Attached files
file | filename |
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EX-31.2 - Measurement Specialties Inc | v209427_ex31-2.htm |
EX-31.1 - Measurement Specialties Inc | v209427_ex31-1.htm |
EX-32.1 - Measurement Specialties Inc | v209427_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(MARK
ONE)
x
QUARTERLY REPORT PURSUANT
TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR
THE FISCAL QUARTERLY PERIOD ENDED DECEMBER 31, 2010
OR
¨
TRANSITION REPORT
PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
COMMISSION
FILE NUMBER: 1-11906
MEASUREMENT
SPECIALTIES, INC.
(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
New Jersey
|
22-2378738
|
|
(STATE
OR OTHER JURISDICTION OF
INCORPORATION
OR ORGANIZATION)
|
(I.R.S.
EMPLOYER
IDENTIFICATION
NO. )
|
1000 LUCAS WAY, HAMPTON, VA
23666
(ADDRESS
OF PRINCIPAL EXECUTIVE OFFICES)
(757)
766-1500
(REGISTRANT’S
TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x
No ¨.
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files). Yes ¨ No
¨.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check
one):
Large
accelerated filer ¨
|
Accelerated
filer x
|
Non-accelerated
filer ¨
|
Smaller
reporting company ¨
|
(Do
not check if a smaller reporting
company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act of 1934). Yes ¨
No x.
Indicate
the number of shares outstanding of each of the issuer’s classes of stock, as of
the latest practicable date: At January 27, 2011, the number of
shares outstanding of the Registrant’s common stock was
14,955,961.
MEASUREMENT
SPECIALTIES, INC.
FORM
10-Q
TABLE OF
CONTENTS
DECEMBER
31, 2010
PART
I.
|
FINANCIAL
INFORMATION
|
3
|
|
ITEM
1.
|
FINANCIAL
STATEMENTS
|
3
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
|
3
|
||
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
4
|
||
CONDENSED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(UNAUDITED)
|
6
|
||
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
7
|
||
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
8
|
||
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
24
|
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
39
|
|
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
41
|
|
PART
II.
|
OTHER
INFORMATION
|
42
|
|
ITEM
1.
|
LEGAL
PROCEEDINGS
|
42
|
|
ITEM
1A.
|
RISK
FACTORS
|
42
|
|
ITEM
6.
|
EXHIBITS
|
42
|
|
SIGNATURES
|
43
|
2
ITEM
1. FINANCIAL STATEMENTS
MEASUREMENT
SPECIALTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(UNAUDITED)
Three Months Ended
December 31,
|
Nine months ended
December 31,
|
|||||||||||||||
(Amounts in thousands, except per share amounts)
|
2010
|
(As
Adjusted)
2009
|
2010
|
(As
Adjusted)
2009
|
||||||||||||
Net
sales
|
$ | 71,687 | $ | 53,595 | $ | 198,022 | $ | 145,256 | ||||||||
Cost
of goods sold
|
42,030 | 32,327 | 114,424 | 91,065 | ||||||||||||
Gross
profit
|
29,657 | 21,268 | 83,598 | 54,191 | ||||||||||||
Selling,
general, and administrative expenses
|
20,752 | 17,425 | 58,065 | 50,800 | ||||||||||||
Operating
income
|
8,905 | 3,843 | 25,533 | 3,391 | ||||||||||||
Interest
expense, net
|
753 | 905 | 2,395 | 3,092 | ||||||||||||
Foreign
currency exchange loss (gain)
|
(63 | ) | (64 | ) | 134 | (1,037 | ) | |||||||||
Equity
income in unconsolidated joint venture
|
(153 | ) | (118 | ) | (402 | ) | (328 | ) | ||||||||
Other
expense (income)
|
(24 | ) | 52 | 110 | 79 | |||||||||||
Income
before income taxes
|
8,392 | 3,068 | 23,296 | 1,585 | ||||||||||||
Income
tax expense (benefit)
|
893 | (196 | ) | 3,453 | (271 | ) | ||||||||||
Income
from continuing operations, net of income taxes
|
7,499 | 3,264 | 19,843 | 1,856 | ||||||||||||
Loss
from discontinued operations, net of income taxes
|
- | (16 | ) | - | (142 | ) | ||||||||||
Net
income
|
$ | 7,499 | $ | 3,248 | $ | 19,843 | $ | 1,714 | ||||||||
Earnings
per common share - Basic:
|
||||||||||||||||
Income
from continuing operations, net of income taxes
|
$ | 0.51 | $ | 0.22 | $ | 1.36 | $ | 0.13 | ||||||||
Loss
from discontinued operations
|
- | - | - | (0.01 | ) | |||||||||||
Net
income - Basic
|
$ | 0.51 | $ | 0.22 | $ | 1.36 | $ | 0.12 | ||||||||
Earnings
per common share - Diluted:
|
||||||||||||||||
Income
from continuing operations, net of income taxes
|
$ | 0.49 | $ | 0.22 | $ | 1.30 | $ | 0.13 | ||||||||
Loss
from discontinued operations
|
- | - | - | (0.01 | ) | |||||||||||
Net
income - Diluted
|
$ | 0.49 | $ | 0.22 | $ | 1.30 | $ | 0.12 | ||||||||
Weighted
average shares outstanding - Basic
|
14,684 | 14,504 | 14,609 | 14,492 | ||||||||||||
Weighted
average shares outstanding - Diluted
|
15,447 | 14,686 | 15,222 | 14,629 |
See
accompanying notes to condensed consolidated financial
statements.
3
MEASUREMENT
SPECIALTIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands)
|
December 31, 2010
|
(As Adjusted)
March 31, 2010
|
||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 30,716 | $ | 23,165 | ||||
Accounts
receivable trade, net of allowance for
|
||||||||
doubtful
accounts of $618 and $464, respectively
|
37,303 | 29,689 | ||||||
Inventories,
net
|
53,670 | 40,774 | ||||||
Deferred
income taxes, net
|
1,609 | 1,602 | ||||||
Prepaid
expenses and other current assets
|
3,878 | 3,148 | ||||||
Other
receivables
|
1,237 | 659 | ||||||
Income
taxes receivable
|
- | 1,287 | ||||||
Total
current assets
|
128,413 | 100,324 | ||||||
Property,
plant and equipment, net
|
48,439 | 44,437 | ||||||
Goodwill
|
116,067 | 99,235 | ||||||
Acquired
intangible assets, net
|
29,358 | 23,613 | ||||||
Deferred income taxes, net
|
6,994 | 6,607 | ||||||
Investment
in unconsolidated joint venture
|
2,410 | 2,117 | ||||||
Other
assets
|
1,642 | 939 | ||||||
Total assets
|
$ | 333,323 | $ | 277,272 |
See
accompanying notes to condensed consolidated financial
statements.
4
MEASUREMENT
SPECIALTIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands, except share amounts)
|
December 31, 2010
|
(As Adjusted)
March 31, 2010
|
||||||
LIABILITIES AND SHAREHOLDERS' EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Short-term
debt
|
$ | 5,000 | $ | 5,000 | ||||
Current
portion of long-term debt
|
161 | 2,295 | ||||||
Current
portion of capital lease obligations
|
80 | 193 | ||||||
Current
portion of promissory notes payable
|
2,657 | 2,349 | ||||||
Accounts
payable
|
19,505 | 17,884 | ||||||
Accrued
expenses
|
5,479 | 4,719 | ||||||
Accrued
compensation
|
10,777 | 7,882 | ||||||
Income
taxes payable
|
1,072 | - | ||||||
Deferred
income taxes, net
|
205 | 182 | ||||||
Other
current liabilities
|
3,089 | 3,064 | ||||||
Total
current liabilities
|
48,025 | 43,568 | ||||||
Revolver
|
56,746 | 53,547 | ||||||
Long-term
debt, net of current portion
|
20,873 | 6,488 | ||||||
Capital
lease obligations, net of current portion
|
16 | 63 | ||||||
Promissory
notes payable, net of current portion
|
2,657 | 2,349 | ||||||
Deferred
income taxes, net
|
6,828 | 2,969 | ||||||
Other
liabilities
|
1,335 | 1,292 | ||||||
Total
liabilities
|
136,480 | 110,276 | ||||||
Equity:
|
||||||||
Serial
preferred stock; 221,756 shares authorized; none
outstanding
|
- | - | ||||||
Common
stock, no par; 25,000,000 shares authorized; 14,906,596
|
||||||||
and
14,534,431 shares issued and outstanding, respectively
|
- | - | ||||||
Additional
paid-in capital
|
92,509 | 85,338 | ||||||
Retained
earnings
|
92,977 | 73,134 | ||||||
Accumulated
other comprehensive income
|
11,357 | 8,524 | ||||||
Total
equity
|
196,843 | 166,996 | ||||||
Total
liabilities and shareholders' equity
|
$ | 333,323 | $ | 277,272 |
See
accompanying notes to condensed consolidated financial statements.
5
MEASUREMENT
SPECIALTIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND
COMPREHENSIVE INCOME
FOR
THE NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009
(UNAUDITED)
Accumulated
|
Compre-
|
|||||||||||||||||||||||
Shares of
|
Additional
|
Other
|
hensive
|
|||||||||||||||||||||
Common
|
Paid-in
|
Retained
|
Comprehensive
|
Income
|
||||||||||||||||||||
(Dollars in thousands)
|
Stock
|
Capital
|
Earnings
|
Income
|
Total
|
(Loss)
|
||||||||||||||||||
Balance, March
31, 2009
|
14,483,622 | $ | 81,948 | $ | 67,218 | $ | 8,110 | $ | 157,276 | |||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||
Net
income
|
- | 1,714 | - | 1,714 | $ | 1,714 | ||||||||||||||||||
Currency
translation adjustment
|
- | - | 4,040 | 4,040 | 4,040 | |||||||||||||||||||
Comprehensive
income
|
$ | 5,754 | ||||||||||||||||||||||
Non-cash
equity based compensation
|
2,275 | - | - | 2,275 | ||||||||||||||||||||
Amounts
from exercise of stock options
|
26,335 | 56 | - | - | 56 | |||||||||||||||||||
Balance, December
31, 2009
|
14,509,957 | $ | 84,279 | $ | 68,932 | $ | 12,150 | $ | 165,361 | |||||||||||||||
Balance, March
31, 2010
|
14,534,431 | $ | 85,338 | $ | 73,134 | $ | 8,524 | $ | 166,996 | |||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||
Net
income
|
- | 19,843 | - | 19,843 | $ | 19,843 | ||||||||||||||||||
Currency
translation adjustment
|
- | - | 2,833 | 2,833 | 2,833 | |||||||||||||||||||
Comprehensive
income
|
$ | 22,676 | ||||||||||||||||||||||
Non-cash
equity based compensation
|
2,231 | - | - | 2,231 | ||||||||||||||||||||
Amounts
from exercise of stock options
|
372,165 | 4,818 | - | - | 4,818 | |||||||||||||||||||
Tax
benefit from exercise of stock options
|
122 | - | - | 122 | ||||||||||||||||||||
Balance, December
31, 2010
|
14,906,596 | $ | 92,509 | $ | 92,977 | $ | 11,357 | $ | 196,843 |
See
accompanying notes to condensed consolidated financial statements.
6
MEASUREMENT
SPECIALTIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
December 31,
|
||||||||
(Amounts in thousands)
|
2010
|
(As Adjusted)
2009
|
||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 19,843 | $ | 1,714 | ||||
Loss
from discontinued operations
|
- | (142 | ) | |||||
Income
from continuing operations
|
19,843 | 1,856 | ||||||
Adjustments
to reconcile net income to net cash
|
||||||||
provided
by operating activities:
|
||||||||
Depreciation
and amortization
|
11,226 | 10,835 | ||||||
Loss
(gain) on sale of assets
|
(3 | ) | 71 | |||||
Non-cash
equity based compensation
|
2,231 | 2,275 | ||||||
Deferred
income taxes
|
360 | 619 | ||||||
Equity
income in unconsolidated joint venture
|
(402 | ) | (328 | ) | ||||
Unconsolidated
joint venture distributions
|
114 | 815 | ||||||
Net
change in operating assets and liabilities:
|
||||||||
Accounts
receivable, trade
|
(5,264 | ) | 1,000 | |||||
Inventories
|
(10,316 | ) | 3,819 | |||||
Prepaid
expenses, other current assets and other receivables
|
(864 | ) | (164 | ) | ||||
Other
assets
|
62 | (3 | ) | |||||
Accounts
payable
|
451 | (175 | ) | |||||
Accrued
expenses, accrued compensation, other current and other
liabilities
|
3,365 | 3,139 | ||||||
Income
taxes payable and income taxes receivable
|
1,784 | (2,744 | ) | |||||
Net
cash provided by operating activities
|
22,587 | 21,015 | ||||||
Cash
flows from investing activities:
|
||||||||
Purchases
of property and equipment
|
(6,676 | ) | (3,727 | ) | ||||
Proceeds
from sale of assets
|
33 | 74 | ||||||
Acquisition
of business, net of cash acquired
|
(27,037 | ) | (100 | ) | ||||
Net
cash used in investing activities
|
(33,680 | ) | (3,753 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Borrowings
from revolver
|
62,746 | - | ||||||
Borrowings
from long-term debt
|
20,000 | - | ||||||
Repayments
of short-term debt, revolver, and capital leases
|
(59,700 | ) | (8,549 | ) | ||||
Repayments
of long-term debt
|
(8,145 | ) | (5,801 | ) | ||||
Tax
benefit from exercise of stock options
|
122 | - | ||||||
Payment
of deferred financing costs
|
(1,568 | ) | (832 | ) | ||||
Proceeds
from exercise of options and employee stock purchase plan
|
4,818 | 56 | ||||||
Net
cash provided by (used in) financing activities
|
18,273 | (15,126 | ) | |||||
Net
cash provided by operating activities of discontinued
operations
|
- | 141 | ||||||
Net
cash provided by discontinued operations
|
- | 141 | ||||||
Net
change in cash and cash equivalents
|
7,180 | 2,277 | ||||||
Effect
of exchange rate changes on cash
|
371 | 444 | ||||||
Cash,
beginning of year (As Adjusted)
|
23,165 | 22,277 | ||||||
Cash,
end of period
|
$ | 30,716 | $ | 24,998 | ||||
Supplemental
Cash Flow Information:
|
||||||||
Cash
paid or received during the period for:
|
||||||||
Interest
paid
|
$ | (2,935 | ) | $ | (2,938 | ) | ||
Income
taxes paid
|
(1,876 | ) | (3,729 | ) | ||||
Income
taxes refunded
|
1,890 | 2,384 |
See
accompanying notes to condensed consolidated financial statements.
7
MEASUREMENT SPECIALTIES, INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009
(UNAUDITED)
(Amounts
in thousands, except share and per share amounts)
1.
DESCRIPTION OF BUSINESS
Interim financial
statements: The information presented as of December 31, 2010
and for the three and nine months ended December 31, 2010 and 2009 is unaudited,
and reflects all adjustments (consisting only of normal recurring adjustments)
which Measurement Specialties, Inc. (the “Company,” “MEAS,” or “we”) considers
necessary for the fair presentation of the Company’s financial position as of
December 31, 2010, the results of its operations for the three and nine months
ended December 31, 2010 and 2009, and cash flows for the nine months ended
December 31, 2010 and 2009. The Company’s March 31, 2010 condensed consolidated
balance sheet information was derived from the audited consolidated financial
statements for the year ended March 31, 2010, which are included as part of the
Company’s Annual Report on Form 10-K.
The
condensed consolidated financial statements included herein have been prepared
in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”)
and the instructions to Form 10-Q and Regulation S-X. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with U.S. generally accepted accounting principles have
been condensed or omitted. These condensed consolidated financial statements
should be read in conjunction with the Company’s audited consolidated financial
statements for the year ended March 31, 2010, which are included as part of the
Company’s Annual Report on Form 10-K.
Description of
business: Measurement Specialties, Inc. is a global leader in
the design, development and manufacture of sensors and sensor-based systems for
original equipment manufacturers (“OEM”) and end users, based on a broad
portfolio of proprietary technology and typically characterized by the MEAS
brand name. We are a global business and we believe we have a high degree of
diversity when considering our geographic reach, broad range of products, number
of end-use markets and breadth of customer base. The Company is a
multi-national corporation with twelve primary manufacturing facilities
strategically located in the United States, China, France, Ireland, Germany and
Switzerland, enabling the Company to produce and market globally a wide range of
sensors that use advanced technologies to measure precise ranges of physical
characteristics. These sensors are used for engine and vehicle, medical, general
industrial, consumer and home appliance, military/aerospace, water monitoring
and test and measurement applications. The Company’s sensor products include
pressure sensors and transducers, pressure and temperature scanning
instrumentation, linear/rotary position sensors, piezoelectric polymer film
sensors, custom microstructures, load cells, accelerometers, optical sensors,
humidity, temperature, fluid property sensors and hydrostatic pressure
transducers. The Company's advanced technologies include piezo-resistive
silicon sensors, application-specific integrated circuits,
micro-electromechanical systems (“MEMS”), piezoelectric polymers, foil strain
gauges, force balance systems, fluid capacitive devices, linear and rotational
variable differential transformers, electromagnetic displacement sensors,
hygroscopic capacitive sensors, ultrasonic sensors, optical sensors, negative
thermal coefficient (“NTC”) ceramic sensors, torque sensors, mechanical
resonators and submersible hydrostatic level sensors.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of
consolidation: The condensed consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries (the
“Subsidiaries”). All significant intercompany balances and
transactions have been eliminated in consolidation.
