Non-cash equity-based compensation expense for the three months ended September 30, 2010 and 2009 was $567 and $811, respectively, and for the six months ended September 30, 2010 and 2009 was $1,257 and $1,411, respectively.  During the three and six months ended September 30, 2010, the Company granted a total of 33,000 and 77,076, respectively, options and restricted stock units from the 2008 Equity Incentive Plan (the “2008 Plan”). The estimated fair value of stock options and restricted stock units granted during the three and six months ended September 30, 2010 approximated $257 and $756, respectively, net of expected forfeitures and is being recognized over their respective vesting periods. During the three and six months ended September 30, 2010, the Company recognized $22 and $140, respectively, of expense related to these options.

The Company has four 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 Equity Incentive Plan (“2010 Plan”).  With the adoption of the 2010 Plan, no further options may be granted under the Company’s 2008 Equity Incentive 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.

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 September 30,								Six months ended September 30,
		2010				2009				2010				2009
Dividend yield			-				-				-				-
Expected volatility			63.4	%			62.9	%			64.2	%			62.9	%
Risk free interest rate			1.7	%			2.1	%			1.9	%			2.1	%
Expected term after vesting (in years)			3.0				2.0				3.3				2.0
Weighted-average grant-date fair value		$	7.21			$	3.49			$	7.71			$	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.

 

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During the six months ended September 30, 2010, 61,550 stock options were exercised yielding $450 in cash proceeds and $10 tax benefit recognized as additional paid-in capital.  At September 30, 2010, there was $1,672 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 1.05 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 1,803,070 and 1,784,643 weighted shares were excluded from the calculation for the three and six months ended September 30, 2010, respectively, as the impact of including such awards in the calculation of diluted earnings per share would have had an anti-dilutive effect.  Since the Company was in a loss position for the three and six months ended September 30, 2009, all shares that may have been issued upon the exercise or conversion of stock options were excluded from the calculation of diluted shares since the impact would have an anti-dilutive effect.

 

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 September 30, 2010:
Basic per share information		$	6,757				14,569			$	0.46
Effect of dilutive securities			-				558				(0.01	)
Diluted per-share information		$	6,757				15,127			$	0.45
Three months ended September 30, 2009:
Basic per share information		$	(57	)			14,486			$	-
Effect of dilutive securities			-				-				-
Diluted per-share information		$	(57	)			14,486			$	-
Six Months Ended September 30, 2010
Basic per share information		$	12,345				14,561			$	0.85
Effect of dilutive securities			-				551				(0.03	)
Diluted per-share information		$	12,345				15,112			$	0.82
Six Months Ended September 30, 2009
Basic per share information		$	(1,535	)			14,486			$	(0.11	)
Effect of dilutive securities			-				-				-
Diluted per-share information		$	(1,535	)			14,486			$	(0.11	)

4. INVENTORIES

 

Inventories and inventory reserves for slow-moving, obsolete and lower of cost or market exposures at September 30, 2010 and March 31, 2010 are summarized as follows:

 

		September 30, 2010				(As Adjusted) March 31, 2010
Raw Materials		$	32,196			$	23,313
Work-in-Process			9,214				6,207
Finished Goods			14,062				15,017
			55,472				44,537
Inventory Reserves			(3,980	)			(3,763	)
		$	51,492			$	40,774

 

 

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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:

		September 30, 2010				(As Adjusted) March 31, 2010			Useful Life
Production equipment and tooling		$	53,011			$	48,526		3-10 years
Building and leasehold improvements			26,453				24,101		39 to 45 years or lesser of useful life or remaining term of lease
Furniture and equipment			14,478				13,620		3-10 years
Construction-in-progress			1,360				864
Total			95,302				87,111
Less: accumulated depreciation and amortization			(46,594	)			(42,674	)
		$	48,708			$	44,437

Total depreciation was $2,002 and $2,047 for the three months ended September 30, 2010 and 2009, respectively.  Total depreciation was $3,981 and $4,055 for the six months ended September 30, 2010 and 2009, respectively.  Property and equipment included $145 and $256 in capital leases at September 30, 2010 and March 31, 2010, respectively.

 

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 six months ended September 30, 2010:

 

Accumulated goodwill		$	102,588
Accumulated impairment losses			(3,353	)
Balance March 31, 2010			99,235
Attributable to 2008 acquisitions			35
Attributable to 2011 acquisitions			13,592
Effect of foreign currency translation			887
Goodwill impairment			-
Balance September 30, 2010		$	113,749

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.

