make
estimates and assumptions that affect the amounts of reported and contingent assets and liabilities
at the date of the consolidated financial statements and the amounts of reported net sales and
expenses during the reporting period.
The Securities and Exchange Commission (the SEC) has issued disclosure guidance for critical
accounting policies. The SEC defines critical accounting policies as those that are most
important to the portrayal of the Companys financial condition and results, and that require
application of managements 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.
19
The Companys significant accounting policies are described in Note 1 of the Notes to Consolidated
Financial Statements included in Part IV of the Companys Annual Report on Form 10-K for the year
ended December 31, 2009. 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 Companys senior management has reviewed these
critical accounting policies and estimates and the related Managements Discussion and Analysis of
Financial Condition and Results of Operations with the Audit Committee of the Board.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, the purchase price is fixed or determinable and collectability is
reasonably assured. Revenue is recorded in accordance with Staff Accounting Bulletin (SAB) No.
104 and in certain circumstances in accordance with the guidance provided by ASC 605-25 Revenue
Recognition Multiple-Element Arrangements. Also during fiscal 2009, RFL and Teal recognized
revenue under Bill and Hold Arrangements according to the guidance provided by SAB No.
104. The major portion of the Companys revenue is derived from equipment sales. However, RFL has
customer service revenue, which accounted for less than one percent of consolidated net revenue for
each of the quarters ended 2010 and 2009. The Company recognizes equipment revenue upon shipment
and transfer of title. Provisions are established for product warranties, principally based on
historical experience. At times the Company establishes reserves for specific warranty issues known
by management. Service and installation revenue is recognized when completed. At SL-MTI, revenue
from one particular contract is considered a multiple-element arrangement and, in that case, is
allocated among the separate accounting units based on relative fair value. In this case the total
arrangement consideration is fixed and there is objective and reliable evidence of fair value. This
contract was essentially completed at December 31, 2009.
SLPE has two sales programs with distributors, pursuant to which credits are issued to
distributors: (1) a scrap program and (2) a competitive discount program. The distributor scrap
program allows distributors to scrap and/or rotate up to a pre-determined percentage of their
purchases over the previous six month period. SLPE provides for this allowance as a decrease to
revenue based upon the amount of sales to each distributor and other historical factors. The
competitive discount program allows a distributor to sell a product out of its inventory at less
than list price in order to meet certain competitive situations. SLPE records this discount as a
reduction to revenue based on the distributors eligible inventory. The eligible distributor
inventory is reviewed at least quarterly. No cash is paid under either distributor program. These
programs affected consolidated gross revenue for each of the six-month periods ended 2010 and 2009
by approximately 0.6% and 0.7%, respectively.
Certain judgments affect the application of the Companys revenue policy, as mentioned above.
Revenue recognition is significant because net revenue is a key component of results of operations.
In addition, revenue recognition determines the timing of certain expenses, such as commissions,
royalties and certain incentive programs. Revenue results are difficult to predict. Any shortfall
in revenue or delay in recognizing revenue could cause operating results to vary significantly from
year to year and quarter to quarter.
20
Allowance For Doubtful Accounts
The Companys 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 customers ability to meet its financial
obligation), the Companys estimates of the recoverability of amounts due could be reduced by a
material amount. The Companys allowance for doubtful accounts represented 2.4% and 2.9% of gross
trade receivables at June 30, 2010 and December 31, 2009, respectively.
Inventories
The Company values inventory at the lower of cost or market, and continually reviews the book value
of discontinued product lines to determine if these items are properly valued. The Company
identifies these items and assesses the ability to dispose of them at a price greater than cost. If
it is determined that cost is less than market value, then cost is used for inventory valuation. If
market value is less than cost, then related inventory is adjusted to market value.
If a write down to the current market value is necessary, the market value cannot be greater than
the net realizable value, which is defined as selling price less costs to complete and dispose, and
cannot be lower than the net realizable value less a normal profit margin. The Company also
continually evaluates the composition of its inventory and identifies slow-moving and excess
inventories. Inventory items identified as slow-moving or excess are evaluated to determine if
reserves are required. If the Company were not able to achieve its expectations of the net
realizable value of the inventory at current market value, it would have to adjust its reserves
accordingly. The Company attempts to accurately estimate future product demand to properly adjust
inventory levels. However, significant unanticipated changes in demand could have a significant
impact on the value of inventory and of operating results. The Companys inventory reserves
represented approximately 15% of gross inventory at June 30, 2010 and December 31, 2009. Included
in the inventory reserve is a LIFO reserve of $529,000 for both periods.
Accounting For Income Taxes
The Company has reported gross unrecognized tax benefits, excluding interest and penalties, of
$2,466,000 and $2,526,000 as of June 30, 2010 and December 31, 2009, respectively. These amounts
represent unrecognized tax benefits, which, if ultimately recognized, will reduce the Companys
effective tax rate. As of June 30, 2010, the Company reported accrued interest and penalties
related to unrecognized tax benefits of $534,000. For additional disclosures related to ASC 740,
see Note 3 of the Notes to the Consolidated Financial Statements included in Part IV of the
Companys Annual Report on Form 10-K for the year ended December 31, 2009.
21
Significant management judgment is required in determining the provision for income taxes, the
deferred tax assets and liabilities and any valuation allowance recorded against deferred tax
assets. The net deferred tax assets as of June 30, 2010 and December 31, 2009 were $9,362,000 and
$9,389,000, respectively, net of valuation allowances of $550,000 and $560,000, respectively. The
carrying value of the Companys net deferred tax assets assumes that the Company will be able to
generate sufficient future taxable income in certain tax jurisdictions. Valuation allowances are
attributable to uncertainties related to the Companys ability to utilize certain deferred tax
assets prior to expiration. These deferred tax assets primarily consist of loss carryforwards. The
valuation allowance is based on estimates of taxable income, expenses and credits by the
jurisdictions in which the Company operates and the period over which deferred tax assets will be
recoverable. In the event that actual results differ from these estimates or these estimates are
adjusted in future periods, the Company may need to establish an additional valuation allowance
that could materially impact its consolidated financial position and results of operations. Each
quarter, management evaluates the ability to realize the deferred tax assets and assesses the need
for additional valuation allowances.
Legal Contingencies
The Company is currently involved in certain legal proceedings. As discussed in Note 10 of the
Notes to the Consolidated Financial Statements included in Part I of this Quarterly Report on Form
10-Q, the Company has accrued an estimate of the probable costs for the resolution of these claims.
This estimate has been developed after investigation and is based upon an analysis of potential
results, assuming a combination of litigation and settlement strategies. Management does not
believe these proceedings will have a further material adverse effect on the Companys 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 Company has allocated its adjusted goodwill balance to its reporting units. The Company tests
goodwill for impairment annually at fiscal year-end and in interim periods if certain events occur
indicating that the carrying value of goodwill may be impaired, such as a significant adverse
change in business climate, an adverse action or assessment by a regulator or the decision to sell
a business, that would make it more likely than not that an impairment may have occurred. The
goodwill impairment test is a two-step process. The first step of the impairment analysis compares
the fair value to the net book value. In determining fair value, the accounting guidance allows for
the use of several valuation methodologies, although it indicates that quoted market prices are the
best evidence of fair value. The Company uses a combination of expected present values of future
cash flows and comparative market multiples. It has also performed a review of market
capitalization with estimated control premiums at December 31, 2009. If the fair value of a
reporting unit is less than its net book value, the Company would perform a second step in its
analysis, which compares the implied fair value of goodwill to its carrying amount. If the carrying
amount of goodwill exceeds its implied fair value, the Company recognizes an impairment loss equal
to that excess amount. Application of the goodwill impairment test requires judgment, including the
identification of reporting units, assigning assets and liabilities to reporting units, assigning
goodwill to reporting units and determining the fair value of each reporting unit. Significant
judgments required to estimate the fair value of reporting units include estimating future cash
flows, determining appropriate discount and growth rates, operating margins and working capital
requirements, selecting comparable companies within each reporting unit and market and determining
control premiums. Changes in these estimates and assumptions could materially affect the
determination of fair value for each reporting unit. There were no impairment charges for the
quarters ended 2010 and 2009. As of June 30, 2010 and December 31, 2009, goodwill totaled
$22,766,000 and $22,769,000 (representing 21% and 23% of total assets), respectively.
22
As of the testing conducted as of December 31, 2009, the Company concluded that no impairment
charge was warranted. However, there can be no assurance that the economic conditions currently
affecting the world economy or other events may not have a negative material impact on the
long-term business prospects of any of the Companys reporting units. In such case, the Company may
need to record an impairment loss, as stated above. The next annual impairment test will be
conducted as of December 31, 2010.
Management has not identified any triggering events, as defined by ASC 350 Intangibles Goodwill
and Other, during 2010. Accordingly, no interim impairment test has been performed.
Impairment Of Long-Lived And Intangible Assets
The Companys long-lived and intangible assets primarily consist of fixed assets, goodwill and
other intangible assets. The Company periodically reviews the carrying value of its long-lived
assets held and used, other than goodwill and intangible assets with indefinite lives, and assets
to be disposed of whenever events or circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company assesses the recoverability of the asset by estimated cash
flows and at times by independent appraisals. It compares estimated cash flows expected to be
generated from the related assets, or the appraised value of the asset, to the carrying amounts to
determine whether impairment has occurred. If the estimate of cash flows expected to be generated
changes in the future, the Company may be required to record impairment charges that were not
previously recorded for these assets. If the carrying value of a long-lived asset is considered
impaired, an impairment charge is recorded for the amount by which the carrying value of the
long-lived asset exceeds its fair value. Asset impairment evaluations are by nature highly
subjective.
Environmental Expenditures
The Company is subject to United States, Mexican, Chinese and United Kingdom environmental laws and
regulations concerning emissions to the air, discharges to surface and subsurface waters, and
generation, handling, storage, transportation, treatment and disposal of waste materials. The
Company is also subject to other federal, state and local environmental laws and regulations,
including those that require it to remediate or mitigate the effects of the disposal or release of
certain chemical substances at various sites, 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. For additional information related to environmental
matters, see Note 13 of the Notes to the Consolidated Financial Statements included in Part IV of
the Companys Annual Report on Form 10-K for the year ended December 31, 2009.
23
The above listing is not intended to be a comprehensive list of all of the Companys accounting
policies. In many cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP with no need for managements judgment in its application. There are also areas in
which managements judgment in selecting any available alternatives would not produce a materially
different result. For a discussion of accounting policies and other disclosures required by GAAP,
see the Companys audited Consolidated Financial Statements and Notes thereto included in Part IV
of the Companys Annual Report on Form 10-K for the year ended December 31, 2009.
