EXHIBIT 99.2











SL Industries, Inc.


Index to Financial Statements





Page numberin this reportReport of Independent Registered Public Accounting Firm2Consolidated Balance Sheets3Consolidated Statements of Income4Consolidated Statements of Comprehensive Income5Consolidated Statements of Shareholders’ Equity6Consolidated Statements of Cash Flows7Notes to Consolidated Financial Statements8





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Report of Independent Registered Public Accounting Firm


The Board of Directors and Shareholders


SL Industries, Inc.


We have audited the accompanying consolidated balance sheets of SL Industries, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Schedule II, Valuation and Qualifying Accounts. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SL Industries, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.





/s/ GRANT THORNTON LLPPhiladelphia, PennsylvaniaMarch 17, 2015








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SL INDUSTRIES, INC.


CONSOLIDATED BALANCE SHEETS





December 31,2014December 31,2013ASSETSCurrent assets:Cash and cash equivalents$31,950,000$7,163,000Receivables, net33,966,00030,765,000Inventories, net23,597,00022,963,000Other current assets4,751,0007,168,000Deferred income taxes, net6,105,0002,804,000Total current assets100,369,00070,863,000Property, plant and equipment, net8,070,00010,790,000Deferred income taxes, net5,496,00010,239,000Goodwill13,072,00017,666,000Other intangible assets, net3,788,0002,346,000Other assets and deferred charges, net981,0001,430,000Total assets$131,776,000$113,334,000LIABILITIESCurrent liabilities:Short-term borrowings and current portion of long-term debt$—$1,048,000Accounts payable19,285,00017,112,000Accrued income taxes3,618,00020,000Accrued liabilities:Payroll and related costs4,880,0005,373,000Other16,466,00010,259,000Total current liabilities44,249,00033,812,000Long-term debt, less current maturities—187,000Deferred compensation and supplemental retirement benefits1,427,0001,695,000Other long-term liabilities8,779,00018,465,000Total liabilities54,455,00054,159,000Commitments and contingenciesSHAREHOLDERS’ EQUITYPreferred stock, no par value; authorized, 6,000,000 shares; none issued——Common stock, $.20 par value; authorized, 25,000,000 shares; issued, 6,656,000 and 6,656,000 shares, respectively1,331,0001,331,000Capital in excess of par value22,747,00022,153,000Retained earnings79,415,00060,520,000Accumulated other comprehensive (loss) gain, net of tax(638,000)822,000Treasury stock at cost, 2,512,000 and 2,530,000 shares, respectively(25,534,000)(25,651,000)Total shareholders’ equity77,321,00059,175,000Total liabilities and shareholders’ equity$131,776,000$113,334,000


See accompanying notes to consolidated financial statements.





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SL INDUSTRIES, INC.


CONSOLIDATED STATEMENTS OF INCOME


FOR THE YEARS ENDED DECEMBER 31,





201420132012Net sales$204,417,000$184,658,000$179,375,000Cost and expenses:Cost of products sold138,794,000126,432,000126,063,000Engineering and product development11,041,00011,340,00010,018,000Selling, general and administrative32,337,00029,586,00030,070,000Depreciation and amortization2,220,0002,010,0002,296,000Restructuring charges463,000—790,000Goodwill impairment—5,055,000—Total cost and expenses184,855,000174,423,000169,237,000Income from operations19,562,00010,235,00010,138,000Other income (expense):Amortization of deferred financing costs(94,000)(83,000)(138,000)Interest income13,00012,0005,000Interest expense(27,000)(61,000)(23,000)Other gain (loss), net1,769,000(78,000)243,000Income from continuing operations before income taxes21,223,00010,025,00010,225,000Income tax provision7,043,0002,547,0002,686,000Income from continuing operations14,180,0007,478,0007,539,000Income from discontinued operations, net of tax4,715,000762,000238,000Net income$18,895,000$8,240,000$7,777,000Basic net income per common shareIncome from continuing operations$3.43$1.81$1.74Income from discontinued operations, net of tax1.140.180.06Net income$4.57$1.99$1.80Diluted net income per common shareIncome from continuing operations$3.39$1.79$1.74Income from discontinued operations, net of tax1.120.180.06Net income$4.51$1.97$1.80Shares used in computing basic net income per common share4,139,0004,138,0004,313,000Shares used in computing diluted net income per common share4,187,0004,184,0004,330,000


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SL INDUSTRIES, INC.


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


FOR THE YEARS ENDED DECEMBER 31,





201420132012Net income$18,895,000$8,240,000$7,777,000Other comprehensive income, net of tax:Foreign currency translation(366,000)180,000(103,000)Net unrealized gain on available-for-sale securities—1,094,000—Net unrealized gain reclassified into income on sale of available-for-sale securities(1,094,000)——Comprehensive income$17,435,000$9,514,000$7,674,000


See accompanying notes to consolidated financial statements.








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SL INDUSTRIES, INC.


CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


FOR THE YEARS ENDED DECEMBER 31, 2014, 2013, AND 2012





Common StockCapital inExcess ofPar ValueRetainedEarningsAccumulatedOtherComprehensive(Loss) IncomeTotalShareholders’EquityIssuedHeld In TreasurySharesAmountSharesAmountBalance December 31, 20116,963,000$1,393,000(2,395,000)$(22,014,000)$25,002,000$52,825,000$(349,000)$56,857,000Net income7,777,0007,777,000Foreign currency translation(103,000)(103,000)Other, including exercise of employee stock options, awards released and related income tax benefits18,000177,000(64,000)113,000Stock-based compensation842,000842,000Repurchase and retirement of common stock(307,000)(62,000)(4,202,000)(4,264,000)Treasury stock purchased(140,000)(2,468,000)(2,468,000)Dividends declared(8,322,000)(8,322,000)Balance December 31, 20126,656,000$1,331,000(2,517,000)$(24,305,000)$21,578,000$52,280,000$(452,000)$50,432,000Net income8,240,0008,240,000Foreign currency translation180,000180,000Net unrealized gain on available-for-sale securities, net of tax1,094,0001,094,000Other, including exercise of employee stock options, awards released and related income tax benefits74,000733,00030,000763,000Stock-based compensation545,000545,000Treasury stock purchased(87,000)(2,079,000)(2,079,000)Balance December 31, 20136,656,000$1,331,000(2,530,000)$(25,651,000)$22,153,000$60,520,000$822,000$59,175,000Net income18,895,00018,895,000Foreign currency translation(366,000)(366,000)Net unrealized gain reclassified into income on sale of available-for-sale securities, net of tax(1,094,000)(1,094,000)Other, including exercise of employee stock options, awards released and related income tax benefits22,000223,000(174,000)49,000Stock-based compensation768,000768,000Treasury stock purchased(4,000)(106,000)(106,000)Balance December 31, 20146,656,000$1,331,000(2,512,000)$(25,534,000)$22,747,000$79,415,000$(638,000)$77,321,000


See accompanying notes to consolidated financial statements.





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SL INDUSTRIES, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR THE YEARS ENDED DECEMBER 31,


201420132012OPERATING ACTIVITIES:Net income$18,895,000$8,240,000$7,777,000Adjustment for income from discontinued operations(4,715,000)(762,000)(238,000)Income from continuing operations14,180,0007,478,0007,539,000Adjustments to reconcile income from continuing operations to net cash provided by operating activities:Depreciation1,549,0001,462,0001,431,000Amortization671,000548,000865,000Amortization of deferred financing costs94,00083,000138,000Stock-based compensation768,000545,000842,000Excess tax benefit on stock compensation—(132,000)(33,000)Loss (gain) on foreign exchange contracts825,00090,000(243,000)Provisions for losses on accounts receivable29,00046,00020,000Deferred compensation and supplemental retirement benefits327,000313,000399,000Deferred compensation and supplemental retirement benefit payments(440,000)(503,000)(480,000)Deferred income taxes1,615,000153,000191,000(Gain) on sale of available-for-sale securities(1,691,000)——(Gain) loss on sales of property, plant and equipment(1,127,000)—24,000Goodwill impairment—5,055,000—Changes in operating assets and liabilities:Accounts receivable(5,129,000)(1,028,000)1,091,000Inventories(388,000)(725,000)847,000Other assets963,000(1,729,000)112,000Accounts payable2,130,000(1,860,000)1,882,000Other accrued liabilities1,321,0003,368,0001,400,000Accrued income taxes4,152,000494,000165,000Net cash provided by operating activities from continuing operations19,849,00013,658,00016,190,000Net cash (used in) operating activities from discontinued operations(9,920,000)(3,959,000)(662,000)NET CASH PROVIDED BY OPERATING ACTIVITIES9,929,0009,699,00015,528,000INVESTING ACTIVITIES:Purchases of property, plant and equipment(2,850,000)(2,434,000)(1,553,000)Proceeds from sale of property, plant and equipment1,657,000——Acquisition of a business, net of cash acquired(3,973,000)—(756,000)Purchases of available-for-sale securities—(2,362,000)—Proceeds from sale of available-for-sale securities4,054,000——Purchases of other assets(379,000)(320,000)(215,000)Net cash (used in) investing activities from continuing operations(1,491,000)(5,116,000)(2,524,000)Net cash provided by (used in) investing activities from discontinued operations17,783,000(416,000)(170,000)NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES16,292,000(5,532,000)(2,694,000)FINANCING ACTIVITIES:Proceeds from Senior Revolving Credit Facility—25,490,0002,850,000Payments of Senior Revolving Credit Facility(1,000,000)(24,490,000)(2,850,000)Proceeds from Revolving Credit Facility——4,100,000Payments of Revolving Credit Facility——(4,100,000)Payments of deferred financing costs(45,000)(42,000)(340,000)Repurchase and retirement of common stock——(4,264,000)Treasury stock purchases(106,000)(2,079,000)(2,468,000)Proceeds from stock options exercised—743,00080,000Excess tax benefit on stock compensation—132,00033,000Dividends paid——(8,322,000)Net cash (used in) financing activities from continuing operations(1,151,000)(246,000)(15,281,000)Net cash (used in) financing activities from discontinued operations(235,000)——NET CASH (USED IN) FINANCING ACTIVITIES(1,386,000)(246,000)(15,281,000)Effect of exchange rate changes on cash(48,000)46,00011,000NET CHANGE IN CASH AND CASH EQUIVALENTS24,787,0003,967,000(2,436,000)CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD7,163,0003,196,0005,632,000CASH AND CASH EQUIVALENTS AT END OF PERIOD$31,950,000$7,163,000$3,196,000





See accompanying notes to consolidated financial statements.


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Notes To Consolidated Financial Statements


Note 1. Summary Of Significant Accounting Policies


Background: SL Industries, Inc. (the “Company”), through its subsidiaries, designs, manufactures and markets power electronics, motion control, power protection, and power quality electromagnetic equipment that is used in a variety of medical, commercial and military aerospace, computer, datacom, industrial, and telecom applications. Its products are generally incorporated into larger systems to improve operating performance, safety, reliability and efficiency. The Company’s products are largely sold to Original Equipment Manufacturers (“OEMs”) and, to a lesser extent, to commercial distributors. The Company’s customer base is primarily located in the United States. The Company’s operating subsidiaries are described and defined in Note 23. The Company’s discontinued operations are described and defined in Note 4.


Unless the context requires otherwise, the terms the “Company,” “SL Industries,” “we,” “us” and “our” mean SL Industries, Inc., a Delaware corporation, and its consolidated subsidiaries after Reincorporation (defined and described below) and SL Industries, Inc., a New Jersey corporation prior to Reincorporation. In the context of describing the Reincorporation, “SL-NJ” means SL Industries, Inc., a New Jersey corporation, and “SL-DE” means SL Industries, Inc., a Delaware corporation and wholly owned subsidiary of SL-NJ.