 

 

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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.  At September 30, 2010, the Company accrued approximately $35 for the sales based earn-out and $0 for the $2,000 commercialization earn-out.  However, subsequent to September 30, 2010, the earn-out related to the successful commercialization of certain sensors was met, and during the third quarter of fiscal 2011, the Company will record the $2,000 earn-out as additional purchase price.  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 earn-out contingencies, related to the Visyx acquisition is as follows:

 

Assets:
Accounts receivable		$	12
Inventory			10
Acquired intangible assets			1,528
Goodwill			109
Total Purchase Price		$	1,659

 

Intersema:  Effective December 28, 2007, the Company completed the acquisition of all of the capital stock of Intersema Microsystems S.A. (“Intersema”), a sensor company headquartered in Bevaix, Switzerland, for $40,160 ($31,249 in cash at closing, $8,708 in unsecured Promissory Notes (“Intersema Notes”), and $203 in acquisition costs). The Intersema Notes bear interest of 4.5% per annum and are payable in four equal annual installments on January 15 of each year. The selling shareholders had the potential to receive up to an additional 20,000 Swiss francs or approximately $18,946 (based on December 31, 2008 exchange rates) tied to calendar 2009 earnings growth objectives.  The established conditions of the contingencies were not met, and no amounts were recorded as an additional element of the cost of the acquisition. Intersema is a designer and manufacturer of pressure sensors and modules with low pressure, harsh media and ultra-small package configurations for use in barometric and sub-sea depth measurement markets. The transaction was principally financed with borrowings under the Company’s previous credit facility with General Electric Capital Corporation (the “Previous Credit Facility”).   The Company’s final purchase price allocation related to the Intersema acquisition is as follows:

Assets:
Cash		$	10,542
Accounts receivable			1,162
Inventory			3,770
Other assets			619
Property and equipment			1,811
Acquired intangible assets			13,773
Goodwill			13,851
			45,528
Liabilities:
Accounts payable			832
Accrued expenses			1,119
Deferred income taxes			3,417
			5,368
Total Purchase Price		$	40,160

 

 

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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 have the potential to receive up to an additional €2,000 tied to sales growth objectives through calendar 2010, and if the contingencies are resolved and established conditions are met, these amounts will be recorded as an additional element of the cost of the acquisition.  The resolution of these contingencies is not determinable at this time, and accordingly, the Company’s purchase price allocation for Atexis is subject to earn-out payments.  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, except for earn-out contingencies, related to the Atexis acquisition is as follows:

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 to be paid after September 30, 2010 based on certain established working capital levels).   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, $1,858 of sales and $80 of net income are included in the Company’s second quarter condensed consolidated financial statements, and transaction-related costs of approximately $175 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:

 

Assets:
Accounts receivable		$	2,290
Inventory			2,017
Prepaid and other			88
Property and equipment			2,837
Other			56
Acquired intangible assets			8,770
Goodwill			13,592
			29,650
Liabilities:
Accounts payable			774
Accrued expenses and other liabilities			631
Deferred income taxes			3,245
			4,650
Cash Paid		$	25,000
Deferred payment			37
Total Purchase Price			25,037

 

All amounts, except for cash balances, accounts receivable, prepaid and other current assets, are preliminary and 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 certain tax filings, and learns more about the newly acquired business, management expects to refine the estimates of fair value and more accurately allocate the purchase price. For instance, deferred income taxes have been recorded for intangible assets.  However, the Company may file with the Internal Revenue Service a 338(h)(10) election, which for tax purposes, treats the acquisition as an asset purchase with the underlying assets stepped up to their fair values, rather than as a stock purchase.  As a result of this election, the goodwill and intangible assets would be deductible for tax purposes.  The Company will make appropriate adjustments to the purchase price allocation prior to completion of the measurement period.

