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| SLI > SEC Filings for SLI > Form 10-Q on 12-Nov-2008 | All Recent SEC Filings |
12-Nov-2008
Quarterly Report
The Company's business strategy has been to enhance the growth and profitability
of each of its businesses through the penetration of attractive new market
niches, further improvement of operations and expansion of global capabilities.
The Company expects to achieve these goals through organic growth and strategic
acquisitions. The Company also continues to pursue strategic alternatives to
maximize the value of its businesses. Some of these alternatives have included,
and will continue to include, selective acquisitions, divestitures and sales of
certain assets. The Company has provided, and may from time to time in the
future provide, information to interested parties regarding portions of its
businesses for such purposes.
In the sections that follow, statements with respect to the quarter ended 2008
or nine months ended 2008 refer to the three-month and nine-month periods ended
September 30, 2008. Statements with respect to the quarter ended 2007 or nine
months ended 2007 refer to the three-month and nine-month periods ended
September 30, 2007.
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 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.
In December 2001, the Securities and Exchange Commission (the "SEC") issued
disclosure guidance for "critical accounting policies." The SEC defines
"critical accounting policies" as those that require application of management's
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain and
may change in subsequent periods.
The Company's significant accounting policies are described in Note 1 of the
Notes to Consolidated Financial Statements included in Part IV of the Company's
Annual Report on Form 10-K for the year ended December 31, 2007. Not all of
these significant accounting policies require management to make difficult,
subjective or complex judgments or estimates. However, the following policies
are deemed to be critical within the SEC definition. The Company's senior
management has reviewed these critical accounting policies and estimates and the
related Management's Discussion and Analysis of Financial Condition and Results
of Operations with the Audit Committee of the Board of Directors.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the purchase price is
fixed or determinable and collectibility 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 the EITF
published Issue No. 00-21 "Revenue Arrangements with Multiple Deliverables." The
major portion of the Company's 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 2008 and 2007. 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.
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
distributor's eligible inventory. The eligible distributor inventory is reviewed
at least quarterly. No cash is paid under either distributor program. These
programs affected consolidated gross revenue for each of the nine month periods
ended 2008 and 2007 by approximately 1.1% and 0.8%, respectively.
Certain judgments affect the application of the Company's revenue policy, as
mentioned above. Revenue recognition is significant because net revenue is a key
component of results of operations. In addition, revenue recognition determines
the timing of certain expenses, such as commissions, royalties and certain
incentive programs. Revenue results are difficult to predict. Any shortfall in
revenue or delay in recognizing revenue could cause operating results to vary
significantly from year to year and quarter to quarter.
Allowance For Doubtful Accounts
The Company's estimate for the allowance for doubtful accounts related to trade
receivables is based on two methods. The amounts calculated from each of these
methods are combined to determine the total amount reserved. First, the Company
evaluates specific accounts where it has information that the customer may have
an inability to meet its financial obligations (e.g., bankruptcy or insolvency).
In these cases, the Company uses its judgment, based on the best available facts
and circumstances, and records a specific reserve for that customer against
amounts due to reduce the receivable to the amount that is expected to be
collected. These specific reserves are reevaluated and adjusted as additional
information is received that impacts the amount reserved. Second, a general
reserve is established for all customers based on several factors, including
historical write-offs as a percentage of sales. If circumstances change (e.g.,
higher than expected defaults or an unexpected material adverse change in a
major customer's ability to meet its financial obligation), the Company's
estimates of the recoverability of amounts due could be reduced by a material
amount. The Company's allowance for doubtful accounts represented 2.8% and 2.9%
of gross trade receivables at September 30, 2008 and December 31, 2007,
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.
Accounting For Income Taxes
On January 1, 2007, the Company adopted FIN 48. The Company has reported gross
unrecognized tax benefits, excluding interest and penalties, of $2,569,000 and
$2,785,000 as of September 30, 2008 and December 31, 2007, respectively. These
amounts represent unrecognized tax benefits, which, if ultimately recognized,
will reduce the Company's effective tax rate. As of September 30, 2008, the
Company reported accrued interest and penalties related to unrecognized tax
benefits of $214,000. For additional disclosures related to FIN 48, see Note 3
of the Notes to the Consolidated Financial Statements included in Part IV of the
Company's Annual Report on Form 10-K for the year ended December 31, 2007.
