ITEM
1. FINANCIAL
STATEMENTS
|
MEASUREMENT
SPECIALTIES, INC.
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
(UNAUDITED)
|
|
|
|
|
|
For
the three months
|
|
|
|
ended
June 30,
|
|
($
in thousands, except share and per share amounts)
|
|
2005
|
|
2004
|
|
Net
sales
|
|
$
|
40,507
|
|
$
|
28,020
|
|
Cost
of goods sold
|
|
|
24,416
|
|
|
15,443
|
|
Gross
profit
|
|
|
16,091
|
|
|
12,577
|
|
Operating
expenses (income):
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
10,292
|
|
|
7,266
|
|
Research
and development
|
|
|
939
|
|
|
809
|
|
Customer
funded development
|
|
|
(56
|
)
|
|
(95
|
)
|
Amortization
of acquired intangibles
|
|
|
428
|
|
|
8
|
|
Total
operating expenses
|
|
|
11,603
|
|
|
7,988
|
|
Operating
income
|
|
|
4,488
|
|
|
4,589
|
|
Interest
expense (income), net
|
|
|
472
|
|
|
(11
|
)
|
Other
expense (income)
|
|
|
43
|
|
|
(9
|
)
|
Income
before income taxes
|
|
|
3,973
|
|
|
4,609
|
|
Income
taxes
|
|
|
1,037
|
|
|
1,314
|
|
Net
income
|
|
$
|
2,936
|
|
$
|
3,295
|
|
|
|
|
|
|
|
|
|
Net
income per common share - Basic
|
|
$
|
0.22
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
Net
Income per common share - Diluted
|
|
$
|
0.21
|
|
$
|
0.23
|
|
Weighted
average shares outstanding - Basic
|
|
|
13,582,488
|
|
|
13,267,552
|
|
Weighted
average shares outstanding - Diluted
|
|
|
14,302,108
|
|
|
14,195,676
|
|
SEE
ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MEASUREMENT
SPECIALTIES, INC.
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
March
31,
|
|
($
IN THOUSANDS)
|
|
2005
|
|
2005
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,853
|
|
$
|
4,402
|
|
Accounts
receivable, trade, net of allowance for doubtful
|
|
|
|
|
|
|
|
accounts
of $452 and $390, respectively
|
|
|
17,034
|
|
|
20,369
|
|
Inventories
|
|
|
23,180
|
|
|
20,282
|
|
Deferred
income taxes
|
|
|
4,252
|
|
|
4,284
|
|
Prepaid
expenses and other current assets
|
|
|
3,100
|
|
|
3,029
|
|
Total
current assets
|
|
|
53,419
|
|
|
52,366
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
15,039
|
|
|
14,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
40,853
|
|
|
40,010
|
|
Acquired
intangible assets, net
|
|
|
9,873
|
|
|
10,583
|
|
Deferred
income taxes
|
|
|
7,145
|
|
|
7,190
|
|
Other
assets
|
|
|
1,448
|
|
|
931
|
|
Total
other assets
|
|
|
59,319
|
|
|
58,714
|
|
Total
Assets
|
|
$
|
127,777
|
|
$
|
126,004
|
|
SEE
ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MEASUREMENT
SPECIALTIES, INC.
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
March
31,
|
|
($
IN THOUSANDS, EXCEPT SHARE AMOUNTS)
|
|
2005
|
|
2005
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Current
portion of promissory notes payable
|
|
$
|
1,000
|
|
$
|
1,200
|
|
Current
portion of deferred acquisition payments
|
|
|
1,720
|
|
|
1,720
|
|
Short-term
debt
|
|
|
674
|
|
|
2,085
|
|
Current
portion of long-term debt
|
|
|
2,247
|
|
|
2,310
|
|
Accounts
payable
|
|
|
15,635
|
|
|
13,394
|
|
Accrued
expenses and other current liabilities
|
|
|
4,454
|
|
|
4,525
|
|
Accrued
compensation
|
|
|
1,786
|
|
|
2,231
|
|
Income
taxes payable
|
|
|
2,363
|
|
|
1,165
|
|
Deferred
gain on sale of assets, current
|
|
|
2,664
|
|
|
2,925
|
|
Total
current liabilities
|
|
|
32,543
|
|
|
31,555
|
|
|
|
|
|
|
|
|
|
Other
liabilities:
|
|
|
|
|
|
|
|
Deferred
gain on sale of assets, net current portion
|
|
|
-
|
|
|
839
|
|
Promissory
notes payable, net current portion
|
|
|
850
|
|
|
1,100
|
|
Long-term
debt, net of current portion
|
|
|
18,291
|
|
|
18,928
|
|
Deferred
acquisition payments, net current portion
|
|
|
3,950
|
|
|
4,069
|
|
Other
liabilities
|
|
|
2,500
|
|
|
1,497
|
|
Total
liabilities
|
|
|
58,134
|
|
|
57,988
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
Serial
preferred stock; 221,756 shares authorized; none
outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, no par; 20,000,000 shares authorized; 13,617,944
and
|
|
|
|
|
|
|
|
13,257,084
shares issued and outstanding, respectively
|
|
|
5,502
|
|
|
5,502
|
|
Additional
paid-in capital
|
|
|
56,520
|
|
|
56,285
|
|
Accumulated
earnings
|
|
|
9,665
|
|
|
6,729
|
|
Accumulated
other comprehensive loss
|
|
|
(2,044
|
)
|
|
(500
|
)
|
Total
shareholders' equity
|
|
|
69,643
|
|
|
68,016
|
|
|
|
$
|
127,777
|
|
$
|
126,004
|
|
SEE
ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MEASUREMENT
SPECIALTIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For
the three months ended June 30, 2005 and 2004
(UNAUDITED)
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Accumulated
|
|
Other
|
|
|
|
|
|
|
|
Common
|
|
paid-in
|
|
Earnings
|
|
Comprehensive
|
|
|
|
Comprehensive
|
|
($
in thousands)
|
|
stock
|
|
capital
|
|
(Deficit)
|
|
Income
(Loss)
|
|
Total
|
|
Income
|
|
Balance,
April 1, 2004
|
|
$
|
5,502
|
|
$
|
53,509
|
|
$
|
(8,097
|
)
|
$
|
(74
|
)
|
$
|
50,840
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
3,295
|
|
|
|
|
|
3,295
|
|
|
3,295
|
|
Currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
1
|
|
|
1
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,296
|
|
Proceeds
from exercise of stock options
|
|
|
|
|
|
96
|
|
|
|
|
|
|
|
|
96
|
|
|
|
|
Tax
benefit from stock options
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
Balance,
June 30, 2004
|
|
$
|
5,502
|
|
$
|
53,627
|
|
$
|
(4,802
|
)
|
$
|
(73
|
)
|
$
|
54,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
April 1, 2005
|
|
$
|
5,502
|
|
$
|
56,285
|
|
$
|
6,729
|
|
$
|
(500
|
)
|
$
|
68,016
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
2,936
|
|
|
|
|
|
2,936
|
|
|
2,936
|
|
Currency
translation adjustment and other
|
|
|
|
|
|
|
|
|
|
|
|
(1,544
|
)
|
|
(1,544
|
)
|
|
(1,544
|
)
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,392
|
|
Proceeds
from exercise of stock options
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
Tax
benefit from stock options
|
|
|
|
|
|
135
|
|
|
|
|
|
|
|
|
135
|
|
|
|
|
Balance,
June 30, 2005
|
|
$
|
5,502
|
|
$
|
56,520
|
|
$
|
9,665
|
|
$
|
(2,044
|
)
|
$
|
69,643
|
|
|
|
|
SEE
ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MEASUREMENT
SPECIALTIES, INC
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
(UNAUDITED)
|
|
|
|
For
the three months
|
|
($
in thousands)
|
|
ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
2,936
|
|
$
|
3,295
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,445
|
|
|
636
|
|
Deferred
rent
|
|
|
-
|
|
|
(2
|
)
|
Amortization
of deferred gain
|
|
|
(1,100
|
)
|
|
(550
|
)
|
Provision
for doubtful accounts
|
|
|
9
|
|
|
11
|
|
Provision
for warranty
|
|
|
225
|
|
|
(12
|
)
|
Provision
for inventory obsolescence
|
|
|
519
|
|
|
39
|
|
Deferred
income taxes
|
|
|
44
|
|
|
1,017
|
|
Tax
benefit on exercise of stock options
|
|
|
135
|
|
|
22
|
|
Net
changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable, trade
|
|
|
3,117
|
|
|
717
|
|
Inventories
|
|
|
(3,710
|
)
|
|
(2,138
|
)
|
Prepaid
expenses and other current assets
|
|
|
(118
|
)
|
|
940
|
|
Other
assets
|
|
|
(490
|
)
|
|
(599
|
)
|
Accounts
payable
|
|
|
2,128
|
|
|
922
|
|
Accrued
expenses and other current liabilities
|
|
|
771
|
|
|
(397
|
)
|
Accrued
litigation expenses
|
|
|
-
|
|
|
(2,100
|
)
|
Net
cash provided by operating activities
|
|
|
5,911
|
|
|
1,801
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(1,318
|
)
|
|
(580
|
)
|
Acquisition
of business, net of cash acquired
|
|
|
(742
|
)
|
|
(4,500
|
)
|
Net
cash used in investing activities
|
|
|
(2,060
|
)
|
|
(5,080
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Payments
under promissory notes
|
|
|
(1,150
|
)
|
|
-
|
|
Payments
under bank line of credit agreement
|
|
|
(1,411
|
)
|
|
-
|
|
Proceeds
from exercise of options and warrants
|
|
|
100
|
|
|
96
|
|
Net
cash provided by (used in) financing activities
|
|
|
(2,461
|
)
|
|
96
|
|
Effect
of exchange rates
|
|
|
61
|
|
|
1
|
|
Net
change in cash and cash equivalents
|
|
|
1,451
|
|
|
(3,182
|
)
|
Cash
and cash equivalents, beginning of year
|
|
|
4,402
|
|
|
19,274
|
|
Cash
and cash equivalents, end of period
|
|
$
|
5,853
|
|
$
|
16,092
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Information:
|
|
|
|
|
|
|
|
Cash
paid (refunded) during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
398
|
|
$
|
22
|
|
Taxes
|
|
|
89
|
|
|
182
|
|
Non-cash
investing and financing transactions:
|
|
|
|
|
|
|
|
Capital
leases
|
|
|
241
|
|
|
-
|
|
Notes
from acquisitions
|
|
|
-
|
|
|
3,000
|
|
Fair
value of assets acquired less liabilities assumed
|
|
|
-
|
|
|
6,343
|
|
SEE
ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MEASUREMENT
SPECIALTIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR
THE THREE MONTHS ENDED JUNE 30, 2005
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1.
