UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-4987
SL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 21-0682685
-------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
520 FELLOWSHIP ROAD, SUITE A114, MT. LAUREL, NJ 08054
----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 856-727-1500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of common stock outstanding as of May 4, 2004 were
5,860,715.
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2004 and December 31, 2003........................ 1
Consolidated Statements of Operations
Three Months Ended March 31, 2004 and 2003.................. 2
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2004 and 2003.................. 3
Notes to Consolidated Financial Statements.................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 24
Item 4. Controls and Procedures......................................... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 25
Item 6. Exhibits and Reports on Form 8-K................................ 26
Signatures.............................................................. 27
Item 1 Financial Statements
SL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2004 2003*
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 4,998,000 $ 3,501,000
Receivables, net ..................................................... 15,199,000 13,064,000
Note receivable ...................................................... 1,000,000 1,000,000
Inventories, net ..................................................... 12,497,000 11,009,000
Prepaid expenses ..................................................... 1,395,000 1,066,000
Deferred income taxes, net ........................................... 3,274,000 3,947,000
------------ ------------
Total current assets ............................................. 38,363,000 33,587,000
Property, plant and equipment, net ..................................... 9,476,000 9,547,000
Deferred income taxes, net ............................................. 2,199,000 2,308,000
Goodwill, net .......................................................... 10,303,000 10,303,000
Other intangible assets, net ........................................... 952,000 980,000
Other assets and deferred charges ...................................... 1,590,000 1,696,000
------------ ------------
Total assets .................................................... $ 62,883,000 $ 58,421,000
------------ ------------
LIABILITIES
Current liabilities:
Debt, current portion ................................................ $ 699,000 $ 887,000
Accounts payable ..................................................... 6,246,000 3,818,000
Accrued income taxes ................................................. 1,668,000 1,203,000
Accrued liabilities:
Payroll and related costs ......................................... 4,503,000 5,665,000
Other ............................................................. 5,464,000 5,402,000
------------ ------------
Total current liabilities ...................................... 18,580,000 16,975,000
Debt, less current portion ............................................. 1,875,000 2,015,000
Deferred compensation and supplemental retirement benefits ............. 3,881,000 3,904,000
Other liabilities ...................................................... 748,000 946,000
------------ ------------
Total liabilities .............................................. $ 25,084,000 $ 23,840,000
------------ ------------
Commitments and contingencies (Note 9)
SHAREHOLDERS' EQUITY
Preferred stock, no par value; authorized, 6,000,000 shares; none issued $ - $ -
Common stock, $.20 par value; authorized, 25,000,000 shares;
issued, 8,298,000 shares ............................................. 1,660,000 1,660,000
Capital in excess of par value ......................................... 39,052,000 38,863,000
Retained earnings ...................................................... 12,160,000 9,018,000
Treasury stock at cost, 2,361,000 and 2,356,000 shares, respectively ... (15,073,000) (14,960,000)
------------ ------------
Total shareholders' equity ..................................... 37,799,000 34,581,000
------------ ------------
Total liabilities and shareholders' equity ..................... $ 62,883,000 $ 58,421,000
------------ ------------
*Reclassified for comparative purposes only.
See accompanying notes to consolidated financial statements.
1
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three-Months Ended
March 31,
2004 2003*
------------ ------------
Net sales .................................................. $ 26,641,000 $ 25,710,000
Cost and expenses:
Cost of products sold .................................... 17,045,000 16,714,000
Engineering and product development ...................... 2,208,000 1,918,000
Selling, general and administrative ...................... 5,720,000 5,572,000
Depreciation and amortization ............................ 474,000 481,000
------------ ------------
Total cost and expenses .................................... 25,447,000 24,685,000
------------ ------------
Income from operations ..................................... 1,194,000 1,025,000
Other income (expense):
Deferred financing charges ............................... (112,000) (101,000)
Interest income .......................................... 43,000 65,000
Interest expense ......................................... (89,000) (171,000)
------------ ------------
Income from continuing operations before income taxes ...... 1,036,000 818,000
Income tax provision ....................................... 351,000 347,000
------------ ------------
Income from continuing operations .......................... 685,000 471,000
Income (loss) from discontinued operations (net of tax) .... 2,457,000 (285,000)
------------ ------------
Net income ................................................. $ 3,142,000 $ 186,000
------------ ------------
BASIC NET INCOME PER COMMON SHARE
Income from continuing operations ........................ $ 0.12 $ 0.08
Income (loss) from discontinued operations (net of tax)... 0.41 (0.05)
------------ ------------
Net income ............................................... $ 0.53 $ 0.03
------------ ------------
DILUTED NET INCOME PER COMMON SHARE
Income from continuing operations ........................ $ 0.11 $ 0.08
Income (loss) from discontinued operations (net of tax)... 0.41 (0.05)
------------ ------------
Net income ............................................... $ 0.52 $ 0.03
------------ ------------
Shares used in computing basic net income (loss)
per common share ........................................ 5,939,000 5,894,000
Shares used in computing diluted net income (loss)
per common share ........................................ 6,032,000 5,897,000
* RECLASSIFIED FOR COMPARATIVE PURPOSES ONLY.
See accompanying notes to consolidated financial statements.
2
SL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND MARCH 31, 2003
(unaudited)
2004 2003*
------------ ------------
OPERATING ACTIVITIES:
Net income from continuing operations ................................................... $ 685,000 $ 471,000
Adjustments to reconcile net income from continuing operations
to net cash provided by operating activities:
Depreciation .......................................................................... 406,000 421,000
Amortization .......................................................................... 68,000 55,000
Amortization of deferred financing costs .............................................. 112,000 101,000
Provisions for losses on accounts receivable .......................................... (5,000) 32,000
Issuance of common stock options ...................................................... 150,000 -
Deletions (additions) to other assets ................................................. (46,000) (58,000)
Deferred compensation and supplemental retirement benefits ............................ 114,000 102,000
Deferred compensation and supplemental retirement benefit payments .................... (137,000) (138,000)
Decrease in deferred income taxes ..................................................... 35,000 -
Changes in operating assets and liabilities, excluding effects of business disposition:
Accounts receivable ................................................................. (2,139,000) (1,736,000)
Inventories ......................................................................... (1,488,000) 746,000
Prepaid expenses .................................................................... (326,000) (308,000)
Accounts payable .................................................................... 2,549,000 (60,000)
Other accrued liabilities ........................................................... (1,435,000) (2,092,000)
Accrued income taxes ................................................................ (162,000) 132,000
------------ ------------
NET CASH USED IN OPERATING ACTIVITES ..................................................... (1,619,000) (2,332,000)
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of subsidiary ....................................................... - 7,000,000
Purchases of property, plant and equipment ............................................. (351,000) (278,000)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITES ....................................... (351,000) 6,722,000
------------ ------------
FINANCING ACTIVITIES:
Payments of deferred financing costs ................................................... - (670,000)
Net proceeds from Senior Credit Facility ............................................... - 10,107,000
Payments of term loans ................................................................. (141,000) (93,000)
Payments to Revolving Credit Facility .................................................. (187,000) (17,557,000)
Proceeds from stock options exercised .................................................. 75,000 -
Treasury stock purchased ............................................................... (150,000) (39,000)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES .................................................... (403,000) (8,252,000)
------------ ------------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS ............................................. 3,870,000 323,000
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS .................................................. 1,497,000 (3,539,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......................................... 3,501,000 3,539,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................................... $ 4,998,000 $ -
------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ............................................................................ $ 92,000 $ 125,000
Income taxes ........................................................................ $ 234,000 $ 114,000
*RECLASSIFIED FOR COMPARATIVE PURPOSES ONLY.