Significant management judgment is required in determining the provision for
income taxes, the deferred tax assets and liabilities and any valuation
allowance recorded against deferred tax assets. The net deferred tax assets as
of September 30, 2008 and December 31, 2007 were $9,270,000 and $9,450,000,
respectively, net of valuation allowances of $2,796,000 and $2,826,000,
respectively. The carrying value of the Company's net deferred tax assets
assumes that the Company will be able to generate sufficient future taxable
income in certain tax jurisdictions. Valuation allowances are attributable to
uncertainties related to the Company's ability to utilize certain deferred tax
assets prior to expiration. These deferred tax assets primarily consist of loss
carryforwards. The valuation allowance is based on estimates of taxable income,
expenses and credits by the jurisdictions in which the Company operates and the
period over which deferred tax assets will be recoverable. In the event that
actual results differ from these estimates or these estimates are adjusted in
future periods, the Company may need to establish an additional valuation
allowance that could materially impact its consolidated financial position and
results of operations. Each quarter, management evaluates the ability to realize
the deferred tax assets and assesses the need for additional valuation
allowances.
Legal Contingencies
The Company is currently involved in certain legal proceedings. As discussed in
Note 11 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 Company's consolidated financial position. It is possible,
however, that future results of operations for any particular quarterly or
annual period could be materially affected by changes in these assumptions, or
the effectiveness of these strategies, related to these proceedings.
Goodwill
The Company has allocated its adjusted goodwill balance to its reporting units.
The Company tests goodwill for impairment annually and in interim periods if
certain events occur indicating that the carrying value of goodwill may be
impaired. 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 states quoted market prices are the best
evidence of fair value. The Company uses a combination of expected present
values of future cash flows and comparable or quoted market prices, when
applicable. If the fair value is less than the net book value, the second step
of the analysis 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 rates and other assumptions. 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 2008 and 2007. As of
September 30, 2008 and December 31, 2007, goodwill totaled $21,980,000 and
$22,006,000 (representing 21% of total assets), respectively.
Impairment Of Long-Lived And Intangible Assets
The Company's long-lived and intangible assets primarily consist of fixed
assets, goodwill and other intangible assets. 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. The Company
recorded asset impairment charges of approximately $77,000, net of tax, related
to properties it owns in Camden, New Jersey and Pennsauken, New Jersey. These
charges are recorded as part of discontinued operations.
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 expensed 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 12 of the Notes to the Consolidated Financial Statements included in Part IV of the Company's Annual Report on Form 10-K for the year ended December 31, 2007. 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. For a discussion of accounting policies and other disclosures required by generally accepted accounting principles, see the Company's audited Consolidated Financial Statements and Notes thereto included in Part IV of the Company's Annual Report on Form 10-K for the year ended December 31, 2007.
Liquidity And Capital Resources
September 30, December 31,
2008 2007 $ Variance % Variance
(in thousands)
Cash and cash equivalents $ - $ 733 $ (733 ) (100 %)
Bank debt $ 4,118 $ 6,000 $ (1,882 ) (31 %)
Working capital $ 31,422 $ 30,606 $ 816 3 %
Shareholders' equity $ 64,616 $ 61,629 $ 2,987 5 %
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During the nine-month period ended September 30, 2008, the net cash provided by operating activities from continuing operations was $4,127,000, as compared to net cash provided by operating activities from continuing operations of $9,318,000 during the nine-month period ended September 30, 2007. The sources of cash from operating activities for the nine-month period ended September 30, 2008 were income from continuing operations of $4,218,000, a decrease in accounts receivable of $1,856,000 and an increase in accrued income taxes of $1,419,000. These sources of cash were primarily offset by a decrease in accrued liabilities of $2,103,000, an increase in inventory of $2,514,000 and a decrease in accounts payable of $1,447,000. The decrease in accrued liabilities is primarily due to the timing of payments related to employee bonuses and consulting and audit fees, most of which were paid in the first quarter of 2008, which are not recurring on a quarterly basis. The decrease of accounts payable is related to the timing of vendor payments. The increase in inventory was primarily caused by the deferral of certain customers' existing orders at Teal, lower than expected orders at SLPE and the increase of orders at MTE. Also, MTE is consolidating facilities and has built inventory in anticipation of the move. The sources of cash provided by operating activities for the nine-month period ended September 30, 2007, were primarily related to income from continuing operations of $7,741,000, a decrease in deferred income tax assets of $995,000, non-cash compensation expense of $1,015,000 and an increase in accounts payable of $826,000.