8
In June
2009, the Financial Accounting Standards Board (“FASB”) issued new accounting
principles for consolidation, which requires entities to perform an analysis to
determine whether the enterprise’s variable interest or interests give it a
controlling financial interest in a variable interest entity (“VIE”). This
analysis identifies the primary beneficiary of a variable interest entity as one
with the power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and obligation to absorb
losses of the entity that could potentially be significant to the variable
interest. The guidance was effective as of the beginning of the annual reporting
period commencing after November 15, 2009. The Company adopted these
provisions as of April 1, 2010.
Effective
April 1, 2010, the Company no longer consolidated its 50 percent ownership
interest in Nikkiso-THERM (“NT”), a joint venture in Japan and the Company’s one
VIE. The Company is not the primary beneficiary of NT since it does
not have both the power to direct activities of the VIE that most significantly
impact the VIE’s economic performance and the obligation to absorb the losses,
or the right to receive the benefits of the VIE. The Company does not
have the power to direct activities of the VIE that most significantly impact
the VIE’s economic performance, but rather that power is shared as each of NT’s
partners is required to consent to those decisions. Accordingly, NT
is accounted for as an unconsolidated VIE under the equity method of
accounting. Under the equity method of accounting, the Company
recognizes its proportionate share of the profits and losses of the
unconsolidated VIE.
The
following provides the adjustments made to the prior year financial statements
and related information with regard to the change in accounting for NT to
conform with current year presentation:
Previously
reported three
months ended
December 31,
2009
|
Adjustment
|
As adjusted
three months
ended
December 31,
2009
|
Previously
reported nine
months ended
December 31,
2009
|
Adjustment
|
As adjusted
nine months
ended
December 31,
2009
|
|||||||||||||||||||
Condensed
Consolidated Statement of Operations:
|
||||||||||||||||||||||||
Net
Sales
|
$ | 54,755 | $ | (1,160 | ) | $ | 53,595 | $ | 148,583 | $ | (3,327 | ) | $ | 145,256 | ||||||||||
Cost
of goods sold
|
32,795 | (468 | ) | 32,327 | 92,472 | (1,407 | ) | 91,065 | ||||||||||||||||
Gross
profit
|
21,960 | (692 | ) | 21,268 | 56,111 | (1,920 | ) | 54,191 | ||||||||||||||||
Selling,
general and administrative expenses
|
17,713 | (288 | ) | 17,425 | 51,513 | (713 | ) | 50,800 | ||||||||||||||||
Operating
income
|
4,247 | (404 | ) | 3,843 | 4,598 | (1,207 | ) | 3,391 | ||||||||||||||||
Equity
income in unconsolidated joint venture
|
- | (118 | ) | (118 | ) | - | (328 | ) | (328 | ) | ||||||||||||||
Income
before income taxes
|
3,354 | (286 | ) | 3,068 | 2,464 | (879 | ) | 1,585 | ||||||||||||||||
Income
from continuing operations,
|
||||||||||||||||||||||||
net
of income taxes
|
3,382 | (118 | ) | 3,264 | 2,184 | (328 | ) | 1,856 | ||||||||||||||||
Income
tax expense (benefit)
|
(28 | ) | (168 | ) | (196 | ) | 280 | (551 | ) | (271 | ) | |||||||||||||
Net
income
|
3,366 | (118 | ) | 3,248 | 2,042 | (328 | ) | 1,714 | ||||||||||||||||
Net
income attributable to noncontrolling interest
|
118 | (118 | ) | - | 328 | (328 | ) | - | ||||||||||||||||
Net
income attributable to MEAS
|
3,248 | (3,248 | ) | - | 1,714 | (1,714 | ) | - |
9
Previously
reported nine
months ended
December 31,
2009
|
Adjustment
|
As adjusted
nine months
ended
December 31,
2009
|
||||||||||
Condensed
Consolidated Statement of Cash Flows:
|
||||||||||||
Net
income
|
$ | 2,042 | $ | (186 | ) | $ | 1,856 | |||||
Loss
on sale of assets
|
64 | 7 | 71 | |||||||||
Equity
income in unconsolidated joint venture
|
- | (328 | ) | (328 | ) | |||||||
Unconsolidated
joint venture distributions
|
- | 815 | 815 | |||||||||
Accounts
receivable, trade
|
834 | 166 | 1,000 | |||||||||
Inventories
|
3,768 | 51 | 3,819 | |||||||||
Prepaid
expenses and other current assets
|
(204 | ) | 40 | (164 | ) | |||||||
Other
assets
|
1,126 | (1,129 | ) | (3 | ) | |||||||
Accounts
payable
|
193 | (368 | ) | (175 | ) | |||||||
Accrued
expenses and other liabilities
|
3,027 | 112 | 3,139 | |||||||||
Income
tax payable and income tax receivable
|
(2,836 | ) | 92 | (2,744 | ) | |||||||
Net
cash provided by operating activities
|
21,885 | (870 | ) | 21,015 | ||||||||
Purchases
of property and equipment
|
(3,683 | ) | (44 | ) | (3,727 | ) | ||||||
Net
cash used in investing activities
|
(3,709 | ) | (44 | ) | (3,753 | ) | ||||||
Noncontrolling
interest distributions
|
(815 | ) | 815 | - | ||||||||
Net
cash used in financing activities
|
(15,941 | ) | 815 | (15,126 | ) |
Previously Reported
|
As Adjusted
|
|||||||||||
March 31, 2010
|
Adjustment
|
March 31, 2010
|
||||||||||
Assets:
|
||||||||||||
Cash
|
$ | 24,293 | $ | (1,128 | ) | $ | 23,165 | |||||
Accounts
receivable
|
31,224 | (1,535 | ) | 29,689 | ||||||||
Inventory
|
41,483 | (709 | ) | 40,774 | ||||||||
Prepaid
expenses and other current assets
|
3,149 | (1 | ) | 3,148 | ||||||||
Income
tax receivable
|
997 | 290 | 1,287 | |||||||||
Deferred
income taxes
|
1,720 | (118 | ) | 1,602 | ||||||||
Other
receivables
|
757 | (98 | ) | 659 | ||||||||
Due
from joint venture partner
|
918 | (918 | ) | - | ||||||||
Total
current assets
|
104,541 | (4,217 | ) | 100,324 | ||||||||
Property
and equipment
|
44,795 | (358 | ) | 44,437 | ||||||||
Other
assets
|
1,184 | (245 | ) | 939 | ||||||||
Investment
in unconsolidated joint venture
|
- | 2,117 | 2,117 | |||||||||
Total
assets
|
279,975 | (2,703 | ) | 277,272 | ||||||||
Liabilities:
|
||||||||||||
Accounts
payable
|
18,144 | (260 | ) | 17,884 | ||||||||
Accrued
compensation
|
8,075 | (193 | ) | 7,882 | ||||||||
Other
current liabilities
|
3,197 | (133 | ) | 3,064 | ||||||||
Total
current liabilities
|
44,154 | (586 | ) | 43,568 | ||||||||
Total
liabilities
|
110,862 | (586 | ) | 110,276 | ||||||||
Equity:
|
||||||||||||
Noncontrolling
interest
|
2,117 | (2,117 | ) | - | ||||||||
Total
equity
|
169,113 | (2,117 | ) | 166,996 | ||||||||
Total
liabilities and shareholders' equity
|
279,975 | (2,703 | ) | 277,272 |
The
nature of the Company’s involvement with NT is not as a sponsor of a qualifying
special purpose entity (“QSPE”) for the transfer of financial
assets. NT is a self-sustaining manufacturer and distributor of
temperature based sensor systems in Asian markets. The assets of NT
are used in the joint venture’s operations and the VIE relationship does not
expose the Company to risks not considered normal business risks.
10
Reclassifications: The
presentation of certain prior year information for non-controlling interest in
the condensed consolidated statements of operations, condensed consolidated
balance sheets, condensed consolidated statements of shareholders’ equity and
condensed consolidated statements of cash flows have been reclassified to
investment or equity income in unconsolidated joint venture to conform with
current year presentation, in accordance with the new accounting standards for
consolidation of VIEs.
Use of estimates: The
preparation of the consolidated financial statements, in accordance with U.S.
generally accepted accounting principles, requires management to make estimates
and assumptions which affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Significant
items subject to such estimates and assumptions include the useful lives of
fixed assets, carrying amount and analysis of recoverability of property, plant
and equipment, acquired intangibles, goodwill, deferred tax assets, valuation
allowances for receivables, inventories, income tax uncertainties and other
contingencies, and stock based compensation. Actual results could differ from
those estimates.
Non-cash
equity-based compensation expense for the three months ended December 31, 2010
and 2009 was $974 and $865, respectively, and for the nine months ended December
31, 2010 and 2009 was $2,231 and $2,275, respectively. During the
three and nine months ended December 31, 2010, the Company granted a total of
441,030 and 518,106, respectively, options and restricted stock units from the
2008 Equity Incentive Plan (the “2008 Plan”) and the 2010 Equity Inventive Plan
(the “2010 Plan”). The estimated fair value of stock options and restricted
stock units granted during the three and nine months ended December 31, 2010
approximated $5,034 and $5,633, respectively, net of expected forfeitures and is
being recognized over their respective vesting periods. During the three and
nine months ended December 31, 2010, the Company recognized $267 and $507,
respectively, of expense related to these options.
The
Company has five equity-based compensation plans for which options are currently
outstanding. At the Company’s Annual Shareholders’ meeting on
September 22, 2010, the Company’s shareholders approved a new stock-based
compensation plan, the 2010 Plan. With the adoption of the 2010 Plan,
no further options may be granted under the 2008 Plan. The 2010 Plan
permits the granting of incentive stock options, non-qualified stock options,
and restricted stock units. Subject to certain adjustments, the
maximum number of shares of common stock that may be issued under the 2010 Plan
in connection with awards is 1,600,000 shares. These plans are
administered by the compensation committee of the Board of Directors, which
approves grants to individuals eligible to receive awards and determines the
number of shares and/or options subject to each award, the terms, conditions,
performance measures, and other provisions of the award. The Chief Executive
Officer can also grant individual awards up to certain limits as approved by the
compensation committee. Awards are generally granted based on the individual’s
performance. Terms for stock-option awards include pricing based on the closing
price of the Company’s common stock on the award date, and generally vest over
three to five year requisite service periods using a graded vesting schedule or
subject to performance targets established by the compensation committee. Shares
issued under stock option plans are newly issued common stock. Readers should
refer to Note 14 of the consolidated financial statements in the Company’s
Annual Report on Form 10-K for the fiscal year ended March 31, 2010 for
additional information related to the four share-based compensation plans under
which options are currently outstanding and the Company’s 2010 Proxy Statement
and Additional Proxy Materials on Schedule 14A for our annual meeting of
shareholders filed on July 29, 2010 and September 7, 2010, respectively, for
further information related to the 2010 Plan.
11
The
Company uses the Black-Scholes-Merton option pricing model to estimate the fair
value of equity-based awards with the following assumptions for the indicated
period.
Three Months Ended December 31,
|
Nine months ended December 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Dividend
yield
|
- | - | - | - | ||||||||||||
Expected
volatility
|
68.8 | % | 64.0 | % | 68.3 | % | 62.9 | % | ||||||||
Risk
free interest rate
|
0.9 | % | 1.9 | % | 1.1 | % | 2.1 | % | ||||||||
Expected
term after vesting (in years)
|
2.0 | 2.0 | 2.0 | 2.0 | ||||||||||||
Weighted-average
grant-date fair value
|
$ | 13.71 | $ | 4.58 | $ | 13.00 | $ | 3.48 |
The
assumptions above are based on multiple factors, including historical exercise
patterns of employees with respect to exercise and post-vesting employment
termination behaviors, expected future exercise patterns for these employees and
the historical volatility of our stock price and the stock prices of companies
in our peer group (Standard Industrial Classification or “SIC” Code 3823). The
expected term of options granted is derived using company-specific, historical
exercise information and represents the period of time that options granted are
expected to be outstanding. The risk-free interest rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.
During
the nine months ended December 31, 2010, 372,165 stock options were exercised
yielding $4,818 in cash proceeds and $122 tax benefit recognized as additional
paid-in capital. At December 31, 2010, there was $5,976 of
unrecognized compensation cost adjusted for estimated forfeitures related to
share-based payments, which is expected to be recognized over a weighted-average
period of approximately 1.32 years.
Per share
information: Basic and diluted per share calculations are
based on net income (loss). Basic per share information is computed
based on the weighted average common shares outstanding during each period.
Diluted per share information additionally considers the shares that may be
issued upon exercise or conversion of stock options, less the shares that may be
repurchased with the funds received from their exercise. Outstanding
awards relating to approximately 688,540 and 1,762,164 weighted shares were
excluded from the calculation for the three and nine months ended December 31,
2010, respectively, and outstanding awards relating to approximately 2,533,537
and 2,327,725 weighted shares were excluded from the calculation for the three
and nine months ended December 31, 2009, respectively, as the impact of
including such awards in the calculation of diluted earnings per share would
have had an anti-dilutive effect.
12
The
computation of the basic and diluted net income per common share is as
follows:
Net income
(Numerator)
|
Weighted
Average Shares
in thousands
(Denominator)
|
Per-Share
Amount
|
||||||||||
Three
months ended December 31, 2010:
|
||||||||||||
Basic
per share information
|
$ | 7,499 | 14,684 | $ | 0.51 | |||||||
Effect
of dilutive securities
|
- | 763 | (0.02 | ) | ||||||||
Diluted
per-share information
|
$ | 7,499 | 15,447 | $ | 0.49 | |||||||
Three
months ended December 31, 2009:
|
||||||||||||
Basic
per share information
|
$ | 3,248 | 14,504 | $ | 0.22 | |||||||
Effect
of dilutive securities
|
- | 182 | - | |||||||||
Diluted
per-share information
|
$ | 3,248 | 14,686 | $ | 0.22 | |||||||
Nine
Months Ended December 31, 2010
|
||||||||||||
Basic
per share information
|
$ | 19,843 | 14,609 | $ | 1.36 | |||||||
Effect
of dilutive securities
|
- | 613 | (0.06 | ) | ||||||||
Diluted
per-share information
|
$ | 19,843 | 15,222 | $ | 1.30 | |||||||
Nine
Months Ended December 31, 2009
|
||||||||||||
Basic
per share information
|
$ | 1,714 | 14,492 | $ | 0.12 | |||||||
Effect
of dilutive securities
|
- | 137 | - | |||||||||
Diluted
per-share information
|
$ | 1,714 | 14,629 | $ | 0.12 |
4.
INVENTORIES
Inventories
and inventory reserves for slow-moving, obsolete and lower of cost or market
exposures at December 31, 2010 and March 31, 2010 are summarized as
follows:
December 31, 2010
|
(As Adjusted)
March 31, 2010
|
|||||||
Raw
Materials
|
$ | 31,421 | $ | 23,313 | ||||
Work-in-Process
|
10,021 | 6,207 | ||||||
Finished
Goods
|
16,580 | 15,017 | ||||||
58,022 | 44,537 | |||||||
Inventory
Reserves
|
(4,352 | ) | (3,763 | ) | ||||
$ | 53,670 | $ | 40,774 |
5.
PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment are stated at cost. Equipment under capital leases is stated
at the present value of minimum lease payments. Property, plant and
equipment are summarized as follows:
December 31, 2010
|
(As Adjusted)
March 31, 2010
|
Useful Life
|
|||||||
Production
equipment and tooling
|
$ | 53,426 | $ | 48,526 |
3-10
years
|
||||
Building
and leasehold improvements
|
26,640 | 24,101 |
39
to 45 years or lesser of useful life or remaining term of
lease
|
||||||
Furniture
and equipment
|
14,833 | 13,620 |
3-10
years
|
||||||
Construction-in-progress
|
1,426 | 864 | |||||||
Total
|
96,325 | 87,111 | |||||||
Less:
accumulated depreciation and amortization
|
(47,886 | ) | (42,674 | ) | |||||
$ | 48,439 | $ | 44,437 |
Total
depreciation was $2,182 and $2,165 for the three months ended December 31, 2010
and 2009, respectively. Total depreciation was $6,163 and $6,221 for
the nine months ended December 31, 2010 and 2009,
respectively. Property and equipment included $96 and $448 in capital
leases at December 31, 2010 and March 31, 2010, respectively.
13
6.
ACQUISITIONS, GOODWILL IMPAIRMENT TESTING, AND ACQUIRED INTANGIBLES
Acquisitions: The
Company continually evaluates potential acquisitions that either strategically
fit with the Company’s existing portfolio or expand the Company’s portfolio into
a new and attractive business area. The Company has completed a
number of acquisitions that have been accounted for as purchases and have
resulted in the recognition of goodwill in the Company’s financial
statements. This goodwill arises because the purchase prices for
these businesses reflect a number of factors, including the future earnings and
cash flow potential of these businesses, and other factors at which similar
businesses have been purchased by other acquirers, the competitive nature of the
process by which the Company acquired the business, and the complementary
strategic fit and resulting synergies these businesses bring to existing
operations.