Liquidity And Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Variance
|
|
|
% Variance
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
|
$
|
6,679
|
|
|
$
|
9,967
|
|
|
$
|
(3,288
|
)
|
|
|
(33
|
%)
|
Bank debt
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Working capital
|
|
$
|
37,218
|
|
|
$
|
35,064
|
|
|
$
|
2,154
|
|
|
|
6
|
%
|
Shareholders equity
|
|
$
|
70,331
|
|
|
$
|
69,100
|
|
|
$
|
1,231
|
|
|
|
2
|
%
|
The net cash used in operating activities from continuing operations during the six-month period
ended June 30, 2010 was $890,000, as compared to net cash provided by operating activities from
continuing operations during the six-month period ended June 30, 2009 of $3,472,000. The uses of
cash from operating activities for the six-month period ended June 30, 2010 were an increase in accounts
receivable of $7,705,000 and an increase in inventories of $1,724,000. The increase in accounts
receivable and inventory was primarily related to increased sales at
all business segments.
Accounts receivable increased by $5,543,000 at SLPE, $1,791,000 at MTE, and $620,000 at SL-MTI.
These uses of cash were partially offset by an increase in accounts payable of $2,568,000,
primarily attributable to SLPE. The sources of cash from operating activities for the
six-month period ended June 30, 2009 were a decrease in accounts receivable of $4,012,000 and a
decrease in inventories of $800,000. The decrease in accounts receivable was primarily related to
improved collections at most entities. The increased collections were $1,598,000 at SLPE,
$1,008,000 at RFL, $976,000 at MTE and $624,000 at Teal. These sources of cash were primarily
offset by a decrease in accounts payable of $1,995,000 and a decrease in accrued liabilities of
$1,537,000. The decreases in accounts payable were primarily related to SLPE ($787,000) and Teal
($615,000). Legal and consulting payables of $370,000 related to environmental matters are charged
to discontinued operations. The increase in prepaid expenses was primarily related to the renewal
of certain insurance policies in the first quarter.
During the six-month period ended June 30, 2010, net cash used in investing activities was
$787,000. This use of cash was primarily related to a down payment on land rights in China and the
purchases of machinery, computer hardware and demonstration equipment. During the six-month period
ended June 30, 2009, net cash used in investing activities was $514,000. This use of cash was
primarily related to a building expansion in Matamoros, Mexico for SL-MTI and the purchases of
machinery, computer hardware, software and demonstration equipment.
24
During the six-month period ended June 30, 2010, net cash used in financing activities was
$1,080,000, which primarily related to the purchase of shares of the Companys treasury stock.
During the six-month period ended June 30, 2009, net cash provided by financing activities was
$297,000, related to treasury stock activity.
On October 23, 2008, the Company entered into the 2008 Credit Facility, with Bank of America, N.A.,
a national banking association, individually, as agent, issuer and a lender thereunder, and the
other financial institutions party thereto. During the third quarter of 2009, the 2008 Credit
Facility was amended and reset. It currently provides for maximum borrowings of $40,000,000.
Additional information with respect to the 2008 Credit Facility is found in Note 8 of the Notes to
the Consolidated Financial Statements included in Part I to this Quarterly Report on Form 10-Q.
The Companys current ratio was 2.42 to 1 at June 30, 2010 and 2.68 to 1 at December 31, 2009.
Current assets increased by $7,546,000 from December 31, 2009, while current liabilities increased
by $5,392,000 during the same period.
The Company had no outstanding bank debt at June 30, 2010 or at December 31, 2009.
Capital expenditures were $635,000 in 2010, which represented an increase of $139,000, or 28%, from
the capital expenditure levels of 2009. Capital expenditures in 2010 were attributable to a down
payment on land rights in China and the purchases of machinery, computer hardware and demonstration
equipment. Capital expenditures of $496,000 were made during the first six months of 2009. These
expenditures were attributable to a plant expansion, as mentioned above, and the purchases of
machinery, computer hardware, software and demonstration equipment.
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, certain legal, litigation, public reporting costs, legacy costs and
costs not specifically allocated to the reportable business segments), all of the Companys
operating segments recorded income from operations for the three and six month periods ended June
30, 2010.
25
Contractual Obligations
The following is a summary of the Companys contractual obligations at June 30, 2010 for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
1 to 3
|
|
|
4 to 5
|
|
|
After
|
|
|
|
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Operating Leases
|
|
$
|
1,227
|
|
|
$
|
1,992
|
|
|
$
|
493
|
|
|
$
|
|
|
|
$
|
3,712
|
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,227
|
|
|
$
|
1,992
|
|
|
$
|
493
|
|
|
$
|
|
|
|
$
|
3,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
It is not the Companys 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
Three months ended June 30, 2010, compared with three months ended June 30, 2009
While differences exist among the Companys business units, demand for the Companys products and
services increased in the quarter ended 2010, compared to the quarter ended 2009, resulting in
aggregate sales growth of $12,834,000, or 37%, and an increase in income from operations of
$3,779,000 for the comparable periods. The growth in sales is due principally to the global
economic recovery that began in the fourth quarter of 2009. Quarter-to-quarter sales comparisons
are particularly pronounced in light of the weak economic conditions that prevailed in 2009. Both
the domestic and international markets experienced sales growth. The growth in income from
operations is primarily related to a significant increase in sales, improved economic conditions
and actions taken by the Company in 2009 to reduce its cost structure to align capacity with lower
business levels.
26
The tables below show the comparisons of net sales and income (loss) from operations for the
quarter ended June 30, 2010 (2010) and the quarter ended June 30, 2009 (2009):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
$ Variance
|
|
|
% Variance
|
|
|
|
Ended
|
|
|
Ended
|
|
|
From
|
|
|
From
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Same Quarter
|
|
|
Same Quarter
|
|
|
|
2010
|
|
|
2009
|
|
|
Last Year
|
|
|
Last Year
|
|
|
|
(in thousands)
|
|
Power Electronics Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SLPE
|
|
$
|
21,100
|
|
|
$
|
13,448
|
|
|
$
|
7,652
|
|
|
|
57
|
%
|
High Power Group
|
|
|
13,225
|
|
|
|
10,166
|
|
|
|
3,059
|
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
34,325
|
|
|
|
23,614
|
|
|
|
10,711
|
|
|
|
45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SL-MTI
|
|
|
7,859
|
|
|
|
6,968
|
|
|
|
891
|
|
|
|
13
|
%
|
RFL
|
|
|
5,606
|
|
|
|
4,374
|
|
|
|
1,232
|
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,790
|
|
|
$
|
34,956
|
|
|
$
|
12,834
|
|
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Operations
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
$ Variance
|
|
|
% Variance
|
|
|
|
Ended
|
|
|
Ended
|
|
|
From
|
|
|
From
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Same Quarter
|
|
|
Same Quarter
|
|
|
|
2010
|
|
|
2009
|
|
|
Last Year
|
|
|
Last Year
|
|
|
|
(in thousands)
|
|
Power Electronics Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SLPE
|
|
$
|
1,557
|
|
|
$
|
(396
|
)
|
|
$
|
1,953
|
|
|
|
493
|
%
|
High Power Group
|
|
|
1,135
|
|
|
|
312
|
|
|
|
823
|
|
|
|
264
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,692
|
|
|
|
(84
|
)
|
|
|
2,776
|
|
|
|
3305
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SL-MTI
|
|
|
1,232
|
|
|
|
997
|
|
|
|
235
|
|
|
|
24
|
%
|
RFL
|
|
|
776
|
|
|
|
202
|
|
|
|
574
|
|
|
|
284
|
%
|
Other
|
|
|
(1,369
|
)
|
|
|
(1,563
|
)
|
|
|
194
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,331
|
|
|
$
|
(448
|
)
|
|
$
|
3,779
|
|
|
|
844
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales for 2010 increased by $12,834,000, or 37%, when compared to the same period
in 2009. When compared to 2009, net sales of the Power Electronics Group increased by $10,711,000,
or 45%, net sales of SL-MTI increased by $891,000, or 13%, and net sales of RFL increased by
$1,232,000, or 28%.
The Company recorded income from operations of $3,331,000 for 2010, compared to a loss from
operations of $448,000 for 2009, representing an increase of $3,779,000, or 844%. Income from
operations equaled 7% of net sales in 2010, compared to a 1% loss on net sales in 2009. All of the
operating segments reported income from operations in 2010.
Income from continuing operations amounted to $2,063,000 (includes other income and expense and the
tax provision), or $0.34 per diluted share, in the quarter ended 2010, compared to a loss
from continuing operations of $347,000, or $0.06 per diluted share, for the same period in 2009.
Income from continuing operations was approximately 4% of net sales in 2010, compared to loss from
continuing operations of 1% of net sales in 2009. The Companys business segments and the
components of operating expenses are discussed in the following sections.
27
The Power Electronics Group, which is comprised of SLPE and the High Power Group (a combination of
Teal and MTE), recorded a sales increase of 45%, when comparing the quarter ended 2010 to the
quarter ended 2009. Income from operations increased by $2,776,000, or 3,305%, this was primarily
attributable to an increase of $1,953,000, or 493%, at SLPE.
SLPE recorded income from operations of $1,557,000, representing 7% of its net sales, in 2010. SLPE
reported a loss from operations of $396,000, (which included a restructuring charge of $534,000)
representing 3% of its net sales, in 2009. As a percentage of consolidated net sales, SLPE
represented 44% of consolidated net sales in 2010, compared to 38% of consolidated net sales in
2009. SLPE experienced sales increases in most of its product lines. Sales of its medical product
line increased by $5,771,000, sales of its industrial equipment product line increased by
$1,276,000, sales of its data communications product line increased by $629,000 and sales of their
other product lines decreased by $24,000. The increase in the sales
from the medical equipment product line was
due to the relatively low demand in 2009. The increase in sales of
the industrial product line was principally generated by increased orders from distributors. The data
communications product line increase was also due primarily to increased activity from
distributors. Returns and distributor credits decreased to approximately 1% of gross sales in 2010,
compared to 2% of gross sales in 2009. Domestic sales increased by 51% and international sales
increased by 79% driven by relatively strong sales in the medical equipment product line. While
SLPE recorded a sales increase of 57%, its cost of products sold percentage increased by
approximately 3% due to an unfavorable product mix, increased commodity prices, and an increase in
its excess and obsolete reserve which included non-recoverable VAT tax in China. The recording of
the reserve accounted for approximately 1.5% of sales. SLPE recorded increased operating costs of
$512,000, or 14%, in 2010, when compared to 2009, due primarily to greater sales related costs.