See accompanying notes to consolidated financial statements.
3
SL INDUSTRIES, INC.
Notes to Consolidated Financial Statements
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. 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, 2004. These financial statements should be read in
conjunction with the Company's audited financial statements and notes thereon
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2003. The statements of operations and cash flows for the period ended March
31, 2003 and certain footnotes have been reclassified to reflect the effect of
discontinued operations.
FINANCING
On January 6, 2003, the Company entered into a three-year senior secured credit
facility (the "Senior Credit Facility") with LaSalle Business Credit LLC. The
Senior Credit Facility provides for a revolving loan and two term loans, up to a
maximum indebtedness of $20,000,000. The revolving loan of up to $16,810,000 is
based upon eligible receivables and inventory, as well as an original
overadvance amount of $1,500,000 (see Note 7). The overadvance amount was fully
paid down on April 7, 2004 (see Note 14). The two term loans of $2,350,000 and
$840,000 are being paid down over a three-year term. The Senior Credit Facility
restricts investments, acquisitions, capital expenditures and dividends. The
Senior Credit Facility contains financial covenants relating to minimum levels
of net worth, fixed charge coverages, "EBITDA" levels and maximum levels of
capital expenditures, as defined. The Company is in compliance with all of the
restrictions and covenants of the Senior Credit Facility.
2. RECEIVABLES
Receivables at March 31, 2004 and December 31, 2003 consisted of the following:
March 31, December 31,
2004 2003
---------- ------------
(in thousands)
Trade receivables ................... $ 15,081 $ 12,656
Less allowances for doubtful accounts (360) (365)
---------- ----------
14,721 12,291
Recoverable income taxes ............ 205 406
Other ............................... 273 367
---------- ----------
$ 15,199 $ 13,064
========== ==========
4
3. INVENTORIES
Inventories at March 31, 2004 and December 31, 2003 consisted of the following:
March 31, December 31,
2004 2003
---------- ------------
(in thousands)
Raw materials ..................... $ 9,633 $ 8,384
Work in process ................... 3,860 3,769
Finished goods .................... 1,787 1,494
---------- ----------
15,280 13,647
Less allowances ................... (2,783) (2,638)
---------- ----------
$ 12,497 $ 11,009
========== ==========
4. INCOME PER SHARE
The Company has presented net income per common share pursuant to the Financial
Accounting Standards Board Statement of Financial Accounting Standard ("SFAS")
No. 128, "Earnings per Share." Basic net income per common share is computed by
dividing reported net income available to common shareholders by the weighted
average number of shares outstanding for the period. Diluted net income per
common share is computed by dividing reported net income available to common
shareholders by the weighted average shares outstanding for the period, adjusted
for the dilutive effect of common stock equivalents, which consist of stock
options, using the treasury stock method.
The table below sets forth the computation of basic and diluted net income per
share:
Three Months Ended March 31,
2004 2003
--------------------------- ---------------------------
(in thousands, except per share amounts)
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
------ ------ --------- ------ ------ ---------
Basic net income per common share $3,142 5,939 $ 0.53 $ 186 5,894 $ 0.03
Effect of dilutive securities 93 3
------ ------ --------- ------ ------ ---------
Diluted net income per common share $3,142 6,032 $ 0.52 $ 186 5,897 $ 0.03
====== ====== ========= ====== ====== =========
For the three-month periods ended March 31, 2004 and March 31, 2003, common
stock options of 454,779 and 567,386, respectively, were excluded from the
diluted computations because the option exercise prices were greater than the
average market price of the Company's common stock during these periods.
5
STOCK BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, "Accounting for Stock Based Compensation-Transition and Disclosure"
("SFAS No. 148"), an amendment of SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 148 provides alternative methods for a
voluntary change to the fair value method of accounting for stock-based employee
compensation and amends the disclosure requirements of SFAS 123. The Company has
elected to continue to account for its stock-based employee compensation plans
under APB Opinion 25, "Accounting for Stock Issued to Employees" ("APB No. 25")
and related interpretations. The following disclosures are provided in
accordance with SFAS 148.
As permitted by the FASB, the Company has elected to follow APB No. 25, and
related interpretations in accounting for its stock option plans. Under APB
Opinion No. 25, compensation expense is measured as the excess, if any, of the
fair value of the Company's common stock at the date of the grant over the
amount a grantee must pay to acquire the stock. The Company's stock option plans
enable the Company to grant options with an exercise price not less than the
fair value of the Company's common stock at the date of the grant. However, the
Company has recognized approximately $244,000 in compensation expense related to
stock option arrangements during the three-month period ended March 31, 2004.
The exercise price of all stock options generally equals the market price of the
Company's common stock on the date of grant. Compensation cost has been
recognized for the Company's stock option plans as noted in the table below. Had
compensation cost for the Company's stock option plans been determined based
upon the fair value at the grant date for awards under these plans consistent
with the methodology prescribed under SFAS No. 123, the Company's net income
(loss) and net income (loss) per common share would have been as follows:
Three Months Ended
March 31,
2004 2003
-------- --------
(in thousands, except per
common share amounts)
Net income, as reported $ 3,142 $ 186
Add: Stock-based employee compensation
expense included in reported net
income, net of related tax effects 190 -
-------- --------
$ 3,332 $ 186
Deduct: Total stock-based employee
compensation expense determined under fair value
based method for awards granted, modified, or
settled, net of related tax effects (257) (319)
-------- --------
Pro forma net income (loss) $ 3,075 $ (133)
======== ========
Earnings per common share:
Basic - as reported $ 0.53 $ 0.03
Basic - pro forma $ 0.52 $ (0.02)
Diluted - as reported $ 0.52 $ 0.03
Diluted - pro forma $ 0.51 $ (0.02)
6
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
Three Months Three Months
Ended Ended
March 31, March 31,
2004 2003
------------ ------------
Expected dividend yield 0.0% 0.0%
Expected stock price volatility 63.56% 60.63%
Risk-free interest rate 2.81% 2.69%
Expected life of stock option 5 years 5 years
============ ============
The fair value of the above stock-based compensation costs were determined using
the Black-Scholes option valuation model. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options,
which have no vesting restrictions, are fully transferable and do not include a
discount for large block trades. In addition, option valuation models require
the input of highly subjective assumptions, including the expected stock price
volatility, expected life of the option and other estimates. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes of the subjective input
assumptions can materially affect the fair value estimate, in the Company's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB revised Statement No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The FASB's revision of
Statement No. 132 requires new annual disclosures about the types of plan
assets, investment strategy, measurement date, plan obligations and cash flows
as well as the components of the net periodic benefit cost recognized in interim
periods. In addition, companies are now required to disclose their estimates of
contributions to their plans during the next fiscal year and the components of
the fair value of total plan assets by type (i.e., equity securities, debt
securities, real estate and other assets). The Company adopted the provisions of
Statement No. 132 (revised), except for expected future benefit payments, which
must be disclosed for fiscal years ending after June 15, 2004.