Goodwill
balances presented in the consolidated balance sheets of foreign acquisitions
are translated at the exchange rate in effect at each balance sheet date;
however, opening balance sheets used to calculate goodwill and acquired
intangible assets are based on purchase date exchange rates, except for earn-out
payments, which are recorded at the exchange rates in effect on the date the
earn-out is accrued. The following table shows the roll-forward of
goodwill reflected in the financial statements for the nine months ended
December 31, 2010:
Accumulated
goodwill
|
$ | 102,588 | ||
Accumulated
impairment losses
|
(3,353 | ) | ||
Balance
March 31, 2010
|
99,235 | |||
Attributable
to 2008 acquisitions
|
2,061 | |||
Attributable
to 2011 acquisitions
|
13,575 | |||
Effect
of foreign currency translation
|
1,196 | |||
Goodwill
impairment
|
- | |||
Balance
December 31, 2010
|
$ | 116,067 |
The
following briefly describes the Company’s recent acquisition, as well as
acquisitions for which final purchase price allocations remain subject to
earn-out contingencies and the Intersema acquisition with related notes payable
information. For a complete description of the Company’s acquisition
activity from the beginning of fiscal 2008 through fiscal
2010, please refer to Note 5 to the Consolidated Financial Statements
included in the 2010 Annual Report on Form 10-K.
Visyx: Effective
November 20, 2007, the Company acquired certain assets of Visyx Technologies,
Inc. (Visyx”) based in Sunnyvale, California for $1,624 ($1,400 at close, $100
held-back to cover certain expenses, and $124 in acquisition costs). The Seller
has the potential to receive up to an additional $2,000 in the form of a
contingent payment based on successful commercialization of specified sensors
prior to December 31, 2011, and an additional $9,000 earn-out based on a
percentage of sales through calendar year 2011. If these earn-out contingencies
are resolved and meet established conditions, these amounts will be recorded as
an additional element of the cost of the acquisition. In December
2010, the Company paid $2,000 for the earn-out related to the successful
commercialization of certain sensors, which was recorded as additional purchase
price. At December 31, 2010, the Company accrued approximately $61
for the sales based earn-out. The final resolution of the sales based
contingencies is not determinable at this time, and accordingly, the Company’s
purchase price allocation for Visyx is subject to these earn-out
payments. Visyx has a range of sensors that measure fluid properties,
including density, viscosity and dielectric constant, for use in heavy truck/off
road engines and transmissions, compressors/turbines, refrigeration and air
conditioning. The Company’s final purchase price allocation, except
for sales-based earn-out contingencies, related to the Visyx acquisition is as
follows:
14
Assets:
|
||||
Accounts
receivable
|
$ | 12 | ||
Inventory
|
10 | |||
Acquired
intangible assets
|
1,528 | |||
Goodwill
|
74 | |||
Preliminary
Purchase Price
|
$ | 1,624 | ||
Cash
paid
|
$ | 1,400 | ||
Deferred
payment
|
100 | |||
Costs
|
124 | |||
Preliminary
Purchase Price
|
1,624 | |||
Earn-out
Contingencies
|
2,061 | |||
Total
Purchase Price
|
$ | 3,685 |
Atexis: On
January 30, 2009, the Company consummated the acquisition of all of the capital
stock of RIT SARL (“Atexis”), a sensor company headquartered in Fontenay,
France, for €4,096. The total purchase price in U.S. dollars based on
the January 30, 2009 exchange rate was approximately $5,359 ($5,152 in cash at
close and $207 in acquisition costs). The selling shareholders had the potential
to receive up to an additional €2,000 tied to sales growth objectives through
calendar 2010. These contingencies are resolved and established
conditions were not met. Atexis designs and manufactures temperature
sensors and probes utilizing NTC, Platinum (Pt) and thermo-couples technologies
through wholly-owned subsidiaries in France and China. The
transaction was partially financed with borrowings under the Company’s previous
credit facility. The Company’s final purchase price allocation
related to the Atexis acquisition is as follows:
Assets:
|
||||
Cash
|
$ | 110 | ||
Accounts
receivable
|
2,268 | |||
Inventory
|
2,613 | |||
Other
assets
|
270 | |||
Property
and equipment
|
1,532 | |||
Acquired
intangible assets
|
1,610 | |||
Goodwill
|
1,524 | |||
9,927 | ||||
Liabilities:
|
||||
Accounts
payable
|
1,384 | |||
Accrued
expenses and other liabilities
|
2,292 | |||
Deferred
income taxes
|
892 | |||
4,568 | ||||
Total
Purchase Price
|
$ | 5,359 |
Pressure Systems,
Inc.: On September 8, 2010, the Company acquired all of the
capital stock of Pressure Systems, Inc. (“PSI”), a sensor company based in
Hampton, Virginia, for $25,037 ($25,000 in cash at close and approximately $37
paid post close). PSI is a global leader in pressure sensing
instrumentation for the aerospace industry and for water monitoring within
operational and resource management applications. The water
monitoring industry is large and a significant growth opportunity for the
Company. Additionally, the Company expects to achieve cost synergies
with the PSI business combination mainly through the consolidation of operations
due to the close proximity of the acquisition to the Company’s existing Hampton
facility. The transaction was funded from a combination of available
cash on hand and borrowings under the Company’s Senior Secured Credit
Facility. PSI had annual aggregate sales of approximately
$18,000 based on its most recently completed fiscal year ended October 31,
2009. Since the acquisition date, $7,190 of sales and $745 of net
income are included in the Company’s condensed consolidated financial
statements, and transaction-related costs of approximately $176 were recorded as
a component of selling, general and administrative expenses. The
Company’s preliminary purchase price allocation related to the PSI acquisition
is as follows:
15
Assets:
|
||||
Accounts
receivable
|
$ | 2,290 | ||
Inventory
|
2,017 | |||
Prepaid
and other
|
88 | |||
Property
and equipment
|
2,854 | |||
Other
|
56 | |||
Acquired
intangible assets
|
8,770 | |||
Goodwill
|
13,575 | |||
29,650 | ||||
Liabilities:
|
||||
Accounts
payable
|
737 | |||
Accrued
expenses and other liabilities
|
631 | |||
Deferred
income taxes
|
3,245 | |||
4,613 | ||||
Total
Purchase Price
|
$ | 25,037 |
All
amounts, except for other assets, property and equipment, and deferred income
taxes, are final. Those amounts considered preliminary are subject to
adjustment. The Company has made a preliminary allocation of the purchase price
at the date of acquisition based upon its understanding of the fair value of the
acquired assets and assumed liabilities. The Company obtained this information
during due diligence and through other sources. In the months after closing, as
the Company obtains additional information about these assets and liabilities,
including through integration into our accounting systems and learns more about
the newly acquired business, management expects to refine the estimates of fair
value and more accurately allocate the purchase price. The Company
will make appropriate adjustments to the purchase price allocation prior to
completion of the measurement period.
Acquired intangible
assets: In connection with all acquisitions, the Company
acquired certain identifiable intangible assets, including customer
relationships, proprietary technology, patents, trade-names, order backlogs and
covenants-not-to-compete. The gross amounts and accumulated amortization, along
with the range of amortizable lives, are as follows:
December 31, 2010
|
March 31, 2010
|
|||||||||||||||||||||||||||
Weighted-
Average Life
in years
|
Gross
Amount
|
Accumulated
Amortization
|
Net
|
Gross
Amount
|
Accumulated
Amortization
|
Net
|
||||||||||||||||||||||
Amortizable
intangible assets:
|
||||||||||||||||||||||||||||
Customer
relationships
|
8
|
$ | 35,492 | $ | (15,408 | ) | $ | 20,084 | $ | 28,497 | $ | (12,250 | ) | $ | 16,247 | |||||||||||||
Patents
|
15
|
3,988 | (1,446 | ) | 2,542 | 4,038 | (1,259 | ) | 2,779 | |||||||||||||||||||
Tradenames
|
2
|
2,278 | (2,273 | ) | 5 | 2,055 | (2,019 | ) | 36 | |||||||||||||||||||
In-process
research & development
|
Indefinite
|
230 | - | 230 | - | - | - | |||||||||||||||||||||
Backlog
|
1
|
3,418 | (3,418 | ) | - | 2,792 | (2,792 | ) | - | |||||||||||||||||||
Covenants-not-to-compete
|
3
|
1,109 | (1,017 | ) | 92 | 1,011 | (977 | ) | 34 | |||||||||||||||||||
Proprietary
technology
|
12
|
8,362 | (1,957 | ) | 6,405 | 6,008 | (1,491 | ) | 4,517 | |||||||||||||||||||
$ | 54,877 | $ | (25,519 | ) | $ | 29,358 | $ | 44,401 | $ | (20,788 | ) | $ | 23,613 |
Amortization
expense for the three months ended December 31, 2010 and 2009 was $1,832 and
$1,465, respectively, and amortization expense for the nine months ended
December 31, 2010 and 2009 was $4,269 and $4,614,
respectively. Annual amortization expense for the years ending
December 31 is estimated as follows:
Amortization
|
||||
Year
|
Expense
|
|||
2011
|
$ | 4,685 | ||
2012
|
4,385 | |||
2013
|
3,625 | |||
2014
|
3,285 | |||
2015
|
3,242 | |||
Thereafter
|
10,136 | |||
$ | 29,358 |
16
Pro forma
Financial Data: The following represents the Company’s pro
forma consolidated income from continuing operations, net of income taxes, for
the three and nine months ended December 31, 2010 and 2009, based on preliminary
purchase accounting information assuming the PSI acquisition occurred
as of April 1, 2009, giving effect to purchase accounting adjustments. The pro
forma data is for informational purposes only and may not necessarily reflect
results of operations had all the acquired companies been operated as part of
the Company since April 1, 2009.
Three months ended
December 31,
|
Nine months ended
December 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
sales
|
$ | 71,687 | $ | 57,737 | $ | 207,416 | $ | 158,343 | ||||||||
Net
income
|
$ | 7,499 | $ | 3,000 | $ | 19,854 | $ | 651 | ||||||||
Net
income per share:
|
||||||||||||||||
Basic
|
$ | 0.51 | $ | 0.21 | $ | 1.36 | $ | 0.04 | ||||||||
Diluted
|
$ | 0.49 | $ | 0.20 | $ | 1.30 | $ | 0.04 |
7.
FINANCIAL INSTRUMENTS:
Fair value of financial
instruments: Effective April 1, 2009, the Company adopted a
new accounting standard related to fair values, which defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Fair value is an exit price, representing
the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. As
such, fair value is a market-based measurement that should be determined based
on assumptions that market participants would use in pricing an asset and
liability. As a basis for considering such assumptions, the
principles establish a fair value hierarchy that prioritizes the inputs used to
measure fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities
(level 1 measurements) and the lowest priority to unobservable inputs (level 3
measurements). The three levels of the fair value hierarchy are as
follows:
Level 1 -
Quoted prices in active markets for identical assets or
liabilities;
Level 2 -
Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active;
and
Level 3 -
Unobservable inputs in which there is little or no market data which require the
reporting entity to develop its own assumptions.
Foreign
currency contracts are recorded at fair value. Financial assets and
liabilities are classified in their entirety based on the lowest level of input
that is significant to the fair value measurement. The Company's
assessment of the significance of a particular input to the fair value
measurement requires judgment, and may affect the valuation of fair value of
assets and liabilities and their placement within the fair value hierarchy
levels. The fair value of the Company’s cash and cash equivalents was
determined using Level 1 measurements in the fair value
hierarchy. The fair value of the Company’s foreign currency contracts
was based on Level 2 measurements in the fair value hierarchy. The
fair value of the foreign currency contracts is based on forward exchange rates
relative to current exchange rates which were obtained from independent
financial institutions reflecting market quotes.
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments:
For cash
and cash equivalents, accounts receivable, other receivables, prepaid and other
assets (current), accounts payable, and accrued expenses and other liabilities
(non-derivatives), the carrying amounts approximate fair value because of the
short maturity of these instruments. Non-current other assets consist
of various miscellaneous items such as deposits and deferred costs and
non-current other liabilities consist mostly of deferred rent and pension
liability. Pension liability is recorded at fair value based on an
actuarial report, which is considered a Level 3 measurement. Deferred
financing costs, deposits and deferred rent are by their nature recorded at
their historical cost. Investment in unconsolidated joint venture is
not recorded at fair value, but accounted for under the equity
method.
For
promissory notes payable, deferred acquisition payments and capital lease
obligation, the fair value is determined as the present value of expected future
cash flows discounted at the current interest rate, which approximates rates
currently offered by lending institutions for loans of similar terms to
companies with comparable credit risk. These are considered Level 2
inputs.
17
Derivative instruments and risk
management: The Company is exposed to market risks from
changes in interest rates, commodities, credit and foreign currency exchange
rates, which could impact its results of operations and financial condition. The
Company attempts to address its exposure to these risks through its normal
operating and financing activities. In addition, the Company’s relatively
broad-based business activities help to reduce the impact that volatility in any
particular area or related areas may have on its operating results as a
whole.
Interest
Rate Risk: Under our term and revolving credit facilities, we are
exposed to a certain level of interest rate risk. Interest on the principal
amount of our borrowings under our revolving credit facility is variable and
accrues at a rate based on either a LIBOR rate plus a LIBOR margin or at an
Indexed (prime based) Rate plus an Index Margin. The LIBOR or Index Rate is at
our election. With our revolving credit facility, our results will be adversely
affected by an increase in interest rates. Interest on the principal
amounts of our borrowings under our term loans accrue at fixed
rates. If interest rates decline, the Company would not be able to
benefit from the lower rates on our long-term debt. We do not
currently hedge these interest rate exposures.
Commodity
Risk: The Company uses a wide range of commodities in its products,
including steel, non-ferrous metals and petroleum based products, as well as
other commodities required for the manufacture of its sensor
products. Changes in the pricing of commodities directly affect its
results of operations and financial condition. The Company attempts
to address increases in commodity costs through cost control measures or pass
these added costs to its customers, and the Company does not currently hedge
such commodity exposures.
Credit
Risk: Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist of cash and temporary
investments, foreign currency forward contracts when in an asset position and
trade accounts receivable. The Company is exposed to credit losses in the event
of nonperformance by counter parties to its financial instruments. The Company
places cash and temporary investments with various high-quality financial
institutions throughout the world. Although the Company does not obtain
collateral or other security to secure these obligations, it does periodically
monitor the third-party depository institutions that hold our cash and cash
equivalents. Our emphasis is primarily on safety and liquidity of principal and
secondarily on maximizing yield on those funds. In addition, concentrations of
credit risk arising from trade accounts receivable are limited due to the
diversity of the Company’s customers. The Company performs ongoing credit
evaluations of its customers’ financial conditions and the Company does not
generally obtain collateral, credit insurance or other
security. Notwithstanding these efforts, the current distress in the
global economy may increase the difficulty in collecting accounts
receivable.
Foreign
Currency Exchange Rate Risk: Foreign currency exchange rate risk
arises from the Company’s investments in subsidiaries owned and operated in
foreign countries, as well as from transactions with customers in countries
outside the U.S. and transactions denominated in currencies other than the
applicable functional currency.
The
effect of a change in currency exchange rates on the Company’s net investment in
international subsidiaries is reflected in the “accumulated other comprehensive
income” component of shareholders’ equity. The Company does not hedge
the Company’s net investment in subsidiaries owned and operated in countries
outside the U.S.
Although
the Company has a U.S. dollar functional currency for reporting purposes, it has
manufacturing and operating sites throughout the world and a large portion of
its sales are generated in foreign currencies. A substantial portion of our
revenues is priced in U.S. dollars, and most of our costs and expenses are
priced in U.S. dollars, with the remaining priced in Chinese RMB, Euros, and
Swiss francs. Sales by subsidiaries operating outside of the United States are
translated into U.S. dollars using exchange rates effective during the
respective period. As a result, the Company is exposed to movements in the
exchange rates of various currencies against the U.S. dollar. Accordingly, the
competitiveness of our products relative to products produced locally (in
foreign markets) may be affected by the performance of the U.S. dollar compared
with that of our foreign customers’ currencies. Refer to Note 10, Segment
Information, for details concerning net sales invoiced from our facilities
within the U.S. and outside of the U.S., as well as long-lived
assets. Therefore, both positive and negative movements in currency
exchange rates against the U.S. dollar will continue to affect the reported
amount of sales, profit, and assets and liabilities in the Company’s
consolidated financial statements.
18
The value
of the RMB relative to the U.S. dollar appreciated by approximately 3.3% during
the first nine months of fiscal 2011. Overall, the RMB was stable
during fiscal 2010. The Chinese government no longer pegs the RMB to the U.S.
dollar, but established a currency policy letting the RMB trade in a narrow band
against a basket of currencies. The Company has more expenses in RMB than sales
(i.e., short RMB position), and as such, if the U.S. dollar weakens relative to
the RMB, our operating profits will decrease. We continue to consider various
alternatives to hedge this exposure, and we are attempting to manage this
exposure through, among other things, forward purchase contracts, pricing
and monitoring balance sheet exposures for payables and
receivables.
Fluctuations
in the value of the Hong Kong dollar have not been significant since October 17,
1983, when the Hong Kong government tied the value of the Hong Kong dollar to
that of the U.S. dollar. However, there can be no assurance that the value of
the Hong Kong dollar will continue to be tied to that of the U.S.
dollar.
The
Company’s French, Irish and German subsidiaries have more sales in Euros than
expenses in Euros and the Company’s Swiss subsidiary has more expenses in Swiss
francs than sales in Swiss francs, and as such, if the U.S. dollar weakens
relative to the Euro and Swiss franc, our operating profits increase in France,
Ireland and Germany, but decrease in Switzerland.