The High Power Group recorded income from operations, as a percentage of its net sales, of 9% in
2010, compared to 3% in 2009. As a percentage of consolidated net sales, the High Power Group
represented 28% of consolidated net sales in 2010, compared to 29% of consolidated net sales in
2009. MTE reported income from operations, as a percentage of sales, of 7% in 2010, compared to a
loss from operations, as a percentage of sales, of 4% in 2009. Sales increased by $2,400,000, or
59%. MTE experienced sales increases in all of its markets. Domestic sales increased 33%, while
international sales increased 213%. MTEs cost of products sold percentage decreased by 1%, due
primarily to the increased volume, partially offset by commodity costs, particularly copper,
production or factory mix (manufacturing shift to the U.S. from Mexico due to the fire) and
increased costs related to the fire, previously mentioned, which occurred at its manufacturing
facility in Mexicali, Mexico in March 2010. MTE experienced increased operating costs of $103,000
in 2010, compared to 2009. This increase is primarily due to sales related costs. Teal reported
income from operations, as a percentage of sales, of 10% in 2010, compared to 8% in 2009. Teal
reported a sales increase of $659,000, or 11%. Teals cost of products sold percentage increased
2%, compared to 2009, primarily due to greater copper and steel prices and to a lesser extent
product mix. Sales to semiconductor manufacturers increased by $607,000; these sales are almost all
internationally based and had been depressed in 2009. Sales to medical imaging equipment
manufacturers increased by $143,000, while sales to
military and aerospace customers decreased by $166,000. Operating costs at Teal remained relatively
constant in 2010, compared to 2009.
28
Net sales for SL-MTI increased by $891,000, or 13%, while income from operations increased by
$235,000, or 24%. As a percentage of consolidated net sales, sales for SL-MTI represented 16% of
consolidated net sales in 2010, compared to 20% of consolidated net sales in 2009. This sales
increase was primarily due to an increase of $572,000 to customers in the defense and commercial
aerospace industries. The other product lines of SL-MTI recorded a net sales increase of $319,000.
SL-MTIs cost of products sold percentage stayed relatively constant in 2010, compared to 2009.
Operating costs stayed relatively stable on a sales increase of 13%.
Income from operations as a
percentage of sales was 16% in 2010, compared to 14% in 2009.
Net sales for RFL increased by $1,232,000, or 28%, while income from operations increased by
$574,000, or 284%. As a percentage of consolidated net sales, sales for RFL represented 12% of
consolidated net sales in 2010, compared to 13% of consolidated net sales in 2009. Sales increases
were reported for two product lines, in particular sales of communication products, which increased
by $773,000, or 41%, when compared to 2009, which had relatively low sales volume. Sales of the
protection products increased by $511,000, or 23%, which are primarily related to sales of the new
GARD product, while customer service sales decreased slightly. Domestic sales increased by
$1,073,000, or 30%, while international sales increased by $159,000, or 21%. The increase in income
from operations is primarily related to the increase in sales of
$1,232,000 or 28%. Operating costs increased by $249,000 primarily
related to increased commissions and bonus accruals. Income from
operations as a percentage of sales was 14% in 2010, compared to 5% in 2009.
Cost of Products Sold
As a percentage of consolidated net sales, cost of products sold was approximately 68% for the
quarter ended 2010, compared to 67% for the quarter ended 2009. At SLPE the cost of products sold
as a percentage of sales increased by approximately 3% while the High Power Group and MTI had
relatively constant cost of products sold percentages. RFL had a significant improvement of
approximately 4% compared to 2009. The reasons for the increase of cost of products sold percentage
at SLPE were previously mentioned, which included an increase in its inventory reserves. RFLs
improvement in its cost of products sold percentage is primarily related to product mix and lean
initiatives.
Engineering and Product Development Expenses
Engineering and product development expenses were approximately 7% of consolidated net sales in
2010, compared to approximately 9% of net sales in 2009. Engineering and product development
expenses in 2010 increased by $228,000, or 8%. This increase was primarily attributable to an
increase at SLPE of $359,000, or 26%. This increase was due to bonus accruals, increased consulting
expenses and purchase of prototype material. All other divisions had decreases in engineering and
product development expenses ranging from 11% to 4%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, as a percentage of net sales, for 2010 were
approximately 16% of sales, compared to 21% of sales in 2009. These expenses increased by $461,000,
or 6%, primarily due to the increase in net sales of $12,834,000, or 37%, compared to prior year.
RFLs selling, general and administrative expenses increased by $281,000, or 21%, due to higher
sales commissions and bonus accruals on increased sales. SLPEs expenses
increased by $153,000, due primarily to sales related costs and, to a lesser extent, increases in
travel expenses and business taxes with respect to the China manufacturing operations and increased
stock option expense. The other operating entities had relatively minor changes in selling, general
and administrative expenses. Corporate and Other expenses decreased by $194,000, or 12%, primarily
due to a decrease in fees for professional services and favorable insurance experience.
29
Restructuring Charges
In 2009 the Company incurred a restructuring charge of $534,000, which was recorded at SLPE. These
charges primarily related to costs associated to reduce workforce levels. The costs represented
actions taken in 2009 to align SLPEs cost structure in response to a further reduction in business
levels. Workforce reductions in 2009 principally affected personnel in Mexico, but also impacted
operations in China and the United States. There were no restructuring charges or payments made in
2010.
Amortization of Deferred Financing Costs
In connection with entering into the 2008 Credit Facility and related waivers and amendments, the
Company incurred costs of approximately $808,000. These costs have been deferred and are being
amortized over the term of the 2008 Credit Facility in accordance with the guidance provided by ASC
470-50 Debt-Modification and Extinguishments.
Fire Related Loss, Net
On March 24, 2010, the Company sustained fire damage at its leased manufacturing facility in
Mexicali, Mexico. This facility manufactures products for both SLPE and MTE. The fire was contained
to an area that manufactures MTE products. The Company is fully insured for the replacement of the
assets damaged in the fire and for the loss of profits due to business interruption and changed
conditions caused by the fire. The Companys fire related loss includes the destruction of property
and equipment, damaged inventory, cleanup costs and increased operating expenses incurred as a
result of the fire. The Companys insurance recovery represents indemnification for all of these
costs, net of applicable adjustments and deductibles. The Company increased its estimated loss
related to the fire by $70,000 in the three months ended June 30, 2010.
Any additional gains, losses and recoveries will be recognized in subsequent periods as amounts are
determined and finalized with the Companys insurance companies. In July the Company received a
$200,000 advance from its carrier related to the fire loss.
Taxes (Continuing Operations)
The effective tax rate for continuing operations for the quarter ended 2010 was approximately 35%.
For the quarter ended 2009, the effective tax benefit rate was approximately 31%. The effective tax
rate reflects the statutory rate after adjustments for state and international tax provisions and
the recording of benefits primarily related to research and development tax credits.
Discontinued Operations
For 2010, the Company recorded a loss from discontinued operations of $1,049,000, net of tax,
compared to a loss of $87,000, net of tax, in 2009. These amounts represent legal and environmental
charges related to discontinued operations. During the second quarter of 2010, the
Company increased the reserves at its Camden site by $784,000, net of tax, to provide for additional
anticipated costs to remediate.
30
Results of Operations
Six months ended June 30, 2010, compared with six months ended June 30, 2009
The tables below show the comparisons of net sales and income (loss) from operations for the six
months ended June 30, 2010 (2010) and the six months ended June 30, 2009 (2009).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
$ Variance
|
|
|
% Variance
|
|
|
|
Ended
|
|
|
Ended
|
|
|
From
|
|
|
From
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Same Period
|
|
|
Same Period
|
|
|
|
2010
|
|
|
2009
|
|
|
Last Year
|
|
|
Last Year
|
|
|
|
(in thousands)
|
|
Power Electronics Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SLPE
|
|
$
|
37,433
|
|
|
$
|
26,314
|
|
|
$
|
11,119
|
|
|
|
42
|
%
|
High Power Group
|
|
|
26,335
|
|
|
|
21,937
|
|
|
|
4,398
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
63,768
|
|
|
|
48,251
|
|
|
|
15,517
|
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SL-MTI
|
|
|
14,869
|
|
|
|
13,358
|
|
|
|
1,511
|
|
|
|
11
|
%
|
RFL
|
|
|
11,286
|
|
|
|
9,579
|
|
|
|
1,707
|
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
89,923
|
|
|
$
|
71,188
|
|
|
$
|
18,735
|
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Operations
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
$ Variance
|
|
|
% Variance
|
|
|
|
Ended
|
|
|
Ended
|
|
|
From
|
|
|
From
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Same Period
|
|
|
Same Period
|
|
|
|
2010
|
|
|
2009
|
|
|
Last Year
|
|
|
Last Year
|
|
|
|
(in thousands)
|
|
Power Electronics Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SLPE
|
|
$
|
2,374
|
|
|
$
|
(577
|
)
|
|
$
|
2,951
|
|
|
|
511
|
%
|
High Power Group
|
|
|
2,243
|
|
|
|
1,233
|
|
|
|
1,010
|
|
|
|
82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,617
|
|
|
|
656
|
|
|
|
3,961
|
|
|
|
604
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SL-MTI
|
|
|
2,030
|
|
|
|
1,778
|
|
|
|
252
|
|
|
|
14
|
%
|
RFL
|
|
|
1,717
|
|
|
|
639
|
|
|
|
1,078
|
|
|
|
169
|
%
|
Other
|
|
|
(2,857
|
)
|
|
|
(3,140
|
)
|
|
|
283
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,507
|
|
|
$
|
(67
|
)
|
|
$
|
5,574
|
|
|
|
8,319
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales for 2010 increased by $18,735,000, or 26%, when compared to the same period
in 2009. When compared to 2009, net sales of the Power Electronics Group increased by $15,517,000,
or 32%; net sales of SL-MTI increased by $1,511,000, or 11%; and net sales of RFL increased by
$1,707,000, or 18%. All of the operating entities, except SLPE, reported
income from operations in both 2010 and 2009. Without the restructuring charges recorded in the
second quarter of 2009, SLPE would have incurred a loss from operations of $43,000.
The Company recorded income from operations of $5,507,000 for 2010, compared to a loss from
operations of $67,000 for 2009, representing an increase of $5,574,000. Income from operations was
6% of sales compared with a loss from operations of 0.1% in 2009.
31
Income from continuing operations was $3,339,000 (includes other income and expense cost and the
tax provision or benefit), or $0.55 per diluted share, in the first half of 2010, compared to a
loss from continuing operations of $102,000, or $0.02 per diluted share, for the same period in
2009. Income from continuing operations was approximately 4% of net sales in 2010, compared to a
loss from continuing operations of 0.1% of net sales in 2009. The Companys business segments and
the components of operating expenses are discussed more fully in the following sections.
The Power Electronics Group recorded a sales increase of 32%, when comparing the first half of 2010
to the first half of 2009. Income from operations increased by $3,961,000, or 604%, which was
attributable to an increase of $2,951,000, or 511%, at SLPE and an increase of $1,010,000, or 82%,
at the High Power Group.