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
March 31, 2004 December 31, 2003
-------------------------------------- --------------------------------------
Accumulated Accumulated
Gross Value Amortization Net Value Gross Value Amortization Net Value
----------- ------------ --------- ----------- ------------ ---------
(in thousands)
Goodwill $ 12,167 $ 1,864 $ 10,303 $ 12,167 $ 1,864 $ 10,303
----------- ------------ --------- ----------- ------------ ---------
Other Intangible Assets:
Patents 946 612 334 946 594 352
Covenant Not To Compete 110 110 -- 110 110 --
Trademarks 922 328 594 922 319 603
Other 501 477 24 501 476 25
----------- ------------ --------- ----------- ------------ ---------
Total Other Intangible Assets 2,479 1,527 952 2,479 1,499 980
----------- ------------ --------- ----------- ------------ ---------
$ 14,646 $ 3,391 $ 11,255 $ 14,646 $ 3,363 $ 11,283
=========== ============ ========= =========== ============ =========
7
The other intangible assets are all amortizable and have original estimated
useful lives as follows: patents are amortized over approximately 13 years and
trademarks over approximately 25 years. Amortization expense for intangible
assets for the three-month periods for fiscal 2004 and 2003 was $28,000.
Amortization expense for intangible assets subject to amortization in each of
the next five fiscal years is estimated to be approximately $111,000 per year.
7. DEBT
Debt consists of the following:
March 31, December 31,
2004 2003
--------- ------------
(in thousands)
Revolving line of credit $ 140 $ 327
Term loan A 1,893 1,992
Term loan B 541 583
--------- ------------
2,574 2,902
Less current portion (699) (887)
--------- ------------
Long term debt $ 1,875 $ 2,015
========= ============
The Company's Senior Credit Facility bears interest ranging from the prime rate
plus fifty basis points to the prime rate plus 2%. The Senior Credit Facility is
secured by all of the Company's assets. The Senior Credit Facility also provides
for certain reserves for outstanding letters of credit and other contingencies,
which have reduced the Company's availability under the revolving loan portion
of the Senior Credit Facility. At March 31, 2004, the outstanding revolving loan
balance was $140,000 and the outstanding term loan balances were $1,893,000 and
$541,000, or a total of $2,574,000. Availability under the Senior Credit
Facility at March 31, 2004 was $13,066,000.
As of May 2, 2004, outstanding balances under the Senior Credit Facility were
$2,341,000 and availability under the revolving loan was $13,205,000.
The schedule of payments on long-term debt is as follows:
March 31, 2004
--------------
(in thousands)
2005 $ 699
2006 1,875
2007 -
--------------
2,574
Less current portion (699)
--------------
Total long-term debt $ 1,875
==============
8
8. ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other consists of the following:
March 31, December 31,
2004 2003
--------- ------------
(in thousands)
Taxes other than income and insurance $ 910 $ 1,062
Commissions 433 484
Accrued litigation and legal 1,259 1,109
Professional fees and other expenses 275 269
Environmental 979 957
Warranty 973 915
Other 1,235 1,206
Reclassified to long-term liabilities (600) (600)
--------- ------------
$ 5,464 $ 5,402
========= ============
The Company's warranty reserve, which is included in accrued liabilities and
other above, for the period ended March 31, 2004 is as follows:
March 31,
2004
--------------
(in thousands)
Liability, beginning of year $ 915
Expense for new warranties issued 113
Expense related to accrual revisions for prior year 12
Warranty claims (67)
--------------
Liability, end of period $ 973
==============
9. COMMITMENTS AND CONTINGENCIES
LITIGATION
In the ordinary course of its business, the Company is subject to loss
contingencies pursuant to foreign and domestic federal, state and local
governmental laws and regulations and is also party to certain legal actions,
which may occur in the normal operations of the Company's business. It is
management's opinion that the impact of these legal actions will not have a
material adverse effect on the consolidated financial position or results of
operations of the Company.
The Company's subsidiary, SL Montevideo Technology, Inc. ("SL-MTI"), defended a
cause of action, brought against it in the fall of 2000, in the United States
District Court for the Western District of Michigan. The lawsuit was filed by a
customer, Eaton Aerospace, Inc. ("Eaton"), alleging breach of contract and
warranty in the defective design and manufacture of a high precision motor and
demanding compensatory damages of approximately $3,900,000. On November 7, 2002,
after a full trial of the facts, a jury awarded Eaton damages of $650,000, which
when combined with pre-trial interest brings the total claim to $780,000, which
is fully reserved. Eaton is appealing the decision.
In 1997, the Company, through a wholly owned subsidiary, commenced a patent
infringement action against American Power Conversion Corporation ("APC") in the
United States District
9
Court for the Southern District of New Jersey. The complaint alleged that APC
infringed a patent held by the subsidiary, and sought damages resulting from
APC's infringement. On February 3, 2004, the Company and APC executed a
Settlement Agreement that provided, among other things, for the release of all
claims against APC and the granting to APC a paid-up license, in return for the
payment to the Company of $4,000,000. The Settlement Agreement was conditioned
on the dismissal with prejudice of the lawsuit. On March 5, 2004, the District
Court dismissed the lawsuit with prejudice and the settlement fee was paid to
the Company. A third party has threatened certain claims against the Company
relating to this matter for a portion of the payment. The Company disputes such
claims and intends to defend them vigorously.
On June 12, 2002, the Company and its wholly owned subsidiary, SL Surface
Technologies, Inc. ("SurfTech"), were served with notice of a class action
complaint filed in Superior Court of New Jersey for Camden County.
(Substantially all of the assets of SurfTech were sold in November 2003). The
Company and SurfTech are currently two of approximately 39 defendants in this
action. The complaint alleges, among other things, that the plaintiffs suffered
personal injuries as a result of consuming water distributed from the Puchack
Wellfield in Pennsauken, New Jersey (which supplies Camden, New Jersey).
This case arises from the same factual circumstances as current administrative
actions involving the Puchack Wellfield, to which the Company is a party. The
administrative actions are discussed below. The administrative actions and the
class action lawsuit both allege that SurfTech and other defendants contaminated
ground water through the disposal of hazardous substances at industrial
facilities in the area. SurfTech once operated a chrome-plating facility in
Pennsauken, New Jersey (the "SurfTech Site").
As with the administrative actions, the Company believes it has significant
defenses against the class action plaintiffs' claims and intends to pursue them
vigorously. Technical data generated as part of remedial activities at the
SurfTech Site have not established offsite migration of contaminants. Based on
this and other technical factors, the Company has been advised by its outside
counsel that it has a strong defense against the claims alleged in the class
action plaintiffs' complaint, as well as the environmental administrative
actions.