 

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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:

 

						September 30, 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			$	35,270			$	(14,351	)		$	20,919			$	28,497			$	(12,250	)		$	16,247
Patents			15				4,071				(1,408	)			2,663				4,038				(1,259	)			2,779
Tradenames			2				2,273				(2,190	)			83				2,055				(2,019	)			36
In-process research & development		Indefinite					230				-				230				-				-				-
Backlog			1				3,418				(2,981	)			437				2,792				(2,792	)			-
Covenants-not-to-compete			3				1,112				(1,002	)			110				1,011				(977	)			34
Proprietary technology			12				8,320				(1,781	)			6,539				6,008				(1,491	)			4,517
						$	54,694			$	(23,713	)		$	30,981			$	44,401			$	(20,788	)		$	23,613

Amortization expense for the three months ended September 30, 2010 and 2009 was $1,347 and $1,440, respectively, and amortization expense for the six months ended September 30, 2010 and 2009 was $3,139 and $3,150, respectively.  Estimated annual amortization expense is as follows:

 

		Amortization
Year		Expense
2011		$	5,720
2012			4,628
2013			3,747
2014			3,366
2015			3,320
Thereafter			10,200
		$	30,981

 

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 six months ended September 30, 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 September 30,								Six months ended September 30,
		2010				2009				2010				2009
Net sales		$	68,995			$	52,331			$	135,729			$	100,606
Net income (loss)		$	6,653			$	(413	)		$	12,355			$	(2,350	)
Net income (loss) per share:
Basic		$	0.46			$	(0.03	)		$	0.85			$	(0.16	)
Diluted		$	0.44			$	(0.03	)		$	0.82			$	(0.16	)

 

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: 

 

 

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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.

 

For long-term debt and the revolver, the fair value of the Company’s long-term debt is estimated by discounting future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities by the Company’s lenders.  These are considered Level 2 inputs.  The fair value of the revolver approximates carrying value due to the variable interest nature of the debt.

 

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.

 

 

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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.

 

The value of the RMB relative to the U.S. dollar appreciated by approximately 2.0% during the first six months of fiscal 2011, including approximately 1.7% in September 2010.  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.

 

 

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The Company has a number of foreign currency exchange contracts in Asia and Europe in an attempt to hedge the Company’s exposure to the RMB and Euro. The RMB/U.S. dollar and Euro/U.S. dollar currency contracts have notional amounts totaling $10,000 and $541, respectively, with exercise dates through September 30, 2011 at average exchange rates of $0.1488 (RMB to U.S. dollar conversion rate) and $1.32 (Euro 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.  With the Euro/U.S. dollar contracts, for every 1% depreciation of the Euro, the Company would be exposed to approximately $5 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:

		September 30,				March 31,
		2010				2010			Balance sheet location
Financial position:
Foreign currency exchange contracts - Euro/US dollar		$	1			$	(40	)	Other assets (liabilities)
Foreign currency exchange contracts - RMB		$	130			$	-		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 September 30, 2010 and 2009 is as follows:

		Three months ended September 30,								Six month ended September 30,
		2010				2009				2010				2009			Location of gain or loss
Results of operations:
Foreign currency exchange contracts - Euro		$	(160	)		$	(98	)		$	19			$	(22	)	Foreign currency exchange (gain) loss
Foreign currency exchange contracts - RMB			(167	)			7				(183	)			75		Foreign currency exchange (gain) loss
Foreign currency exchange contracts - Japanese yen			-				4				-				-		Foreign currency exchange (gain) loss
Total		$	(327	)		$	(87	)		$	(164	)		$	53

		Six month ended September 30,
		2010				2009			Location of gain or loss
Cash flows from operating activities:  Source (Use)
Foreign currency exchange contracts - Euro		$	(58	)		$	50		Prepaid expenses, other current assets (Accrued expenses, other liabilities)
Foreign currency exchange contracts - RMB			56				(125	)	Prepaid expenses, other current assets (Accrued expenses, other liabilities)
Total		$	(2	)		$	(75	)

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.

 

 

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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.

As of September 30, 2010, the Company utilized the LIBOR based rate for $60,746 of the Revolving Credit Facility. The weighted average interest rate applicable to borrowings under the Revolving Credit Facility was approximately 2.4% at September 30, 2010. As of September 30, 2010, the outstanding borrowings on the Revolving Credit Facility, which is classified as non-current, were $62,746, and the Company had an additional $47,254 available under the Revolving Credit Facility. The Company’s borrowing capacity was limited by financial covenant ratios, including earnings ratios, and as such, our borrowing capacity was subject to change.  At September 30, 2010, the Company could have borrowed an additional $47,254. 

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.

 

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The Company was in compliance with applicable financial covenants at September 30, 2010.