The
Company has a number of foreign currency exchange contracts in Asia in an
attempt to hedge the Company’s exposure to the RMB. The RMB/U.S. dollar currency
contracts have notional amounts totaling $9,900, with exercise dates through
December 31, 2011 at average exchange rates of $0.1503 (RMB to U.S. dollar
conversion rate). With the RMB/U.S. dollar contracts, for every 1%
depreciation of the RMB, the Company would be exposed to approximately $100 in
additional foreign currency exchange losses. Since these derivatives
are not designated as hedges for accounting purposes, changes in their fair
value are recorded in results of operations, not in other comprehensive
income.
To manage
our exposure to potential foreign currency transaction and translation risks, we
may purchase additional foreign currency exchange forward contracts, currency
options, or other derivative instruments, provided such instruments may be
obtained at suitable prices.
Fair
values of derivative instruments not designated as hedging
instruments:
December 31,
|
March 31,
|
||||||||
2010
|
2010
|
Balance sheet location
|
|||||||
Financial
position:
|
|||||||||
Foreign
currency exchange contracts - Euro/US dollar
|
$ | - | $ | (40 | ) |
Other
assets (liabilities)
|
|||
Foreign
currency exchange contracts - RMB
|
$ | 201 | $ | - |
Other
assets
(liabilities)
|
The
effect of derivative instruments not designated as hedging instruments on the
statements of operations and cash flows for the respective periods ended
December 31, 2010 and 2009 is as follows:
Three months ended
December 31,
|
Nine month ended
December 31,
|
||||||||||||||||
2010
|
2009
|
2010
|
2009
|
Location of gain or loss
|
|||||||||||||
Results of
operations:
|
|||||||||||||||||
Foreign
currency exchange contracts - Euro
|
$ | 3 | $ | (87 | ) | $ | 22 | $ | (24 | ) |
Foreign
currency exchange (gain) loss
|
||||||
Foreign
currency exchange contracts - RMB
|
(123 | ) | - | (307 | ) | 18 |
Foreign
currency exchange (gain) loss
|
||||||||||
Foreign
currency exchange contracts - Japanese yen
|
- | 76 | - | (232 | ) |
Foreign
currency exchange (gain) loss
|
|||||||||||
Total
|
$ | (120 | ) | $ | (11 | ) | $ | (285 | ) | $ | (238 | ) |
19
Nine month ended
December 31,
|
|||||||||
2010
|
2009
|
Location of gain or loss
|
|||||||
Cash
flows from operating activities: Source (Use)
|
|||||||||
Foreign
currency exchange contracts - Euro
|
$ | (61 | ) | $ | 224 |
Prepaid
expenses, other current assets (Accrued expenses, other
liabilities)
|
|||
Foreign
currency exchange contracts - RMB
|
112 | (125 | ) |
Prepaid
expenses, other current assets (Accrued expenses, other
liabilities)
|
|||||
Foreign
currency exchange contracts - Japense yen
|
- | 107 |
Prepaid
expenses, other current assets and other receivables
|
||||||
Total
|
$ | 51 | $ | 206 |
8.
LONG-TERM DEBT:
Long-term debt and
revolver: The Company entered into a Credit Agreement (the
"Senior Secured Credit Facility") dated June 1, 2010 among JPMorgan Chase Bank,
N.A., as administrative agent and collateral agent (in such capacity, the
"Senior Secured Facility Agents"), Bank America, N.A., as syndication agent,
HSBC Bank USA, N.A., as document agent, and certain other parties thereto (the
"Credit Agreement") to refinance the Amended and Restated Credit Agreement
effective as of April 1, 2006 among the Company, General Electric Capital
Corporation (“GE”), as agent and a lender, and certain other parties thereto and
to provide for the working capital needs of the Company including to effect
permitted acquisitions. During the three months ended June 30, 2010,
the Company wrote-off the remaining $585 in deferred financing costs associated
with the previous credit facility with GE as amortization expense in selling,
general and administrative expenses.
The
Senior Secured Facility consists of a $110,000 revolving credit facility (the
"Revolving Credit Facility") with a $50,000 accordion feature enabling expansion
of the Revolving Credit Facility to $160,000. The Revolving Credit
Facility has a variable interest rate based on either the London Inter-bank
Offered Rate ("LIBOR") or the ABR Rate (prime based rate) with applicable
margins ranging from 2.00% to 3.25% for LIBOR based loans or 1.00% to 2.25% for
ABR Rate loans. The applicable margins may be adjusted quarterly
based on a change in the leverage ratio of the Company. The Senior
Secured Credit Facility also includes the ability to borrow in currencies other
than U.S. dollars, such as the Euro and Swiss Franc, up to
$66,000. Commitment fees on the unused balance of the Revolving
Credit Facility range from 0.375% to 0.500% per annum of the average amount of
unused balances. The Revolving Credit Facility will expire on June 1,
2014 and all balances outstanding under the Revolving Credit Facility will be
due on such date. The Company has provided a security interest in
substantially all of the Company's U.S. based assets as collateral for the
Senior Secured Credit Facility and private placement of credit facilities
entered into by the Company from time to time not to exceed $50,000, including
the Prudential Shelf Facility (as defined below). The Senior Secured
Credit Facility includes an inter-creditor arrangement with Prudential and is on
a pari passu (equal
force) basis with the Prudential Shelf Facility.
The
Senior Secured Facility includes specific financial covenants for maximum
leverage ratio and minimum fixed charge coverage ratio, as well as customary
representations, warranties, covenants and events of default for a transaction
of this type. Consolidated earnings before interest, taxes,
depreciation and amortization (“EBITDA”) for debt covenant purposes is the
Company's consolidated net income determined in accordance with GAAP minus the
sum of income tax credits, interest income, gain from extraordinary items for
such period, any non-cash gains, and gains due to fluctuations in currency
exchange rates, plus the sum of any provision for income taxes,
interest expense, loss from extraordinary items, any aggregate net loss during
such period arising from the disposition of capital assets, the amount of
non-cash charges for such period, amortized debt discount for such period,
losses due to fluctuations in currency exchange rates and the amount of any
deduction to consolidated net income as the result of any grant to any members
of the management of the Company of any equity interests. The
Company's leverage ratio consists of total debt less unrestricted cash
maintained in U.S. bank accounts which are subject to control agreements in
favor of JPMorgan Chase Bank, N.A., as Collateral Agent, to Consolidated
EBITDA. Adjusted fixed charge coverage ratio is Covenant EBITDA less
capital expenditures divided by fixed charges. Fixed charges are the
last twelve months of scheduled principal payments, taxes paid in cash and
consolidated interest expense. All of the aforementioned financial
covenants are subject to various adjustments, many of which are detailed in the
Credit Agreement.
20
As of
December 31, 2010, the Company utilized the LIBOR based rate for $56,746 of the
Revolving Credit Facility. The weighted average interest rate applicable to
borrowings under the Revolving Credit Facility was approximately 2.3% at
December 31, 2010. As of December 31, 2010, the outstanding borrowings on the
Revolving Credit Facility, which is classified as non-current, were $56,746, and
the Company had an additional $53,254 available under the Revolving Credit
Facility. The Company’s borrowing capacity is limited by financial covenant
ratios, including earnings ratios, and as such, our borrowing capacity is
subject to change. At December 31, 2010, the Company could have
borrowed an additional $53,254.
On June
1, 2010, the Company entered into a Master Shelf Agreement (the "Prudential
Shelf Facility") with Prudential Investment Management, Inc. ("Prudential")
whereby Prudential agreed to purchase up to $50,000 of senior secured notes (the
"Senior Secured Notes") issued by the Company. Prudential purchased
two Senior Secured Notes each for $10,000 and the remaining $30,000 of such
Senior Secured Notes may be purchased at the discretion of Prudential or one or
more of its affiliates upon the request of the Company. The
Prudential Shelf Facility has a fixed interest rate of 5.70% and 6.15% for each
of the two $10,000 Senior Secured Notes issued by the Company and the Senior
Secured Notes issued there under are due on June 1, 2015 and 2017,
respectively. The Prudential Shelf Facility includes specific
financial covenants for maximum total leverage ratio and minimum fixed charge
coverage ratio consistent with the Senior Secured Credit Facility, as well as
customary representations, warranties, covenants and events of
default. The Prudential Shelf Facility includes an inter-creditor
arrangement with the Senior Secured Facility Agents and is on a pari passu (equal force)
basis with the Senior Secured Facility.
The
Company was in compliance with applicable financial covenants at December 31,
2010.
Deferred
financing costs: As part of the June 1, 2010 refinancing, the Company
recorded approximately $1,568 in deferred financing costs and wrote-off
approximately $585 in deferred financing costs associated with the previous
credit facility. Amortization of deferred financing costs associated
with the refinancing for the three and nine months ended December 31, 2010 was
$92 and $209, respectively. Annual amortization expense is estimated
to be approximately $381.
Chinese credit
facility: On November 3, 2009, the Company’s subsidiary in
China (“MEAS China”) entered into a two year credit facility agreement (the
“China Credit Facility”) with China Merchants Bank Co., Ltd
(“CMB”). The China Credit Facility permits MEAS China to borrow
up to RMB 68,000 (approximately $10,000). Specific covenants
include customary limitations, compliance with laws and regulations, use of
proceeds for operational purposes, and timely payment of interest and
principal. MEAS China has pledged its Shenzhen facility to CMB as
collateral. The interest rate will be based on the London Inter-bank
Offered Rate (“LIBOR”) plus a LIBOR spread, depending on the term of the loan
when drawn. The purpose of the China Credit Facility is primarily to
provide additional flexibility in funding operations of MEAS
China. At December 31, 2010, there was $5,000 borrowed against the
China Credit Facility at an interest rate of 5.05% and is classified as
short-term debt since it is payable on January 29, 2011. At December
31, 2010, MEAS China could borrow an additional $5,000 under the China Credit
Facility.
European credit
facility: On July 21, 2010, the Company’s subsidiary in France
(“MEAS Europe”) entered into a five year credit facility agreement (the
“European Credit Facility”) with La Societe Bordelaise de Credit Industriel et
Commercial (“CIC”). The European Credit Facility permits MEAS Europe
to borrow up to €2,000 (approximately $2,600). Specific covenants
include certain financial covenants for maximum leverage ratio and net debt to
equity ratio, as well as customary limitations, compliance with laws and
regulations, use of proceeds, and timely payment of interest and
principal. MEAS Europe has pledged its Les Clayes-sous-Bois, France
facility to CIC as collateral. The interest rate is based on the
EURIBOR Offered Rate (“EURIBOR”) plus a spread of 1.8%. The EURIBOR
interest rate will vary depending on the term of the loan when
drawn. The purpose of the European Credit Facility is primarily to
provide additional flexibility in funding operations of MEAS
Europe. At December 31, 2010, there were no amounts borrowed against
the European Credit Facility and MEAS Europe could borrow €2,000.
21
Promissory notes: In
connection with the acquisition of Intersema Microsystems SA (“Intersema”), the
Company issued 10,000 Swiss franc unsecured promissory notes (the “Intersema
Notes”). At December 31, 2010, the Intersema Notes totaled $5,314, of
which $2,657 was classified as current. The Intersema Notes are payable in four
equal annual installments through January 15, 2012, and bear an interest rate of
4.5% per year.
Long-term debt and promissory notes:
Below
is a summary of the long-term debt and promissory notes outstanding at December
31, 2010 and March 31, 2010:
December
31,
|
March
31,
|
|||||||
2010
|
2010
|
|||||||
Term
notes at 5.70% due in full on June 1, 2015
|
$ | 10,000 | $ | - | ||||
Term
notes at 6.15% due in full on June 1, 2017
|
10,000 | - | ||||||
Five
year term-loan at prime or LIBOR plus 4.50% or 3.00%
|
- | 8,000 | ||||||
Governmental
loans from French agencies at no interest and payable based on R&D
expenditures
|
948 | 476 | ||||||
Term
credit facility with six French banks at an interest rate of 4% payable
through 2010
|
86 | 307 | ||||||
21,034 | 8,783 | |||||||
Less
current portion of long-term debt
|
161 | 2,295 | ||||||
$ | 20,873 | $ | 6,488 | |||||
4.5%
promissory note payable in four equal annual installments through January
15, 2012
|
$ | 5,314 | $ | 4,698 | ||||
Less
current portion of promissory notes payable
|
2,657 | 2,349 | ||||||
$ | 2,657 | $ | 2,349 |
The
annual principal payments of long-term debt, promissory notes and revolver as of
December 31, 2010 are as follows:
Year ended
December 31, |
Term
|
Other
|
Subtotal
|
Notes
|
Revolver /
Short-term
debt
|
Total
|
||||||||||||||||||
2011
|
$ | - | $ | 161 | $ | 161 | $ | 2,657 | $ | 5,000 | $ | 7,818 | ||||||||||||
2012
|
- | 130 | 130 | 2,657 | - | 2,787 | ||||||||||||||||||
2013
|
- | 203 | 203 | - | - | 203 | ||||||||||||||||||
2014
|
- | 132 | 132 | - | 56,746 | 56,878 | ||||||||||||||||||
2015
|
10,000 | 408 | 10,408 | - | - | 10,408 | ||||||||||||||||||
Thereafter
|
10,000 | - | 10,000 | - | - | 10,000 | ||||||||||||||||||
Total
|
$ | 20,000 | $ | 1,034 | $ | 21,034 | $ | 5,314 | $ | 61,746 | $ | 88,094 |
9.
COMMITMENTS AND CONTINGENCIES:
Litigation and pending legal matters - There
are currently no material pending legal proceedings. From time to time, the
Company is subject to legal proceedings and claims in the ordinary course of
business. The Company currently is not aware of any such legal proceedings or
claims that the Company believes will have, individually or in the aggregate, a
material adverse effect on the Company’s business, financial condition, or
operating results.
22
Contingency: Exports
of technology necessary to develop and manufacture certain of the Company’s
products are subject to U.S. export control laws and similar laws of other
jurisdictions, and the Company may be subject to adverse regulatory
consequences, including government oversight of facilities and export
transactions, monetary penalties and other sanctions for violations of these
laws. All exports of technology necessary to develop and manufacture the
Company’s products are subject to U.S. export control laws. In certain
instances, these regulations may prohibit the Company from developing or
manufacturing certain of its products for specific end applications outside the
United States. In late May 2009, the Company became aware that certain of its
piezo products when designed or modified for use with or incorporation into a
defense article are subject the International Traffic in Arms Regulations
("ITAR") administered by the United States Department of State. Certain
technical data relating to the design of the products may have been exported to
China without authorization from the U.S. Department of State. As required
by the ITAR, the Company conducted a thorough investigation into the
matter. Based on the investigation, the Company filed in
December 2009 a final voluntary disclosure with the U.S. Department of State
relating to that matter, as well as to exports and re-exports of other
ITAR-controlled technical data and/or products to Canada, India, Ireland,
France, Germany, Italy, Israel, Japan, the Netherlands, South Korea, Spain and
the United Kingdom, which disclosure has since been supplemented. In the
course of the investigation, the Company also became aware that certain of its
products may have been exported from France without authorization from the
relevant French authorities. The Company investigated this matter
thoroughly. In December 2009, it also voluntarily submitted to French
customs authorities a list of products that may have required prior export
authorization, which
has since been supplemented to exclude certain products. In
addition, the Company has taken steps to mitigate the impact of potential
violations, and we are in the process of strengthening our export-related
controls and procedures. The U.S. Department of State and other regulatory
authorities encourage voluntary disclosures and generally afford parties
mitigating credit under such circumstances. The Company nevertheless could be
subject to potential regulatory consequences related to these possible
violations ranging from a no-action letter, government oversight of facilities
and export transactions, monetary penalties, and in extreme cases, debarment
from government contracting, denial of export privileges and/or criminal
penalties. It is not possible at this time to predict the precise
timing or probable outcome of any potential regulatory consequences related to
these possible violations. The Company has incurred
during the nine months ended December 31, 2010 and cumulatively, approximately
$32 and $566, respectively, in legal fees associated with the ITAR and related
matters.
Acquisition earn-outs and contingent
payments: In
connection with the Visyx acquisition, the Company has a sales performance based
earn-out totaling $9,000. At December 31, 2010, the Company has recorded
approximately $61 for the sales based earn-out related to Visyx.
10.
SEGMENT INFORMATION:
The
Company continues to have one reporting segment, a sensor business, under
applicable accounting guidelines for segment reporting. For a
description of the products and services of the Sensor business, see Note
1. Management continually assesses the Company’s operating structure,
and this structure could be modified further based on future circumstances and
business conditions.
Geographic
information for revenues based on country from which invoiced and long-lived
assets based on country of location, which includes property, plant and
equipment, but excludes intangible assets and goodwill, net of related
depreciation and amortization follows:
For the three months ended
December 31,
|
For the nine months ended
December 31,
|
|||||||||||||||
2010
|
(As Adjusted)
2009
|
2010
|
(As Adjusted)
2009
|
|||||||||||||
Net
Sales:
|
||||||||||||||||
United
States
|
$ | 27,307 | $ | 17,271 | $ | 72,159 | $ | 51,615 | ||||||||
France
|
11,226 | 9,323 | 31,514 | 26,068 | ||||||||||||
Germany
|
5,062 | 4,195 | 12,941 | 10,310 | ||||||||||||
Ireland
|
7,180 | 5,957 | 22,857 | 13,297 | ||||||||||||
Switzerland
|
4,356 | 2,750 | 11,270 | 7,963 | ||||||||||||
China
|
16,556 | 14,099 | 47,281 | 36,003 | ||||||||||||
Total:
|
$ | 71,687 | $ | 53,595 | $ | 198,022 | $ | 145,256 |
|
December 31,
2010
|
(As Adjusted)
March 31, 2010
|
||||||
Long Lived Assets: | ||||||||
United
States
|
$ | 9,047 | $ | 6,652 | ||||
France
|
8,572 | 7,940 | ||||||
Germany
|
3,021 | 2,334 | ||||||
Ireland
|
3,102 | 3,311 | ||||||
Switzerland
|
1,924 | 1,735 | ||||||
China
|
22,773 | 22,465 | ||||||
Total:
|
$ | 48,439 | $ | 44,437 |
23
At
December 31, 2010, approximately $12,270 of the Company’s cash is maintained in
China, which is subject to certain restrictions on the transfer to another
country because of currency control regulations.