On May 9, 2013, the Company’s shareholders voted to approve a proposal to change the state of incorporation of SL Industries from the State of New Jersey to the State of Delaware by merging SL-NJ with and into SL-DE (the “Reincorporation”). On June 20, 2013 (the “Effective Date”), the Reincorporation was effected by merging SL-NJ with and into SL-DE pursuant to an Agreement and Plan of Merger, dated June 3, 2013, between SL-NJ and SL-DE. SL-DE survived the merger and SL-NJ ceased to exist. The principal reason for the Reincorporation was to give the Company a greater measure of flexibility and simplicity in corporate governance and provide greater clarity and predictability with respect to the Company’s corporate legal affairs. The Reincorporation did not result in any change in the name, business, management, fiscal year, accounting, location of the principal executive officers, assets or liabilities or net worth (other than the costs of reincorporation which were immaterial) of the Company.


On November 17, 2014, SL Delaware Holdings, Inc. (“SL Delaware Holdings”), a wholly-owned subsidiary of the Company, entered into a definitive Stock Purchase Agreement (the “Purchase Agreement”) with Hubbell Power Systems, Inc. (“Hubbell”), a subsidiary of Hubbell Incorporated, pursuant to which SL Delaware Holdings sold all of the issued and outstanding capital stock of RFL Electronics Inc. (“RFL”). The Company concluded that the accounting requirements for reporting the results of operations and cash flows of the divested business as discontinued operations were met at November 17, 2014. As a result, the accompanying consolidated statements of income for 2013 and 2012, the consolidated statements of cash flows for 2013 and 2012, and the amounts in these notes to the consolidated financial statements related to 2013 and 2012 have been recast to reflect the presentation of the results of operations and cash flows of the formerly owned RFL businesses as discontinued operations. Refer to Note 4, “Discontinued Operations”, for additional information regarding this transaction.


Basis Of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.





Use Of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant areas that require the use of management estimates relate to product warranty costs, accrued liabilities related to litigation, allowance for doubtful accounts, allowance for inventory obsolescence and environmental costs, the valuation of acquisitions and long-lived assets, and income taxes, including estimates for certain tax liabilities and the determination of recoverability of certain of the deferred tax assets.


Cash Equivalents: The Company considers all highly liquid debt instruments with an original maturity date of three months or less and investments in money market accounts to be cash equivalents. At December 31, 2014 and December 31, 2013, cash and cash equivalents held in the United States are held principally at one financial institution.


Accounts Receivable: The Company’s accounts receivable primarily consist of trade receivables and are reported net of allowances for doubtful accounts of approximately $281,000 and $581,000 as of December 31, 2014 and December 31, 2013, respectively. The Company’s estimate for the allowance for doubtful accounts related to trade receivables is based on two methods. The amounts calculated from each of these methods are combined to determine the total amount reserved. First, the Company 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


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and circumstances, and records a specific reserve for that customer against amounts due to reduce the receivable to the amount that is expected to be collected. These specific reserves are reevaluated and adjusted as additional information is received that impacts the amount reserved. Second, a general reserve is established for all customers based on several factors, including historical write-offs as a percentage of sales. If circumstances change (e.g., higher than expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligation), the Company’s estimates of the recoverability of amounts due could be reduced by a material amount. Receivables are charged off against the reserve when they are deemed uncollectible.


Inventories: Inventories are valued at the lower of cost or market. Cost is primarily determined using the first-in, first-out (“FIFO”) method. Cost for certain inventories is determined using the last-in, first-out (“LIFO”) method. The Company’s carrying cost of inventory is valued at the lower of cost or market as the Company 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 obsolete, slow-moving, and excess inventories. Inventory items identified as obsolete, slow-moving, or excess are evaluated to determine if reserves are required. If the Company were not able to achieve its expectations of the net realizable value of the inventory at current market value, it would have to adjust its reserves accordingly. The Company attempts to accurately estimate future product demand to properly adjust inventory levels. However, significant unanticipated changes in demand could have a significant impact on the value of inventory and of operating results.





Investments: The Company determines the appropriate classification of its investments in equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings. Marketable equity securities not classified as trading are classified as available for sale, and are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income and reported in shareholders’ equity. The fair value of all securities held by the Company is determined by quoted market prices.


Property, Plant And Equipment: Property, plant and equipment are carried at cost and include expenditures for new facilities and major renewals and betterments. Maintenance, repairs and minor renewals are charged to expense as incurred. When assets are sold or otherwise disposed of, any gain or loss is recognized currently. Depreciation is provided primarily using the straight-line method over the estimated useful lives of the assets, which range from 25 to 40 years for buildings, 3 to 15 years for equipment and other property, and the lesser of the lease term or life of the asset for leasehold improvements. Assets subject to capital leases are depreciated over the lesser of the estimated useful life of the asset or length of the contract.


Goodwill And Other Intangibles: The Company follows Accounting Standards Codification (“ASC”) 350 “Intangibles – Goodwill and Other,” which requires that goodwill and other indefinite-lived intangible assets will no longer be amortized to earnings, but instead be subject to periodic testing for impairment. Intangible assets determined to have definitive lives will continue to be amortized over their estimated useful lives.


The Company’s impairment testing is undertaken annually, or more frequently upon the occurrence of some indication that an impairment may take place. The Company conducted its annual impairment test as of December 31, 2014.


A two-step process is utilized to determine if goodwill has been impaired. In the first step, the fair value of each reporting unit is compared to the net asset value recorded for such unit. If the fair value exceeds the net asset value, the goodwill of the reporting unit is not adjusted. However, if the recorded net asset value exceeds the fair value, the Company would perform a second step to measure the amount of impairment loss, if any. In the second step, the implied fair value of the reporting unit’s goodwill is compared with the goodwill recorded for such unit. If the recorded amount of goodwill exceeds the implied fair value, an impairment loss is recognized in the amount of the excess. The nonrecurring fair value measurement of goodwill is developed using significant unobservable inputs (Level 3) (see Note 18 for additional information).


Long-Lived Assets: The Company evaluates the recoverability of its long-lived assets in accordance with ASC 360 “Property, Plant, and Equipment.” The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets are measured by a comparison of the carrying amount of an asset to future cash flows expected to be generated by the asset, undiscounted and


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without interest or independent appraisals. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the assets.





Revenue Recognition: Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. The major portion of the Company’s revenue is derived from equipment sales. The Company recognizes equipment revenue upon shipment or delivery, depending upon the terms of the order, and transfer of title. Generally, the revenue recognition criteria are met at the time the product is shipped. Provisions are made at the time the related revenue is recognized for product returns, product warranties, rebates, certain re-stocking programs with distributors and other sales incentives offered by the Company to its customers. Freight revenues billed to customers are included in net sales and expenses for shipping products are included in cost of sales.


Environmental Expenditures : Environmental expenditures that relate to current operations are charged to expense or capitalized, as appropriate. Expenditures that relate to an existing condition caused by formerly owned operations are expensed and recorded as part of discontinued operations, net of tax. Expenditures include costs of remediation 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.


Deferred Financing Costs: Costs incurred in securing long-term debt are deferred and amortized on a straight-line basis over the term of the related debt. In the case of loan modifications, the Company follows the guidance provided by ASC 470-50 “Debt – Modification and Extinguishments.” The net unamortized deferred financing costs at December 31, 2014 and December 31, 2013 were $177,000 and $227,000, respectively. The financing cost amortization expense was $94,000, $83,000, and $138,000, for 2014, 2013, and 2012, respectively.


Product Warranty Costs: The Company offers various warranties on its products. These warranties vary in length depending on the product. The Company provides for its estimated future warranty obligations in the period in which the related sale is recognized primarily based on historical experience. For 2014, 2013 and 2012, product warranty costs from continuing operations were $818,000, $757,000 and $524,000, respectively.


Advertising Costs: Advertising costs are expensed as incurred. For 2014, 2013 and 2012, advertising costs from continuing operations were $349,000, $258,000 and $271,000, respectively.


Research And Development Costs: Research and development costs are expensed as incurred. For 2014, 2013 and 2012, research and development costs from continuing operations were $4,054,000, $4,215,000 and $2,992,000, respectively.





Other Gain (Loss), net: Other gain (loss), net in 2014 was a net gain of $1,769,000 compared to net loss of $78,000 in 2013 and a net gain of $243,000 in 2012. Other gain (loss), net in 2014 included a $1,691,000 gain recognized from the sale of available-for-sale securities, a $892,000 gain on the sale of the Company’s former manufacturing facility located in Xianghe, China, and $11,000 of dividend income received from investments in available-for-sale securities, which were partially offset by a $825,000 unrealized loss on foreign currency forward contracts. Other gain (loss), net in 2013 included a $90,000 unrealized loss on foreign currency forward contracts, which was partially offset by $12,000 of dividend income received from investments in available-for-sale securities. Other gain (loss), net in 2012 included a $243,000 unrealized gain on foreign currency forward contracts.


Since 2012, the Company has entered into a series of foreign currency forward contracts to hedge its exposure to foreign exchange rate movements in its forecasted expenses in China and Mexico. The loss recognized in 2014 and 2013 and the gain recognized in 2012 represents the change in fair value of foreign currency forward contracts that are marked to market (see Note 19 for additional information).


Income Taxes: The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based upon the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company establishes valuation allowances if the Company believes that it is more likely than not that some of the deferred tax assets will not be realized. The Company does not recognize a tax benefit


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unless it is more likely than not that the benefit will be sustained on audit by the taxing authority based on the merits of the associated tax position. If the recognition threshold is met, the Company recognizes a tax benefit measured at the largest amount of the tax benefit that, based on the Company’s judgment, is greater than fifty percent likely to be realized. The Company records interest and penalties related to unrecognized tax benefits as income tax expense.


Foreign Currency Conversion: Assets and liabilities of foreign operations are translated from local currency to U.S. dollars at the exchange rates in effect at the end of the fiscal period. Gains and losses from the translation of foreign operations are included in accumulated other comprehensive gain (loss) on the Company’s Consolidated Balance Sheets. Revenue and expenses are translated at the year-to-date average rate of exchange. Transaction gains and losses arising from currency exchange rate fluctuations on transactions denominated in a currency other than the local currency are included in the Company’s Consolidated Statements of Income.


Derivative Instruments And Hedging Activities: FASB ASC 815, “Derivatives and Hedging” (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.





The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. Certain of the Company’s foreign operations expose the Company to fluctuations of foreign interest rates and exchange rates. These fluctuations may impact the value of the Company’s revenues, expenses, cash receipts and payments in terms of the Company’s functional currency. The Company enters into derivative financial instruments to protect the value or fix the amount of certain cash flows in terms of the functional currency of the business unit with that exposure.


As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. The Company enters into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. Currently, the Company does not apply hedge accounting to any of its foreign currency derivatives.


Note 2. Income Per Share


The Company has presented net income per common share pursuant to ASC 260 “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.


There were no anti-dilutive options for the years ended December 31, 2014 and December 31, 2013. For the year ended December 31, 2012, 6,000 stock options were excluded from the dilutive computation as the assumed shares repurchased under the treasury method would have been anti-dilutive.






