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 September 30, 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 September 30, 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 September 30, 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, the Company issued 10,000 Swiss franc unsecured promissory notes (the “Intersema Notes”).  At September 30, 2010, the Intersema Notes totaled $5,122, of which $2,561 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 September 30, 2010 and March 31, 2010:

		September 30,				March 31,
		2010				2010
Four-year term notes at 5.70% due in full on June 1, 2015		$	10,000			$	-
Five-year 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			851				476
Term credit facility with six French banks at an interest rate of 4% payable through 2010			153				307
			21,004				8,783
Less current portion of long-term debt			197				2,295
		$	20,807			$	6,488
4.5% promissory note payable in four equal annual installments through January 15, 2012		$	5,122			$	4,698
Less current portion of promissory notes payable			2,561				2,349
		$	2,561			$	2,349

 

 

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The annual principal payments of long-term debt, promissory notes and revolver as of September 30, 2010 are as follows:

Year ended September 30,		Term				Other				Subtotal				Notes				Revolver / Short-term debt				Total
2011		$	-			$	197			$	197			$	2,561			$	5,000			$	7,758
2012			-				127				127				2,561				-				2,688
2013			-				179				179				-				-				179
2014			-				82				82				-				62,746				62,828
2015			10,000				419				10,419				-				-				10,419
Thereafter			10,000				-				10,000				-				-				10,000
Total		$	20,000			$	1,004			$	21,004			$	5,122			$	67,746			$	93,872

 

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.

 

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 six months ended September 30, 2010 and cumulatively, approximately $18 and $552, 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 contingent payment obligation of approximately $2,000 based on the commercialization of certain sensors, and a sales performance based earn-out totaling $9,000. At September 30, 2010, the Company has recorded approximately $35 for the sales based earn-out related to Visyx and $0 for the $2,000 commercialization earn-out.  However, subsequent to September 30, 2010, the earn-out related to the successful commercialization of the sensors was met, and during the third fiscal quarter ending December 31, 2010, the Company will record this $2,000 as additional purchase price.  In connection with the Atexis acquisition, the selling shareholders have the potential to receive up to an additional €2,000 tied to sales growth thresholds through calendar 2010.  No amounts related to the Atexis earn-out were accrued at September 30, 2010, because the contingencies were not determinable or achieved.

 

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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 September 30,								For the six months ended September 30,
		2010				(As Adjusted) 2009				2010				(As Adjusted) 2009
Net Sales:
United States		$	24,340			$	16,459			$	44,853			$	34,344
France			10,365				8,537				20,288				16,745
Germany			3,741				3,484				7,880				6,115
Ireland			7,672				4,694				15,677				7,340
Switzerland			3,638				2,736				6,914				5,214
China			15,410				12,029				30,724				21,903
Total:		$	65,166			$	47,939			$	126,336			$	91,661

Long Lived Assets:		September 30, 2010				(As Adjusted) March 31, 2010
United States		$	9,294			$	6,652
France			8,800				7,940
Germany			2,906				2,334
Ireland			3,243				3,311
Switzerland			1,887				1,735
China			22,578				22,465
Total:		$	48,708			$	44,437

At September 30, 2010, approximately $10,679 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.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(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.

 

 

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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;

·	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.

 

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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 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 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 more than 15-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 before interest, tax, depreciation and amortization (“EBITDA”).  We took aggressive actions that not only proactively addressed the economic recession, but we also positioned the Company for future growth in sales and profitability, all of which we ultimately expect to translate to enhanced shareholder value.  To that end, 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.

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.  The Company has performed well during the first half of fiscal 2011.  Our sales and earnings during the first half 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”).  PSI, based in Hampton, Virginia, is a global leader in pressure sensing instrumentation for the aerospace industry and water monitoring.  PSI has a dominant market position in the aerospace research industry as a result of its innovative pressure sensing instrumentation.  PSI’s aerospace products are sold to major aircraft businesses along with customers involved in turbine development and maintenance; power generation and a wide spectrum of other turbine applications.  The water monitoring industry is large and a significant growth opportunity for the Company.  PSI is a leader in hydrostatic level measurement within operational and resource management applications, a natural extension to the Company’s established expertise within pressure transducers.  Additionally, the Company expects to achieve cost synergies through the consolidation of operations with PSI to the Company’s existing Hampton facility. 

 

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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.