(Amounts
in thousands, except per share data)
INFORMATION
RELATING TO FORWARD-LOOKING STATEMENTS
This
report includes forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended. Certain information included or
incorporated by reference in this Quarterly Report, in press releases, written
statements or other documents filed with or furnished to the Securities and
Exchange Commission (“SEC”), or in our communications and discussions through
webcasts, phone calls, conference calls and other presentations and meetings,
may be deemed to be “forward-looking statements” within the meaning of the
federal securities laws. All statements other than statements of historical fact
are statements that could be deemed forward-looking statements, including
statements regarding: projections of revenue, margins, expenses, tax provisions
(or tax benefits), earnings or losses from operations, cash flows,
synergies or other financial items; plans, strategies and objectives of
management for future operations, including statements relating to potential
acquisitions, executive compensation and purchase commitments; developments,
performance or industry or market rankings relating to products or services;
future economic conditions or performance; future compliance with debt
covenants; the outcome of outstanding claims or legal proceedings; assumptions
underlying any of the foregoing; and any other statements that address
activities, events or developments that Measurement Specialties, Inc. (“MEAS,”
the “Company,” “we,” “us,” “our”) intends, expects, projects, believes or
anticipates will or may occur in the future. Forward-looking statements may be
characterized by terminology such as “forecast,” “believe,” “anticipate,”
“should,” “would,” “intend,” “plan,” “will,” “expects,” “estimates,” “projects,”
“positioned,” “strategy,” and similar expressions. These statements are based on
assumptions and assessments made by our management in light of their experience
and perception of historical trends, current conditions, expected future
developments and other factors they believe to be appropriate.
Any such
forward-looking statements are not guarantees of future performance and involve
a number of risks and uncertainties, many of which are beyond our control.
Actual results, developments and business decisions may differ materially from
those envisaged by such forward-looking statements. These forward-looking
statements speak only as of the date of the report, press release, statement,
document, webcast or oral discussion in which they are made. Factors that might
cause actual results to differ materially from the expected results described in
or underlying our forward-looking statements include:
·
|
Conditions
in the general economy, including risks associated with the current
financial markets and worldwide economic conditions and reduced demand for
products that incorporate our
products;
|
·
|
Competitive
factors, such as price pressures and the potential emergence of rival
technologies;
|
·
|
Compliance
with export control laws and
regulations;
|
·
|
Fluctuations
in foreign currency exchange and interest
rates;
|
·
|
Interruptions
of suppliers’ operations or the refusal of our suppliers to provide us
with component materials, particularly in light of the current economic
conditions and potential for suppliers to
fail;
|
·
|
Timely
development, market acceptance and warranty performance of new
products;
|
·
|
Changes
in product mix, costs and
yields;
|
24
·
|
Uncertainties
related to doing business in Europe and
China;
|
·
|
Legislative
initiatives, including tax legislation and other changes in the Company’s
tax position;
|
·
|
Legal
proceedings;
|
·
|
Compliance
with debt covenants, including events beyond our
control;
|
·
|
Conditions
in the credit markets, including our ability to raise additional funds or
refinance our existing credit
facilities;
|
·
|
Adverse
developments in the automotive industry and other markets served by us;
and
|
·
|
The
risk factors listed from time to time in the reports we file with the SEC,
including those described under “Item 1A. Risk Factors” in our Annual
Report on Form 10-K.
|
This list
is not exhaustive. Except as required under federal securities laws
and the rules and regulations promulgated by the SEC, we do not intend to update
publicly any forward-looking statements after the filing of this Quarterly
Report on Form 10-Q, whether as a result of new information, future events,
changes in assumptions or otherwise.
OVERVIEW
Measurement
Specialties, Inc. is a global leader in the design, development and manufacture
of sensors and sensor-based systems for original equipment manufacturers and end
users. Our products are based on a broad portfolio of proprietary
technology and typically sold under the MEAS brand name. We are a global
business and we believe we have a relatively high degree of diversity when
considering our geographic reach, our broad range of products, the number of
end-use markets and breadth of customer base. The Company is a multi-national
corporation with twelve primary manufacturing facilities strategically located
in the United States, China, France, Ireland, Germany and Switzerland, enabling
the Company to produce and market world-wide a broad range of sensors that use
advanced technologies to measure precise ranges of physical characteristics.
These sensors are used for automotive, medical, consumer, military, aerospace,
water monitoring and industrial applications. The Company’s sensor products
include pressure sensors and transducers, pressure and temperature scanning
instrumentation, linear/rotary position sensors, piezoelectric polymer film
sensors, custom microstructures, load cells, accelerometers, optical sensors,
humidity, temperature, fluid property sensors and hydrostatic pressure
transducers. The Company's advanced technologies include piezo-resistive
silicon sensors, application-specific integrated circuits,
micro-electromechanical systems, piezoelectric polymers, foil strain gauges,
force balance systems, fluid capacitive devices, linear and rotational variable
differential transformers, electromagnetic displacement sensors, hygroscopic
capacitive sensors, ultrasonic sensors, optical sensors, negative thermal
coefficient ceramic sensors, torque sensors, mechanical resonators and
submersible hydrostatic level sensors. We compete in growing global
market segments driven by demand for products that are more energy-efficient,
safer and environmentally-friendly. We deliver a strong value
proposition to our customers through our willingness to customize sensor
solutions, leveraging our innovative portfolio of core technologies and
exploiting our low-cost manufacturing model based on our 16-year presence in
China.
EXECUTIVE
SUMMARY
While the
Company’s results in fiscal years 2010 and 2009 were adversely impacted by one
of the worst global economic recessions in decades, we believe the results also
demonstrate our management team’s ability to manage the Company through
challenging conditions. The Company remains focused on creating
long-term shareholder value through continued development of innovative
technologies and by expanding customer relationships. To accomplish
this goal, we continue to take measures we believe will result in sales
performance in excess of the growth of the overall market and in the generation
of strong earnings and cash flows. We currently have one of the
strongest product development pipelines in the history of the Company, which we
expect to lay the foundation for future sales growth. Research and
development will continue to play a key role in our efforts to introduce
innovative products for new sales and to improve profitability. The
Company continues to expand its position as a global leader: Our
broad range of products and geographic diversity provide the Company with a
variety of opportunities to leverage technology, products, manufacturing base
and, ultimately, our financial performance.
25
Prior to
the recession, the Company delivered strong growth in sales and profitability
through organic growth as well as through acquisitions. The Company
is returning to this strategy. Our sales and earnings during the
first nine months of fiscal 2011 were strong (above pre-recession levels) and we
continue to grow the backlog through strong bookings. On September 8,
2010, the Company completed its first acquisition in 18 months with the purchase
of Pressure Systems, Inc. (“PSI”).
TRENDS
There are
a number of trends that we expect to have material effects on the Company in the
future, including recovering global economic conditions with the resulting
impact on our sales, profitability, and capital spending, changes in foreign
currency exchange rates relative to the U.S. dollar, changes in our debt levels
and applicable interest rates, and shifts in our overall effective tax
rate. Additionally, sales and results of operations could be impacted
by additional acquisitions, though there is no specific timetable for any
acquisitions.
We
believe sales will continue to trend positively. We believe our
fiscal 2011 sales growth will continue to be fueled by continued improvement in
those markets that have not fully recovered since the economic decline,
contribution from new product introductions, and
the expansion of the global sensor market which is growing in excess of gross
domestic product, as well as from any acquisitions that we may make. In future
periods, we expect the sensor market will continue to perform well relative to
the overall economy as a result of the increase in sensor content in various
products across most end markets in the U.S., Europe and
Asia. Product sensor content is increasing faster than product unit
growth as OEMs add more intelligence in products across multiple market
verticals to improve energy efficiency, meet regulatory compliance requirements,
and to improve user safety and user convenience.
As
detailed in the graph below, the Company continues to post consecutive quarters
with higher net sales and higher Adjusted EBITDA on a trailing
quarter-to-quarter comparison. Economic conditions remain unclear
because there is uncertainty as to the strength of the economic recovery with,
among other factors, the euro-zone debt crisis, high unemployment, tight credit
markets, weakness in the housing market and commodity cost
pressures.
26
Adjusted
EBITDA is a non-GAAP financial measure that is not in accordance with, or an
alternative to, measures prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”). The Company believes certain
financial measures which meet the definition of non-GAAP financial measures
provide important supplemental information. The Company considers
Adjusted EBITDA an important financial measure because it provides a financial
measure of the quality of the Company’s earnings from a cash flow perspective
(prior to taking into account the effects of changes in working capital and
purchases of property and equipment and debt service). Other
companies may calculate Adjusted EBITDA differently than we do, which might
limit its usefulness as a comparative measure. Adjusted EBITDA is
used by management in addition to and in conjunction with the results presented
in accordance with GAAP. Additionally, we believe quarterly Adjusted
EBITDA provides the current run-rate for trending purposes rather than a
trailing twelve month historical amount. The following table has been
adjusted to exclude amounts for Nikkiso-THERM (“NT”), the Company’s only
variable interest entity, in accordance with new accounting standards for
consolidation (See Footnote 2 in the Condensed Consolidated Financial
Statements). The table below details quarterly net sales and also
provides a non-GAAP reconciliation of quarterly Adjusted EBITDA to the
applicable GAAP financial measures.
Quarter
Ended
|
Net Sales
(As
Adjusted)**
|
Quarterly
Adjusted
EBITDA* (As
Adjusted)**
|
Income (Loss)
from
Continuing
Operations
|
Interest
|
Foreign
Currency
Exchange Loss
(Gain)
|
Depreciation
and
Amortization
|
Income
Taxes (As
Adjusted)
|
Share-based
Compensation
|
Other*
|
|||||||||||||||||||||||||||
12/31/2008
|
$ | 42,286 | $ | 5,446 | $ | 876 | $ | 675 | $ | 351 | $ | 3,011 | $ | (194 | ) | $ | 727 | $ | - | |||||||||||||||||
3/31/2009
|
$ | 41,735 | $ | 3,364 | $ | (3,170 | ) | $ | 894 | $ | 87 | $ | 3,622 | $ | 1,240 | $ | 691 | $ | - | |||||||||||||||||
6/30/2009
|
$ | 43,722 | $ | 2,963 | $ | (1,477 | ) | $ | 1,168 | $ | (536 | ) | $ | 3,730 | $ | (522 | ) | $ | 600 | $ | - | |||||||||||||||
9/30/2009
|
$ | 47,939 | $ | 5,540 | $ | 68 | $ | 1,018 | $ | (437 | ) | $ | 3,475 | $ | 448 | $ | 810 | $ | 158 | |||||||||||||||||
12/31/2009
|
$ | 53,595 | $ | 8,709 | $ | 3,264 | $ | 905 | $ | (64 | ) | $ | 3,630 | $ | (191 | ) | $ | 865 | $ | 300 | ||||||||||||||||
3/31/2010
|
$ | 59,772 | $ | 9,634 | $ | 4,203 | $ | 808 | $ | 50 | $ | 3,237 | $ | 317 | $ | 943 | $ | 76 | ||||||||||||||||||
6/30/2010
|
$ | 61,170 | $ | 12,123 | $ | 5,589 | $ | 758 | $ | (81 | ) | $ | 3,770 | $ | 1,386 | $ | 691 | $ | 10 | |||||||||||||||||
9/30/2010
|
$ | 65,166 | $ | 13,018 | $ | 6,757 | $ | 884 | $ | 277 | $ | 3,350 | $ | 1,175 | $ | 567 | $ | 8 | ||||||||||||||||||
12/31/2010
|
$ | 71,687 | $ | 14,176 | $ | 7,499 | $ | 753 | $ | (63 | ) | $ | 4,106 | $ | 893 | $ | 974 | $ | 14 |
* -
Adjusted EBITDA = Income from Continuing Operations before Interest, Foreign
Currency Exchange Loss (Gain), Depreciation and Amortization, Income Taxes,
Share-based Compensation and Other. Other represents legal fees
incurred related to certain International Traffic in Arms Regulations
matters.
** - As
Adjusted represents the deconsolidation of N-T in accordance with new accounting
principles for consolildation.
The
primary factors that impact our costs of revenue include production and sales
volumes, product sales mix, foreign currency exchange rates, especially with the
Chinese RMB, and changes in the price of raw materials. We expect our
gross margins during fiscal 2011 to range from approximately 40% to 43%,
primarily reflecting the impact of improved manufacturing overhead absorption
driven by increased production volumes and assuming stability in the value of
the RMB relative to the U.S. dollar, as well as product sales mix. In
the near term, the RMB is expected to be relatively stable, but there are
indications that the Chinese government may allow the RMB to appreciate
again.
Total
selling, general and administrative expense (“Total SG&A”) as a percentage
of net sales was higher in fiscal 2010 and 2009 as compared to prior years
before the recession, mainly reflecting the increase in Total SG&A expenses
due to SG&A expenses related to acquisitions and the decrease in
sales. Historically, we have been successful in leveraging our
SG&A expense, growing SG&A expense more slowly than our sales growth,
but the global economic recession adversely impacted our SG&A
leverage. As a percent of sales, Total SG&A for 2010 was 33.9%,
as compared to 35.4% and 29.5% in fiscal years 2009 and 2008, respectively.
During the first nine months of fiscal 2011, Total SG&A as a percent
of sales was approximately 29.3%. We are expecting in 2011 an overall
decrease in our SG&A as a percentage of net sales mainly due to higher
sales, which are expected to be partially offset by continued investment in
R&D for new programs that are not yet generating sales (such as our new
fluid property sensor), reinstatement of compensation previously reduced as part
of our proactive cost cutting measures to address the global economic recession,
additional grants of share-based awards and increases in costs associated with
acquisitions, including higher amortization of acquired intangible
assets.
Amortization
of acquired intangible assets and deferred financing costs increased over the
past two years mainly due to the acquisitions of Intersema and Visyx (the “2008
Acquisitions”) and the acquisitions of Atexis and FGP (the “2009
Acquisitions”). Amortization is disproportionately front-loaded more
in the initial years of the acquisition, and therefore amortization expense is
higher in the quarters immediately following a transaction, and declines in
later years based on how various intangible assets are valued and amortized.
Assuming no new acquisitions, amortization of acquired intangible assets was
expected to decrease in fiscal 2011 as compared to fiscal 2010, because a number
of intangible assets from previous acquisitions were fully
amortized. However, since the Company completed an acquisition in
fiscal 2011, amortization expense will increase
accordingly. Additionally, amortization of deferred financing costs
was expected to increase because of the costs incurred in connection with the
refinancing of the Company’s primary credit facility (See Long-term Debt section
below for further details regarding the refinancing) and the write-off of
approximately $585 in deferred financing costs associated with the previous
credit facility.
27
In
addition to the margin exposure as a result of the depreciation of the U.S.
dollar relative to the RMB, the Company also has foreign currency exchange
exposures related to balance sheet accounts. When foreign currency exchange
rates fluctuate, there is a resulting revaluation of assets and liabilities
denominated and accounted for in foreign currencies. Foreign currency exchange
(“fx”) losses or gains due to the revaluation of local subsidiary balance sheet
accounts with realized and unrealized fx transactions increased sharply in
recent years, because of, among other factors, volatility of foreign currency
exchange rates. For example, our Swiss company, which uses the Swiss franc as
its functional currency, holds cash denominated in foreign currencies (U.S.
dollar and Euro). As the Swiss franc appreciates against the U.S. dollar and/or
Euro, the cash balances held in those denominations are devalued when stated in
terms of Swiss francs. These fx transaction gains and losses are reflected in
our “Foreign Currency Exchange Gain or Loss.” Aside from cash, our foreign
entities generally hold receivables in foreign currencies, as well as payables.
In fiscal 2010, we recorded net fx gains of $987, and in 2009, we recorded net
fx losses of $771, in realized and unrealized fx changes associated with the
revaluation of foreign assets and liabilities held by our foreign entities. The
Company’s operations outside of the U.S. have expanded over the years from
acquisitions. We expect to see continued fx losses or gains
associated with volatility of foreign currency exchange rates.
The
Company uses and may continue to use foreign currency contracts to hedge these
fx exposures. The Company does not hedge all of its fx exposures, but
has accepted some exposure to exchange rate movements. The Company
does not apply hedge accounting when derivative financial instruments are used
to manage these fx exposures. Since the Company does not apply hedge
accounting, the changes in the fair value of those derivative financial
instruments are reported in earnings in the fx gains or losses
caption. We expect the value of the U.S. dollar will continue to
fluctuate relative to the RMB, Euro, Swiss franc and Japanese
yen. Therefore, both positive and negative movements in
currency exchange rates relative to the U.S. dollar will continue to affect the
reported amounts of sales, profits, and assets and liabilities in the Company’s
consolidated financial statements.