It is management's opinion that the impact of legal actions brought against the
Company and its operations will not have a material adverse effect on its
financial position or results of operations. However, the ultimate outcome of
these matters, as with litigation generally, is inherently uncertain, and it is
possible that some of these matters may be resolved adversely to the Company.
The adverse resolution of any one or more of these matters could have a material
adverse effect on the business, operating results, financial condition or cash
flows of the Company.
ENVIRONMENTAL
Loss contingencies include potential obligations to investigate and eliminate or
mitigate the effects on the environment of the disposal or release of certain
chemical substances at various sites, such as Superfund sites and other
facilities, whether or not they are currently in operation. The Company is
currently participating in environmental assessments and cleanups at a number of
sites under these laws and may in the future be involved in additional
environmental assessments and cleanups. Based upon investigations completed by
the Company and its independent engineering-consulting firms to date, management
has provided an estimated accrual for all known costs believed to be probable in
the amount of $979,000. However, it is in
10
the nature of environmental contingencies that other circumstances might arise,
the costs of which are indeterminable at this time due to such factors as
changing government regulations and stricter standards, the unknown magnitude of
defense and cleanup costs, the unknown timing and extent of the remedial actions
that may be required, the determination of the Company's liability in proportion
to other responsible parties, and the extent, if any, to which such costs are
recoverable from other parties or from insurance. Although these contingencies
could result in additional expenses or judgments, or off-sets thereto, at
present such expenses or judgments are not expected to have a material effect on
the consolidated financial position or results of operations of the Company.
Substantially all of the Company's environmental costs relate to discontinued
operations and all such costs have been recorded in discontinued operations.
The Company is the subject of various other lawsuits and actions relating to
environmental issues, including an administrative action in connection with the
SurfTech Site, which could subject the Company to, among other things,
$9,266,000 in collective reimbursements (with other parties) to the New Jersey
Department of Environmental Protection (the "NJDEP"). The Company believes that
it has significant defenses against all or any part of the claim and that any
material impact is unlikely.
The Company has reported a ground water contamination plume on its property in
Camden, New Jersey. In January 2003, the Company submitted to the NJDEP a plan
to remediate the site, which is currently under review. Based upon the
preliminary evidence, the Company was advised that the cost to remediate the
site could amount to $500,000. The Company recorded a provision for this amount
during the first quarter of 2002.
The Company is investigating soil and ground water contamination on SL-MTI's
property in Montevideo, Minnesota. The Company has submitted to the Minnesota
Department of Environmental Protection a plan to remediate the site, which is
currently under review. At this date, it is too early to estimate the costs of
remediation.
The Company filed claims with several of its insurers seeking reimbursement for
past and future environmental costs. In settlement of its claims, the Company
received aggregate cash payments of $2,400,000 prior to fiscal 1998 and
commitments from three insurers to pay for a portion of environmental costs
associated with the SurfTech Site of 15% of costs up to $300,000, 15% of costs
up to $150,000 and 20% of costs up to $400,000, respectively. In addition, the
Company received $100,000 per year during fiscal 1998, 1999, 2000 and 2001, as
stipulated in the settlement agreement negotiated with one of the three
insurers. As of March 31, 2004 and December 31, 2003, the remaining
environmental accruals of $979,000 and $957,000, respectively, have been
included in "Accrued Liabilities."
10. SEGMENT INFORMATION
The Company currently operates under four business segments: Condor D.C. Power
Supplies, Inc. ("Condor"), Teal Electronics Corp. ("Teal"), RFL Electronics Inc.
("RFL) and SL-MTI. In the second quarter of 2003, management decided to combine
Condor and Teal into one business unit classified as the Power Electronics
Group. Accordingly, for the periods presented, the Company's reportable segments
consisted of Condor, Teal (the "Power Electronics Group"), SL-MTI and RFL.
At December 31, 2002, the Company was comprised of five operating business
units. On November 24, 2003, the Company sold the operating assets of SurfTech,
and has classified this
11
operating segment as discontinued for all periods presented. Condor produces a
wide range of standard and custom power supply products that convert AC or DC
power to direct electrical current to be used in customers' end products. Power
supplies closely regulate and monitor power outputs, using patented filter and
other technologies, resulting in little or no electrical interference. Teal is a
leader in the design and manufacture of customized power conditioning and power
distribution units. Teal products are developed and manufactured for custom
electrical subsystems for original equipment manufacturers of semiconductor,
medical imaging, graphics, and telecommunications systems. SL-MTI is a
technological leader in the design and manufacture of intelligent, high power
density precision motors. New motor and motion controls are used in numerous
applications, including aerospace, medical, and industrial products. RFL designs
and manufactures teleprotection products/systems that are used to protect
utility transmission lines and apparatus by isolating faulty transmission lines
from a transmission grid. RFL also provides customer service and maintenance for
all electric utility equipment protection systems. The Other segment includes
corporate related items, financing activities and other costs not allocated to
reportable segments, which include but are not limited to certain legal,
litigation and public reporting charges and the results of insignificant
operations.
The unaudited comparative results for the three-month periods are as follows:
Three Months Ended
March 31,
2004 2003
-------- --------
(in thousands)
NET SALES FROM CONTINUING OPERATIONS
Power Electronics Group:
Condor $ 7,863 $ 9,489
Teal 7,393 4,314
-------- --------
Total 15,256 13,803
-------- --------
SL-MTI 5,896 5,397
RFL 5,489 6,510
-------- --------
Consolidated $ 26,641 $ 25,710
======== ========
Three Months Ended
March 31,
2004 2003
-------- --------
(in thousands)
INCOME FROM OPERATIONS
Power Electronics Group:
Condor $ (124) $ 565
Teal 1,334 355
-------- --------
Total 1,210 920
-------- --------
SL-MTI 640 299
RFL 424 624
Other (1,080) (818)
-------- --------
Consolidated $ 1,194 $ 1,025
======== ========
12
March 31, December 31,
2004 2003
--------- ------------
(in thousands)
TOTAL ASSETS
Power Electronics Group:
Condor $ 13,501 $ 11,439
Teal 11,043 9,665
--------- ------------
Total 24,544 21,104
--------- ------------
SL-MTI 9,960 9,255
RFL 16,350 16,512
Other 12,029 11,550
--------- ------------
Consolidated $ 62,883 $ 58,421
========= ============
March 31, December 31,
2004 2003
--------- ------------
(in thousands)
INTANGIBLE ASSETS (NET)
Teal $ 5,982 $ 6,009
SL-MTI 24 25
RFL 5,249 5,249
--------- ------------
Consolidated $ 11,255 $ 11,283
========= ============
11. DISCONTINUED OPERATIONS
SL WABER
Effective August 27, 2001, substantially all of the assets of SL Waber, Inc.