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The table below sets forth the computation of basic and diluted net income per share:





December 31,2014December 31,2013December 31,2012(in thousands, except per share amounts)Net income available to common shareholders:Basic net income available to common shareholders from continuing operations$14,180$7,478$7,539Basic net income available to common shareholders from discontinued operations$4,715$762$238Diluted net income available to common shareholders from continuing operations$14,180$7,478$7,539Diluted net income available to common shareholders from discontinued operations$4,715$762$238Shares:Basic weighted average number of common shares outstanding4,1394,1384,313Common shares assumed upon exercise of stock options484617Diluted weighted average number of common shares outstanding4,1874,1844,330Basic net income per common share:Income from continuing operations$3.43$1.81$1.74Income from discontinued operations (net of tax)1.140.180.06Net income$4.57$1.99$1.80Diluted net income per common share:Income from continuing operations$3.39$1.79$1.74Income from discontinued operations (net of tax)1.120.180.06Net income$4.51$1.97$1.80


Note 3. Recently Adopted and Issued Accounting Standards


Recently Adopted Accounting Standards And Other Standards


In July 2013, the FASB issued ASU No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force),” which provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 is effective for fiscal periods beginning after December 15, 2013. The implementation of this guidance did not have a material impact on the Company’s consolidated financial statements.





Recently Issued Accounting Pronouncements And Other Standards


In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of an Entity,” which amends the guidance for reporting discontinued operations and disposals of components of an entity. The amended guidance requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as sale should be reported as discontinued operations. The amendments also expand the disclosure requirements for discontinued operations and add new disclosures for individually significant dispositions that do not qualify as discontinued operations. ASU 2014-08 is effective prospectively for fiscal periods beginning after December 15, 2014 (early adoption is permitted only for disposals that have not been previously reported). The implementation of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.


In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which provides guidance that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for fiscal periods beginning after December 15, 2016 and may be applied either (i) retrospectively to each prior reporting period presented with an election for certain specified practical expedients, or (ii) retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application, with additional disclosure requirements. Early


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application is not permitted. The Company is currently evaluating the impact of the implementation of this guidance on the Company’s consolidated financial statements. The Company’s management has not yet determined the method by which it will adopt the standard in 2017.


In June 2014, the FASB issued ASU No. 2014-12, “Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force),” which requires a reporting entity to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition. ASU 2014-12 is effective for fiscal periods beginning after December 15, 2015. Earlier application is permitted. The implementation of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.


In November 2014, the FASB issued ASU No. 2014-16, “Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force),” which clarifies how current guidance should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. The amendments require that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of a host contract. ASU 2014-16 is effective for fiscal periods beginning after December 15, 2015. Earlier adoption is permitted. The implementation of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.





In November 2014, the FASB issued ASU No. 2014-17, “Business Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force),” which gives acquired companies the option to apply pushdown accounting to its separate financial statements upon a change-in-control event. ASU 2014-15 is effective on November 18, 2014. The implementation of this guidance did not have a material impact on the Company’s consolidated financial statements.


Note 4. Discontinued Operations


The results of total income from discontinued operations for the years ended December 31, 2014, December 31, 2013, and December 31, 2012 were as follows:





December 31,201420132012(in thousands)Income (loss) from discontinued operations before income taxes:Divested operations - RFL$8,215$2,852$2,797Environmental costs(896)(1,620)(2,151)Total income from discontinued operations before income taxes$7,319$1,232$646Income (loss) from discontinued operations, net of tax:Divested operations - RFL$5,338$1,854$1,818Environmental costs(623)(1,092)(1,580)Total income from discontinued operations, net of tax$4,715$762$238


The loss from discontinued operations due to environmental costs in 2014, 2013, and 2012 is related to remediation costs, consulting fees, and legal expenses associated with the past operations of the Company’s five environmental sites (See Note 16 – Commitments and Contingencies for further information concerning the environmental sites).


On November 17, 2014, SL Delaware Holdings, a wholly-owned subsidiary of the Company, entered into the Purchase Agreement with Hubbell pursuant to which SL Delaware Holdings sold all of the issued and outstanding capital stock of RFL to Hubbell for aggregate cash consideration of $20,000,000, subject to a post-closing working capital adjustment which amounted to $299,000 and was received in February 2015. A portion of the cash consideration ($2,000,000, subject to adjustment after nine months), is being held in escrow to secure the indemnification obligations of SL Delaware Holdings. As a result, the Company recognized a pre-tax gain of $6,650,000 ($4,322,000 net of tax).


The Company concluded that the accounting requirements for reporting the results of operations and cash flows of the divested business as discontinued operations were met at November 17, 2014. As a result, the consolidated statements of income for


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2013 and 2012 and the consolidated statements of cash flows for 2013 and 2012 have been recast to reflect the formerly owned RFL businesses as discontinued operations.





The results of the discontinued operations for RFL for the years ended December 31, 2014, December 31, 2013, and December 31, 2012 were as follows:





December 31,201420132012(in thousands)Net sales$17,093$20,030$21,202Costs and expensesCost of products sold8,2879,40510,479Engineering and product development1,8291,7141,728Selling, general and administrative5,0275,8395,750Depreciation and amortization352396415Restructuring charges—67Total cost and expenses15,49517,35418,439Income from operations1,5982,6762,763Other income (expense):Interest expense(33)(26)(25)Other gain (loss), net—20259Gain on disposal6,650——Income from discontinued operations before income taxes8,2152,8522,797Income tax provision2,877998979Income from discontinued operations, net of tax$5,338$1,854$1,818


In the Consolidated Statements of Cash Flows, environmental costs and the financial results of the RFL segment were included in net cash (used in) operating activities from discontinued operations, net cash provided by (used in) investing activities from discontinued operations, and net cash (used in) financing activities from discontinued operations.


Note 5. Receivables


Receivables consist of the following:





December 31,20142013(in thousands)Trade receivables$34,025$30,766Less: allowance for doubtful accounts(281)(581)Trade receivables, net33,74430,185Recoverable income taxes81344Other141236Receivables, net$33,966$30,765





Note 6. Concentrations Of Credit Risk


Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments with high credit quality financial institutions. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company’s customer base, and their dispersion across many industries and geographic regions. The Company seeks to limit its exposure to credit risks in any single country or region. The Company performs periodic credit evaluations of


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its customers’ financial condition and generally requires no collateral from its customers. The Company provides an allowance for potential credit losses based upon collectability of such receivables. Losses have not been significant for any of the periods presented. All financial investments inherently expose holders to market risks, including changes in currency and interest rates. The Company manages its exposure to these market risks through its regular operating and financing activities.


Note 7. Inventories


Inventories consist of the following:





December 31,20142013(in thousands)Raw materials$16,865$16,198Work in process4,5844,842Finished goods4,2324,124Gross inventory25,68125,164Less: allowances(2,084)(2,201)Inventories, net$23,597$22,963


The above includes certain inventories that are valued using the LIFO method, which aggregated $8,722,000 and $5,789,000 as of December 31, 2014 and December 31, 2013, respectively. The excess of FIFO cost over LIFO cost as of December 31, 2014 and December 31, 2013 was approximately $160,000 and $495,000, respectively.


Note 8. Property, Plant And Equipment


Property, plant and equipment consist of the following:





December 31,20142013(in thousands)Land$216$1,146Buildings and leasehold improvements6,6049,448Equipment and other property25,14828,02231,96838,616Less: accumulated depreciation(23,898)(27,826)Property, plant and equipment, net$8,070$10,790





Depreciation expense on property, plant and equipment was $1,549,000, $1,462,000, and $1,431,000 for 2014, 2013 and 2012, respectively.


Property, plant, and equipment under capital leases had a gross value of $239,000 as of December 31, 2013. The capital lease was acquired in December 2013 by RFL and is included in equipment and other property. During 2014, the leased equipment was purchased prior to the divestiture of RFL.


Note 9. Goodwill And Intangible Assets


Acquisitions in Fiscal 2014


On July 25, 2014, the Company acquired certain assets and assumed certain liabilities of Dynetic Systems, Inc. (“Dynetic”), pursuant to an Asset Purchase Agreement for an initial purchase price of $4,000,000 less a working capital adjustment of $27,000 (the “Dynetic Acquisition”). The Asset Purchase Agreement also includes a possible earn-out, initially estimated at $310,000, which is comprised of annual payments based on sales of Dynetic products and sales to Dynetic customers over the period immediately following the date of the Dynetic Acquisition through December 31, 2017. Dynetic designed, developed and manufactured precision quality, instrument grade motion control products, and provided custom motor and motion control solutions to the aerospace, defense, medical, commercial and industrial markets. In connection with the Dynetic Acquisition,


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SL Montevideo Technology, Inc. (“SL-MTI”) recorded $266,000 of non-cash inventory step-up amortization due to purchase accounting and direct acquisition costs of approximately $146,000 during 2014. The non-cash inventory step-up amortization was recorded within cost of products sold and direct acquisition costs were recorded within selling, general and administrative expenses in the Consolidated Statements of Income. SLMTI DS LLC (“SLMTI DS”), a new formed subsidiary of SL-MTI, holds the assets acquired in the Dynetic Acquisition.


At December 31, 2014, the financial statements reflect the final purchase price based on estimated fair values at the date of acquisition. The acquisition resulted in intangible assets of $1,861,000 and goodwill of $653,000, which are deductible for tax purposes. Included in intangibles is a customer list valued at $1,510,000 with an estimated useful life of 10 years, developed technology valued at $280,000 with an estimated useful life of 6 years, a trademark valued at $60,000 with an estimated useful life of 2 years, and a non-competition agreement valued at $11,000 with an estimated useful life of 5 years. The total weighted-average amortization period of Dynetic intangible assets, excluding goodwill, is approximately 9 years.


As of December 31, 2014, the total liability for the estimated earn-out was $288,000. During 2014, there were no payments related to the earn-out. The Dynetic results from the date of acquisition through December 31, 2014 are included in the SL-MTI segment.


Acquisitions in Fiscal 2012


On February 27, 2012, the Company purchased certain assets of Pro-Dex Astromec, Inc. (“Astromec”), a subsidiary of Pro-Dex Inc. (“Pro-Dex”), for approximately $1,050,000, which includes the assumption of liabilities for an estimated earn-out of $294,000. The total liability for the earn-out as of December 31, 2014 and December 31, 2013 was $32,000 and $116,000, respectively. During 2014 and 2013, $112,000 and $148,000 were paid related to the earn-out, respectively. The results from the date of acquisition through December 31, 2014 are included in the SL-MTI segment.





Goodwill And Intangible Assets


Intangible assets consist of the following:





December 31, 2014December 31, 2013AmortizableLife (years)Gross ValueAccumulatedAmortizationNet ValueGross ValueAccumulatedAmortizationNet Value(in thousands)Finite-lived intangible assets:Customer relationships(1)5 to 10$5,378$3,858$1,520$3,868$3,436$432Patents(2)5 to 201,5011,2232781,3021,21290Developed technology(1)5 to 61,9801,7192611,7001,700—Licensing fees(3)5 to 10———550398152Trademarks(1)2601347———Non-compete agreements(1)511110———Total amortized finite-lived intangible assets8,9306,8142,1167,4206,746674Indefinite-lived intangible assets:Trademarks1,672—1,6721,672—1,672Other intangible assets, net$10,602$6,814$3,788$9,092$6,746$2,346





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On July 25, 2014, the Company purchased certain assets of Dynetic. Included in the purchase price allocation is a customer list valued at $1,510,000 with an estimated useful life of 10 years, developed technology valued at $280,000 with an estimated useful life of 6 years, a trademark valued at $60,000 with an estimated useful life of 2 years, and a non-competition agreement valued at $11,000 with an estimated useful life of 5 years.

|    |                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | During 2014, MTE Corporation (“MTE”), which is part of the High Power Group segment, purchased a patent from a third party. The value of the asset is $160,000 and the estimated useful life of the asset is 14 years. During 2014, MTE also capitalized $39,000 of legal fees related to a new patent application. The estimated useful life of the asset is 20 years.

|    |                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------
|(3) | On November 17, 2014, the Company sold all of the issued and outstanding capital stock of RFL, which included a licensing fee.