SLPE recorded income from operations of $2,374,000, representing 6% of its net sales, in 2010. In
2009, SLPE reported a loss from operations of $577,000, representing 2% of its net sales. As a
percentage of consolidated net sales, SLPE represented 42% of consolidated net sales in 2010,
compared to 37% in 2009. At SLPE, sales of its medical product line increased by $7,914,000, or
54%, sales of its industrial equipment product line increased by $1,696,000, or 41%, and sales of its
data communications product line increased $1,579,000, or 24%. The increase in sales of the medical
equipment product line and the data communications product line was due in part to weak market
demand in these segments in 2009 and strong international sales in 2010. The increase in sales of
the industrial product line was caused by increased demand in orders from distributors, as a result
of increased economic activity compared to 2009. Returns and distributor credits also affected net
sales, which represented approximately 2% of gross sales in 2010 and 2009. Domestic sales increased
by 32% and international sales increased by 84%.
The High Power Group recorded income from operations, as a percentage of its net sales, of 9% in
2010, compared to 6% in 2009. As a percentage of consolidated net sales, the High Power Group
represented 29% of consolidated net sales in 2010, compared to 31% in 2009. MTE reported income
from operations, as a percentage of sales, of 6% in 2010, compared to a loss from operations, as a
percentage of sales, of 2% in 2009. This increase is due to a sales increase of $3,432,000, or 41%.
Sales to both OEMs and distributors have increased sharply from last year when MTEs products were
in decline as a result of the global economic downturn. The increase in sales is due to an across
the board increase in all of MTEs markets. Domestic sales increased 29%, while international sales
increased 96%. This increase in international sales is due to an increase in project based sales to
South American and Asian customers. As a result of the increase in sales, the cost of product sold
percentage decreased by 2%. Teal reported income from operations, as a percentage of sales, of 10%
in 2010 and 2009. Teal reported a sales increase of $967,000, or 7%, while the cost of products
sold increased by approximately 3%. Teals sales to OEM manufacturers increased by $923,000 partly
due to the extremely low level of sales in 2009. This market has experienced increased activity in
2010 and is almost all driven by international sales. Sales to medical imaging equipment manufacturers
increased by $520,000 as
customers replenished their low inventory levels carried in 2009. Sales to military and aerospace
customers decreased by $618,000, compared to 2009, as the first two quarters of 2009 were big
shipment quarters.
32
SL-MTIs net sales increased $1,511,000, or 11%, while income from operations increased by
$252,000, or 14%. As a percentage of consolidated net sales, SL-MTI represented 17% of consolidated
net sales in 2010, compared to 19% in 2009. Sales to customers in the defense and commercial
aerospace industries increased by $1,086,000. Sales of medical products and commercial products
increased by $160,000 and $265,000, respectively. SL-MTIs cost of products sold percentage
remained relatively constant in 2010, compared to 2009.
RFLs net sales increased by $1,707,000, or 18%, compared to 2009. As a percentage of consolidated
net sales, RFL represented 13% of consolidated net sales in 2010 and 2009. Sales of RFLs
communications product line increased by $817,000, or 19%, while sales of its protection products
decreased by $881,000, or 18%. Customer service sales remained relatively flat. The increase in
sales in the communications product line was primarily due to increased sales related to
multiplexer products and higher volume of replacement orders. The increase in protection products
is primarily related to sales of the new GARD product. Domestic sales increased by $1,630,000, or
22%, while international sales increased by $77,000, or 4%. Income from operations increased by
$1,078,000, or 169%. The increase in income from operations is primarily related to higher sales
volume, partially offset by increased operating costs of $245,000.
Cost of Products Sold
As a percentage of net sales, cost of products sold was approximately 68% for the first half of
2010, compared to 67% for the first half of 2009. The cost of products sold percentage increased on
a sales increase of 26%. The cost of products sold percentage for SLPE increased by approximately
1%. RFL had a decrease of approximately 4%, while the High Power Group and SL-MTI remained
relatively stable. The increase in cost of products sold as a percentage of sales at SLPE is due
primarily to (1) unfavorable product mix, (2) higher commodity prices and (3) increased overtime
expenses to meet the increased volume and customer demands. Also SLPE recorded an increase in its
excess and obsolete reserve which included non-recoverable VAT tax in China. This accounted for
approximately 1% of sales. RFLs decrease in the percentage of cost of products sold was due to
favorable mix and lean initiatives which began in 2009.
Engineering and Product Development Expenses
Engineering and product development expenses were approximately 7% of net sales in 2010, compared
to 9% in 2009. Engineering and product development expenses in 2010 decreased by $43,000, or 1%.
All of the operating entities had relatively minor decreases in engineering and product development
expenses, when compared to 2009. SLPE did experience an increase of $124,000, or 4%, due primarily
to reduced customer funding for development projects.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, as a percentage of net sales, for 2010 were
approximately 18% of sales, compared to 21% of sales in 2009. Selling, general and administrative expenses increased by
$1,164,000, or 8%, on a 26% increase in sales. SLPEs expenses increased by $651,000, compared to
2009, due to an increase in sales related costs as previously mentioned, higher travel cost and
stock option expense. RFLs expenses increased by $332,000 on sales related expenses
including commissions on higher sales. The High Power Group recorded an increase in selling,
general and administrative expenses of $178,000 and SL-MTI increased by $167,000 primarily related
to higher sales levels. Corporate and Other expenses decreased by $283,000, or 9%, primarily due to
decreased professional fees, lower compensation expense, and lower insurance costs.
33
Depreciation and Amortization
Depreciation and amortization expenses were approximately 2% of net sales in 2010, compared to 3%
in 2009.
Taxes (Continuing Operations)
The effective tax rate for continuing operations for the first half of 2010 was approximately 36%.
For the first half of 2009, the effective tax benefit rate was approximately 50%. The effective tax
rate reflects the statutory rate after adjustments for state and international tax provisions and
after recording benefits primarily related to research and development tax credits. The effective
tax benefit rate in 2009 was positively impacted by research and development tax credits, which had
a greater impact in 2009, due to the lower amount of income from operations.
Discontinued Operations
For 2010, the Company recorded a loss from discontinued operations, net of tax, of $1,199,000,
compared to $283,000, net of tax, in 2009. These amounts represent legal and environmental charges
related to discontinued operations. During the quarter ended June 30, 2010, the Company increased
its reserves related to the Camden site, as previously discussed.
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 that 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 Companys business, future capital expenditures and the Companys
prospects and strategy. These statements are identified by the use of such terms as may, would,
could, expect, intend, believe, plan, estimate, forecast, project, anticipate,
likely, continue or other comparable terms. 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 Companys business in or beyond the Companys control. These factors include
a change in the rate 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 Companys markets that have experienced 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.
34
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 Companys markets that have
experienced 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
Companys 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 Companys 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. 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 Interim Chief Financial Officer, has evaluated the effectiveness of the
design and operation of the Companys 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).
Conclusion of Evaluation
Based upon that evaluation, the Companys Chief Executive Officer and Interim Chief Financial
Officer have concluded that the Companys disclosure controls and procedures were effective as of
the end of the period covered by this Quarterly Report on Form 10-Q.
Inherent Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the Companys disclosure controls and procedures, management recognizes
that any controls, no matter how well designed and operated, can provide only reasonable, not
absolute, assurance of achieving the desired control objectives. Due to the inherent limitations in
all control systems, no evaluation of controls can provide absolute
assurance that misstatements due to error or fraud will not occur or that all control issues and
instances of fraud, if any, within the Company have been detected.
35
Changes in Internal Control Over Financial Reporting
There were no changes in the Companys internal control over financial reporting during the second
quarter of 2010 that have materially affected or are reasonably likely to materially affect its
internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 10 of the Notes to the Consolidated Financial Statements included in Part I to this
Quarterly Report on Form 10-Q. Also, see Note 13 of the Notes to the Consolidated Financial
Statements of the Companys Annual Report on Form 10-K for the year ended December 31, 2009, for
additional disclosure related to the Companys legal proceedings.
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On December 30, 2008, the Board authorized the repurchase of up to 500,000 shares of the Companys
stock. Previously, the Board of Directors had authorized the repurchase of up to 560,000 shares of
the Companys common stock. Any repurchases pursuant to the Companys stock repurchase program
would be made in the open market or in negotiated transactions. For the six months ended June 30,
2010, the Company did not repurchase any shares pursuant to its existing stock repurchase program.
The Company did purchase shares through its deferred compensation plans during the six-month
periods ended June 30, 2010 and June 30, 2009, in the amount of 210,376 and 73,500 shares,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
of Shares That May
|
|
|
|
Total
|
|
|
|
|
|
|
Purchased as Part
|
|
|
Yet Be Purchased
|
|
|
|
Number of
|
|
|
Average
|
|
|
of Publicly
|
|
|
under Publicly
|
|
|
|
Shares
|
|
|
Price Paid
|
|
|
Announced Plans
|
|
|
Announced Plans or
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
or Programs
|
|
|
Programs
|
|
January 2010
|
|
|
13,351
|
(1)
|
|
$
|
8.36
|
|
|
|
|
|
|
|
500,000
|
|
February 2010
|
|
|
5,131
|
(1)
|
|
$
|
8.08
|
|
|
|
|
|
|
|
500,000
|
|
March 2010
|
|
|
101,694
|
(1)
|
|
$
|
8.09
|
|
|
|
|
|
|
|
500,000
|
|
April 2010
|
|
|
14,300
|
(1)
|
|
$
|
10.51
|
|
|
|
|
|
|
|
500,000
|
|
May 2010
|
|
|
73,000
|
(1)
|
|
$
|
11.38
|
|
|
|
|
|
|
|
500,000
|
|
June 2010
|
|
|
2,900
|
(1)
|
|
$
|
12.47
|
|
|
|
|
|
|
|
500,000
|
|
Total
|
|
|
210,376
|
|
|
$
|
9.47
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The Company purchased these shares other than through a publicly announced plan
or program.
|
36
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 5. OTHER INFORMATION
Pursuant to Section 10A(i)(2) of the Exchange Act, the Company is responsible for listing the
non-audit services performed by Grant Thornton, the Companys external auditor, in the first six
months of 2010, as approved by its Audit Committee. During the six-month period ended June 30,
2010, there were no non-audit services performed by Grant Thornton LLP.
ITEM 6. EXHIBITS
|
|
|
|
|
|
10.1
|
|
|
Employment Agreement, dated June 29, 2010, between the SL Industries, Inc. and William Fejes,
Jr.
|
|
|
|
|
|
|
10.2
|
|
|
Stock Option Agreement, dated June 29, 2010, between the SL Industries, Inc. and William
Fejes, Jr.
|
|
|
|
|
|
|
31.1
|
|
|
Certification by Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (transmitted herewith).
|
|
|
|
|
|
|
31.2
|
|
|
Certification by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (transmitted herewith).
|
|
|
|
|
|
|
32.1
|
|
|
Certification by Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (transmitted herewith).
|
|
|
|
|
|
32.2
|
|
Certification by Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (transmitted herewith).
|
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
Date: August 2, 2010
|
SL INDUSTRIES, INC.