("SL Waber") and the stock of Waber de Mexico S.A. de C.V. were sold for
approximately $1,053,000. As part of this transaction, the purchaser acquired
the rights to the SL Waber name and assumed certain liabilities and obligations
of SL Waber. Subsequent to the sale, the Company changed the name of SL Waber to
SLW Holdings, Inc. ("SLW Holdings"). The net income or losses of this subsidiary
are included in the consolidated statements of operations under discontinued
operations for all periods presented. There was no activity from operations of
SLW Holdings during the fourth quarter of 2001 and thereafter. In 1997, SL Waber
commenced patent infringement litigation against APC, the rights to which were
retained by SL Waber after the sale. On February 3, 2004, the Company and APC
executed a Settlement Agreement that provided, among other things, for a release
of all claims against APC and granted to APC a paid-up license, in return for
the payment to the Company of $4,000,000. The Settlement Agreement was
conditioned on the dismissal with prejudice of the lawsuit (see Note 9). On
March 5, 2004, the settlement fee was paid to the Company. The Settlement fee,
net of tax, in the amount of $2,606,000 is recorded as part of discontinued
operations in the Company's consolidated statements of operations and cash flows
for the three months ended March 31, 2004.
ELEKTRO-METALL EXPORT GmbH
On January 6, 2003, the Company sold its wholly-owned, indirect German
subsidiary, Elektro-Metall Export GmbH ("EME"). In consideration for 100% of the
issued and outstanding capital stock of EME, the purchaser paid $8,000,000,
consisting of cash of $4,000,000 paid at closing and $4,000,000 of purchaser
notes. In addition, EME made a distribution of $2,000,000 to the Company prior
to closing. The purchaser notes were comprised of a $3,000,000 secured note that
13
bore interest at the prime rate plus 2%, which was paid on March 14, 2003, and a
$1,000,000 unsecured note that bore interest at an annual rate of 12%, which was
paid on April 2, 2004. All cash proceeds relating to the purchase price for the
sale of EME have now been received by the Company.
SL SURFACE TECHNOLOGIES, INC.
On November 24, 2003, the Company sold the operating assets of SurfTech. The
sale included current assets and equipment used by SurfTech. The purchaser paid
$600,000 in cash, plus the assumption of certain liabilities. The Company
continues to own the land and building on which SurfTech's operations were
conducted, and has entered into a ten-year lease with the buyer. As a result of
the sale, the Company recorded an after tax loss of $442,000 in the fourth
quarter of 2003, which included severance, closing costs and liabilities
associated with the withdrawal from a multi-employer union pension plan. The
Company paid all severance and closing costs related to the sale in the fourth
quarter of 2003, but continues to make payments related to its withdrawal
liability from the pension plan in which SurfTech was a participant. There has
not been any operational activity related to SurfTech since the sale in November
2003. During the three month period ended March 31, 2003, SurfTech had sales of
$508,000 and a net loss before income taxes of $163,000, which has been
reclassified as discontinued operations.
12. RETIREMENT PLANS AND DEFERRED COMPENSATION
The Company maintains three noncontributory defined contribution pension plans
covering substantially all employees. The Company's contributions to these plans
are based on a percentage of employee elective contributions and, in one plan,
plan year gross wages, as defined. Contributions to plans maintained by Teal and
RFL are based on a percentage of employee elective contributions. RFL has also
made a profit sharing contribution annually. Costs incurred under these plans
amounted to $272,000 and $319,000 during the quarters ended March 31, 2004 and
March 31, 2003, respectively.
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 at discount rates ranging from 6% to 12%. The amount charged to
income in connection with these agreements amounted to $82,000 and $72,000 for
the quarters ended March 31, 2004 and March 31, 2003, respectively.
13. RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2004, the Company was billed $47,000 in
legal fees for 2004 services performed by Olshan Grundman Frome Rosenzweig &
Wolosky LLP ("Olshan"), a law firm in which a director of the Company is a
senior partner. As of March 31, 2004, all of the above remains payable for 2004
services. The fees relate to general corporate and securities matters. During
the three months ended March 31, 2003, the Company was billed $154,000 in legal
fees for services performed in 2003 by Olshan.
The compensation committee has approved the payment of certain fees from the
Company to Steel Partners, Ltd. ("SPL"), a company controlled by the Chairman of
the Board and Chief Executive Officer of the Company, Warren Lichtenstein. These
fees are in consideration for the services of Mr. Lichtenstein and the Company's
President, Glen Kassan, as well as other assistance provided by SPL from time to
time. During the three months ended March 31, 2004, the Company has expensed
$119,000 for SPL services, of which $40,000 remains payable.
14
During the prior year quarter, the Company expensed $118,000 for services
performed for the three months ended March 31, 2003.
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 the three months ended March 31, 2004 and March 31, 2003 were $595,000 and
$286,000, respectively. Accounts receivable due from RFL Communications at March
31, 2004 was $546,000.
14. SUBSEQUENT EVENTS
On April 2, 2004, the Company was paid $1,000,000 from the purchaser of EME,
representing all amounts outstanding under its unsecured note. The Company has
now received all cash proceeds relating to the purchase price for the sale of
EME. A portion of the note proceeds in the amount of $77,000 was used to pay
down the overadvance portion of the Senior Credit Facility. The overadvance, in
the original amount of $1,500,000, has now been paid in full.
On December 12, 2003, the Company announced that its Board of Directors had
authorized the repurchase of up to 10% of the outstanding shares of common stock
of the Company. Any repurchases are to be made in the open market or in
negotiated transactions. As of May 2, 2004, the Company had purchased 74,950
shares of common stock for an aggregate purchase price of $741,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company through its subsidiaries, designs, manufactures and markets power
electronics, power motion, power protection equipment, teleprotection and
specialized communication equipment that is used in a variety of aerospace,
computer, datacom, industrial, medical, telecom, transportation and utility
equipment applications. The Company is comprised of four domestic business
segments, two of which have significant manufacturing operations in Mexico. Most
of the Company's sales are made to customers who are based in the United States.
However, the Company has over the years increased its presence in international
markets. The Company places an emphasis on high quality, well-built, dependable
products and continues its dedication to product enhancement and innovations.
CRITICAL ACCOUNTING POLICIES
The Company's Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States. These
generally accepted accounting principles require management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the Consolidated
Financial Statements and the reported amounts of net sales and expenses during
the reporting period.
The Company's significant accounting policies are described in Note 1 in the
Notes to Consolidated Financial Statements included in Part IV of the Company's
Annual Report on Form 10-K. Not all of these significant accounting policies
require management to make
15
difficult, subjective or complex judgments or estimates. However, the following
policies could be deemed to be critical, as that term is defined by the
Securities and Exchange Commission.
REVENUE RECOGNITION
Revenue from product sales is recognized at the time the product is shipped,
with provisions established for estimated product returns and returns related to
one business segment's stock scrap program with distributors. Upon shipment, the
Company provides for the estimated cost that may be incurred for product
warranties. Rebates and other sales incentives offered by the Company are
recorded as a reduction of sales at the time of shipment. Revenue recognition is
significant because net sales is a key component of results of operations. In
addition, revenue recognition determines the timing of certain expenses, such as
commissions and royalties. The Company follows generally accepted guidelines in
measuring revenue. However, certain judgments affect the application of its
revenue policy. Revenue results are difficult to predict, and any shortfall in
revenue or delay in recognizing revenue could cause operating results to vary
significantly from quarter to quarter and could result in future operating
losses.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company's estimate for the allowance for doubtful accounts related to trade
receivables is based on two methods. The amounts calculated from each of these
methods are combined to determine the total amount reserved. First, the Company
evaluates specific accounts where it has information that the customer may have
an inability to meet its financial obligations (bankruptcy, etc.). 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 (i.e., higher than
expected defaults or an unexpected material adverse change in a major customer's
ability to meet its financial obligation), the Company's estimates of the
recoverability of amounts due could be reduced by a material amount.