Our
overall effective tax rate will continue to fluctuate as a result of the
distribution of earnings among the various taxing jurisdictions in which we
operate and their varying tax rates. This is particularly challenging
due to the different timing and rates of economic recovery as economies around
the world try to recover from the recession. We expect an increase in
our 2011 overall effective tax rate as compared to last year, excluding discrete
items. The increase in the estimated overall effective tax rate
mainly reflects an increase and a shift of taxable earnings to tax jurisdictions
with higher tax rates. Additionally, last year’s effective tax rate
was impacted by a number of discrete items and the overall shift in profits and
losses with a higher proportion of profits to those jurisdictions with lower tax
rates and a higher proportion of losses to jurisdictions with higher tax
rates. The overall estimated effective tax rate is based on
expectations and other estimates and involves complex domestic and foreign tax
issues, which the Company monitors closely, but are subject to
change.
The
Company expects to continue investing in various capital projects in fiscal
2011, and capital spending in 2011 is expected to approximate
$10,000. This level of capital spending is higher than in fiscal
2010, reflecting improved economic conditions and investments in new programs to
generate new sales.
Note:
Effective April 1, 2010, the Company no longer consolidated its 50 percent
ownership interest in Nikkiso-THERM (“NT”), a joint venture in Japan and the
Company’s one variable interest entity (“VIE”), because of the adoption of new
accounting standards for consolidation of VIEs. Accordingly, the
financial statements for prior periods have been adjusted for the change in
accounting related to NT to conform with current year
presentation. Refer to Note 2 of the condensed consolidated financial
statements for additional information regarding the adjustments to last year’s
financial statements.
28
RESULTS
OF OPERATIONS
THREE
MONTHS ENDED DECEMBER 31, 2010 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2009
The
following table sets forth certain items from operations in our condensed
consolidated statements of operations for the three months ended December 31,
2010 and 2009, respectively:
Three Months Ended
December 31,
|
||||||||||||||||
2010
|
(As
Adjusted)
2009
|
Change
|
Percent
Change
|
|||||||||||||
Net
sales
|
$ | 71,687 | $ | 53,595 | $ | 18,092 | 33.8 | |||||||||
Cost
of goods sold
|
42,030 | 32,327 | 9,703 | 30.0 | ||||||||||||
Gross
profit
|
29,657 | 21,268 | 8,389 | 39.4 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Selling,
general, and administrative
|
17,854 | 15,095 | 2,759 | 18.3 | ||||||||||||
Non-cash
equity based compensation
|
974 | 865 | 109 | 12.6 | ||||||||||||
Amortization
of acquired intangibles and deferred financing costs
|
1,924 | 1,465 | 459 | 31.3 | ||||||||||||
Total
selling, general and administrative expenses
|
20,752 | 17,425 | 3,327 | 19.1 | ||||||||||||
Operating
income
|
8,905 | 3,843 | 5,062 | 131.7 | ||||||||||||
Interest
expense, net
|
753 | 905 | (152 | ) | (16.8 | ) | ||||||||||
Foreign
currency exchange gain
|
(63 | ) | (64 | ) | 1 | (1.6 | ) | |||||||||
Equity
income in unconsolidated joint venture
|
(153 | ) | (118 | ) | (35 | ) | 29.7 | |||||||||
Other
expense (income)
|
(24 | ) | 52 | (76 | ) | (146.2 | ) | |||||||||
Income
before income taxes
|
8,392 | 3,068 | 5,324 | 173.5 | ||||||||||||
Income
tax expense (benefit) from continuing operations
|
893 | (196 | ) | 1,089 | (555.6 | ) | ||||||||||
Income
from continuing operations, net of income taxes
|
$ | 7,499 | $ | 3,264 | $ | 4,235 | 129.7 |
Net
sales: Net
sales increased to $71,687 for the quarter ended December 31, 2010 from $53,595
for the quarter ended December 31, 2009, an increase of $18,092 or
33.8%. Organic sales, defined as net sales excluding sales attributed
to the PSI acquisition of $5,332, increased $12,760 or 24%. Sales
increases were in all sensor product lines, with the largest increases in
pressure, temperature and position. The overall increase in sales is
due to the improvement in overall global economic conditions, as well as new
sales from broader product adoptions and new programs.
Partially
offsetting the increase in sales was a translation decrease in sales resulting
from changes in foreign currency exchange rates. If the average U.S. dollar /
Euro exchange rate had not changed during the three months ended December 31,
2010 as compared to the three months ended December 31, 2009, the Company’s net
sales would have been higher by approximately $1,660. Since a portion
of the Company’s sales are denominated in Euros and translated into U.S.
dollars, there can be a translation decrease or a translation increase in the
Company’s net sales depending on changes in exchange rates. The U.S.
dollar appreciated relative to the Euro in comparing average exchange rates for
the three months ended December 31, 2010 to the three months ended December 31,
2009. For example, €1,000 is translated to $1,306 based on the three
month average exchange rate ending December 31, 2010, but the same €1,000 is
translated to $1,420 using three month average exchange rate ending
December 31, 2009.
Gross
margin: Gross margin (gross profit as a percent of net sales)
increased to approximately 41.4% for the quarter ended December 31, 2010 from
approximately 39.7% during the quarter ended December 31, 2009. The increase in
margin is mainly due to higher volumes of production and sales and the resulting
improvement in leverage and overhead absorption. As with all manufacturers, our
gross margins are sensitive to overall volume of business in that certain costs
are fixed, and when volumes increase, our margins are
higher. Additionally, margins were favorably impacted by improved
product sales mix. However, partially offsetting the increase in
gross margins was the appreciation of the RMB. During the three
months ended December 31, 2010, the RMB appreciated approximately 1.3% relative
to the U.S. dollar as compared to the corresponding period last
year. We estimated on an annual basis a decrease in our operating
income of approximately $174 with every 1% appreciation of the RMB against the
U.S. dollar.
29
On a
continuing basis, our gross margin may vary due to product mix, sales volume,
availability and cost of raw materials, foreign currency exchange rates, and
other factors.
Selling, general
and administrative: Overall, total selling,
general and administrative (“total SG&A”) expenses increased $3,327 or 19.1%
to $20,752. Organic SG&A costs, defined as total SG&A
excluding SG&A costs associated with the acquisition of PSI of $2,276,
increased $1,051 or 6%. The increase in total SG&A mainly
reflects higher compensation costs, including wage, 401(k) match and incentive
compensation accruals, as well as costs associated with the acquisition of
PSI. The Company reinstated compensation previously cut during the
recession and during the quarter ended December 31, 2010, the Company accrued
approximately $150 and $1,053 of 401(k) match and annual incentive compensation,
respectively, for which no amounts were accrued last year.
Total
SG&A expenses as a percent of net sales decreased to 28.9% from 32.5%. The
decrease in total SG&A as a percent of net sales is due to costs increasing
at a lower rate than net sales.
Non-cash equity
based compensation: Non-cash equity based compensation
increased $109 to $974 for the three months ended December 31, 2010, as compared
to $865 for the three months ended December 31, 2009. The increase in non-cash
equity based compensation is mainly due to the higher fair value assigned to the
annual awards granted on December 1, 2010. The higher fair value
reflects, among other things, the increase in the Company’s share
price. Total compensation cost related to share based payments not
yet recognized totaled $5,976 at December 31, 2010, which is expected to be
recognized over a weighted average period of approximately 1.32
years.
Amortization of
acquired intangible assets and deferred financing costs: Amortization of
acquired intangible assets and deferred financing costs increased $459 to $1,924
for the three months ended December 31, 2010 as compared to $1,465 for the three
months ended December 31, 2009. The increase in amortization expense
is mainly because of the acquisition of PSI. Amortization expense is
generally higher during the first year after an acquisition because, among other
things, the order back-log is fully amortized during the initial
year.
Interest expense,
net: Interest expense
decreased $152 to $753 for the three months ended December 31, 2010 from $905
during the three months ended December 31, 2009. The decrease in
interest expense is mainly due to the decrease in interest rates, partially
offset by an increase in average debt outstanding. Interest rates
declined to approximately 3.4% this year from about 4.5% last
year. The decrease in interest rates mainly reflects the improved
pricing with the new Senior Secured Credit Facility dated June 1,
2010. Average total consolidated outstanding debt increased to
approximately $91,344 during the three months ended December 31, 2010 from
$82,137 during the three months ended December 31, 2009 (restated).
Foreign currency
exchange gains and losses: Foreign currency exchange gains and
losses represent the impact of changes in foreign currency exchange rates with,
among other things, the revaluation of balance sheet accounts. When foreign
currency exchange rates fluctuate, there is a resulting revaluation of assets
and liabilities denominated and accounted for in foreign currencies. The Company
continues to be impacted by volatility in foreign currency exchange rates,
including the impact of the fluctuation of the U.S. dollar relative to the Euro
and Swiss franc, as well as the appreciation of the RMB relative to the U.S.
dollar.
Income
taxes: Income tax expense
increased to $893 for the three months ended December 31, 2010 from a tax
benefit of $196 the same period last year. The fluctuation is
primarily due to the generation of higher profits before taxes during the
current quarter and the generation of losses before taxes in certain tax
jurisdictions during the corresponding period last year, partially offset by the
impact of certain discrete tax adjustments.
The
overall effective tax rate (income tax expense divided by income from continuing
operations before income taxes) for the quarter ended December 31, 2010 was
approximately 11%, as compared to a negative 6% for the quarter ended December
31, 2009. The prior year overall effective tax rate was impacted by a
number of discrete tax adjustments, including certain adjustments for Chinese
R&D deductions, lower tax rate in Switzerland and the deferred tax liability
for distribution of certain earnings from Ireland, which were recorded during
the second quarter last year resulting in additional income tax expense of
approximately $184. During the three months ended December 31, 2010,
the following non-cash discrete tax adjustments resulted in a net
income tax benefit of $550:
30
The
Company recorded a credit to income tax expense of approximately $3,200 with
respect to the release of a valuation allowance on German deferred tax
assets. Based on recent improved results in Germany including
forecasts of future taxable income, management determined, based on weighing
positive and negative evidence, that it was more likely than not that the
deferred tax assets are realizable. Separately, approximately $400 of
the valuation allowance release was associated with forecast taxable income for
the current taxable year, which was included within the Company's estimated
annual effective tax rate for non-discrete items.
The
Company recorded an income tax expense of $2,800 relating to the distribution of
foreign earnings. This was part of the Company’s ongoing evaluation
of various tax planning and repatriation strategies in allocating the Company’s
resources. The Company has elected to recognize $8,000 of earnings from
its Irish subsidiary, MEAS Ireland, and recorded a deferred tax liability and
corresponding discrete income tax expense.
The
Company recorded an income tax credit adjustment of $150 related to the
refinement of the estimates between the preparation of the prior year tax
provision and the filing of the prior year tax returns.
Income
tax expense without discrete adjustments during interim periods is based on an
estimated annual effective tax rate (“estimated ETR”). The estimated
ETR without discrete items for fiscal 2011 is approximately 17%, as compared to
the negative 7% estimated ETR without discrete items during the second quarter
of fiscal 2010. The shift from a negative estimated ETR to a positive
estimated ETR mainly reflects the increase in taxable earnings during the
current year and the generation of losses before taxes in certain tax
jurisdictions. The overall estimated ETR is based on expectations and
other estimates and involves complex domestic and foreign tax issues, which the
Company monitors closely and are subject to change.
Diluted shares
outstanding: As compared to the
three months ended December 31, 2009, the average number of diluted shares
outstanding increased 761,000 to 15,447,000 for the three months ended December
31, 2010. This increase primarily reflects the impact that the higher
price of the Company’s stock has in calculating diluted shares
outstanding. The calculation of fully diluted shares outstanding
under the treasury stock method includes the net of new shares potentially
issued by unexercised in-the-money options and assumes the proceeds that the
Company would receive from the in-the-money option exercises would be used to
repurchase common shares in the market. In-the-money options are
those option awards with a grant price below market price.
NINE
MONTHS ENDED DECEMBER 31, 2010 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
2009
The
following table sets forth certain items from operations in our condensed
consolidated statements of operations for the nine months ended December 31,
2010 and 2009, respectively:
31
Nine months ended
December 31,
|
||||||||||||||||
2010
|
(As Adjusted)
2009
|
Change
|
Percent Change
|
|||||||||||||
Net
sales
|
$ | 198,022 | $ | 145,256 | $ | 52,766 | 36.3 | |||||||||
Cost
of goods sold
|
114,424 | 91,065 | 23,359 | 25.7 | ||||||||||||
Gross profit
|
83,598 | 54,191 | 29,407 | 54.3 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Selling,
general, and administrative
|
50,771 | 43,911 | 6,860 | 15.6 | ||||||||||||
Non-cash
equity based compensation
|
2,231 | 2,275 | (44 | ) | (1.9 | ) | ||||||||||
Amortization
of acquired intangibles and deferred financing costs
|
5,063 | 4,614 | 449 | 9.7 | ||||||||||||
Total selling, general and administrative expenses
|
58,065 | 50,800 | 7,265 | 14.3 | ||||||||||||
Operating income (loss)
|
25,533 | 3,391 | 22,142 | 653.0 | ||||||||||||
Interest
expense, net
|
2,395 | 3,092 | (697 | ) | (22.5 | ) | ||||||||||
Foreign
currency exchange loss (gain)
|
134 | (1,037 | ) | 1,171 | (112.9 | ) | ||||||||||
Equity
income in unconsolidated joint venture
|
(402 | ) | (328 | ) | (74 | ) | 22.6 | |||||||||
Other
expense
|
110 | 79 | 31 | 39.2 | ||||||||||||
Income
before income taxes
|
23,296 | 1,585 | 21,711 | 1,369.8 | ||||||||||||
Income tax expense (benefit) from continuing operations
|
3,453 | (271 | ) | 3,724 | (1,374.2 | ) | ||||||||||
Income
from continuing operations, net of income taxes
|
19,843 | 1,856 | 17,987 | 969.1 | ||||||||||||
Loss
from discontinued operations, net of income taxes
|
- | (142 | ) | 142 | (100.0 | ) | ||||||||||
Net
income (loss)
|
$ | 19,843 | $ | 1,714 | $ | 18,129 | 1,057.7 |
Net
sales: Net
sales increased to $198,022 for the nine months ended December 31, 2010 from
$145,256 for the nine months ended December 31, 2009, an increase
of $52,766 or 36.3%. Organic sales, defined as net sales
excluding sales attributed to the PSI acquisition of $7,190, increased $45,576
or 31.4%. Sales increases were in all sensor product lines, with the
largest increases in temperature, pressure and force. The overall
increase in sales is due to the improvement in overall global economic
conditions, as well as new sales from broader product adoptions and new
programs.
Partially
offsetting the increase in sales was a translation decrease in sales resulting
from changes in foreign currency exchange rates. If the average U.S.
dollar / Euro exchange rate had not changed during the nine months ended
December 31, 2010 as compared to the nine months ended December 31, 2009, the
Company’s net sales would have been higher by approximately
$4,308. Since a portion of the Company’s sales are denominated in
Euros and translated into U.S. dollars, there can be a translation decrease or a
translation increase in the Company’s net sales depending on changes in exchange
rates. The U.S. dollar appreciated relative to the Euro in comparing
average exchange rates for the nine months ended December 31, 2010 to the nine
months ended December 31, 2009. For example, €1,000 is translated to
$1,359 based on the nine month average exchange rate ended December 31, 2010,
but the same €1,000 is translated to $1,476 using nine month average exchange
rate ending December 31, 2009.
The
global recession in 2008-2009 had been one of the worst recessions in decades,
and the overall impact of the recession was evident during the nine months
ending December 31, 2009. The recession-related decrease in sales
during the nine months of last fiscal year reflected decreases in all sectors,
driven largely by sharp reductions in sales to passenger and non-passenger
vehicle customers in U.S., Europe and Asia.
Gross
margin: Gross margin (gross profit as a percent of net sales)
increased to approximately 42.2% for the nine months ended December 31, 2010
from approximately 37.3% during the nine months ended December 31, 2009. The
increase in margin is mainly due to higher volumes of production and sales and
the resulting improvement in leverage and overhead absorption. As with all
manufacturers, our gross margins are sensitive to overall volume of business in
that certain costs are fixed, and when volumes increase, our margins are
higher. Additionally, margins were favorably impacted by improved
product sales mix. However, partially offsetting the increase in
gross margins was the appreciation of the RMB. During the nine months
ended December 31, 2010, the RMB appreciated approximately 3.3% relative to the
U.S. dollar as compared to the corresponding period last year. We
estimated on an annual basis a decrease in our operating income of approximately
$174 with every 1% appreciation of the RMB against the U.S. dollar.
On a
continuing basis, our gross margin may vary due to product mix, sales volume,
availability of raw materials, foreign currency exchange rates, and other
factors.
32
Selling, general
and administrative: Overall, total selling,
general and administrative (“total SG&A”) expenses increased $7,265 or 14.3%
to $58,065. Organic SG&A costs, defined as total SG&A
excluding SG&A costs associated with the PSI acquisition of $2,806,
increased $4,459 or 9%. The increase in total SG&A mainly
reflects higher compensation costs, including wage, 401(k) match, and incentive
compensation accruals. The Company reinstated compensation previously
cut during the recession and the Company accrued approximately $450 and $3,158
of 401(k) match and annual incentive compensation, respectively, for which no
amounts were accrued last year.
Total
SG&A expenses as a percent of net sales decreased to 29.3% from 35%. The
decrease in total SG&A as a percent of net sales is due to improved leverage
with costs increasing at a lower rate than net sales.