Goodwill is tested at the reporting unit levels annually, and if necessary, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The fair values of the reporting units were estimated using a combination of the expected present values of future cash flows, an assessment of comparable market multiples and a review of market capitalization with estimated control premiums.


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There were no impairment charges related to goodwill recorded during 2014 and 2012. There were no impairment charges related to indefinite-lived intangible assets recorded during 2014, 2013, and 2012. In 2013, the Company’s annual impairment test resulted in our assessment that the carrying value of the TEAL Electronics Corp (“TEAL”) reporting unit exceeded its fair value. As a result of the Company’s annual impairment test, a $5,055,000 non-cash goodwill impairment charge was assessed and recorded in goodwill impairment expense on the Consolidated Statements of Income in the fourth quarter of 2013 in our High Power Group segment. The goodwill impairment was primarily due to a decline in medical imaging equipment market sales during the year coupled with the cancellation of a large solar contract during the fourth quarter of 2013. This resulted in the TEAL reporting unit having lower sales and cash flows for the year than previously projected and lower forecasts of future sales and cash flows for the reporting unit.





Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount and growth rates, operating margins and working capital requirements, selecting comparable companies within each reporting unit and market and determining control premiums. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit.


As of December 31, 2013, the total fair values for each of the remaining reporting units in all of the Company’s segments exceeded their total carrying values by 168% or greater. Although our analysis regarding the fair values of the goodwill and indefinite lived intangible assets indicates that they exceed their respective carrying values, materially different assumptions regarding the future performance of the Company’s businesses or significant declines in the Company’s stock price could result in additional goodwill impairment losses.


Estimated future amortization expense for intangible assets subject to amortization in each of the next five fiscal years is as follows:





AmortizationExpense(in thousands)2015$2822016$2662017$2232018$2182019$217


Total amortization expense, excluding the amortization of deferred financing costs, for 2014, 2013 and 2012 was $671,000, $548,000 and $865,000, respectively. Amortization expense related to intangible assets for 2014, 2013 and 2012 was $466,000, $384,000 and $706,000, respectively. Amortization expense related to software for 2014, 2013 and 2012 was $205,000, $164,000 and $159,000, respectively.





Changes in goodwill balances by segment (which are defined below) are as follows:





BalanceDecember 31,2013AcquisitionsDiscontinuedOperationsForeignExchangeBalanceDecember 31,2014(in thousands)SL Power Electronics Corp.$4,228$—$—$2$4,230High Power Group:MTE Corporation8,189———8,189TEAL Electronics Corp.—————SL-MTI—653——653RFL Electronics Inc.(1)5,249—(5,249)——Goodwill$17,666$653$(5,249)$2$13,072


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The following table reflects the components of goodwill as of December 31, 2014, and December 31, 2013:





December 31, 2014December 31, 2013GrossAmountAccumulatedImpairmentLossesGoodwill,NetGrossAmountAccumulatedImpairmentLossesGoodwill,Net(in thousands)SL Power Electronics Corp.$4,230$—$4,230$4,228$—$4,228High Power Group:MTE Corporation8,189—8,1898,189—8,189TEAL Electronics Corp.5,0555,055—5,0555,055—SL-MTI653—653———RFL Electronics Inc.(1)———5,249—5,249Goodwill$18,127$5,055$13,072$22,721$5,055$17,666





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On November 17, 2014, SL Delaware Holdings., a wholly-owned subsidiary of the Company, entered into the Purchase Agreement with Hubbell pursuant to which SL Delaware Holdings sold all of the issued and outstanding capital stock of RFL to Hubbell for aggregate cash consideration of $20,000,000, subject to a post-closing working capital adjustment which amounted to $299,000 and was received in February 2015. The Company concluded that the accounting requirements for reporting the results of operations of the divested business as discontinued operations were met at November 17, 2014. As a result, the results of operations for the periods presented have been recast to reflect the formerly owned RFL businesses as discontinued operations.

Note 10. Investments


Investments in publicly traded equity securities (which include equity interests of less than 20%) are classified as available-for-sale securities. These investments are carried at fair value using quoted market prices and are included in other current assets in the Company’s Consolidated Balance Sheets. Unrealized gains and losses, net of tax, are included in the determination of comprehensive income and reported in shareholders’ equity.





As of December 31, 2014, the Company had no available-for-sale securities. Available-for-sale securities consist of the following as of December 31, 2013:





December 31, 2013(in thousands)CostGains inAccumulatedOtherComprehensiveIncomeEstimatedFair ValueCommon stock$2,362$1,739$4,101


During the first six months of 2014, the Company sold all of its available-for-sale securities for total proceeds of $4,054,000. The gross realized gains on these sales totaled $1,691,000 ($1,063,000 net of tax), for the year ended December 31, 2014. For the purpose of determining gross realized gains, the cost of securities sold was based on the first in, first out (FIFO) method.


No available-for-sale securities were sold during the year ended December 31, 2013. Gross unrealized holding gains on available-for-sale securities for the year ended December 31, 2013 of $1,739,000 ($1,094,000 net of tax), have been included in accumulated other comprehensive income.





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Note 11. Income Taxes


Income tax provision (benefit) for the fiscal years 2014, 2013 and 2012 is as follows:





Years Ended December 31,201420132012(in thousands)Income tax provision from continuing operations$7,043$2,547$2,686Income tax provision from discontinued operations2,604470408Total income tax provision$9,647$3,017$3,094


Income from continuing operations before provision for income taxes consists of the following:





Years Ended December 31,201420132012(in thousands)Domestic$17,788$8,980$8,023Foreign3,4351,0452,202Income from continuing operations before income taxes$21,223$10,025$10,225





The provision for income taxes from continuing operations consists of the following:





Years Ended December 31,201420132012(in thousands)Current:Federal$5,613$3,543$1,685Foreign1,105313719State418271(191)Deferred:Federal(104)(1,510)554Foreign(113)(20)89State124(50)(170)Income tax provision from continuing operations$7,043$2,547$2,686


Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2014 and December 31, 2013 are as follows:





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December 31,20142013(in thousands)Deferred tax assets related to continuing operations:Deferred compensation$695$746Inventory valuation693384Tax loss carryforward1,0721,293R&D tax credit carryforward8171,146Accrued expenses538520Warranty437349Vacation and bonus expense9851,347Other1,065336Less valuation allowances(602)(588)Deferred tax assets related to continuing operations5,7005,533Deferred tax liabilities related to continuing operations:Accelerated depreciation and amortization479794Net deferred tax assets related to continuing operations5,2214,739Net deferred tax assets related to discontinued operations6,3808,304Net deferred tax assets$11,601$13,043


The Company has not made a provision for U.S. income taxes and foreign withholding taxes for the anticipated repatriation of certain earnings of foreign subsidiaries of the Company. The Company considers the undistributed earnings of its foreign subsidiaries above the amount already provided to be permanently reinvested. As of December 31, 2014 and December 31, 2013, $10,942,000 and $8,772,000 of the undistributed earnings are expected to be permanently reinvested.


As of December 31, 2014 and December 31, 2013 the Company has no foreign tax credit carryforwards.





As of December 31, 2014 and December 31, 2013, the Company’s gross research and development tax credit carryforwards totaled approximately $1,655,000 and $1,762,000, respectively. The decrease in research and development tax credits during 2014 was due to the utilization of the credits and a change in estimate. Of the December 31, 2014 credits, approximately $417,000 can be carried forward for 15 years and expire between 2015 and 2029, while $658,000 will carry over indefinitely.


As of December 31, 2014, the Company has gross federal and state net operating loss carryforward tax benefits of $2,383,000 and $1,320,000, respectively, which expire at various dates from 2015 to 2019. In addition, the Company has a gross foreign net operating loss carryforward tax benefit of $615,000, which does not expire.


The Company has assessed its past earnings history and trends, sales backlog, budgeted sales, and expiration dates of tax carryforwards and has determined that it is more likely than not that $11,601,000 of the net deferred tax assets as of December 31, 2014 will be realized. The Company has an allowance of $1,720,000 (mostly related to discontinued operations) provided against the gross deferred tax assets, which relates to the inability of the Company to realize the state tax benefit of the environmental expenses and the state net operating loss carryforwards.


The following is a reconciliation of income tax expense related to continuing operations at the applicable federal statutory rate and the effective rates from continuing operations:





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Years Ended December 31,201420132012Statutory rate35%35%35%Tax rate differential on domestic manufacturing deduction benefit(1)(3)(3)State income taxes, net of federal income tax243Foreign operations(2)(1)(2)Research and development credits(1)(10)(5)Other——(2)Effective tax rate from continuing operations33%25%26%


For the years ended December 31, 2014 and December 31, 2013, the estimated income tax rate from continuing operations was 33% and 25%, respectively. The increase in the effective tax rate was primarily due to the amount of federal research and development tax credits available in 2014 as compared to 2013 as well as a change in estimate related to the federal and state research and development tax credits which was recognized during the third quarter of 2014. In the first quarter of 2013, the Company recorded a research and development tax benefit for the quarter, plus the retroactive reinstatement of the federal research and development tax credits from the enactment of the American Tax Relief Act of 2012.


For the fiscal years ended December 31, 2014 and December 31, 2013, included in the research and development credits is the recognition of previously unrecognized tax benefits (including interest) in accordance with the guidance provided in ASC 740-10-25 “Income Taxes, Overall, Recognition.”





The final regulations regarding the deduction and capitalization of expenditures related to tangible property were issued during the third quarter of 2013 by the IRS. The Company has reviewed these regulations and does not intend to early adopt or amend any previously filed returns. The implementation of these regulations did not have a material impact on the Company’s consolidated financial statements for the year ending December 31, 2014.


Unrecognized Tax Positions


The Company and its subsidiaries file income tax returns in the United States and in various state, local and foreign jurisdictions. The Company and its subsidiaries are occasionally examined by tax authorities in these jurisdictions. The Company has been audited by the Internal Revenue Service (the “IRS”) through 2010. State income tax statutes are generally open for periods back to and including the calendar year 2010.


A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits, excluding interest and penalties, is as follows:





December 31,201420132012(in thousands)Gross unrecognized tax benefits, beginning of year$834$595$722Increases in tax positions taken in the current year31014465Increases in tax positions taken in prior years—17260Decreases in tax positions taken in prior years(8)——Decreases in tax positions related to settlement with tax authorities—(34)(96)Statute of limitations expired(271)(43)(156)Gross unrecognized tax benefits, end of year$865$834$595


If recognized, all of the net unrecognized tax benefits at December 31, 2014 would impact the effective tax rate. The Company accrues interest and penalties related to unrecognized tax benefits as income tax expense. At December 31, 2014 and December 31, 2013, the Company had accrued interest and penalties related to unrecognized tax benefits of $81,000 and $100,000, respectively.


It is reasonably possible that the Company’s gross unrecognized tax benefits balance may change within the next twelve months due to the expiration of the statutes of limitation of the federal government and various state governments by a range of zero to $244,000. The Company records such unrecognized tax benefits upon the expiration of the applicable statute of


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limitations or the settlement with tax authorities. As of December 31, 2014, the Company has a liability for unrecognized benefits of $265,000 for federal taxes and $397,000 for state taxes and $203,000 for international taxes.