INVENTORIES
The Company values inventory at the lower of cost or market, and continually
reviews the book value of discontinued product lines to determine if these items
are properly valued. The Company identifies these items and assesses the ability
to dispose of them at a price greater than cost. If it is determined that cost
is less than market value, then cost is used for inventory valuation. If market
value is less than cost, then related inventory is adjusted to that 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 is not able to achieve its
expectations of the net realizable value of the inventory at current market
value, it adjusts its reserves accordingly.
ACCOUNTING FOR INCOME TAXES
The Company's income tax policy records the estimated future tax effects of
temporary differences between the tax basis of assets and liabilities and
amounts reported in the
16
accompanying consolidated balance sheets, as well as operating loss and tax
credit carryforwards. The Company follows generally accepted guidelines
regarding the recoverability of any tax assets recorded on the balance sheet and
provides any necessary allowances as required. As part of the process of
preparing its consolidated financial statements, the Company is required to
estimate its income taxes in each of the jurisdictions in which it operates.
This process involves estimating the actual current tax exposure, together with
assessing temporary differences resulting from the differing treatment of
certain items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within the consolidated
balance sheet. Management must then assess the likelihood that deferred tax
assets will be recovered from future taxable income and to the extent it
believes that recovery is not likely, the Company must establish a valuation
allowance. To the extent it establishes a valuation allowance or increases or
decreases this allowance in a period, it must include expense or income, as the
case may be, within the tax provision in the consolidated statement of
operations.
Significant management judgment is required in determining the provision for
income taxes, the deferred tax assets and liabilities and any valuation
allowance recorded against deferred tax assets. As of March 31, 2004 and
December 31, 2003, the Company had recorded total valuation allowances of
$352,000 for both periods due to uncertainties related to the utilization of
some deferred tax assets, primarily consisting of certain loss carryforwards and
foreign tax credits, before they expire. The valuation allowance is based on
estimates of taxable income by jurisdiction in which the Company operates and
the period over which deferred tax assets will be recoverable. In the event that
actual results differ from these estimates or these estimates are adjusted in
future periods, the Company may need to establish an additional valuation
allowance that could materially impact its consolidated financial position and
results of operations.
The net deferred tax assets as of March 31, 2004 and December 31, 2003 were
$5,473,000 and $6,255,000, respectively, net of valuation allowances of $352,000
for both periods. The carrying value of the Company's net deferred tax assets
assumes that it will be able to generate sufficient future taxable income in
certain tax jurisdictions, based on estimates and assumptions. If these
estimates and related assumptions change in the future, the Company may be
required to record additional valuation allowances against its deferred tax
assets resulting in additional income tax expense in the consolidated statement
of operations. Management evaluates the reliability of the deferred tax assets
and assesses the need for additional valuation allowances quarterly.
LEGAL CONTINGENCIES
The Company is currently involved in certain legal proceedings. As discussed in
Note 9 in the Notes to the Consolidated Financial Statements included in Part I
to 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 material adverse
effect on the Company's consolidated financial position. It is possible,
however, that future results of operations for any particular quarterly or
annual period could be materially affected by changes in these assumptions, or
the effectiveness of these strategies, related to these proceedings.
IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS
The Company's long-lived and intangible assets primarily consist of fixed
assets, goodwill and other intangible assets. Statement of Financial Accounting
Standards No. 142 "Goodwill and
17
Other Intangible Assets" ("SFAS 142") requires that goodwill be tested for
impairment at the reporting unit level (operating segment or one level below an
operating segment) on an annual basis and between annual tests in certain
circumstances. Application of the goodwill impairment test requires judgment,
including the identification of reporting units, assigning assets and
liabilities to reporting units, assigning goodwill to reporting units, and
determining the fair value of each reporting unit. Significant judgments
required to estimate the fair value of reporting units include estimating future
cash flows, determining appropriate discount rates and other assumptions.
Changes in these estimates and assumptions could materially affect the
determination of fair value for each reporting unit.
ENVIRONMENTAL EXPENDITURES
The Company is subject to United States and Mexican 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 past 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.
The above listing is not intended to be a comprehensive list of all of the
Company's accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by generally accepted accounting
principles with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternatives would not produce a materially different result. See the Company's
audited Consolidated Financial Statements and Notes thereto included in Part IV
of its Annual Report on Form 10-K, which contain accounting policies and other
disclosures required by generally accepted accounting principles.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, the Company maintained a cash balance of $4,998,000, with
outstanding bank debt of $2,574,000. Availability under the Senior Credit
Facility was $13,066,000. During the three months ended March 31, 2004, the net
cash used by operating activities was $1,619,000, as compared to net cash used
in operating activities of $2,332,000 during the three months ended March 31,
2003. The primary uses of cash from operating activities for the first quarter
of 2004 were an increase in accounts receivable, an increase in inventory and a
decrease in accrued liabilities. These were offset by increases to accounts
payable and income from continuing operations. In the first quarter of 2003, net
cash used from operating activities
18
consisted of a decrease in accrued liabilities and an increase in accounts
receivable. These were partially offset by a reduction in inventory and income
from continuing operations.
On January 6, 2003, the Company entered into a three-year Senior Secured Credit
Facility (the "Senior Credit Facility") with LaSalle Business Credit LLC. The
Senior Credit Facility provides for a revolving loan facility and two term
loans, up to a maximum indebtedness of $20,000,000. The revolving loan of up to
$16,810,000 is based upon eligible receivables and inventory, as well as an
overadvance amount of $1,500,000, which was repaid in full on April 7, 2004. The
two term loans of $2,350,000 and $840,000 are amortized over a three-year term.
The Senior Credit Facility restricts investments, acquisitions, capital
expenditures and dividends. It contains financial covenants relating to minimum
levels of net worth, fixed charge coverages, and EBITDA levels, as defined. The
Company is currently in compliance with all the restrictions and covenants of
the Senior Credit Facility. The Senior Credit Facility bears interest ranging
from the prime rate plus fifty basis points to prime rate plus 2%. The Senior
Credit Facility is secured by all of the Company's assets.
During the three months ended March 31, 2004, net cash used by investing
activities was $351,000, related to capital expenditures primarily for
computers, machinery and equipment. During the three months ended March 31,
2003, net cash provided by investing activities was $6,722,000, which was
primarily generated by the proceeds of $7,000,000 from the sale of the EME
subsidiary.
During the three months ended March 31, 2004, net cash used in financing
activities was $403,000, primarily due to the payment of the fixed portion of
debt under the Senior Credit Facility. During the three months ended March 31,
2003, net cash used in financing activities was $8,252,000, primarily related to
the pay down of the Former Credit Facility in the net amount of $17,557,000,
offset by borrowing of $10,107,000 under the Senior Credit Facility.