(Registrant)
|
|
|
By:
|
/s/ William T. Fejes
|
|
|
|
William T. Fejes
|
|
|
|
Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
|
By:
|
/s/ Glen M. Kassan
|
|
|
|
Glen M. Kassan
|
|
|
|
Interim Chief Financial Officer
(Principal Accounting Officer)
|
|
38
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the Agreement) is entered into as of June 29, 2010 (the
Effective Date), by and between SL Industries, Inc. (the Company), having its principal place
of business at 520 Fellowship Road, Suite A-114, Mt. Laurel, New Jersey 08054 and William Fejes
(Executive, and the Company and the Executive collectively referred to herein as the Parties).
W
I
T
N
E
S
S
E
T
H:
WHEREAS, the Company desires to hire Executive and to employ him as the Chief Executive
Officer (CEO) of the Company, and the Parties desire to enter into this Agreement embodying the
terms of such employment and will begin work on June 28, 2010;
NOW, THEREFORE, in consideration of the premises and the mutual covenants and promises of the
Parties contained herein, the Parties, intending to be legally bound, hereby agree as follows:
1.
Title and Job Duties
.
(a) Subject to the terms and conditions set forth in this Agreement, the Company agrees to
employ Executive as CEO. In this capacity, Executive shall have the duties, authorities and
responsibilities commensurate with the duties, authorities and responsibilities of persons in
similar capacities in similarly sized companies, and such other duties, authorities and
responsibilities as the Board of Directors of the Company (the Board) shall designate from time
to time that are not inconsistent with the Executives position as CEO. Executive shall report
directly to the Board. All employees of the Company shall report directly to Executive or his
designee.
(b) Executive accepts such employment and agrees, during the term of his employment, to devote
his full business and professional time and energy to the Company. Executive agrees to carry out
and abide by all lawful directions of the Board and the Chairman of the Board that are consistent
with his position as Chief Executive Officer.
(c) Without limiting the generality of the foregoing, Executive shall not, without the written
approval of the Company, render services of a business or commercial nature on his own behalf or on
behalf of any other person, firm, or corporation, whether for compensation or otherwise, during his
employment hereunder, provided that the foregoing shall not prevent the Executive from (i) serving
on the boards of directors of non-profit organizations and, with the prior written approval of the
Board, other for profit companies (provided that no such written approval is necessary for
Executives continued service on the board of directors of Broadwind Energy Inc.), (ii)
participating in charitable, civic, educational, professional, community or industry affairs, and
(iii) managing Executives passive personal investments so
long as such activities in the aggregate do not materially interfere or conflict with
Executives duties hereunder or create a potential business or fiduciary conflict.
(d) Executive may own passive investments in Competing Businesses, defined below, (including,
but not limited to, indirect investments through mutual funds), provided the securities of the
Competing Business are publicly traded and Executive does not own or control more than one percent
(1%) of the outstanding voting rights or equity of the Competing Business. Competing Business
means any corporation, partnership, limited liability company or other entity or person (other than
the Company) which is engaged in any business (i) presently carried on by the Company, or (ii) in
which the Company, the Board and senior management together consider engaging in the twelve (12)
months prior to the termination of Executives employment.
2.
Salary and Additional Compensation
.
(a)
Base Salary
. The Company shall pay to Executive an annual base salary of
$350,000, less applicable withholdings and deductions, in accordance with the Companys normal
payroll procedures. The Board may increase the Executives annual base salary from time to time in
its sole and absolute discretion (such salary as increased from time to time, the Base Salary).
(b)
Bonus
. Executive shall be eligible for an annual bonus of up to one-hundred
percent (100%) of Executives annual Base Salary (Target Bonus), at the sole discretion of the
Board. Such Target Bonus shall be payable in a manner that is consistent with the then current SL
Industries, Inc. Annual Bonus Plan (the Bonus Plan).
(c)
Options
. On the later of the Effective Date or the date upon which the
Compensation Committee of the Board approves such a grant, the Company shall grant to Executive an
option to purchase 100,000 shares of the Companys common stock (Options) under the 2008
Incentive Stock Plan (the Plan), pursuant to terms and conditions of the Plan, this Agreement and
the stock option award agreement attached hereto as
Exhibit A
(the Stock Option
Agreement), which Options shall be granted at the Fair Market Value (as such term is defined in
the Plan) on the date of the grant, and shall vest according to the following schedule: Thirty-four
percent (34%) of the Options shall vest on the first anniversary of the Effective Date,
thirty-three percent (33%) of the Options shall vest on the second anniversary of the Effective
Date, and thirty-three percent (33%) of the Options shall vest on the third anniversary of the
Effective Date. In the event that the Company declares and pays an extraordinary cash dividend to
its stockholders on or prior to the third anniversary of the Effective Date, then Executive shall
receive a payment on the third anniversary of the Effective Date equal to the product of (x) the
amount of such extraordinary cash dividend (reduced dollar for dollar by any reduction to the
exercise price of the Options made in connection with such dividend), and (y) the number of shares
subject to outstanding and unexercised Options granted pursuant to this Section 2(c).
(d)
Future Equity Awards
. The Executive shall be eligible to participate in future
grants pursuant to the Plan and other Company performance incentive plans extended to senior
executives of the Company generally, at levels commensurate with Executives position.
3.
Expenses
. In accordance with Company policy, the Company shall reimburse Executive
for all reasonable business expenses properly and reasonably incurred and paid by Executive in the
performance of his duties under this Agreement upon his presentment of detailed receipts in the
form required by the Companys policy.
4.
Benefits
.
(a)
Vacation
. Executive shall be entitled to vacation in accordance with the
Companys standard vacation policy extended to senior executives of the Company generally, at
levels commensurate with Executives position.
(b)
Health Insurance and Other Plans
. Executive shall be eligible to participate in
the Companys medical, dental, long term incentive plan, and other employee benefit programs, if
any, that are provided by the Company for its employees generally, at levels commensurate with
Executives position, in accordance with the provisions of any such plans, as the same may be in
effect from time to time.
5.
Term
. Except as otherwise provided herein, the terms set forth in this Agreement
will commence on the Effective Date hereof and shall remain in effect for an initial term of one
(1) year and shall automatically renew for subsequent one (1) year periods unless Executive or the
Company is notified of non-renewal upon no less than thirty (30) days written notice by the other
party (the initial term and subsequent terms are referred to collectively as the Term).
6.
Termination
.
(a)
Termination at the Companys Election
.
(i)
For Cause
. At the election of the Company, Executives employment may be
terminated for Cause (as defined below) upon written notice to Executive pursuant to Section 13 of
this Agreement. For purposes of this Agreement, Cause for termination shall mean that Executive:
(A) pleads guilty or no contest to or is indicted for or convicted of a felony under federal or
state law or as a crime under federal or state law which involves Executives fraud or dishonesty;
(B) in carrying out his duties, engages in conduct that constitutes gross negligence or willful
misconduct; (C) engages in misconduct that causes material harm to the reputation of the Company;
or (D) materially breaches any term of this Agreement or material written policy of the Company,
provided that if the Company provides written notice of Cause pursuant to (D), the Executive shall
be given thirty (30) days from the date of such written notice to cure such breach.
(ii)
Upon Disability, Death or Without Cause
. At the election of the Company,
Executives employment may be terminated without Cause: (A) should Executive become physically or
mentally unable to perform his duties for the Company hereunder and such incapacity has continued
for a total of ninety (90) consecutive days or any one hundred eighty (180) days in a period of
three hundred sixty-five (365) consecutive days (a Disability); (B) upon Executives death
(Death); or (C) upon thirty (30) days written notice for any other reason.
(b)
Termination at Executives Election
.
(i)
For Good Reason
. At Executives election, Executives employment may be
terminated for Good Reason (as defined below) by providing notice to the Company pursuant to
Section 13 of this Agreement. For purposes of this Agreement, Good Reason shall be deemed to
exist if the following actions occur without Executives consent: (A) a material diminution in
Executives Base Salary; (B) a material diminution in Executives authority, duties or
responsibilities under this Agreement, provided that removal of Executive as a director of the
Board (if Executive is appointed to the Board at any time), shall not constitute a material
diminution in Executives authority, duties or responsibilities under this Agreement; or (C) any
other action or inaction that constitutes a material breach of the terms of this Agreement by the
Company. In the event any of the occurrences in (A) through (C) above have occurred, the Company
shall be given written notice by Executive of Executives intention to so terminate Executives
employment, such notice: (i) to state in detail the particular acts or failures to act that
constitute the grounds on which the proposed termination for Good Reason is based, and (ii) to be
given within sixty (60) days after the first occurrence of such acts or failures to act. The
Company shall have thirty (30) days following receipt of such notice to cure such acts or failures
to act in all material respects. If the Company has not cured such acts or failures to act within
the thirty (30) day cure period, and Executive has not withdrawn the notice, then the Executives
employment shall be immediately terminated for Good Reason.
(ii)
Voluntary Resignation
. Notwithstanding anything contained elsewhere in this
Agreement to the contrary, Executive may terminate his employment hereunder at any time and for any
reason whatsoever or for no reason at all in Executives sole discretion by giving thirty (30) days
written notice pursuant to Section 13 of this Agreement.
7.
Payments Upon Termination of Employment
.
(a)
Termination for Cause or Resignation Without Good Reason
. If, prior to the
expiration of the Term, the Executives employment is terminated by the Company for Cause or if
the Executive resigns from his employment hereunder other than for Good Reason, the Executive
shall be entitled to the following amounts only: (A) payment of his Base Salary accrued up to and
including the date of termination or resignation within thirty (30) days following termination, (B)
payment in lieu of any accrued but unused vacation time, in accordance with the Companys vacation
policy, and (C) payment of any unreimbursed expenses in accordance with the Companys business
reimbursement policy, and (D) payments and benefits under any Company benefit plan, program or
policy that Executive participated in during employment and paid pursuant to the terms of such
plan, program and policy (collectively, the Accrued Obligations).