Note 12. Debt


The Company had no debt as of December 31, 2014. Debt as of December 31, 2013 consisted of the following:





December 31,2013(in thousands)2012 Credit Facility:$40 million variable interest rate senior revolving credit facility maturing in 2016$1,000Other capital leases with maturities through 2018235Total debt1,235Less current portion(1,048)Total long-term portion$187


On August 9, 2012, the Company entered into a Credit Agreement with PNC Bank, National Association, as administrative agent and lender (“PNC Bank”), and the lenders from time to time party thereto, as amended (the “2012 Credit Facility). The 2012 Credit Facility was amended on March 11, 2013, June 20, 2013, and September 15, 2014.


The 2012 Credit Facility provides for borrowings up to $40,000,000 and under certain conditions maximum borrowings up to $70,000,000. The 2012 Credit Facility includes a sublimit for letters of credit and provides for a separate $10,700,000 letter of credit which expires one year from the date of closing, with annual extensions. The sublimit for letters of credit equals the lesser of (i) an amount equal to $5,000,000 plus the aggregate amount of Designated Usage LC issued and outstanding under the Designated Usage LC sublimit or (ii) $25,000,000. The 2012 Credit Facility expires on August 9, 2016.


Borrowings under the 2012 Credit Facility bear interest, at the Company’s option, at the London interbank offering rate (“LIBOR”) plus a margin rate ranging from 1.25% to 2.0%, or the higher of a Base Rate plus a margin rate ranging from 0.25% to 1.0%. The Base Rate is equal to the highest of (i) the Federal Funds Open Rate plus 0.5% and (ii) the Prime Rate and (iii) the Daily Libor Rate plus 1%. The margin rates are based on certain leverage ratios, as defined. The Company is subject to compliance with certain financial covenants set forth in the 2012 Credit Facility, including, but not limited to, indebtedness to EBITDA, as defined, minimum levels of fixed charges and limitations on capital expenditures, as defined. Availability under the 2012 Credit Facility is based upon the Company’s trailing twelve month EBITDA, as defined.


The Company’s obligations under the 2012 Credit Facility are secured by the grant of security interests in substantially all of its assets.


On March 11, 2013, the Company entered into a First Amendment (the “First Amendment”) to the 2012 Credit Facility. The First Amendment, among other things, (a) amends the Letter of Credit (“LC”) sublimit amount to the lesser of (i) an amount equal to $5,000,000 plus the aggregate amount of Designated Usage LC issued and outstanding under the Designated Usage LC sublimit or (ii) $25,000,000 and (b) allows the Company to enter into foreign currency exchange services with Loan Parties on an unsecured basis and that such obligations shall not exceed at any time an aggregate amount equal to $3,500,000.





On May 28, 2013 a letter of credit in the amount of $8,564,000 was issued in favor of the Environmental Protection Agency (“EPA”) to provide financial assurance related to the Company’s environmental payments in accordance with the terms of the Consent Decree reached with the United States Department of Justice (“DOJ”) and EPA related to its liability for both OU-1 and OU-2 (see Note 16 for additional information). The letter of credit requires an annual commitment fee of 0.125% and standby commission of 1%, and does not reduce amounts available under the 2012 Credit Facility.


On June 20, 2013, the Company entered into a Second Amendment and Joinder to Credit Agreement and to Security Agreement (the “Second Amendment”), which amends the 2012 Credit Facility in order to reflect the Reincorporation of the Company. The Second Amendment, among other things, joins the Company as a “Borrower” under the Credit Agreement and a “Debtor” under the Security Agreement entered into by SL-NJ in connection with the 2012 Credit Facility.


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On May 20, 2014, the Company made the second payment related to its obligation under the Consent Decree in the amount of $2,141,000, excluding interest. As a result, the total liability under the letter of credit equaled $6,423,000 as of December 31, 2014. The letter of credit expires on May 28, 2015, and is renewed annually.


On September 15, 2014, the Company entered into a Third Amendment and Joinder to Credit Agreement and to Security Agreement (the “Third Amendment”) that amended the terms of the 2012 Credit Facility. The Third Amendment, among other things, joined SLMTI DS as a borrower and debtor under the 2012 Credit Facility following consummation of the Dynetic Acquisition, and increases the permitted amount of foreign currency exchange services to the borrowers and guarantors under the 2012 Credit Facility, which are to be provided on an unsecured basis, to a notional contract amount of such obligations not to exceed at any time an aggregate amount equal to $15,500,000. Also, the Third Amendment allows the Company, in certain circumstances, to make investments not to exceed $1,000,000 at any one time during the term of the 2012 Credit Facility.


As of December 31, 2014, the Company had no outstanding balance under the 2012 Credit Facility. As of December 31, 2013, the Company had an outstanding balance of $1,000,000 under the 2012 Credit Facility. At December 31, 2014, and December 31, 2013, the Company had total availability under the 2012 Credit Facility of $39,527,000 and $38,526,000, respectively.





Note 13. Accrued Liabilities – Other


Accrued liabilities – other consist of the following:





December 31,20142013(in thousands)Taxes (other than income) and insurance$879$769Commissions551645Litigation and legal fees91121Other professional fees496624Environmental9,4754,589Warranty1,1761,145Deferred revenue4454Acquisition earn-out, current32107Other3,7222,205Accrued liabilities - other$16,466$10,259


Included in the environmental accrual are estimates for all known costs believed to be probable and reasonably estimable for sites that the Company currently operates or operated at one time (see Note 16 for additional information).


A liability is established for estimated future warranty and service claims that relate to current and prior period sales. The Company estimates warranty costs based on historical claim experience and other factors including evaluating specific product warranty issues.


The following is a summary of activity in accrued warranty and service liabilities:





December 31,20142013(in thousands)Liability, beginning of year$1,145$1,102Expense for new warranties issued818757Adjustments for discontinued operations(1)(205)(5)Warranty claims paid(582)(709)Liability, end of period$1,176$1,145





|    |                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On November 17, 2014, SL Delaware Holdings., a wholly-owned subsidiary of the Company, entered into the Purchase Agreement with Hubbell pursuant to which SL Delaware Holdings sold all of the issued and outstanding capital stock of RFL to Hubbell for aggregate cash consideration of

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$20,000,000, subject to a post-closing working capital adjustment which amounted to $299,000 and was received in February 2015. The Company concluded that the accounting requirements for reporting the results of operations of the divested business as discontinued operations were met at November 17, 2014. As a result, the results of operations for the periods presented have been recast to reflect the formerly owned RFL businesses as discontinued operations.





Note 14. Other Long-Term Liabilities


Other long-term liabilities consist of the following:





December 31,20142013(in thousands)Environmental$7,384$17,200Unrecognized tax benefits, interest and penalties549934Long-term incentive plan558322Acquisition earn-out, long-term2889Other long-term liabilities$8,779$18,465


Note 15. Retirement Plans And Deferred Compensation


During the years ended December 31, 2014, December 31, 2013 and December 31, 2012, the Company maintained a defined contribution pension plan covering all full-time, U.S. employees of SL Power Electronics Corp. (“SLPE”), the High Power Group, including TEAL and MTE Corporation (“MTE”), SL-MTI, and the corporate office. The Company’s contributions to this plan are based on a percentage of employee contributions and/or plan year gross wages, as defined. Costs incurred under these plans during 2014, 2013 and 2012 amounted to approximately $551,000, $406,000, and $510,000, respectively. The reduction in costs incurred in 2013 compared to 2012 was primarily due to the Company utilizing funds from forfeitures to reduce the Company’s contribution.


The Company has agreements with certain retired directors, officers and key employees providing for supplemental retirement benefits. The liability for supplemental retirement benefits is based on the most recent mortality tables available and discount rates ranging from 6% to 12%. The amount charged to expense in connection with these agreements amounted to $327,000, $313,000 and $399,000 for 2014, 2013 and 2012, respectively.


Note 16. Commitments And Contingencies


Leases: The Company is a party to certain operating leases for facilities, equipment and vehicles from third parties, which expire through 2020. During 2013, the Company’s RFL segment was party to a capital lease with a third party for production equipment which was scheduled to expire in 2018. During 2014, the leased equipment was purchased prior to the divestiture of RFL.





The minimum rental commitments for capital leases and operating leases as of December 31, 2014 are as follows:





OperatingLeases(in thousands)2015$1,83120161,26620171,19820184222019418Thereafter428Total minimum lease payments$5,563


For 2014, 2013 and 2012, rental expense from continuing operations equaled $1,934,000, $1,955,000 and $2,061,000, respectively.


Letters Of Credit: As of December 31, 2014 and December 31, 2013, the Company was contingently liable for $473,000 and $474,000, respectively, under an outstanding letter of credit issued for casualty insurance requirements.


As of December 31, 2014 and December 31, 2013, the Company was contingently liable for $6,423,000 and $8,564,000, respectively, under an outstanding letter of credit issued to provide financial assurance related to the Company’s environmental payments in accordance with the terms of the Consent Decree reached with the DOJ and EPA related to its liability for both OU-1 and OU-2.


Litigation: The Company has been and is the subject of administrative actions that arise from its ownership of SL Surface Technologies, Inc. (“SurfTech”), a wholly-owned subsidiary, the assets of which were sold in November 2003. SurfTech formerly operated chrome-plating facilities in Pennsauken Township, New Jersey (the “Pennsauken Site”) and Camden, New Jersey (the “Camden Site”).


In 2006 the United States Environmental Protection Agency (the “EPA”) named the Company as a potential responsible party (a “PRP”) in connection with the remediation of the Puchack Well Field, which has been designated as a Superfund Site. The EPA is remediating the Puchack Well Field Superfund Site in two separate operable units. The first operable unit (“OU-1”) consists of an area of chromium groundwater contamination in three aquifers that exceeds the selected cleanup standard. The second operable unit (“OU-2”) pertains to sites that are allegedly the sources of contamination for the first operable unit.


The Company has reached an agreement with both the United States Department of Justice (“DOJ”) and EPA effective April 30, 2013 related to its liability for both OU-1 and OU-2 pursuant to the terms of a Consent Decree which governs the agreement. Specifically, the Company has agreed to perform the remediation for OU-2 and pay a fixed sum for the EPA’s past cost for OU-2 and a portion of the EPA’s past cost for OU-1. The payments are to be made in five equal payments of $2,141,000, for a total $10,705,000, plus interest. The Company has also agreed to pay the EPA’s costs for oversight of the OU-2 remediation. The United States District Court judge signed the Consent Decree effective April 30, 2013, thereby triggering the Company’s obligation under the Consent Decree. On May 10, 2013, the Company made the first payment related to its obligation under the Consent Decree in the amount of $2,185,000, which included interest. On May 20, 2014, the Company made the second payment related to its obligation under the Consent Decree in the amount of $2,211,000, which included interest. The next three payments will be made on the anniversary of the prior year’s payment plus ten days in the same amount of $2,141,000, plus interest. In 2013, the Company had obtained financial assurances for the OU-2 remediation and the fixed payments as required by the terms of the Consent Decree. The financial assurance is reduced annually as the fixed


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payments are made. Also, the financial instruments did not affect the Company’s availability under its Credit facility (see Note 12 Debt).


The Company has completed the final stages of the design phase of the remediation activities for OU-2. The “100% Remediation Design” (the “Final Design”) was finalized in November 2014. The Final Design, was approved by the EPA in January 2015. The Final Design essentially sets the scope of work for the Company’s remediation responsibility related to OU-2 under the terms of the Consent Decree. The Company’s consultants performed a significant amount of work during 2014, which included demolition of the Company’s former facility and a building on an adjacent property, shoring, equipment mobilization and set in-place the main components of the on-site soil processing batch plant. The Company’s consultants have been providing the EPA with progress reports during the year, prior to submission of the Final Design. The Company expects to incur significant remediation costs in 2015, which have been accrued.