The Company's current ratio was 2.06 to 1 at March 31, 2004 and 1.98 to 1 at
December 31, 2003. The increase in the current ratio for March 31, 2004 is due
to increases in receivables and inventory from year-end levels.
As a percentage of total capitalization, consisting of debt and shareholders'
equity, total borrowings by the Company were 6% at March 31, 2004 and 8% at
December 31, 2003. During the first three months of 2004 total debt decreased by
$328,000.
Capital expenditures of $351,000 made during the first quarter of 2004 primarily
related to computer equipment, factory machinery and equipment purchases.
Capital expenditures for the period represent a $73,000 increase from the
comparable period in 2003. During the remainder of the year 2004, the Company
anticipates incurring additional capital expenditures of approximately
$2,200,000, which includes obligations under capital leases. This amount is
subject to change depending upon a number of factors, including certain market
conditions within the Company's business segments and availability of financing.
During the first quarter of 2004, the Company was able to generate adequate
amounts of cash to meet its operating needs, while reducing total borrowings by
$328,000. During the period, the operating segments had an aggregate negative
cash flow of $94,000, compared to negative cash flow of $327,000 in the same
period of 2003. The $233,000 improvement in cash flow for the operating segments
was primarily due to increased sales at Teal and a significant reduction in
19
inventory at RFL. Both Condor and SL-MTI had negative cash flow for the quarter.
Condor's negative cash flow is primarily attributable to its decrease in income
from operations. SL-MTI's negative cash flow is primarily attributable to
increases in inventory and receivables, partially offset by improved income from
operations. The operating segments' negative cash flow was also significantly
affected by payments under the Company's 2003 bonus plan and incentive programs,
which were distributed in March 2004.
CONTRACTUAL OBLIGATIONS
The following is a summary of the Company's contractual obligations that existed
as of March 31, 2004:
Less Than 1 to 3 4 to 5 After 5
1 Year Years Years Years Total
--------- ------ ------ ------- -------
(in thousands)
Operating Leases $ 874 $1,402 -- -- $ 2,276
Debt 699 1,875 -- -- 2,574
Capital Leases 57 127 -- -- 184
--------- ------ ------ ------- -------
$ 1,630 $3,404 -- -- $ 5,034
========= ====== ====== ======= =======
OFF-BALANCE SHEET ARRANGEMENTS
It is not the Company's usual business practice to enter into off-balance sheet
arrangements such as guarantees on loans and financial commitments,
indemnification arrangements, and retained interests in assets transferred to an
unconsolidated entity for securitization purposes. Consequently, the Company has
no off-balance sheet arrangements, except for operating lease commitments
disclosed in the table above, that 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.
Assuming no further significant slowdown of economic activity in the Company's
served markets, management believes that cash from operations and funds expected
to be available under the Senior Credit Facility will be sufficient to fund the
Company's operations and working capital requirements.
THREE MONTHS ENDED MARCH 31, 2004, COMPARED WITH THREE MONTHS ENDED MARCH 31,
2003
The table below shows the comparison of net sales from continuing operations for
the quarter ended March 31, 2004 and the quarter ended March 31, 2003.
20
Three Months Three Months Increase/ Increase/
Ended Ended (Decrease) Over (Decrease) Over
March 31, March 31, Same Quarter Same Quarter
2004 2003 Last Year Last Year
------------ ------------ --------------- ---------------
Amount Amount Amount Percent
------------ ------------ --------------- ---------------
(in thousands)
Power Electronics Group:
Condor $ 7,863 $ 9,489 $ (1,626) (17%)
Teal 7,393 4,314 3,079 71%
------------ ------------ --------------- ---------------
Total 15,256 13,803 1,453 11%
------------ ------------ --------------- ---------------
SL-MTI 5,896 5,397 499 9%
RFL 5,489 6,510 (1,021) (16%)
------------ ------------ --------------- ---------------
Total $ 26,641 $ 25,710 $ 931 4%
------------ ------------ --------------- ---------------
The table below shows the comparison of income from operations for the quarter
ended March 31, 2004 and the quarter ended March 31, 2003.
Three Months Three Months Increase/ Increase/
Ended Ended (Decrease) Over (Decrease) Over
March 31, March 31, Same Quarter Same Quarter
2004 2003 Last Year Last Year
------------ ------------ --------------- ---------------
Amount Amount Amount Percent
------------ ------------ --------------- ---------------
(in thousands)
Power Electronics Group:
Condor $ (124) $ 565 $ (689) (122%)
Teal 1,334 355 979 276%
------------ ------------ --------------- ---------------
Total 1,210 920 290 32%
------------ ------------ --------------- ---------------
SL-MTI 640 299 341 114%
RFL 424 624 (200) (32%)
Other (1,080) (818) (262) (32%)
------------ ------------ --------------- ---------------
Total $ 1,194 $ 1,025 $ 169 16%
------------ ------------ --------------- ---------------
Consolidated net sales from continuing operations for the three month period
ended March 31, 2004 ("2004") increased by $931,000, or 4%, compared to the
quarter ended March 31, 2003 ("2003"). Teal experienced a significant sales
increase from 2003 of $3,079,000, or 71%. SL-MTI also recorded increased sales
over 2003 of $499,000, or 9%. Compared to 2003, Condor's sales decreased
$1,626,000, or 17% and RFL's sales decreased $1,021,000, or 16%. Net income from
continuing operations was $685,000, or $0.11 per diluted share, compared to
$471,000, or $0.08 per diluted share, in 2003. Compared to 2003, net income from
continuing operations increased $214,000, or 45%.
The Company's income from operations increased to $1,194,000 in 2004, compared
to $1,025,000 in 2003. All of the Company's business segments had income from
operations during
21
2004, except Condor. The Company's business segments and the components of
operating expenses are discussed more fully in the following sections.
The Power Electronics Group, which is comprised of Condor and Teal, recorded a
sales increase of $1,453,000, or 11%, and an increase of income from operations
of $290,000, or 32%, over 2003. The results within this group were mixed. Teal
experienced increases in sales and income from operations of $3,079,000 and
$979,000, respectively. Condor experienced decreases in sales and income from
operations of $1,626,000 and $689,000, respectively. Teal's sales increase was
primarily attributable to increases in semiconductor sales, as that sector
appears to be rebounding. Teal also experienced a sales increase in its medical
imaging product line. Condor experienced lower sales primarily due to (1) a
shortfall in shipments from its contract manufacturers based in China, and (2)
difficulties working with a new ERP system put in place in December 2003, which
caused a shortage of floor stock components at its plant in Mexicali, Mexico.
Condor's management is currently addressing the start up issues associated with
the Asian sourcing problem. Operating problems with the new ERP system were
remedied in the latter part of March. Bookings and backlog at Condor are above
levels for the same period in 2003.
SL-MTI's net sales increased $499,000, or 9%, and income from operations
increased $341,000, or 114%, compared to 2003. Increased orders from medical
customers, compared to 2003, contributed to the sales gain. Income from
operations increased by $341,000, or 114%, due to higher revenue, and improved
gross margins from increased overhead absorption.