Non-cash equity
based compensation: Non-cash equity based compensation
decreased $44 to $2,231 for the nine months ended December 31, 2010, as compared
to $2,275 for the nine months ended December 31, 2009. The decrease in non-cash
equity based compensation is due to a number of factors, including the number of
awards, the grant-fair-value, the ratable recognition of non-cash equity based
compensation and the timing of the annual awards. Non-cash equity
based compensation is expected to increase next quarter, due to the higher grant
fair value. The higher fair value reflects, among other things, the
increase in the Company’s share price. Total compensation cost
related to share based payments not yet recognized totaled $5,976 at December
31, 2010, which is expected to be recognized over a weighted average period of
approximately 1.32 years.
Amortization of
acquired intangible assets and deferred financing costs: Amortization of
acquired intangible assets and deferred financing costs increased $449 to $5,063
for the nine months ended December 31, 2010 as compared to $4,614 for the nine
months ended December 31, 2009. The increase in amortization expense
is mainly because of the PSI acquisition, as well as the write-off of $585 in
deferred financing costs associated with the previous credit
facility. Amortization expense is generally higher during the first
year after an acquisition because, among other things, the order back-log is
fully amortized during the initial year.
Interest
expense, net: Interest
expense decreased $697 to $2,395 for the nine months ended December 31, 2010
from $3,092 during the nine months ended December 31, 2009. The
decrease in interest expense is due to the decreases in average interest rates
and average total debt outstanding. Interest rates declined to
approximately 3.9% this year from about 4.8% last year. The decrease
in interest rates mainly reflects the improved pricing with the new Senior
Secured Credit Facility. Total average consolidated outstanding debt
decreased to approximately $80,469 during the nine months ended December 31,
2010 from $86,713 during the nine months ended December 31, 2009
(restated).
Foreign currency
exchange gains and losses: Foreign currency exchange gains and
losses represent the impact of changes in foreign currency exchange rates with,
among other things, the revaluation of balance sheet accounts. When foreign
currency exchange rates fluctuate, there is a resulting revaluation of assets
and liabilities denominated and accounted for in foreign currencies. For
example, our Irish company, which uses the Euro as its functional currency,
holds cash denominated in foreign currencies, including U.S. dollar. As the Euro
appreciates against the U.S. dollar, the cash balances held in those
denominations are devalued when stated in terms of Euro, resulting in a foreign
currency exchange loss.
The
fluctuation in foreign currency exchange from a gain last year to a loss this
year is due to the revaluation of the U.S. dollar denominated net asset position
of the Company’s European operations, which was impacted by the depreciation of
the Euro relative to the U.S. dollar. The Company continues to be
impacted by volatility in foreign currency exchange rates, including the impact
of the fluctuation of the U.S. dollar relative to the Euro and Swiss franc, as
well as the appreciation of the RMB relative to the U.S. dollar.
Income
taxes: Income tax expense
increased $3,724 to $3,453 for the nine months ended December 31, 2010, as
compared to $271 income tax benefit during the same period last
year. The fluctuation is primarily due to the generation of
higher profits before taxes during the current period and the generation of
losses before taxes in certain tax jurisdictions during the corresponding period
last year, partially offset by the impact of certain discrete tax
adjustments.
33
The
overall effective tax rate (income tax expense (benefit) divided by income from
continuing operations before income taxes) for the nine months ended December
31, 2010 was approximately 15%, as compared to a negative 5% for the nine ended
December 31, 2009. During the nine months ended December 31, 2010,
the following non-cash discrete tax adjustments resulted in a net
income tax benefit of $430:
The
Company recorded a credit to income tax expense of approximately $3,200 with
respect to the release of a valuation allowance on German deferred tax
assets. Based on recent improved results in Germany including
forecasts of future taxable income, management determined, based on weighing
positive and negative evidence, that it was more likely than not that the
deferred tax assets are realizable. Separately, approximately $400 of
the valuation allowance release was associated with forecast taxable income for
the current taxable year, which was included within the Company's estimated
annual effective tax rate for non-discrete items.
The
Company recorded an income tax expense of $2,800 relating to the distribution of
foreign earnings. This was part of the Company’s ongoing evaluation
of various tax planning and repatriation strategies in allocating the Company’s
resources. The Company has elected to recognize $8,000 of earnings from
its Irish subsidiary, MEAS Ireland, and recorded a deferred tax liability and
corresponding discrete income tax expense.
The
Company recorded an income tax credit adjustment of $150 related to the
refinement of the estimates between the preparation of the prior year tax
provision and the filing of the prior year tax returns. The Company
also recorded an income tax expense of $350 related to an IRS audit and
settlement and approximately $230 in income tax credits for adjustments to
certain income tax liabilities.
Income
tax expense or benefit without discrete adjustments during interim periods is
based on an estimated annual effective tax rate (“estimated
ETR”). The estimated ETR without discrete items for fiscal 2011 is
approximately 17%, as compared to 5% estimated ETR without discrete items during
the first nine months of fiscal 2010. The increase in the estimated
ETR reflects the shift from losses before taxes last year in certain tax
jurisdictions to higher taxable earnings during the current year. The
overall estimated ETR is based on expectations and other estimates and involves
complex domestic and foreign tax issues, which the Company monitors closely and
subject to change.
Diluted shares
outstanding: As compared to the nine
months ended December 31, 2009, the average number of diluted shares outstanding
increased 593,000 to 15,222,000 for the nine months ended December 31,
2010. This increase primarily reflects the impact that the higher
price of the Company’s stock has in calculating diluted shares
outstanding. The calculation of fully diluted shares outstanding
under the treasury stock method includes the net of new shares potentially
issued by unexercised in-the-money options and assumes the proceeds that the
Company would receive from the in-the-money option exercises would be used to
repurchase common shares in the market. In-the-money options are
those option awards with a grant price below market price.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
balances totaled $30,716 at December 31, 2010, an increase of $7,551 as compared
to March 31, 2010, reflecting, among other factors, positive cash flows
generated from operating activities, borrowings to fund the PSI acquisition and
proceeds from stock-option exercises, partially offset by the utilization of
certain cash balances for the acquisition of PSI, payment of debt and purchases
of property, plant and equipment.
34
The
following compares the primary categories of the consolidated condensed
statement of cash flows for the nine months ended December 31, 2010 and
2009:
Nine months ended December 31,
|
||||||||||||
2010
|
2009
|
Change
|
||||||||||
Net
cash provided by operating activities
|
$ | 22,587 | $ | 21,015 | $ | 1,572 | ||||||
Net
cash used in investing activities
|
(33,680 | ) | (3,753 | ) | (29,927 | ) | ||||||
Net
cash provided by (used in) financing activities
|
18,273 | (15,126 | ) | 33,399 | ||||||||
Net cash provided by discontinued operations | - | 141 | (141 | ) | ||||||||
Effect
of exchange rate changes on cash
|
371 | 444 | (73 | ) | ||||||||
Net
change in cash and cash equivalents
|
$ | 7,551 | $ | 2,721 | $ | 4,830 |
A key
source of the Company’s liquidity is its ability to generate operating cash
flows. The Company continues to generate positive operating cash
flows. Cash flows provided by operating activities increased $1,572 to
$22,587 for the nine months ended December 31, 2010. The increase in
operating cash flows was mainly due to the increase in net income, partially
offset by the decrease in cash flows from operating working capital (changes in
trade accounts receivables, inventory, and accounts payable), which declined by
$19,773 as compared to the nine months ending December 31, 2009. The
decline in cash flows from operating working capital was partially offset by the
$17,987 increase in income from continuing operations. The two largest
drivers of the decrease in current period operating cash flows are the increases
in inventory and trade receivables. Inventory balances increased $10,316
because of the higher levels of inventory to support the increase in
sales. The $5,264 increase in accounts receivable mainly reflects the
increase in sales, as compared to a decrease in accounts receivable last year
due the overall decline in sales due to the recession. Offsetting the
increases in inventory and receivables is the $451 increase in accounts payable,
which corresponds to higher inventory purchases. The increase in the
income tax payable reflects, among other things, higher levels of taxable income
due to the improvement in operating results.
Historically,
funding for business acquisitions constitutes one of the more significant, if
not the most significant, use of the Company’s cash. Net cash used in
investing activities was $33,680 as compared to $3,753 last year. The increase
in net cash used in investing activities is due to the acquisition of PSI and
the Visyx earn-out payments. There were no significant cash outlays for
business acquisitions during the nine months ended December 31, 2009. The
increase in capital expenditures during the first nine months of fiscal 2011
reflects the purchase of equipment for the manufacturing of new products and
programs, and the lower level of capital spending during the prior year mainly
reflected the various cost control measures in direct response to the
recession.
Net cash
provided by financing activities totaled $18,273 for the nine months ended
December 31, 2010, as compared to $15,126 in net cash used in financing
activities during the corresponding period last year. The borrowings from
revolver and long-term debt and the corresponding repayments of the revolver and
long-term debt reflect the financing activities associated with the refinancing
executed on June 1, 2010. The Company’s credit facilities are mainly utilized to
fund acquisitions, and with the purchase of PSI during the current period, the
Company’s borrowings increased accordingly. There were no acquisitions
during the previous year. Last year, the Company made debt payments as
part of our efforts to reduce debt levels during the recession. The
Company has made approximately $6,000 in revolver payments during the three
months ending December 31, 2010, and the Company plans to make additional
payments during the final quarter of fiscal 2011. Also contributing to the
increase in net cash provided by financing activities, proceeds from the
exercise of stock-options totaled $4,818 for the nine months ended December 31,
2010, mainly reflecting more employees exercising options due to the increase in
the Company’s share price. The Company has maintained cash balances to
fund acquisitions, capital expenditures for new programs, and operations to,
among other things, support increased working capital requirements resulting
from higher sales.
35
Long-term
debt: The Company entered into a new Credit Agreement (the "Senior
Secured Credit Facility") dated June 1, 2010 among JPMorgan Chase Bank, N.A., as
administrative agent and collateral agent (in such capacity, the "Senior Secured
Facility Agents"), Bank America, N.A., as syndication agent, and certain other
parties thereto (the "Credit Agreement") to refinance the Amended and Restated
Credit Agreement effective as of April 1, 2006 among the Company, General
Electric Capital Corporation, as agent and a lender, and certain other parties
thereto and to provide for the working capital needs of the Company including to
effect permitted acquisitions. The Senior Secured Facility consists of a
$110,000 revolving credit facility (the "Revolving Credit Facility") with a
$50,000 accordion feature enabling expansion of the Revolving Credit Facility to
$160,000. The Revolving Credit Facility has a variable interest rate based
on either the London Inter-bank Offered Rate ("LIBOR") or the ABR Rate (prime
based rate) with applicable margins ranging from 2.00% to 3.25% for LIBOR based
loans or 1.00% to 2.25% for ABR Rate loans. The applicable margins may be
adjusted quarterly based on a change in the leverage ratio of the Company.
The Senior Secured Credit Facility also includes the ability to borrow in
currencies other than U.S. dollars, such as the Euro and Swiss Franc, up to
$66,000. Commitment fees on the unused balance of the Revolving
Credit Facility range from 0.375% to 0.50% per annum of the average amount of
unused balances. The Revolving Credit Facility will expire on June 1, 2014
and all balances outstanding under the Revolving Credit Facility will be due on
such date. The Company has provided a security interest in substantially
all of the Company's U.S. based assets as collateral for the Senior Secured
Credit Facility and private placement of credit facilities entered into by the
Company from time to time not to exceed $50,000, including the Prudential Shelf
Facility (as defined below). The Senior Secured Credit Facility includes
an inter-creditor arrangement with Prudential and is on a pari passu (equal force)
basis with the Prudential Shelf Facility.
The
Senior Secured Facility includes specific financial covenants for maximum
leverage ratio and minimum fixed charge coverage ratio, as well as customary
representations, warranties, covenants and events of default for a transaction
of this type. Consolidated EBITDA for debt covenant purposes is the
Company's consolidated net income determined in accordance with GAAP minus the
sum of income tax credits, interest income, gain from extraordinary items for
such period, any non-cash gains, and gains due to fluctuations in currency
exchange rates, plus the sum of any provision for income taxes, interest
expense, loss from extraordinary items, any aggregate net loss during such
period arising from the disposition of capital assets, the amount of non-cash
charges for such period, amortized debt discount for such period, losses due to
fluctuations in currency exchange rates and the amount of any deduction to
consolidated net income as the result of any grant to any members of the
management of the Company of any equity interests. The Company's leverage
ratio consists of total debt less unrestricted cash maintained in U.S. bank
accounts which are subject to control agreements in favor of JPMorgan Chase
Bank, N.A., as Collateral Agent, to Consolidated EBITDA. Adjusted fixed
charge coverage ratio is Consolidated EBITDA less capital expenditures divided
by fixed charges. Fixed charges are the last twelve months of scheduled
principal payments, taxes paid in cash and consolidated interest expense.
All of the aforementioned financial covenants are subject to various
adjustments, many of which are detailed in the Credit Agreement.
As of
December 31, 2010, the Company utilized the LIBOR based rate for $56,746 of the
Revolving Credit Facility. The weighted average interest rate applicable to
borrowings under the Revolving Credit Facility was approximately 2.3% at
December 31, 2010. As of December 31, 2010, the outstanding borrowings on the
Revolving Credit Facility, which is classified as non-current, were $56,746, and
the Company had an additional $53,254 available under the Revolving Credit
Facility. The Company’s borrowing capacity is limited by financial covenant
ratios, including earnings ratios, and as such, our borrowing capacity is
subject to change. At December 31, 2010, the Company could have borrowed
an additional $53,254.
On June
1, 2010, the Company entered into a Master Shelf Agreement (the "Prudential
Shelf Facility") with Prudential Investment Management, Inc. ("Prudential")
whereby Prudential agreed to purchase up to $50,000 of senior secured notes (the
"Senior Secured Notes") issued by the Company. Prudential purchased two
Senior Secured Notes each for $10,000 and the remaining $30,000 of such Senior
Secured Notes may be purchased at the discretion of Prudential or one or more of
its affiliates upon the request of the Company. The Prudential Shelf
Facility has a fixed interest rate of 5.70% and 6.15% for each of the two
$10,000 Senior Secured Notes issued by the Company and the Senior Secured Notes
issued there under are due on June 1, 2015 and 2017, respectively.
The Prudential Shelf Facility includes specific financial covenants for
maximum total leverage ratio and minimum fixed charge coverage ratio consistent
with the Senior Secured Credit Facility, as well as customary representations,
warranties, covenants and events of default. The Prudential Shelf Facility
includes an inter-creditor arrangement with the Senior Secured Facility Agents
and is on a pari passu
(equal force) basis with the Senior Secured Facility.
The
Company was in compliance with applicable financial covenants at December 31,
2010.
36
Deferred
financing costs: As part of the June 1, 2010 refinancing, the Company
recorded approximately $1,568 in deferred financing costs and wrote-off
approximately $585 in deferred financing costs associated with the previous
credit facility. Amortization of deferred financing costs associated with
the refinancing for the three and nine months ended December 31, 2010 was $92
and $209, respectively. Annual amortization expense is estimated to be
approximately $381.
China credit
facility: On November 3, 2009, the Company’s subsidiary in China
(“MEAS China”) entered into a two year credit facility agreement (the “China
Credit Facility”) with China Merchants Bank Co. Ltd (“CMB”). The
China Credit Facility permits MEAS China to borrow up to RMB 68,000
(approximately $10,000). Specific covenants include customary
limitations, compliance with laws and regulations, use of proceeds for
operational purposes, and timely payment of interest and principal. MEAS
China has pledged its Shenzhen facility to CMB as collateral. The interest
rate is based on the London Inter-bank Offered Rate (“LIBOR”) plus a LIBOR
spread, depending on the term of the loan when drawn. The purpose of the
China Credit Facility is primarily to provide additional flexibility in funding
operations of MEAS China. At December 31, 2010, there was $5,000 borrowed
against the China Credit Facility at an interest rate of 5.05% and is classified
as short-term debt since it is payable on January 29, 2011. At December
31, 2010, MEAS China could borrow an additional $5,000 under the China Credit
Facility.
European credit
facility: On July 21, 2010, the Company’s subsidiary in France
(“MEAS Europe”) entered into a five year credit facility agreement (the
“European Credit Facility”) with La Societe Bordelaise de Credit
Industriel et Commercial (“CIC”). The European Credit Facility permits
MEAS Europe to borrow up to €2,000 (approximately $2,600).
Specific covenants include specific financial covenants for
maximum leverage ratio and net debt to equity ratio, as well as customary
limitations, compliance with laws and regulations, use of proceeds, and timely
payment of interest and principal. MEAS Europe has pledged its Les
Clayes-sous-Bois, France facility to CIC as collateral. The interest rate
is based on the EURIBOR Offered Rate (“EURIBOR”) plus a spread of 1.8%.
The EURIBOR interest rate will vary depending on the term of the loan when
drawn. The purpose of the European Credit Facility is primarily to provide
additional flexibility in funding operations of MEAS Europe. At December
31, 2010, there were no amounts borrowed against the European Credit Facility
and MEAS Europe could borrow €2,000.
Promissory
notes: In connection with the acquisition of Intersema Microsystems
SA (“Intersema”), the Company issued 10,000 Swiss franc unsecured promissory
notes (the “Intersema Notes”). At December 31, 2010, the Intersema Notes
totaled $5,314, of which $2,657 was classified as current. The Intersema Notes
are payable in four equal annual installments through January 15, 2012, and bear
an interest rate of 4.5% per year.