During the nine-month period ended September 30, 2008, net cash used in
investing activities was $2,189,000. This use of cash is primarily related to
the purchase of machinery, computer hardware, software and demonstration
equipment. During the nine-month period ended September 30, 2007, net cash used
in investing activities was $1,235,000. This use of cash in investing activities
during the period was primarily related to the purchase of factory machinery and
equipment.
During the nine-month period ended September 30, 2008, net cash used in
financing activities was $1,482,000, which is primarily related to borrowings
under the Company's Revolving Credit Facility in the amount of $17,828,000,
offset by payments under the Company's Revolving Credit Facility of $19,710,000.
During the nine-month period ended September 30, 2007, net cash used in
financing activities was $7,130,000. This use of cash was principally related to
the repayment of debt under the Revolving Credit Facility in the net amount of
$9,800,000.
The Company's current ratio was 2.22 to 1 at September 30, 2008 and 2.10 to 1 at
December 31, 2007. Current assets decreased by $1,115,000 from December 31,
2007, while current liabilities decreased by $1,931,000 during the same period.
Total borrowings by the Company, as a percentage of total capitalization,
consisting of debt and shareholders' equity, were 6% at September 30, 2008 and
9% at December 31, 2007. During the first nine months of 2008, total debt
decreased by $1,882,000, or 31%, primarily funded by net cash provided by
operating activities from continuing operations.
Capital expenditures were $1,446,000 in the first nine months of 2008, which
represents an increase of $276,000, or 24%, from the capital expenditure levels
of the comparable period in 2007. Capital expenditures in the first nine months
of 2008 were attributable to machinery, computer hardware and software
purchases. Capital expenditures of $1,170,000 were made during the first nine
months of 2007. These expenditures primarily related to computer equipment and
factory machinery and 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, public reporting costs and
costs not specifically allocated to the reportable business segments), all of
the Company's operating segments recorded income from operations for the periods
presented, except SLPE, in the three months ended September 30, 2008.
Contractual Obligations
The following is a summary of the Company's contractual obligations at
September 30, 2008 for the periods indicated:
Less Than 1 to 3 4 to 5 After
1 Year Years Years 5 Years Total
(in thousands)
Operating Leases $ 1,658 $ 2,254 $ 704 $ - $ 4,616
Debt - 4,118 - - 4,118
Capital Leases 8 6 - - 14
$ 1,666 $ 6,378 $ 704 $ - $ 8,748
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Off-Balance Sheet Arrangements
It is not the Company's usual business practice to enter into off-balance sheet
arrangements such as guarantees on loans and financial commitments,
indemnification arrangements and retained interests in assets transferred to an
unconsolidated entity for securitization purposes. Consequently, the Company has
no off-balance sheet arrangements, except for operating lease commitments
disclosed in the table above, which have, or are reasonably likely to have, a
material current or future effect on its financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
Results of Operations
Three months ended September 30, 2008, compared with three months ended
September 30, 2007
The tables below show the comparisons of net sales and income from operations
for the quarter ended September 30, 2008 ("2008") and the quarter ended
September 30, 2007 ("2007").
Net Sales
Three Months Three Months $ Variance % Variance
Ended Ended From From
September 30, September 30, Same Quarter Same Quarter
2008 2007 Last Year Last Year
(in thousands)
Power Electronics Group:
SLPE $ 18,168 $ 22,367 $ (4,199 ) (19 %)
High Power Group 15,274 15,690 (416 ) (3 %)
Total 33,442 38,057 (4,615 ) (12 %)
SL-MTI 6,146 6,800 (654 ) (10 %)
RFL 6,654 5,795 859 15 %
Total $ 46,242 $ 50,652 $ (4,410 ) (9 %)
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The table below shows the comparison of income from operations for 2008 and 2007:
Income from Operations
Three Months Three Months $ Variance % Variance
Ended Ended From From
September 30, September 30, Same Quarter Same Quarter
2008 2007 Last Year Last Year
(in thousands)
Power Electronics Group:
SLPE $ (589 ) $ 2,017 $ (2,606 ) (129 %)
High Power Group 1,704 2,397 (693 ) (29 %)
Total 1,115 4,414 (3,299 ) (75 %)
SL-MTI 681 651 30 5 %
. . .
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