Other


In the ordinary course of its business the Company is and may be subject to other loss contingencies pursuant to foreign and domestic federal, state and local governmental laws and regulations and may be party to certain legal actions, frequently involving complaints by terminated employees and disputes with customers, suppliers and others. In the opinion of management, any such other loss contingencies are not expected to have a material adverse effect on the financial condition or results of operations of the Company.


Environmental Matters : Loss contingencies include potential obligations to investigate and eliminate or mitigate the effects on the environment of the disposal or release of certain chemical substances at various sites, such as Superfund sites and other facilities, whether or not they are currently in operation. The Company is currently participating in environmental assessments and cleanups at a number of sites and in the future may be involved in additional environmental assessments and cleanups. Based upon investigations completed to date by the Company and its independent engineering-consulting firms, management has provided an estimated accrual for all known costs believed to be probable and costs that can be reasonably estimated in the amount of $16,859,000, of which $7,384,000 is included as other long-term liabilities, with the remainder recorded as other short-term accrued liabilities, as of December 31, 2014. However, it is the nature of environmental contingencies that other circumstances might arise, the costs of which are indeterminable at this time due to such factors as changing government regulations and stricter standards, the unknown magnitude of cleanup costs, and the unknown timing and extent of the remedial actions that may be required. These other circumstances could result in additional expenses or judgments, or offsets thereto. The adverse resolution of any one or more of these other circumstances could have a material adverse effect on the business, operating results, financial condition or cash flows of the Company. The Company’s environmental costs primarily relate to discontinued operations and such costs have been recorded in discontinued operations, net of tax.





There are three sites on which the Company may incur material environmental costs in the future as a result of past activities of its former subsidiary, SurfTech. There are two Company owned sites related to its former subsidiary, SurfTech. These sites are located in Pennsauken, New Jersey (the “Pennsauken Site”) and in Camden, New Jersey (the “Camden Site”). There is also a third site, which is not owned by the Company, referred to as the “Puchack Well Field Site.” The Puchack Well Field Site and the Pennsauken Site are part of the Puchack Well Field Superfund Site.


With respect to the Camden Site, the Company has reported soil contamination and a groundwater contamination plume emanating from the site. The New Jersey Department of Environmental Protection (“NJDEP”) approved, and the Company implemented in 2010, an interim remedial action pilot study to inject neutralizing chemicals into the unsaturated soil. Based on an assessment of post-injection data, our consultants believe the pilot study can be implemented as a full scale soil remedy to treat unsaturated contaminated soil. A Remedial Action Workplan (“RAWP”) for soils is being developed. The RAWP will select the injection remedy as the site wide remedy for unsaturated soils, along with demolition and proper disposal of the former concrete building slab and targeted excavation and disposal of impacted soil immediately underlying the slab. Additionally, the RAWP will address a small area of impacted soil off the property. The RAWP for soils is expected to be submitted to the NJDEP in the first quarter of 2015, by the Licensed Site Remediation Professional (“LSRP”) for the site. The RAWP for treatment of unsaturated soils is scheduled to be implemented in the third quarter of 2015. The Company’s environmental consultants also implemented an interim remedial action pilot study to treat on-site contaminated groundwater, which consisted of injecting food-grade product, into the groundwater at the down gradient property boundary, to create a “bio-barrier.” Post-injection groundwater monitoring to assess the bio-barrier’s effectiveness was completed. Consistent decreases in target contaminants concentrations in groundwater were observed. In December 2014, a report was submitted to the NJDEP stating sufficient information was obtained from the pilot study to complete the full scale groundwater remedy design. A Remedial Action Report/Remedial Action Workplan for full scale implementation will be provided to the NJDEP in 2015.


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As previously reported, the Company is currently participating in environmental assessments and cleanups at a number of sites. One of these sites is a commercial facility, located in Wayne, New Jersey. Contaminated soil and groundwater has undergone remediation with NJDEP and LSRP oversight, but contaminants of concern (“COCs”) in groundwater and surface water, which extend off-site, still remain above applicable NJDEP remediation standards. A soil remedial action plan has been developed to remove the new soil source contamination that continues to impact groundwater. Our LSRP completed a supplemental groundwater remedial action, pursuant to a RAWP filed with, and permit approved by, the NJDEP. The remedial action consisted of additional in-situ injections of food grade product into on-site groundwater and post-performance groundwater monitoring. The in-situ injections are completed, and remedial action performance monitoring for groundwater is scheduled to occur through 2015. Enhancements to the existing vapor intrusion system were completed in the fourth quarter 2014. The Company’s consultants have developed cost estimates for supplemental remedial injections, soil excavation and additional tests and remedial activities. Costs related to this site are recorded as part of discontinued operations, net of tax. The “Remedial Investigation” deadline for this site has been extended to May 7, 2016.





The Company’s sale of RFL triggered certain requirements of the Industrial Site Recovery Act or (“ISRA”), which applies to New Jersey statutorily defined transactions involving industrial establishments. Under the stock purchase agreement pursuant to which RFL was sold (the “RFL-SPA”), the Company agreed to undertake, or cause to undertake, all actions necessary to comply with ISRA arising from the RFL-SPA. The Company hired an LSRP to complete a Preliminary Assessment. Based on the Preliminary Assessment, the LSRP recommended the completion of a site investigation (the “Site Investigation”) for certain areas of concern. The LSRP completed most of the Site Investigation in January 2015, and the remainder of the investigation is scheduled to be completed by April 2015. A Preliminary Assessment Report and Site Investigation Report are scheduled to be filed with the NJDEP by no later than November 17, 2015. The Company may then be obligated to perform additional investigation or remediation, depending on the outcome of the Site Investigation.


The Company has reported soil and groundwater contamination at the facility of SL-MTI located on its property in Montevideo, Minnesota. An analysis of the contamination has been completed and a remediation plan has been implemented at the site pursuant to the remedial action plan approved by the Minnesota Pollution Control Agency (“MCPA”). A soil vapor extraction system has been operating at the site since October 2008. In 2013 the regulatory and screening levels for soil vapor and groundwater were lowered for some of the contaminants at the site. In response to this regulatory change, SL-MTI’s consultants are conducting additional testing to delineate site impacts and update the site conceptual model. A work plan was submitted to MPCA and approved on September 22, 2014. Pending the results of work performed during 2015, additional investigations or remedial actions may be required in the future. Costs related to this site are recorded as a component of continuing operations.


As of December 31, 2014 and December 31, 2013, environmental accruals of $16,859,000 and $21,789,000, respectively, have been recorded by the Company in accrued liabilities – other and in other long-term liabilities, as appropriate (see Notes 13 and 14 for additional information).


Employment Agreements : During 2010, the Company entered into severance agreements with certain key employees that provide for one-time payments in the event the employee is terminated within twelve months of a change-of-control, as defined. These payments equal twelve months of the employee’s base salary as of the termination date, as defined. If a triggering event had taken place in 2014 and if these employees had been terminated during the year, the payments would have aggregated approximately $717,000 under such change-of-control agreements.


Note 17. Foreign Operations


In addition to manufacturing operations in California, Minnesota, and Wisconsin, the Company manufactures substantial quantities of products in premises leased in Mexicali, Mexico, Matamoros, Mexico, Tecate, Mexico, and Xianghe, China. SLPE manufactures most of its products in Mexico and China. TEAL, which is part of the High Power Group, has transferred the majority of its manufacturing to a wholly-owned subsidiary located in Mexico. SL-MTI manufactures a significant portion of its products in Mexico. These external and foreign sources of supply present risks of interruption for reasons beyond the Company’s control, including political or economic instability and other uncertainties.





Generally, the Company’s sales are priced and invoiced in U.S. dollars and its costs and expenses are priced in U.S. dollars, Mexican pesos and Chinese yuan. The Mexican subsidiaries of SLPE, the High Power Group and SL-MTI maintain their books and records in Mexican pesos. SLPE’s subsidiaries in China maintain their books and records in Chinese yuan; however, most of their sales are invoiced in U.S. dollars. Business operations conducted in Mexico or China incur their respective labor costs and supply expenses in Mexican pesos and Chinese yuan, as the case may be.


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The competitiveness of the Company’s products relative to locally produced products may be affected by the performance of the U.S. dollar compared with that of its foreign customers’ and competitors’ currencies. Foreign net sales comprised 30%, 22% and 20% of net sales from continuing operations for 2014, 2013 and 2012, respectively. Additionally, the Company is exposed to foreign currency exchange rate fluctuations, which may result from fluctuations in the value of the Mexican peso and Chinese yuan versus the U.S. dollar (see Note 19 for additional information).


As a result of a work stoppage at the Company’s Xianghe manufacturing facilities from March 7, 2013 through March 20, 2013, revenues for the quarter ended March 31, 2013 were adversely impacted by approximately $900,000. The Company realized those sales during the second quarter of 2013. Additionally, certain incremental costs were incurred during 2013 related to the work stoppage, including employee, travel, consulting and legal costs of $675,000. No incremental costs were incurred during 2014.


Note 18. Fair Value Measurement And Financial Instruments


ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.


ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).


Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.





Currently, the Company uses foreign currency forward contracts to hedge its foreign currency risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including spot rates and market forward points. The fair value of the foreign currency forward contracts is based on interest differentials between the currencies being traded, spot rates and market forward points.


To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees, where applicable.


Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2014, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.


In conjunction with its implementation of updates to the fair value measurements guidance, the Company made an accounting policy election to measure derivative financial instruments subject to master netting agreements on a net basis.


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During the third quarter of 2013, the Company purchased publicly traded equity securities which had been classified as available-for-sale securities. Fair values for these investments were based on closing stock prices from active markets for identical assets and therefore were classified within Level 1 of the fair value hierarchy. The fair value of available-for-sale securities was included in other current assets in the Company’s Consolidated Balance Sheets at December 31, 2013 (see Note 10 for additional information). During 2014, the Company sold all of its available-for-sale securities.





The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2014 and December 31, 2013, aggregated by the level in the fair value hierarchy within which those measurements fall:





Quoted Prices in ActiveMarkets for Identical Assetsand Liabilities (Level 1)Significant OtherObservableInputs (Level 2)SignificantUnobservableInputs (Level 3)Balance atDecember 31, 2014(in thousands)LiabilitiesDerivative financial instruments$—$673$—$673Quoted Prices in ActiveMarkets for Identical Assetsand Liabilities (Level 1)Significant OtherObservableInputs (Level 2)SignificantUnobservableInputs (Level 3)Balance atDecember 31, 2013(in thousands)AssetsAvailable-for-sale securities$4,101$—$—$4,101Derivative financial instruments—152—152Total Assets$4,101$152$—$4,253


The Company believes that the fair values of its current assets and current liabilities (cash and cash equivalents, receivables, net, short-term borrowings and current portion of long-term debt, accounts payable, and accrued liabilities) and the fair value of its long-term debt, less current maturities, approximate their reported carrying amounts.


During 2014, the Company did not have any fair value measurements that used significant unobservable inputs (Level 3). During 2013, in connection with the Company’s annual impairment test, goodwill with a carrying amount of $5,055,000 was written down to its implied fair value of zero. This resulted in a $5,055,000 goodwill impairment charge that was recorded in goodwill impairment expense in the High Power Group segment on the Consolidated Statements of Income. The nonrecurring fair value measurement was developed using significant unobservable inputs (Level 3). The fair value was computed using a combination of a discounted cash flow valuation methodology and comparative market multiples methodology (see Note 9 of the Consolidated Financial Statements).


Credit Risk Contingent Features


The Company has agreements with its derivative counterparties that contain a provision where if the Company defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.


Note 19. Derivative Instruments And Hedging Activities


ASC Topic 815, as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by ASC Topic 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to variability in expected future cash flows related to forecasted foreign exchange-based risk are considered economic hedges of the Company’s forecasted cash flows.