(b)
Termination for Reasons other than Cause or Voluntary Resignation
. If Executives
employment is terminated, at his or the Companys election at any time due to his Death or
Disability, due to the expiration or non-renewal of the Agreement prior to the Executives
65
th
birthday, or for reasons other than Cause or Voluntary Resignation and Section 7(c)
is not applicable at the time of Executives termination of employment, Executive shall be entitled
to receive the Accrued Obligations and, provided he executes a General Release in the form annexed
hereto as Exhibit B (the General Release), severance payments and benefits
equal to the following: (i) subject to Section 20, one (1) year of Executives Base Salary
paid in installments in accordance with the Companys regular payroll practices (the Severance
Payment); (ii) reimbursement for the premium associated with one (1) year continuation of health
insurance coverage pursuant to COBRA, (iii) immediate vesting of any Options that are scheduled to
vest, pursuant to Section 2(c), within one year of the date of termination of employment
,
provided
that Executive may exercise vested Options until the earlier of (y) thirty (30) days following
termination of employment and (z) the scheduled expiration of the Options (Post Termination
Exercise Period); (iv) unpaid bonuses with respect to the fiscal year ending on or preceding the
date of termination, if any, provided Executive is employed on December 31 of that year and the
Bonus Plan is in full force and effect, shall be paid pursuant to the terms of the Bonus Plan
(Accrued Bonus), provided that such payment shall be paid at the same time as other employees
receive their bonuses and no later than December 31 of the year after the year in which the bonus
was earned; and (v) unpaid bonus through the termination or resignation date, if any, or, if the
full bonus has not been earned, a pro-rata portion of such bonus, pursuant to the terms of the
Bonus Plan. Payment of the Base Salary component of Executives severance shall be made on regular
paydays. Subject to Executives execution and delivery of a general release (that has not been
revoked and is no longer subject to revocation under applicable law) of the Company, its parents,
subsidiaries and affiliates and each of its officers, directors, employees, agents, successors and
assigns in the form attached hereto as
Exhibit B
(the General Release) all payments
and/or grants under this Section 7(b) shall begin sixty (60) days following termination of
employment provided, that the first payment for severance payments described in Section 7(b)(i)
shall include payment of any amounts otherwise due as of the date of termination and all payments
and benefits that are not considered deferred compensation under Code Section 409A, shall be
commenced, made or provided, as applicable, as soon as administratively feasible after the General
Release becomes effective, provided, further that if Executives employment terminates due to Death
or Disability, Executive (or his legal representative or estate) shall not be required to execute
and deliver the General Release in order to receive severance payments and benefits provided in
this Section 7(b).
(c)
Termination of the Term
. If Executives employment terminates on the expiration
of the Term as provided in Section 5, and the Executive is age 65 or older on the date of
expiration of the Term, then Executive shall only be entitled to the Accrued Obligations.
(d)
No Mitigation; No Set-Off
. The Companys obligation to pay Executive the amounts
provided and to make the arrangements provided hereunder shall not be subject to set-off,
counterclaim or recoupment of amounts owed by Executive to the Company or its affiliates.
Executive shall not be required to mitigate the amount of any payment provided for pursuant to this
Agreement by seeking other employment, and no amounts otherwise
earned shall be set-off against
the amounts due hereunder.
8.
Confidentiality Agreement and Assignment of Intellectual Property
.
(a) Executive understands that during the Term, he may have access to unpublished and
otherwise confidential information both of a technical and non-technical nature, relating to the
business of the Company and any of its parents, subsidiaries, divisions, affiliates (collectively,
Affiliated Entities), or clients, including without limitation any of their actual or anticipated
business, research or development, any of their technology or the implementation or
exploitation thereof, including without limitation information Executive and others have
collected, obtained or created, information pertaining to clients, accounts, vendors, prices,
costs, materials, processes, codes, material results, technology, system designs, system
specifications, materials of construction, trade secrets and equipment designs, including
information disclosed to the Company by others under agreements to hold such information
confidential (collectively, the Confidential Information). Executive agrees to observe all
Company policies and procedures concerning such Confidential Information. Executive further agrees
not to disclose or use, either during his employment or at any time thereafter, any Confidential
Information for any purpose, including without limitation any competitive purpose, unless
authorized to do so by the Company in writing, except that he may disclose and use such information
in the good faith performance of his duties for the Company. Executives obligations under this
Agreement will continue with respect to Confidential Information, whether or not his employment is
terminated, until such information becomes generally available from public sources through no fault
of Executive or any representative of Executive. Notwithstanding the foregoing, however, Executive
shall be permitted to disclose Confidential Information as may be required by a subpoena or other
governmental order, provided that he first notifies the Company of such subpoena, order or other
requirement and such that the Company has the opportunity to obtain a protective order or other
appropriate remedy.
(b) During Executives employment, upon the Companys request, or upon the termination of his
employment for any reason, Executive will promptly deliver to the Company all documents, records,
files, notebooks, manuals, letters, notes, reports, customer and supplier lists, cost and profit
data, e-mail, apparatus, computers, blackberries or other PDAs, hardware, software, drawings,
blueprints, and any other material of the Company or any of its Affiliated Entities or clients,
including all materials pertaining to Confidential Information developed by Executive or others,
and all copies of such materials, whether of a technical, business or fiscal nature, whether on the
hard drive of a laptop or desktop computer, in hard copy, disk or any other format, which are in
his possession, custody or control. Executive may retain the Executives rolodex and similar
address books, including in electronic form, provided, that such items only include contact
information.
(c) Executive will promptly disclose to the Company any idea, invention, discovery or
improvement, whether patentable or not (
Creations
), conceived or made by him alone or
with others at any time during his employment. Executive agrees that the Company owns any such
Creations, conceived or made by Executive alone or with others at any time during his employment,
and Executive hereby assigns and agrees to assign to the Company all rights he has or may acquire
therein and agrees to execute any and all applications, assignments and other instruments relating
thereto which the Company deems necessary or desirable. These obligations shall continue beyond
the termination of his employment with respect to Creations and derivatives of such Creations
conceived or made during his employment with the Company. The Company and Executive understand
that the obligation to assign Creations to the Company shall not apply to any Creation which is
developed entirely on his own time without using any of the Companys equipment, supplies,
facilities, and/or Confidential Information unless such Creation (a) relates in any way to the
business or to the current or anticipated research or development of the Company or any of its
Affiliated Entities; or (b) results in any way from his work at the Company.
(d) Executive will not assert any rights to any invention, discovery, idea or improvement
relating to the business of the Company or any of its Affiliated Entities or to his duties
hereunder as having been made or acquired by Executive prior to his work for the Company, except
for the matters, if any, described in
Exhibit C
to this Agreement.
(e) During his employment with the Company, if Executive incorporates into a product or
process of the Company or any of its Affiliated Entities anything listed or described in
Exhibit C
,
the Company is hereby granted and shall have a non-exclusive, royalty-free,
irrevocable, perpetual, worldwide license (with the right to grant and authorize sublicenses) to
make, have made, modify, use, sell, offer to sell, import, reproduce, distribute, publish, prepare
derivative works of, display, perform publicly and by means of digital audio transmission and
otherwise exploit as part of or in connection with any product, process or machine.
(f) Executive agrees to cooperate fully with the Company, both during and after his employment
with the Company, with respect to the procurement, maintenance and enforcement of copyrights,
patents, trademarks and other intellectual property rights (both in the United States and foreign
countries) relating to such Creations. Executive shall sign all papers, including, without
limitation, copyright applications, patent applications, declarations, oaths, formal assignments,
assignments of priority rights and powers of attorney, which the Company may deem necessary or
desirable in order to protect its rights and interests in any Creations. Executive further agrees
that if the Company is unable, after reasonable effort, to secure Executives signature on any such
papers, any officer of the Company shall be entitled to execute such papers as his agent and
attorney-in-fact and Executive hereby irrevocably designates and appoints each officer of the
Company as his agent and attorney-in-fact to execute any such papers on his behalf and to take any
and all actions as the Company may deem necessary or desirable in order to protect its rights and
interests in any Creations, under the conditions described in this paragraph.
9.
Non-solicitation; non-competition
.
(a) Executive agrees that while he is employed
and for a period of one (1) year after the termination of his employment, Executive will not,
directly or indirectly, including on behalf of any person, firm or other entity, employ or solicit
for employment any employee of the Company, or anyone who was an employee of the Company or any of
its Affiliated Entities within the twelve (12) months prior to the termination of Executives
employment, or induce any such employee to terminate his or her employment with the Company.
(b) Executive further agrees that while he is employed and for a period of one (1) year after
the termination of his employment, Executive will not, directly or indirectly, including on behalf
of any person, firm or other entity, without the express written consent of an authorized
representative of the Company, (i) perform services within the Territory (as defined below) for any
Competing Business (as defined below), whether as an employee, consultant, agent, contractor or in
any other capacity, (ii) hold office as an officer or director or like position in any Competing
Business, (iii) request any present or future customers or suppliers of the Company or any of its
Affiliated Entities to curtail or cancel their business with the Company or any of its Affiliated
Entities, and (iv) solicit or accept business from such present or future customers or suppliers of
the Company or any of its Affiliated Entities. These obligations will
continue for the specified period regardless of whether the termination of Executives
employment was voluntary or involuntary or with or without Cause.
(c) Territory shall mean (i) throughout the United States, but if such area is determined by
judicial action to be too broad, then it shall mean (ii) throughout the states of New Jersey,
Massachusetts, Wisconsin, Minnesota and California.
(d) Executive agrees that in the event a court determines the length of time or the geographic
area or activities prohibited under this Section 9 are too restrictive to be enforceable, the court
may reduce the scope of the restriction to the extent necessary to make the restriction
enforceable.
10.
Legal Fees
. The Company shall pay directly to Executives legal counsel or
reimburse Executive for up to $15,000 for legal fees incurred by Executive relating to negotiating,
drafting and execution of this Agreement and any related equity award agreements.
11.
Representation and Warranty
. Executive represents and warrants to the Company
that he is not subject to any agreement restricting his ability to enter into this Agreement and
fully carry out his duties and responsibilities hereunder. To the extent that Executive continues
to be bound by confidentiality, non-disparagement obligations with regard to his former employer,
the Company and Executive agree that neither shall require Executive to disclose any confidential
information of any prior employer of Executive or misappropriate any intellectual property
belonging to any other person or entity during the Term.
12.
Injunctive Relief
. Without limiting the remedies available to the Company,
Executive acknowledges that a breach of any of the covenants contained in Sections 8 and 9 above
may result in material irreparable injury to the Company for which there is no adequate remedy at
law, that it will not be possible to measure damages for such injuries precisely and that, in the
event of such a breach or threat thereof, the Company shall be entitled, without the requirement to
post bond or other security, to obtain a temporary restraining order and/or injunction restraining
Executive from engaging in activities prohibited by this Agreement or such other relief as may be
required to specifically enforce any of the covenants in Sections 8 and 9 of this Agreement.
13.
Notice
. Any notice or other communication required or permitted to be given to
the Parties shall be deemed to have been given if personally delivered, if sent by nationally
recognized overnight courier or if mailed by certified or registered mail, return receipt
requested, first class postage prepaid, and addressed as follows:
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(a)
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If to Executive, to:
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the address shown on the records of the Company.
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with a copy to:
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Dechert LLP
1775 I Street, NW
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Washington, DC 20006
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Attn: David E. Schulman, Esq.
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(b)
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If to the Company, to:
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SL Industries, Inc.
520 Fellowship Road
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Suite A114
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Mt. Laurel, New Jersey 08054
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Attention: Chairman of the Board
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with a copy to:
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Olshan Grundman Frome Rosenzweig & Wolosky LLP
65 East 55
th
Street
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New York, New York 10022
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Attention: Adam W. Finerman, Esq.