Acquisition
earn-outs and contingent payments: In connection with the Visyx
acquisition, the Company has a sales performance based earn-out totaling $9,000.
At December 31, 2010, the Company has recorded approximately $61 for the sales
based earn-out related to Visyx.
LIQUIDITY:
Management assesses the Company’s liquidity in terms of available cash, our
ability to generate cash and our ability to borrow to fund operating, investing
and financing activities. The Company continues to generate cash from operating
activities, and the Company remains in a positive financial position with
availability under existing credit facilities. The Company will continue
to have cash requirements to support working capital needs, capital
expenditures, earn-outs related to acquisitions, and to pay interest and service
debt. We believe the Company’s financial position, generation of cash and
the existing credit facilities, in addition to the potential to refinance or
obtain additional financing will be sufficient to meet funding of day-to-day and
material short and long-term commitments for the foreseeable
future.
At
December 31, 2010, we had approximately $30,716 of available cash, and
availability under the revolver of approximately $53,254 after considering the
limitations set on the Company’s total leverage under the revolving credit
facility. This cash balance includes cash of $12,270 in China, which is
subject to certain restrictions on the transfer to another country
because of currency control regulations. The Company’s cash balances are
generated and held in numerous locations throughout the world, including
substantial amounts held outside the United States. The Company utilizes a
variety of tax planning and financing strategies in an effort to ensure that its
worldwide cash is available in the locations in which it is needed. Wherever
possible, cash management is centralized and intra-company financing is used to
provide working capital to the Company’s operations. Cash balances held outside
the United States could be repatriated to the United States, but, under current
tax laws and consistent with our tax planning strategies and position that
undistributed earnings of most of our foreign operations are indefinitely
reinvested outside of the U.S., would potentially be subject to United States
federal income taxes, less applicable foreign tax credits. Repatriation of some
foreign balances is restricted or prohibited by local laws. Where local
restrictions prevent an efficient intra-company transfer of funds, the Company’s
intent is that cash balances would remain in the foreign country and it would
meet United States liquidity needs through ongoing cash flows, external
borrowings, or both.
37
ACCUMULATED
OTHER COMPREHENSIVE INCOME: Accumulated other comprehensive income
primarily consists of foreign currency translation adjustments, which relate to
the Company’s European and Asian operations and the effects of changes in the
exchange rates of the U.S. dollar relative to the Euro, Chinese RMB, Hong Kong
dollar, Japanese Yen and Swiss franc.
DIVIDENDS: We have not declared
cash dividends on our common equity. Additionally, the payment of dividends is
prohibited under our credit facilities. We intend to retain earnings to support
our growth strategy and we do not anticipate paying cash dividends in the
foreseeable future.
At
present, there are no material restrictions on the ability of our Hong Kong and
European subsidiaries to transfer funds to us in the form of cash dividends,
loans, advances, or purchases of materials, products, or services, except with
regard to our tax planning strategies and position that undistributed earnings
of most of our foreign operations are indefinitely reinvested outside of the
U.S. Chinese laws and regulations, including currency exchange controls,
however, restrict distribution and repatriation of dividends by our China
subsidiary.
SEASONALITY: As a whole, there is no
material seasonality in our sales. However, general economic conditions have an
impact on our business and financial results, and certain end-use markets
experience certain seasonality. For example, European sales are often lower in
summer months and OEM sales are often stronger immediately preceding and
following the introduction of new products.
INFLATION:
We compete on the basis of product design, features, and value. Accordingly, our
prices generally have kept pace with inflation, notwithstanding that inflation
in the countries where our subsidiaries are located has been consistently higher
than inflation in the United States. Increases in labor costs have not had a
significant impact on our business because most of our employees are in China,
where prevailing labor costs are low. However, we have experienced increases in
materials costs, especially during the end of fiscal 2008 and during the first
part of fiscal 2009, and as a result, we suffered a decline in margin during
those periods. During the second half of fiscal 2009 and all of fiscal
2010, material costs stabilized as a result of the global economic
recession.
OFF
BALANCE SHEET ARRANGEMENTS: Effective April 1, 2010, the Company no longer
consolidated its 50 percent ownership interest in Nikkiso-THERM (“NT”), a joint
venture in Japan and the Company’s one variable interest entity (“VIE”).
In accordance with accounting standards for consolidation of VIEs, the Company
is not considered the primary beneficiary since it does not have both the power
to direct activities of the VIE that most significantly impact the VIE’s
economic performance and the obligation to absorb the losses of the VIE or the
right to receive the benefits of the VIE. The Company does not have the
power to direct activities of the VIE that most significantly impact the VIE’s
economic performance. The unconsolidated VIE is accounted for under equity
method of accounting. Under the equity method of accounting, the Company
recognizes its proportionate share of the profits and losses of the
unconsolidated VIE. The nature of the Company’s involvement with NT is not
as a sponsor of a qualifying special purpose entity (QSPE) for the transfer of
financial assets. NT is a self-sustaining manufacturer and distributor of
temperature based sensor systems in Asian markets. The assets of NT are
for the operations of the joint venture and the VIE relationship does not expose
the Company to risks not considered normal business risks.
Except
for NT, we do not have any partnerships with unconsolidated entities, such as
entities often referred to as structured finance or special purpose entities
which are often established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. Accordingly, we
are not exposed to any financing, liquidity, market or credit risk that could
arise if we had such relationships.
38
The
Company has acquired and divested of certain assets, including the acquisition
of businesses and the sale of the Consumer business. In connection with these
acquisitions and divestitures, the Company often provides representations,
warranties and/or indemnities to cover various risks and unknown liabilities,
such as claims for damages arising out of the use of products or relating to
intellectual property matters, commercial disputes, environmental matters or tax
matters. The Company cannot estimate the potential liability from such
representations, warranties and indemnities because they relate to unknown
conditions. However, the Company does not believe that the liabilities relating
to these representations, warranties and indemnities will have a material
adverse effect on the Company’s financial position, results of operations or
liquidity.
AGGREGATE
CONTRACTUAL OBLIGATIONS: As of December 31, 2010, the Company’s
contractual obligations, including payments due by period, are as
follows:
Contractual Obligations:
|
Payment due by period
|
|||||||||||||||||||
Total
|
1 year
|
2-3 years
|
4-5 years
|
> 5 years
|
||||||||||||||||
Long-term
debt obligations
|
$ | 88,094 | $ | 7,818 | $ | 2,990 | $ | 67,286 | $ | 10,000 | ||||||||||
Interest
obligation on long-term debt
|
12,019 | 2,995 | 5,363 | 3,321 | 340 | |||||||||||||||
Capital
lease obligations
|
96 | 80 | 16 | - | - | |||||||||||||||
Operating
lease obligations
|
24,017 | 3,911 | 7,183 | 5,182 | 7,741 | |||||||||||||||
Purchase
obligations
|
$ | 10,537 | 9,730 | 807 | - | - | ||||||||||||||
Other
long-term obligations*
|
10,346 | 10,242 | 104 | - | - | |||||||||||||||
Total
|
$ | 145,109 | $ | 34,776 | $ | 16,463 | $ | 75,789 | $ | 18,081 |
* Other long-term obligations
on the Company’s balance sheet under GAAP primarily consist of obligations under
warranty polices, foreign currency contracts and tax liabilities. The timing of
cash flows associated with these obligations is based upon management’s estimate
over the terms of these arrangements and are largely based on historical
experience.
The above
contractual obligation table excludes certain contractual obligations, such as
earn-outs related to acquisitions, possible severance payments to certain
executives, since these contractual commitments are not accrued as liabilities
at December 31, 2010. These contractual obligations are accrued as
liabilities when the respective contingencies are estimable or
determinable.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Amounts
in thousands)
The
Company is exposed to market risk from changes in interest rates, foreign
currency exchange rates, commodity and credit risk, which could impact its
results of operations and financial condition. The Company attempts to address
its exposure to these risks through its normal operating and financing
activities. In addition, the Company’s broad-based business activities help to
reduce the impact that volatility in any particular area or related areas may
have on its operating earnings as a whole.
Interest
Rate Risk: Under our term and revolving credit facilities, we are exposed
to a certain level of interest rate risk. Interest on the principal amount of
our borrowings under our revolving credit facility is variable and accrues at a
rate based on either a LIBOR rate plus a LIBOR margin or at an Indexed (prime
based) Rate plus an Index Margin. The LIBOR or Index Rate is at our election.
Our results will be adversely affected by any increase in interest rates. For
example, based on the $56,746 of total revolver debt outstanding under
these facilities at December 31, 2010, an interest rate increase of 100
basis points would increase annual interest expense and decrease our pre-tax
profitability by $567. Interest on the principal amounts of our borrowings
under our term loans accrues interest at fixed rates of interest. If
interest rates decline, the Company would not be able to benefit from the lower
rates on our long-term debt. For example, based on the $20,000 of
total debt outstanding under these facilities at December 31, 2010, an
interest rate decrease of 100 basis points would result in higher annual
interest expense of $200. We do not currently hedge these interest rate
exposures.
39
Commodity
Risk: The Company uses a wide range of commodities in our products,
including steel, non-ferrous metals and petroleum based products, as well as
other commodities required for the manufacture of our sensor products.
Changes in the pricing of commodities directly affect our results of operations
and financial condition. We attempt to address increases in commodity
costs through cost control measures or pass these added costs to our customers,
and we do not currently hedge such commodity exposures.
Credit
Risk: Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist of cash and temporary
investments, foreign currency forward contracts and trade accounts receivable.
The Company is exposed to credit losses in the event of nonperformance by
counter parties to its financial instruments. The Company places cash and
temporary investments with various high-quality financial institutions
throughout the world. Although the Company does not obtain collateral or other
security to secure these obligations, it does periodically monitor the
third-party depository institutions that hold our cash and cash equivalents. Our
emphasis is primarily on safety and liquidity of principal and secondarily on
maximizing yield on those funds. In addition, concentrations of credit risk
arising from trade accounts receivable are limited due to the diversity of the
Company’s customers. The Company performs ongoing credit evaluations of its
customers’ financial conditions and the Company does not obtain collateral,
insurance or other security. Notwithstanding these efforts, the current
distress in the global economy may increase the difficulty in collecting
accounts receivable.
Foreign
Currency Exchange Rate Risk: Foreign currency exchange rate risk arises
from the Company’s investments in subsidiaries owned and operated in foreign
countries, as well as from transactions with customers in countries outside the
United States. The effect of a change in currency exchange rates on the
Company’s net investment in international subsidiaries is reflected in the
“accumulated other comprehensive income” component of stockholders’ equity. A
10% appreciation in major currencies relative to the U.S. dollar at December 31,
2010 would result in an increase in stockholders’ equity of approximately
$13,176 .
Although
the Company has a U.S. dollar functional currency for reporting purposes, it has
manufacturing sites throughout the world and a large portion of its sales are
generated in foreign currencies. A substantial portion of our revenues are
priced in U.S. dollars, and most of our costs and expenses are priced in U.S.
dollars, with the remaining priced in Chinese RMB, Euros, Swiss francs and
Japanese yen. Sales by subsidiaries operating outside of the United States are
translated into U.S. dollars using exchange rates effective during the
respective period. As a result, the Company is exposed to movements in the
exchange rates of various currencies against the United States dollar.
Accordingly, the competitiveness of our products relative to products produced
locally (in foreign markets) may be affected by the performance of the U.S.
dollar compared with that of our foreign customers’ currencies. Refer to Item 1,
Business, Foreign Operations set forth in our Annual Report filed on Form 10-K
for details concerning annual net sales invoiced from our facilities within the
U.S. and outside of the U.S. and as a percentage of total net sales for the last
three years, as well as net assets and the related functional currencies.
Therefore, both positive and negative movements in currency exchange rates
against the U.S. dollar will continue to affect the reported amount of sales,
profit, and assets and liabilities in the Company’s consolidated financial
statements.
The value
of the RMB relative to the U.S. dollar appreciated approximately 3.3% during the
nine months of fiscal 2011. Overall, the RMB was stable during fiscal
2010. The Chinese government no longer pegs the RMB to the US dollar, but
established a currency policy letting the RMB trade in a narrow band against a
basket of currencies. The Company has more expenses in RMB than sales (i.e.,
short RMB position), and as such, when the U.S. dollar weakens relative to the
RMB, our operating profits decrease. Based on our net exposure of RMB to U.S.
dollars for the fiscal year ended March 31, 2010 and forecast information for
fiscal 2011, we estimate a negative operating income impact of approximately
$174 for every 1% appreciation in RMB against the U.S. dollar (assuming no price
increases passed to customers, and no associated cost increases or currency
hedging). We continue to consider various alternatives to hedge this exposure,
and we are attempting to manage this exposure through, among other
things, forward purchase contracts, pricing and monitoring balance sheet
exposures for payables and receivables.
40
Fluctuations
in the value of the Hong Kong dollar have not been significant since October 17,
1983, when the Hong Kong government tied the value of the Hong Kong dollar to
that of the U.S. dollar. However, there can be no assurance that the value of
the Hong Kong dollar will continue to be tied to that of the U.S.
dollar.
The
Company’s French, Irish and Germany subsidiaries have more sales in Euros than
expenses in Euros and the Company’s Swiss subsidiary has more expenses in Swiss
francs than sales in Swiss francs. As such, if the U.S. dollar weakens
relative to the Euro and Swiss franc, our operating profits increase in France,
Ireland and Germany but decline in Switzerland. Based on the net exposures of
Euros and Swiss francs to the U.S. dollars for the fiscal year ended March 31,
2010, we estimate a positive operating income impact of approximately $12 and a
negative income impact of less than $30 for every 1% appreciation in the Euro
and Swiss franc, respectively, relative to the U.S. dollar (assuming no price
increases passed to customers, and associated cost increases or currency
hedging).
The
Company has a number of foreign currency exchange contracts in Asia in an
attempt to hedge the Company’s exposure to the RMB. The RMB/U.S. dollar currency
contracts have notional amounts totaling $9,900 with exercise dates through
December 31, 2011 at average exchange rates of $0.1503 (RMB to U.S. dollar
conversion rate). With the RMB/U.S. dollar contracts, for every 1%
depreciation of the RMB, the Company would be exposed to approximately $100 in
additional foreign currency exchange losses. Since these derivatives are
not designated as hedges for accounting purposes, changes in their fair value
are recorded in results of operations, not in other comprehensive
income.
To manage
our exposure to potential foreign currency transaction and translation risks, we
may purchase additional foreign currency exchange forward contracts, currency
options, or other derivative instruments, provided such instruments may be
obtained at suitable prices.
ITEM
4. CONTROLS AND PROCEDURES
(Amounts
in thousands)
(a) Evaluation of Disclosure
Controls and Procedures
The
Company’s Chief Executive Officer and Chief Financial Officer with the
participation of management evaluated the effectiveness of our disclosure
controls and procedures as of December 31, 2010. The term “disclosure controls
and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls
and other procedures of a company that are designed to ensure that information
required to be disclosed by the company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the company’s management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures as of December
31, 2010, our Chief Executive Officer and Chief Financial Officer concluded
that, as of such date, our disclosure controls and procedures were
effective.
(b) Changes in Internal
Control Over Financial Reporting
During
the fiscal quarter ended December 31, 2010, management did not identify any
changes in the Company’s internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
41
Management’s
evaluation of the Company’s internal controls and procedures as of December 31,
2010 excluded the evaluation of internal controls for the Company’s recent
acquisition, Pressure Systems, Inc. The Company continues to work on the
integration of Pressure Systems, Inc. into the Company’s enterprise resource
platform and management reporting/analysis information systems. At
December 31, 2010, Pressure Systems, Inc. represented $6,887 in total assets,
excluding goodwill and intangible assets resulting from acquisition accounting,
and $7,190 in net sales since the date of acquisition.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
Pending
Matters: From time to time, the Company is subject to legal
proceedings and claims in the ordinary course of business. The Company currently
is not aware of any legal proceedings or claims that the Company believes will
have, individually or in the aggregate, a material adverse effect on the
Company’s business, financial condition, or operating results.
ITEM
1A. RISK FACTORS
While we
attempt to identify, manage and mitigate risks and uncertainties associated with
our business to the extent practical under the circumstances, some level of risk
and uncertainty will always be present. Item 1A of our Annual Report on
Form 10-K for the year ended March 31, 2010 describes some of the risks and
uncertainties associated with our business. These risks and
uncertainties have the potential to materially affect our results of operations
and our financial condition. We do not believe that there have been
any material changes to the risk factors previously disclosed in our Annual
report on Form 10-K for the year ended March 31, 2010.
ITEM
6. EXHIBITS
See
Exhibit Index.
42
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Measurement
Specialties, Inc.
(Registrant)
|
||
Date: February
2, 2011
|
By:
|
/s/ Frank D. Guidone
|
Frank
D. Guidone
President,
Chief Executive Officer
(Principal
Executive Officer)
|
Date: February
2, 2011
|
By:
|
/s/ Mark Thomson
|
Mark
Thomson
Chief
Financial Officer
(Principal
Financial Officer)
|
43
EXHIBIT
INDEX
EXHIBIT
NUMBER
|
DESCRIPTION
|
|
31.1
|
Certification
of Frank D. Guidone required by Rule 13a-14(a) or Rule
15d-14(a)
|
|
31.2
|
Certification
of Mark Thomson required by Rule 13a-14(a) or Rule
15d-14(a)
|
|
32.1
|
Certification
of Frank D. Guidone and Mark Thomson required by Rule 13a-14(b) or Rule
15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
|
44