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Risk Management Objective of Using Derivatives


The Company is a USD functional currency entity that manufactures products in the USA, Mexico and China. The Company’s sales are priced in U.S. dollars and its costs and expenses are priced in U.S. dollars, Mexican peso (MXN) and Chinese yuan (CNH). As a result, the Company has exposure to changes in exchange rates between the time when expenses in the non-functional currencies are initially incurred and the time when the expenses are ultimately paid. The Company’s objective in using derivatives is to add stability and to manage its exposure to foreign exchange risks. To accomplish this objective, the Company uses foreign currency forward contracts to manage its exposure to fluctuations in the exchange rates. Foreign currency forward contracts involve fixing the USD-MXN and USD-CNH exchange rates for delivery of a specified amount of foreign currency on a specified date.


Since 2012, the Company has entered into a series of foreign currency forward contracts to hedge its exposure to foreign exchange rate movements in its forecasted expenses in China and Mexico. The foreign currency forwards are not speculative and are being used to manage the Company’s exposure to foreign exchange rate movements. Foreign currency forward contracts involve fixing the USD-MXN and USD-CNH exchange rates for delivery of a specified amount of foreign currency on a specified date. The Company has elected not to apply hedge accounting to these derivatives and they are marked to market through earnings. Therefore, gains and losses resulting from changes in the fair value of these contracts are recognized at the end of each reporting period directly in earnings. The gains and losses associated with the foreign currency forward contracts are included in other gain (loss), net on the Consolidated Statements of Income. As of December 31, 2014, the fair value of the foreign currency forward contracts was recorded as a $673,000 liability in other current liabilities on the Consolidated Balance Sheets. As of December 31, 2013, the fair value of the foreign currency forward contracts was recorded as a $152,000 asset in other current assets on the Consolidated Balance Sheets.


Non-designated Hedges of Foreign Exchange Risk


The notional amounts are used to measure the volume of foreign currency forward contracts and do not represent exposure to foreign currency losses. The following table summarizes the notional values of the Company’s derivative financial instruments as of December 31, 2014:





ProductNumber of InstrumentsNotional(in thousands)Mexican Peso (MXN) Forward Contracts18MXN124,703Chinese Yuan (CNH) Forward Contracts18CNH80,950


The following table details the location in the financial statements of the gain or loss recognized on foreign currency forward contracts that are marked to market for the twelve months ended December 31, 2014 , December 31, 2013, and December 31, 2012:





Amount of Gain (Loss) Recognized in Income on DerivativeDerivatives Not Designated as HedgingInstrumentsLocation of Gain (Loss) Recognizedin Income on DerivativeYear EndedDecember 31,2014Year EndedDecember 31,2013Year EndedDecember 31,2012(in thousands)Foreign Exchange ContractsOther gain (loss), net$(825)$(90)$243





Note 20. Shareholders’ Equity


On November 16, 2010, the Board of Directors authorized a plan that allows for the repurchase up to an aggregate of 470,000 shares of the Company’s outstanding common stock (the “2010 Repurchase Plan”). Any repurchases pursuant to the 2010 Repurchase Plan would be made in the open market or in negotiated transactions. During 2014, the Company purchased approximately 4,000 shares of Company stock at an average price of $24.68 a share under the 2010 Repurchase Plan. During 2013, the Company purchased approximately 87,000 shares of Company stock at an average price of $23.99 a share under the 2010 Repurchase Plan.


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On December 24, 2014, the Board of Directors authorized a plan that allows for the repurchase up to an aggregate of 420,000 shares of the Company’s outstanding common stock (the “2014 Repurchase Plan”). The 2014 Repurchase Plan supersedes the 2010 Repurchase Plan. Any repurchases pursuant to the 2014 Repurchase Plan would be made in the open market or in negotiated transactions. No purchases were made under the 2014 Repurchase Plan during 2014. As of December 31, 2014, 420,000 shares remained available for purchase under the 2014 Repurchase Plan. Currently, the 2014 Repurchase Plan has no expiration date (see Note 27 for additional information).


Note 21. Stock-Based Compensation


At December 31, 2014, the Company had stock-based employee compensation plans as described below. For the years ended December 31, 2014, December 31, 2013, and December 31, 2012, the total compensation expense (included in selling, general and administrative expense) related to these plans was $768,000, $545,000, and $842,000 ($513,000, $395,000, and $605,000, net of tax), respectively.


During 2011, the shareholders of the Company approved amendments to the previously approved 2008 Incentive Stock Plan (the “2008 Plan”) to: (a) increase the number of shares of the Company’s common stock subject to the 2008 Plan from 315,000 shares to 450,000 shares, and (b) require shareholder approval prior to the reduction of the exercise price of any outstanding options or stock appreciation rights, any repricing through cancellations and re-grants of new options or stock appreciation rights, or any cancellation of outstanding options or stock appreciation rights with an exercise price above the current stock price in exchange for cash or other securities. On May 12, 2014, the shareholders of the Company approved an amendment to the 2008 Plan to increase number of shares of Common Stock subject to the 2008 Plan from 450,000 shares to 500,000 shares. As of December 31, 2014, there were 184,000 options outstanding under the 2008 Plan. As of December 31, 2014, there were 116,000 shares available for grant under the 2008 Plan.


During the first quarter of 2012, the Company implemented a Long-Term Incentive Plan (the “2012 LTIP”) pursuant to the 2008 Plan which awarded restricted stock units (“RSUs”) to eligible executives. Under the terms of the 2012 LTIP, the number of RSUs that may vest, if any, will be based on, among other things, the Company achieving certain sales and return on invested capital (“ROIC”), as defined, targets during the January 2012 to December 2014 performance period. Earned RSUs, if any, cliff vest at the end of fiscal 2014 (100% of earned RSUs vest at December 31, 2014). The final value of these RSUs will be determined by the number of shares earned. The value of these RSUs is charged to compensation expense on a straight-line basis over the three year vesting period with periodic adjustments to account for changes in anticipated award amounts. The weighted-average price for these RSUs was $18.00 per share based on the grant date of February 17, 2012. During 2014, $10,000 was charged to compensation expense. At December 31, 2014, 6,000 RSUs were earned under the 2012 LTIP.





During the first quarter of 2013, the Company implemented a Long-Term Incentive Plan (the “2013 LTIP”) pursuant to the 2008 Plan which had similar conditions and vesting terms as the 2012 LTIP. The weighted-average price for these RSUs was $19.17 per share based on the grant date of March 5, 2013. During the year ended December 31, 2014, $62,000 was charged to compensation expense. As of December 31, 2014, total unamortized compensation expense for this grant was $77,000. As of December 31, 2014, the maximum number of achievable RSUs under the 2013 LTIP was 18,000 RSUs.


During the first quarter of 2014, the Company implemented a Long-Term Incentive Plan (the “2014 LTIP”) pursuant to the 2008 Plan which had similar conditions and vesting terms as the 2012 LTIP. The weighted-average price for these RSUs was $26.24 per share based on the grant date of March 3, 2014. During the year ended December 31, 2014, $112,000 was charged to compensation expense. As of December 31, 2014, total unamortized compensation expense for this grant was $295,000. As of December 31, 2014, the maximum number of achievable RSUs under the 2014 LTIP was 20,000 RSUs.


On May 9, 2013, the Company granted each Director 3,000 restricted shares pursuant to the 2008 Plan. The weighted-average price of these restricted stock grants was $20.60 per share based on the grant date of May 9, 2013. All shares vested and were granted under this award on May 9, 2014.


During the first quarter of 2014, the Company granted 91,000 stock options to two officers of the Company under the 2008 Incentive Stock Plan (the “2008 Plan”). The options issued vest in two equal installments each on the second and third anniversary of the grant date. The options granted are exercisable no later than 5 years after the grant date. Compensation expense is recognized straight-line over the vesting period of the options.


During the first quarter of 2014, the Company granted 10,000 stock options to a key executive under the 2008 Plan. The options issued vest in three equal installments each on the first, second and third anniversary of the grant date. The options granted are exercisable no later than 10 years after the grant date. Compensation expense is recognized straight-line over the vesting period of the options.


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On May 12, 2014, the Company granted each Director 3,000 restricted shares pursuant to the 2008 Plan. The shares vest upon the first anniversary of the grant date. Based on the terms of the awards the value of these restricted shares is charged to compensation expense on a straight-line basis over the one year vesting period. As a result, the Company recognized $257,000 of stock compensation expense during the year ended December 31, 2014. As of December 31, 2014, total unamortized compensation expense for this grant was $145,000. The weighted-average price of these restricted stock grants was $26.79 per share based on the grant date of May 12, 2014. As of December 31, 2014, no shares were granted under this award.


The Company uses the Black-Scholes option pricing model to value all stock options. Volatility is determined using changes in historical stock prices. The weighted average expected life computation is based on historical exercise patterns and post-vesting termination behavior. The interest rate for periods within the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.





The fair value of all option grants was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values as follows:





Year EndedDecember 31,2014Weighted average fair value of grants$9.00Valuation assumptions:Expected dividend yield—%Expected volatility47.62%Expected life (in years)3.35Risk-free interest rate0.83%


No stock options were granted during fiscal 2013 and 2012.


Stock Options


Option activity under the principal option plans as of December 31, 2014 and changes during the year then ended were as follows:





Shares(in thousands)Weighted-AverageExercise PriceWeighted-AverageRemainingContractual Term(in years)AggregateIntrinsicValue(in thousands)Outstanding as of December 31, 2012135$12.794.33$670Granted——Exercised(52)14.03Forfeited——Expired——Outstanding as of December 31, 201383$11.993.28$1,247Granted10126.02Exercised——Forfeited——Expired——Outstanding as of December 31, 2014184$19.713.59$3,540Exercisable as of December 31, 201483$11.992.28$2,228


The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of fiscal 2014 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2014. This amount changes based on the fair market value of the Company’s stock. No options were exercised


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during the year ended December 31, 2014. The total intrinsic value of options exercised for the years ended December 31, 2013 and December 31, 2012, were $642,000 and $161,000, respectively.


As of December 31, 2014, $656,000 of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.2 years.





Tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options are classified as financing cash flows. No options were exercised during the year ended December 31, 2014. Cash received from option exercises for the year ended December 31, 2013 and December 31, 2012 was $743,000 and $80,000, respectively. The actual tax benefit realized for the tax deduction from option exercises of the share-based payment units totaled $230,000 and $33,000 for the fiscal years ended December 31, 2013 and December 31, 2012. The Company has applied the “Short-cut” method in calculating the historical windfall tax benefits. All tax shortfalls will be applied against this windfall before being charged to earnings.


Note 22. Cash Flow Information


Supplemental disclosures of cash flow information:





Years Ended December 31,201420132012(in thousands)Interest paid$61$87$46Income taxes paid$4,734$3,579$2,997


For the years ended December 31, 2014 and December 31, 2013, net cash used in operating activities from discontinued operations was $9,920,000, $3,959,000, and $662,000, respectively. In 2014, net cash used in operating activities from discontinued operations was primarily related to a pre-tax gain of $6,650,000 ($4,322,000 net of tax) related to the sale of the Company’s formerly owned RFL segment (see Note 4 for additional information) and $5,902,000 of environmental payments (see Note 16 for additional information). In 2013 and 2012, net cash used in operating activities from discontinued operations was primarily related environmental payments.


For the year ended December 31, 2014, net cash provided by investing activities from discontinued operations was $17,783,000. For the years ended December 31, 2013, and December 31, 2012, net cash used in investing activities from discontinued operations was $416,000 and $170,000, respectively. In 2014, net cash provided by investing activities from discontinued operations was primarily related to $18,000,000 of cash proceeds from the sale of the Company’s formerly owned RFL subsidiary. In 2013 and 2012, net cash used in investing activities from discontinued operations was primarily related to purchases of property, plant and equipment by the Company’s formerly owned RFL segment.