In 2004, RFL's net sales decreased $1,021,000, or 16%, and income from
operations decreased by $200,000, or 32%, compared to 2003. Sales of RFL's
control systems and telemetry product line decreased $271,000, or 43%, compared
to 2003. Sales of carrier communications products decreased $1,447,000, or 46%,
compared to the same period last year. These decreases were partially offset by
an increase in its teleprotection product line, which increased $864,000, or
39%. RFL continues to experience inconsistent procurement patterns from electric
utility companies, who are the major purchasers of its products. In particular,
the pendency of proposed federal energy legislation has apparently deferred the
procurement and capital investment decisions of many electric power utility
companies.
COST OF PRODUCTS SOLD
As a percentage of net sales, cost of products sold in 2004 was approximately
64%, compared to 65% for 2003. Although the cost of products sold as a
percentage of net sales remained relatively constant for the comparative
quarters, the relative performance of the Company's business segments changed
considerably. The cost of products sold percentage for the Power Electronics
Group remained at 65% for 2004, compared to 2003. Within the Power Electronics
Group, Teal's cost of products sold percentage decreased by 2%, due primarily to
a favorable product mix and significantly higher sales volume. Condor's cost of
products sold percentage increased by approximately 2%, due to significantly
lower sales volume and lower efficiencies at its Mexicali, Mexico plant, as
discussed above. SL-MTI improved its cost of products sold percentage from 74%
in 2003, to 70% in 2004, due to volume increases and greater efficiencies at its
Cedro, Mexico plant. RFL's cost of products sold percentage in 2004 was 54%, as
compared to 56% in 2003. The improvement in RFL's cost of products sold
percentage is primarily due to more favorable pricing and product mix, compared
to 2003.
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ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES
As a percentage of net sales, engineering and product development expenses for
2004 and 2003 were 8% and 7%, respectively. In 2004 engineering and product
development costs increased by $290,000, from 2003. The increase in engineering
and product development cost is primarily attributable to increases at Condor.
To a lesser extent, both Teal and RFL have increased their expenditures in the
current quarter due to new product development.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for 2004 increased by $148,000, or
3%, compared to 2003. As a percentage of sales, selling, general and
administrative expenses for 2004 and 2003 were 21% and 22%, respectively. The
increase in 2004, compared to 2003, is primarily related to high selling,
general and administrative costs at Teal due to significant increases in sales.
In addition, in 2004 the Company accrued increased expenses associated with a
bonus for certain key members of management.
AMORTIZATION OF DEFERRED FINANCING COSTS
In connection with entering into the Senior Credit Facility on January 6, 2003,
the Company incurred costs of approximately $1,342,000. These costs have been
deferred and are being amortized over the three-year term of the Senior Credit
Facility. In 2004 and 2003 amortization of deferred financing assets was
$112,000 and $101,000, respectively.
INTEREST INCOME (EXPENSE)
Interest income decreased by $22,000 in 2004, compared to 2003. Interest expense
decreased by $82,000 primarily due to the significant reduction in debt in 2004,
compared to 2003.
TAXES
The effective tax rate for 2004 was approximately 34%, which reflects the
statutory rate after adjustments for state tax provisions, offset by research
and development credits and certain foreign sales credits. The effective tax
benefit rate for 2003 was greater than the statutory rate primarily due to
adjustments made to the Company's Mexican tax liabilities.
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 Company's business, future capital
expenditures and the Company's prospects and strategy. In reviewing such
information, it should be kept in mind that actual results may differ materially
from those projected or suggested in such forward-looking information. This
forward-looking information is based on various factors and was derived
utilizing numerous assumptions. Many of these factors previously have been
identified in filings or statements made by or on behalf of the Company.
Important assumptions and other important factors that could cause actual
results to differ materially from those set forth in the forward-looking
information include changes in the general economy, changes in capital
investment and/or consumer spending, competitive factors and other factors
affecting the Company's business in or beyond the Company's control. These
factors include a change in the rate of inflation, a change in state or federal
legislation or regulations, an
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adverse determination with respect to a claim in litigation or other claims
(including environmental matters), the ability to recruit and develop employees,
the ability to successfully implement new technology and the stability of
product costs. These factors also include the timing and degree of any business
recovery in certain of the Company's markets that are currently experiencing a
cyclical economic downturn.
Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the forward-looking
information. The Company does not undertake to update forward-looking
information contained herein or elsewhere to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
information.
Future factors include the effectiveness of cost reduction actions undertaken by
the Company; increasing price, products and services competition by U.S. and
non-U.S. competitors, including new entrants; rapid technological developments
and changes and the Company's ability to continue to introduce and develop
competitive new products and services on a timely, cost-effective basis;
availability of manufacturing capacity, components and materials; credit
concerns and the potential for deterioration of the credit quality of customers;
customer demand for the Company's products and services; ability of the Company
to continue to finance its operations on satisfactory terms; 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 increased economic uncertainty and instability, and interest rate and
currency exchange rate fluctuations and other future factors.
For a further description of future factors that could cause actual results to
differ materially from such forward-looking statements, see the discussion in
the Company's Annual Report on Form 10-K for the year ended December 31, 2003,
Part I, Item 1 - Risk Factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in quantitative and qualitative market risk
from the disclosure contained in Item 7A of the Company's Annual Report on Form
10-K for the year ended December 31, 2003, which is incorporated herein by
reference.
ITEM 4. CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the design and operation of the
Company's "disclosure controls and procedures," as such term is defined in Rules
13a-15e and 15d-15e promulgated under the Securities Exchange Act of 1934, as
amended, (the "Exchange Act") as of this Quarterly Report on Form 10-Q (this
"Report"). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this Report to
provide reasonable assurance
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that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. There have been no changes in internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1997, the Company, through a wholly-owned subsidiary, commenced a patent
infringement action against American Power Conversion Corporation ("APC") in the
United States District Court for the Southern District of New Jersey. The
complaint alleged that APC infringed a patent held by the subsidiary, and sought
damages resulting from APC's infringement. On February 3, 2004, the Company and
APC executed a Settlement Agreement that provided, among other things, for the
release of all claims against APC and the granting to APC a paid-up license, in
return for the payment to the Company of $4,000,000. The Settlement Agreement
was conditioned on the dismissal with prejudice of the lawsuit. On March 5,
2004, the District Court dismissed the lawsuit with prejudice and the settlement
fee was paid to the Company. A third party has threatened certain claims against
the Company relating to this matter for a portion of the payment. The Company
disputes such claims and intends to defend them vigorously.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amended Change-in-Control Agreement dated May 1, 2004 between the Company
and James C. Taylor (transmitted herewith).
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by the Company during the
period covered by this report:
Current report on Form 8-K dated and filed March 5, 2004
pursuant to Item 5 (Other Events And Required FD Disclosure).
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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: May 10, 2004 SL INDUSTRIES, INC.
--------------------------------------
(Registrant)
By: /s/ Warren Lichtenstein
--------------------------------------
Warren Lichtenstein
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ David R. Nuzzo
--------------------------------------
David R. Nuzzo
Chief Financial Officer
(Principal Accounting Officer)
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