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14.
Severability
. If any provision of this Agreement is declared void or
unenforceable by a court of competent jurisdiction, all other provisions shall nonetheless remain
in full force and effect.
15.
Governing Law and Arbitration
. This Agreement shall be governed by, and construed
and enforced in accordance with, the laws of the State of New Jersey, without regard to the
conflict of laws provisions thereof. Any action, suit or other legal proceeding that is commenced
to resolve any matter arising under or relating to any provision of this Agreement shall be
submitted to the exclusive jurisdiction of any state or federal court in Burlington County, New
Jersey.
16.
Liability Insurance
. The Company shall cover Executive under the directors and
officers liability insurance during the Term in the same amount and to the same extent as the
Company covers its other officers and directors.
17.
Waiver
. The waiver by either Party of a breach of any provision of this Agreement
shall not be or be construed as a waiver of any subsequent breach. The failure of a Party to
insist upon strict adherence to any provision of this Agreement on one or more occasions shall not
be considered a waiver or deprive that Party of the right thereafter to insist upon strict
adherence to that provision or any other provision of this Agreement. Any waiver must be in
writing.
18.
Assignment
. This Agreement is a personal contract and Executive may not sell,
transfer, assign, pledge or hypothecate his rights, interests and obligations hereunder. Except as
otherwise herein expressly provided, this Agreement shall be binding upon and shall inure to the
benefit of Executive and his personal representatives and shall inure to the benefit of and be
binding upon the Company and its successors and assigns, except that the Company may not assign
this Agreement without the Executives prior written consent, except to an acquirer of all or
substantially all of the assets of the Company other than the real estate assets and upon written
assumption of the obligations of this Agreement.
19.
Entire Agreement
. This Agreement (together with the Exhibits attached hereto)
embodies all of the representations, warranties, and agreements between the Parties relating to
Executives employment with the Company. No other representations, warranties, covenants,
understandings, or agreements exist between the Parties relating to Executives employment. This
Agreement shall supersede all prior agreements, written or oral, relating to Executives
employment. This Agreement may not be amended or modified except by a writing signed by the
Parties.
20.
Code Section 409A Compliance
.
(a) The intent of the parties is that payments and benefits under this Agreement comply with,
or be exempt from, Internal Revenue Code (Code) Section 409A and the regulations and guidance
promulgated thereunder (collectively
Code Section 409A
) and, accordingly, to the maximum
extent permitted, this Agreement shall be interpreted to be in compliance therewith. If the
Executive notifies the Company (with specificity as to the reason therefore) that the Executive
believes that as a result of subsequent published guidance issued by the I.R.S. upon which
taxpayers generally rely, any provision of this Agreement (or of any award of compensation,
including equity compensation or benefits) would cause Executive to incur any additional tax or
interest under Code Section 409A and the Company concurs with such belief or the Company
independently makes such determination, the Company shall, after consulting with the Executive,
reform such provision to try to comply with Code Section 409A through good faith modifications to
the minimum extent reasonably appropriate to conform with Code Section 409A, and to the extent
applicable, IRS Notice 2010-6. To the extent that any provision hereof is modified in order to
comply with Code Section 409A, such modification shall be made in good faith and shall, to the
maximum extent reasonably possible, maintain the original intent and economic benefit to the
Executive and the Company and is tax neutral to the Company of the applicable provision without
violating the provisions of Code Section 409A.
(b) A termination of employment shall not be deemed to have occurred for purposes of any
provision of this Agreement providing for the payment of any amounts or benefits upon or following
a termination of employment that are considered nonqualified deferred compensation under Code
Section 409A unless such termination is also a separation from service within the meaning of Code
Section 409A and, for purposes of any such provision of this Agreement, references to a
termination, termination of employment or like terms shall mean separation from service. If
the Executive is deemed on the date of termination to be a specified employee within the meaning
of that term under Code Section 409A(a)(2)(B), then with regard to any payment that is considered
non-qualified deferred compensation under Code Section 409A payable on account of a separation
from service, such payment or benefit shall be made or provided at the date which is the earlier
of (A) the expiration of the six (6)-month period measured from the date of such separation from
service of the Executive, and (B) thirty (30) days from the date of the Executives death (the
Delay Period
). Upon the expiration of the Delay Period, all payments and benefits
delayed pursuant to this
Section 20
(whether they would have otherwise been payable in a
single sum or in installments in the absence of such delay) shall be paid or reimbursed to the
Executive in a lump sum and any remaining payments and benefits due under this Agreement shall be
paid or provided in accordance with the normal payment dates specified for them herein.
(c) For purposes of Code Section 409A, the Executives right to receive any installment
payments pursuant to this Agreement shall be treated as a right to receive a series of separate and
distinct payments.
(d) All reimbursements under this
Agreement (including without limitation under Sections
3, 7 and 10)
shall be made as soon as practicable following submission of a reimbursement
request, but no later than the end of the year following the year during which the underlying
expense was incurred.
21.
Limitation on Benefits.
Notwithstanding anything to the contrary contained in
this Agreement, to the extent that any of the payments and benefits provided for under this
Agreement or any other agreement or arrangement between the Company and Executive, or any
arrangement or agreement with any person whose actions result in a change of ownership of effective
control or a change in ownership of a substantial portion of the assets of the corporation covered
by Section 280G(b)(2) (collectively, the Payments) (i) constitute a parachute payment within
the meaning of Section 280G of the Code and (ii) but for this Section 21, would be subject to the
excise tax imposed by Section 4999 of the Code, then the Payments shall be payable either (i) in
full or (ii) as to such lesser amount which would result in no portion of such Payments being
subject to excise tax under Section 4999 of the Code; whichever of the foregoing amounts, taking
into account the applicable federal, state and local income taxes, payroll taxes and the excise tax
imposed by Section 4999, results in Executives receipt on an after-tax basis, of the greater
amount of payment and benefits. Any reduction under clause (ii) of the preceding sentence shall be
done first by reducing any cash severance payments with the last payment reduced first; next any
equity or equity derivatives that are included at full value rather than accelerated value; next
any equity or equity derivatives based on acceleration value shall be reduced with the highest
value reduced first. Notwithstanding the foregoing, to the extent that the Company and Executive
agree that it would not violate Code Section 409A or impact the ability of the parties to reduce
the amounts receivable, the Executive may prescribe a different order of reduction. Unless
Executive and the Company otherwise agree in writing, any determination required under this Section
shall be made in writing by the Companys independent public accountants (the Accountants), whose
determination shall be conclusive and binding upon Executive and the Company for all purposes. For
purposes of making the calculations required by this Section, the Accountants may make reasonable
assumptions and approximations concerning applicable taxes and may rely in reasonable, good faith
interpretations concerning the application of Section 280G and 4999 of the Code. The Company and
Executive shall furnish to the Accountants such information and documents as the Accountants may
reasonably request in order to make a determination under this Section. The Company shall bear all
costs the Accountants may reasonably incur in connection with any calculations contemplated by this
Section. If the limitation set forth in this Section 21 is applied to reduce an amount payable to
Executive, and the Internal Revenue Service successfully asserts that, despite the reduction,
Executive has nonetheless received payments which are in excess of the maximum amount that could
have been paid to Executive without being subjected to any excise tax, then, unless it would be
unlawful for the Company to make such a loan or similar extension of credit to Executive, Executive
shall repay such excess amount to the Company as though such amount constitutes a loan to Executive
made at the date of payment of such excess amount, bearing interest at 120% of the applicable
federal rate (as determined under section 1274(d) of the Code in respect of such loan), provided
that if the recalculation of the higher
amount was then redone based on the IRS position and the Executive would net more if no
reduction took place, such reduction shall be cancelled and the full amount paid to Executive in a
lump sum within thirty (30) days of the IRS assessment becoming final, unless this proviso would
negate the ability to use the reduction if this was not implemented or caused a violation of Code
Section 409A, in which case this proviso shall be null and void.
[Signature page follows]
IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed and delivered
on the date above.
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SL INDUSTRIES, INC.
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By:
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/s/ Glen Kassan
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Name:
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Glen Kassan
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Title:
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Chairman of the Board
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Agreed to and Accepted:
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/s/ William Fejes, Jr.
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William Fejes
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EXHIBIT A
Stock Option Agreement
EXHIBIT B
AGREEMENT AND RELEASE
Agreement and Release (Agreement) executed this
_____day of
_____, 20_____, by and between
William Fejes (Executive) with an address at
and SL Industries, Inc., its
parents, subsidiaries and affiliates (the Company) with an address at
.
1. Executives employment shall be terminated effective
_____
(Termination Date). As of
that date, Executives duties, responsibilities, office and title shall cease. Capitalized terms
used without definition in this Agreement shall have the meanings set forth in the Employment
Agreement by and between Executive and the Company, dated
[
June [
], 2010
]
(the Employment
Agreement).
2. (a) If Executives employment terminates pursuant to Section 6(a)(ii) (Death, Disability or
without Cause) or 6(b)(i) (for Good Reason) of the Employment Agreement, then provided the Release
Effective Date, defined below, has passed, on the sixtieth (60
th
) day following the
Termination Date the Company shall begin to pay to Executive the payments and benefits described in
Section 7(b) of the Employment Agreement in accordance with the Companys standard payroll
procedures and on regular paydays, provided however that Executive shall receive the Accrued
Obligations regardless of whether he executes this Agreement.
(b) The Company and Executive agree that in the event that any of the payments in this Section
2 constitute deferred compensation within the meaning of Section 409(A) of the Internal Revenue
Code of 1986, as amended (the Code), and Executive is at such time a specified employee, such
payment or payments that constitute nonqualified deferred compensation within the meaning of the
Code shall not be made prior to the date which is the earlier of (A) the expiration of the six
(6)-month period measured from the date of such separation from service of the Executive, and (B)
thirty (30) days from the date of the Executives death (within the meaning of the Code).
3. Executive agrees and acknowledges that the payments and/or benefits provided in Paragraph 2
above exceed any payments and benefits to which Executive would otherwise be entitled under any
policy, plan, and/or procedure of the Company absent his signing this Agreement. Executive
acknowledges that he has been paid for work performed up to and including the Termination Date and
for accrued but unused vacation.
4. Executive shall have up to twenty-one (21) days from the date of his receipt of this
Agreement to consider the terms and conditions of this Agreement. Executive may accept this
Agreement at any time within the twenty-one (21) day period by executing it before a notary and
returning it to the Chairman of the Board of Directors, SL Industries, Inc. [ADDRESS], no later
than 5:00 p.m. on the twenty-first (21st) day after Executives receipt of this Agreement.