Note 23. Industry Segments


The Company has historically operated under four business segments: SLPE, the High Power Group, SL-MTI and RFL. On November 17, 2014, the Company completed the sale of all the issued and outstanding capital stock of RFL and classified the results of operations of its RFL segment as discontinued operations. As a result, the Company currently operates under three business segments from continuing operations: SLPE, the High Power Group, and SL-MTI. TEAL and MTE are combined into one business segment, which is reported as the High Power Group.





The Company aggregates operating business subsidiaries into a single segment for financial reporting purposes if aggregation is consistent with the objectives of ASC 280 “Segment Reporting.” Business units are also combined if they have similar characteristics in each of the following areas:





|  |                                
|- | -------------------------------
|• | nature of products and services

|  |                             
|- | ----------------------------
|• | nature of production process

|  |                          
|- | -------------------------
|• | type or class of customer

|  |                        
|- | -----------------------
|• | methods of distribution

SLPE designs, manufactures and markets high-reliability power conversion products in internal and external footprints. The Company’s power supplies provide a reliable and safe power source for the customer’s specific equipment needs. SLPE, which sells products under three brand names (SL Power Electronics, Condor and Ault), is a major supplier to the original equipment


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manufacturers (“OEMs”) of medical, industrial/instrumentation, military and information technology equipment. The High Power Group sells products under two brand names (TEAL and MTE). TEAL designs and manufactures custom power conditioning and distribution units for OEMs of medical imaging, medical treatment, military aerospace, semiconductor, solar and advanced simulation systems. MTE designs and manufactures power quality products used to protect equipment from power surges, bring harmonics into compliance and improve the efficiency of variable speed motor drive systems. SL-MTI designs and manufactures high power density precision motors that are used in numerous applications, including military and commercial aerospace, oil and gas, and medical and industrial products. The Unallocated Corporate Expenses segment includes corporate related items, financing activities and other costs not allocated to reportable segments, which includes but is not limited to certain treasury, risk management, legal, litigation, public reporting costs, certain strategic costs, legacy costs and costs not specifically allocated to the reportable business segments. The accounting policies for the business units are the same as those described in the summary of significant accounting policies (see Note 1 for additional information).


Business segment operations are conducted through domestic subsidiaries. For all periods presented, sales between business segments were not material. No single customer accounted for more than 10% of consolidated net sales during 2014, 2013 or 2012. Each of the segments has certain major customers, the loss of any of which would have a material adverse effect on such segment.





Years Ended December 31,201420132012(in thousands)Net salesSLPE$74,593$78,177$77,869High Power Group85,33268,75265,283SL-MTI44,49237,72936,223Net sales$204,417$184,658$179,375





Years Ended December 31,201420132012(in thousands)Income from operationsSLPE$7,217$6,558$2,487High Power Group(1)12,1752,2066,822SL-MTI7,1707,2026,292Unallocated Corporate Expenses(2)(7,000)(5,731)(5,463)Income from operations19,56210,23510,138Amortization of deferred financing costs(94)(83)(138)Interest income13125Interest expense(27)(61)(23)Other gain (loss), net1,769(78)243Income from continuing operations before income taxes$21,223$10,025$10,225





|    |                                                                                                 
|--- | ------------------------------------------------------------------------------------------------
|(1) | Fiscal 2013 includes a $5,055,000 goodwill impairment charge related to the TEAL reporting unit.

|    |                                                                                                                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Unallocated Corporate Expenses includes corporate related items, financing activities and other costs not allocated to reportable segments, which includes but is not limited to certain treasury, risk management, legal, litigation, public reporting costs, certain strategic costs, legacy costs and costs not specifically allocated to the reportable business segments.

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December 31,20142013(in thousands)Total assetsSLPE$34,989$36,835High Power Group33,30629,506SL-MTI22,75214,601RFL—13,503Unallocated Corporate Assets40,72918,889Total assets$131,776$113,334December 31,20142013(in thousands)Goodwill and other intangible assets, netSLPE$4,530$4,528High Power Group9,8399,976SL-MTI2,491106RFL—5,402Goodwill and other intangible assets, net$16,860$20,012





Years Ended December 31,201420132012(in thousands)Capital expenditures(1)SLPE$1,287$1,076$386High Power Group700841613SL-MTI855513549Unallocated Corporate Expenses845Capital expenditures$2,850$2,434$1,553





|    |                                                                  
|--- | -----------------------------------------------------------------
|(1) | Excludes capital expenditures of the formerly owned RFL business.




Years Ended December 31,201420132012(in thousands)Depreciation and amortization(1)SLPE$702$743$926High Power Group835761926SL-MTI675494431Unallocated Corporate Expenses81213Depreciation and amortization$2,220$2,010$2,296





|    |                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes amortization of deferred financing costs. Also excludes depreciation and amortization of the formerly owned RFL business.

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Financial information relating to the Company’s segments by geographic area is as follows:





Years Ended December 31,201420132012(in thousands)Net sales(1)United States$143,784$144,739$143,733Foreign60,63339,91935,642Consolidated net sales$204,417$184,658$179,375Long-lived assets(2)United States$4,214$7,530$6,318Foreign3,8563,2603,275Consolidated long-lived assets$8,070$10,790$9,593





|    |                                                                     
|--- | --------------------------------------------------------------------
|(1) | Net sales are attributed to countries based on location of customer.

|    |                                                                 
|--- | ----------------------------------------------------------------
|(2) | Includes net tangible assets excluding goodwill and intangibles.

Note 24. Restructuring Costs


Restructuring activity for the period ended December 31, 2014 was as follows:





Accrual atBeginning of theYearCharged toEarningsCash PaymentsAccrual atDecember 31, 2014(in thousands)2014 PlanSeverance and other employee-related charges$—$463$463$—


No restructuring activity was recognized during the period ended December 31, 2013.





2014 Restructuring Plan


During the first quarter of 2014, the Company announced to its employees a restructuring plan (“2014 Plan”) to align its costs with current and projected sales activity. The costs reductions were primarily production, engineering, selling and administration employees at TEAL, which is part of the High Power Group. As of December 31, 2014, there was a consolidated charge to earnings of $463,000, which was composed of severance and other employee related charges. The total number of employees affected by the restructuring plan was 11, all of which had been terminated during the first quarter of 2014.


2012 Restructuring Plan


During the third quarter of 2012, the Company announced to its employees a restructuring plan (“2012 Plan”) to align its costs with current and projected sales activity. The costs reductions were primarily direct labor employees and engineering, selling and administration employees at SLPE and TEAL, which is part of the High Power Group. During the year ended December 31, 2012, there was a consolidated charge to earnings of $790,000, which was comprised of a $732,000 charge at SLPE and a $58,000 charge at TEAL. The charges are composed of severance and other employee related charges. The total number of employees affected by the restructuring plan was 55, all of which had been terminated as of December 31, 2012.


Note 25. Related Party Transactions


On May 1, 2014, the Company renewed the Management Services Agreement (“Management Services Agreement”) with SP Corporate Services LLC (“SP Corporate”). SP Corporate is an affiliate of SPH Group Holdings LLC (“SPHG”). A member of the Company’s Board of Directors, Warren G. Lichtenstein, is affiliated with SPHG. Also, the Company’s Chairman of the Board, Glen M. Kassan is affiliated with SPHG. Pursuant to the Management Services Agreement, SP Corporate agreed to provide, at the direction of the Company’s Chief Executive Officer, non-exclusive services to support the Company’s growth strategy, business development, planning, execution assistance and related support services. The monthly fee for these services


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is $10,400 paid in advance. The Management Services Agreement has a term of one year and has been approved by the Audit Committee of the Board of Directors and a majority of the disinterested directors of the Company.


Note 26. Selected Quarterly Financial Data (Unaudited)





Three MonthsEndedMarch 31, 2014(1)Three MonthsEndedJune 30, 2014(1)Three MonthsEndedSeptember 30, 2014(1)Three MonthsEndedDecember 31, 2014Twelve MonthsEndedDecember 31, 2014(in thousands, except per share data)Net sales$48,746$51,669$50,725$53,277$204,417Cost of products sold$33,214$34,156$34,326$37,098$138,794Income from continuing operations before income taxes$4,171$7,998$4,211$4,843$21,223(Loss) income from discontinued operations, net of tax$(181)$183$400$4,313$4,715Net income$2,527$5,528$2,895$7,945$18,895Basic net income per common share$0.61$1.34$0.70$1.92$4.57Diluted net income per common share$0.61$1.33$0.69$1.89$4.51Three MonthsEndedMarch 31, 2013 (1)Three MonthsEndedJune 30, 2013 (1)Three MonthsEndedSeptember 30, 2013 (1)Three MonthsEndedDecember 31, 2013 (1)Twelve MonthsEndedDecember 31, 2013 (1)(in thousands, except per share data)Net sales$43,781$45,053$48,180$47,644$184,658Cost of products sold$29,783$30,505$33,540$32,604$126,432Income from continuing operations before income taxes(2)$2,996$2,904$3,880$245$10,025Income from discontinued operations, net of tax$374$18$218$152$762Net income$2,766$2,015$3,152$307$8,240Basic net income per common share$0.67$0.48$0.76$0.07$1.99Diluted net income per common share$0.66$0.48$0.75$0.07$1.97





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On November 17, 2014, SL Delaware Holdings., a wholly-owned subsidiary of the Company, entered into the Purchase Agreement with Hubbell pursuant to which SL Delaware Holdings sold all of the issued and outstanding capital stock of RFL to Hubbell for aggregate cash consideration of $20,000,000, subject to a post-closing working capital adjustment which amounted to $299,000 and was received in February 2015. The Company concluded that the accounting requirements for reporting the results of operations of the divested business as discontinued operations were met at November 17, 2014. As a result, the results of operations for the periods presented have been recast to reflect the formerly owned RFL businesses as discontinued operations.

|    |                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------
|(2) | Includes a $5,055,000 goodwill impairment charge related to the TEAL reporting unit, which is part of the High Power Group segment.

Note 27. Subsequent Events


On December 24, 2014, the Board of Directors authorized the 2014 Repurchase Plan, which allows for the repurchase up to an aggregate of 420,000 shares of the Company’s outstanding common stock. The 2014 Repurchase Plan supersedes the 2010 Repurchase Plan. Any repurchases pursuant to the 2014 Repurchase Plan would be made in the open market or in negotiated transactions. No purchases were made under the 2014 Repurchase Plan during 2014. As of February 27, 2015, the Company purchased approximately 62,000 shares of Company stock at an average price of $38.98 a share under the 2014 Repurchase Plan. As of February 27, 2015, approximately 358,000 shares remained available for purchase under the 2014 Repurchase Plan. Currently, the 2014 Repurchase Plan has no expiration date.


On March 10, 2015, Compass Directional Guidance, Inc. (“Compass”) filed a complaint (the “Complaint”) against SL-MTI in the District Court in Harris County, Texas. The Complaint seeks damages in excess of $18 million arising from the SL-MTI’s


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sale of certain brushless motors to Compass. Compass asserts that SL-MTI breached express and implied warranties, violated the Texas Deceptive Trade Practices Act, and negligently misrepresented the quality, specification and uses of its motors to Compass. SL-MTI intends to vigorously defend the claims asserted in the Complaint which it believes are limited by the contractual terms between the parties as well as the applicable statute of limitations, and are substantially without merit. The Company has notified its insurance carriers regarding this claim.


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