Thereafter, Executive will have seven (7) days to revoke this Agreement by stating his desire to do
so in writing to the Chairman of the Board of Directors at the address listed above, and delivering
it to the Chairman of the Board of Directors no later than 5:00 p.m. on the seventh
(7
th
) day following the date Executive signs this Agreement. The effective date of
this Agreement shall be the eighth (8
th
) day following Executives signing of this
Agreement (the Release Effective Date), provided the Executive does not revoke the Agreement
during the revocation period. In the event Executive does not accept this Agreement as set forth
above, or in the event Executive revokes this Agreement during the revocation period, this
Agreement, including but not limited to the obligation of the Company and its subsidiaries and
affiliates to provide the payment and/or benefits referred to in Paragraph 2 above, shall
automatically be deemed null and void.
5. (a) In consideration of the payment and/or benefits referred to in Paragraph 2 above,
Executive for himself and for his heirs, executors, and assigns (hereinafter collectively referred
to as the Releasors), forever releases and discharges the Company and any and all of its parent
corporations, subsidiaries, divisions, affiliated entities, predecessors, successors and assigns,
and any and all of its or their employee benefit and/or pension plans or funds, and any of its or
their past or present officers, directors, stockholders, agents, trustees, administrators,
employees or assigns (whether acting as agents for such entities or in their individual
capacities), (hereinafter collectively referred to as the Releasees), from any and all claims,
demands, causes of action, fees and liabilities of any kind whatsoever (based upon any legal or
equitable theory, whether contractual, common-law, statutory, decisional, federal, state, local or
otherwise), whether known or unknown, which Releasors ever had, now have or may have against the
Releasees by reason of any actual or alleged act, omission, transaction, practice, conduct,
occurrence, or other matter from the beginning of the world up to and including the Release
Effective Date, except for the obligations of the Company under this Agreement and subject to 5(f)
below.
(b) The Company forever releases and discharges Releasors from any and all claims, demands,
causes of action, fees and liabilities of any kind whatsoever (based upon any legal or equitable
theory, whether contractual, common-law, statutory, decisional, federal, state, local or
otherwise), whether known or unknown, which the Company ever had, now has or may have against the
Releasors by reason of any actual or alleged act, omission, transaction, practice, conduct,
occurrence, or other matter from the beginning of the world up to and including the Release
Effective Date except for Executives actions that constitute discriminatory practices or illegal
conduct and except for the obligations of Executive under this Agreement.
(c) Without limiting the generality of the foregoing subparagraph (a), this Agreement is
intended to and shall release the Releasees from any and all claims arising out of Executives
employment with Releasees and/or the termination of Executives employment, including but not
limited to any claim(s) under or arising out of (i) Title VII of the Civil Rights Act of 1964, as
amended; (ii) the Americans with Disabilities Act, as amended; (iii) the Employee Retirement Income
Security Act of 1974, as amended (ERISA) (excluding claims for accrued, vested benefits under any
employee benefit plan of the Company in accordance with the terms of such plan and applicable law);
(iv) the Age Discrimination in Employment Act, as amended, or the Older Workers Benefit Protection
Act; (v) the New Jersey law Against Discrimination; (vi) the California Fair Employment Practices
and Housing Act; (vii) the Minnesota Human Rights Act; (viii) the Wisconsin Fair Employment
Practices Act; (ix) the Massachusetts Fair Employment Practices Act; (x) Section 806 of the
Sarbanes Oxley Act of 2002; (xi) alleged discrimination or retaliation in employment (whether based
on federal, state or
local law, statutory or decisional); (xii) the terms and conditions of Executives employment
with the Company, the termination of such employment, and/or any of the events relating directly or
indirectly to or surrounding that termination; and (xiii) any law (statutory or decisional)
providing for attorneys fees, costs, disbursements and/or the like.
(d) As a further consideration and inducement for this Agreement, to the extent permitted by
law, Executive hereby waives and releases any and all rights under Section 1542 of the California
Civil Code or any analogous state, local, or federal law, statute, rule, order or regulation that
Executive had or may have with respect to the Releasees. California Civil Code Section 1542 reads
as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE
MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.
Executive hereby expressly agrees that this Agreement shall extend and apply to all unknown,
unsuspected and unanticipated injuries and damages, as well as any that are now disclosed, arising
prior to Executives execution of this Agreement. This release does not extend to those rights,
which as a matter of law cannot be waived, including but not limited to unwaivable rights Executive
may have under the California Labor Code. Nothing in this Agreement shall limit Executives right
to file a charge or complaint with any state or federal agency or to participate or cooperate in
such a manner.
(e) Notwithstanding the foregoing, nothing in this Agreement shall be construed to prevent
Executive from filing a charge with or participating in an investigation conducted by any
governmental agency, including, without limitation, the United States Equal Employment Opportunity
Commission (EEOC) or applicable state or city fair employment practices agency, to the extent
required or permitted by law. Nevertheless, Executive understands and agrees that he is waiving
any relief available (including, for example, monetary damages or reinstatement), under any of the
claims and/or causes of action waived in Paragraphs 6(a) and (b), including but not limited to
financial benefit or monetary recovery from any lawsuit filed or settlement reached by the EEOC or
anyone else with respect to any claims released and waived in this Agreement.
(f) Nothing in this Agreement shall release Executives rights (i) as a stockholder of the
Company; (ii) to any claims that arise following the execution of this Agreement; (ii) to payment
of the Accrued Obligations (as defined in the Employment Agreement); (iii) to payment of the
severance payments and benefits described in Section 2 of this Agreement; (iv) to indemnification
pursuant to the Companys bylaws as may be in effect from time to time and any other agreements
then in effect indemnifying Executive; (v) to any claims for accrued vested benefits or rights
under any other employee benefit plan, policy or arrangement (whether tax-qualified or not)
maintained by the Company; (vi) to equity awards that are vested or which may vest under any
equity, equity-based, profits interest, stock option, or similar plans, agreements, and/or notices
to the extent set forth in such awards or as otherwise
provided for in such documents, which awards shall be subject to all the terms and conditions
of such document.
6. (a) Executive agrees that he has not and will not engage in any conduct that is injurious
to the Companys or the Releasees reputation or interest, including but not limited to publicly
disparaging (or inducing or encouraging others to publicly disparage) the Company or the Releasees.
The Board of Directors of the Company agrees that it has not and will not engage in any conduct
that is injurious to the Releasees reputation or interest, including but not limited to publicly
disparaging (or inducing or encouraging others to publicly disparage) Releasee. The foregoing
shall not be violated by truthful testimony, if provided pursuant to the terms of Section 7(b).
(b) Executive acknowledges that he has returned to the Company any and all originals and
copies of documents, materials, records, credit cards, keys, building passes, computers,
blackberries and other electronic devices or other items in his possession or control belonging to
the Company or containing proprietary information relating to the Company pursuant to Section 8(b)
of the Employment Agreement. Executive may retain the Executives rolodex and similar address
books, including in electronic form, provided, that such items only include contact information.
(c) Executive acknowledges that the terms of Section 8, Confidentiality Agreement and
Assignment of Intellectual Property, and Section 9, Non-Solicitation and Non-Competition, of the
Employment Agreement are incorporated herein by reference, and Executive agrees and acknowledges
that he is bound by its terms.
7. (a) Executive will cooperate with the Company and/or its subsidiaries and affiliates and
its/their counsel in connection with any investigation, administrative proceeding or litigation
relating to any matter in which Executive was involved or of which Executive has knowledge.
(b) Executive agrees that, in the event he is subpoenaed by any person or entity (including,
but not limited to, any government agency) to give testimony (in a deposition, court proceeding or
otherwise) that in any way relates to Executives employment with the Company, he will give prompt
notice of such request to the Chairman of the Board of Directors, and will make no disclosure until
the Company has had a reasonable opportunity to contest the right of the requesting person or
entity to such disclosure, provided that nothing herein shall prevent Executive from complying with
the requirements of the law.
8. Prior to public announcement, the terms and conditions of this Agreement are and shall be
deemed to be confidential, and shall not be disclosed by Executive to any person or entity without
the prior written consent of the Chairman of the Board of Directors, except if required by law, and
to Executives accountants, attorneys, and spouse, provided that they agree to maintain the
confidentiality of this Agreement. Executive further represents that he has not disclosed the
terms and conditions of this Agreement to anyone other than his attorneys, accountants and spouse.
9. The making of this Agreement is not intended, and shall not be construed, as an admission
that one party has violated any federal, state or local law (statutory or decisional), ordinance or
regulation, breached any contract, or committed any wrong whatsoever against the other party.
10. The parties agree that this Agreement may not be used as evidence in a subsequent
proceeding except in a proceeding to enforce the terms of this Agreement.
11. Executive acknowledges that: (a) he has carefully read this Agreement in its entirety; (b)
he has had an opportunity to consider fully the terms of this Agreement; (c) he has been advised by
the Company in writing to consult with an attorney of his choosing in connection with this
Agreement; (d) he fully understands the significance of all of the terms and conditions of this
Agreement and he has discussed it with his independent legal counsel, or has had a reasonable
opportunity to do so; (e) he has had answered to his satisfaction any questions he has asked with
regard to the meaning and significance of any of the provisions of this Agreement; and (f) he is
signing this Agreement voluntarily and of his own free will and assents to all the terms and
conditions contained herein.
12. This Agreement is binding upon, and shall inure to the benefit of, the parties and their
respective heirs, executors, administrators, successors and assigns.
13. If any provision of this Agreement shall be held by a court of competent jurisdiction to
be illegal, void, or unenforceable, such provision shall be of no force and effect. However, the
illegality or unenforceability of such provision shall have no effect upon, and shall not impair
the enforceability of, any other provision of this Agreement; provided, however, that, upon any
finding by a court of competent jurisdiction that the release and covenants provided for by Section
6 above is illegal, void, or unenforceable, Executive agrees to execute a release, waiver and/or
covenant that is legal and enforceable. Finally, any breach of the terms of Sections 7, 8 and/or 9
above shall constitute a material breach of this Agreement as to which the Company may seek
appropriate relief in a court of competent jurisdiction.
14. This Agreement shall be governed by, and construed and enforced in accordance with, the
laws of the State of New Jersey
,
without regard to the conflict of laws provisions thereof.
Actions to enforce the terms of this Agreement, or that relate to Executives employment with the
Company shall be submitted to the exclusive jurisdiction of any state or federal court sitting in
Burlington County, New Jersey.
15. This Agreement may be executed in counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were upon the same instrument of this
Agreement.
16. This Agreement (including any exhibits attached hereto) constitutes the complete
understanding between the parties with respect to the termination of the Executives employment at
the Company and supersedes any and all agreements, understandings, and discussions, whether written
or oral, between the parties. No amendment of any provision of this Agreement shall be valid
unless the same shall be in writing and signed by each of the parties hereto.
[Signature page follows]
[Signature page to Agreement and Release]
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Dated:
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William Fejes
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SL INDUSTRIES, INC.
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By:
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Date:
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EXHIBIT C
Intellectual Property Prior to Employment