BASIS
OF PRESENTATIONS:
Interim
financial statements:
The
information presented as of June 30, 2005 and for the three month periods
ended
June 30, 2005 and 2004 is unaudited, and reflects all adjustments (consisting
only of normal recurring adjustments) which the Company considers necessary
for
the fair presentation of the Company’s financial position as of June 30, 2005
and the results of its operations and cash flows for the three month periods
ended June 30, 2005 and 2004. The March 31, 2005 balance sheet information
was
derived from the audited consolidated financial statements for the year
ended
March 31, 2005.
The
condensed consolidated financial statements included herein have been prepared
in accordance with U.S. generally accepted accounting principles and the
instructions to Form 10-Q and Rule 10-01 of 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, 2005, which are included as part
of the
Company’s Annual Report on Form 10-K.
Description
of business:
Measurement
Specialties, Inc. ("MSI" or the "Company") is a designer and manufacturer
of
sensors and sensor-based consumer products. The Company produces a wide
variety
of sensors that use advanced technologies to measure precise ranges of
physical
characteristics including pressure, motion, force, displacement, tilt/angle,
flow, distance and humidity. The Company has two segments, a Sensor business
and
a Consumer Products business.
The
Sensor segment designs and manufactures sensors for original equipment
manufacturers. These sensors are used for automotive, medical, consumer,
military/aerospace and industrial applications. The Company's sensor products
include pressure and electromagnetic displacement sensors, piezoelectric
polymer
film sensors, custom microstructures, load cells, accelerometers, optical
sensors and humidity sensors.
The
Consumer Products segment designs and manufacturers sensor-based consumer
products that are sold to retailers and distributors in both the United
States
and Europe. Consumer products include bathroom and kitchen scales, tire
pressure
gauges and distance estimators.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles
of consolidation:
The
consolidated financial statements include the accounts of Measurement
Specialties, Inc. and its wholly-owned subsidiaries (the "Subsidiaries").
The
Company has made the following acquisitions which are included in the
consolidated financial statements as of the effective date of acquisition
(See
Note 7):
Acquired
Company
|
Effective
Date of Acquisition
|
Country
|
Elekon
Industries USA, Inc. (“Elekon”)
|
June
24, 2004
|
USA
|
Entran
Devices, Inc. and Entran SA (“Entran”)
|
July
16, 2004
|
USA
and France
|
Encoder
Devices, LLC (“Encoder”)
|
July
16, 2004
|
USA
|
Humirel,
SA (“Humirel”)
|
December
1, 2004
|
France
|
MWS
Sensorik GmbH (“MWS Sensorik”)
|
January
1, 2005
|
Germany
|
Polaron
Components Ltd
|
February
1, 2005
|
United
Kingdom
|
Elekon,
Entran, Humirel and MWS Sensorik are wholly-owned subsidiaries of the Company.
All
significant inter-company balances and transactions have been eliminated.
Reclassifications:
The
presentation of certain prior year information has been reclassified to
conform
with the current year presentation.
Stock
Based Compensation:
The
Company has three stock-based employee compensation plans. The Company
applies
APB Opinion 25, Accounting
for Stock Issued to Employees,
and
related Interpretations in accounting for its plans. There was no compensation
expense recognized for the three months ended June 30, 2005 and 2004, as
a
result of options issued. The table below illustrates the effect on net
income
and net income per share if the Company had applied the fair value recognition
provisions of FASB Statement 123, Accounting
for Stock-Based Compensation.
|
|
For
the three months
|
|
|
|
ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
2,936
|
|
$
|
3,295
|
|
Add:
Stock-based employee compensation
|
|
|
|
|
|
|
|
expense
included in reported net
|
|
|
|
|
|
|
|
income,
net of related tax effects
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Deduct:
Total stock-based employee compensation
|
|
|
|
|
|
|
|
expense
determined under fair value based
|
|
|
|
|
|
|
|
method
for awards granted, modified, or
|
|
|
|
|
|
|
|
settled,
net of related tax effects
|
|
|
640
|
|
|
157
|
|
Pro
forma net income
|
|
$
|
2,296
|
|
$
|
3,138
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
0.22
|
|
$
|
0.25
|
|
Basic
- pro forma
|
|
|
0.17
|
|
|
0.24
|
|
Diluted
- as reported
|
|
|
0.21
|
|
|
0.23
|
|
Diluted
- pro forma
|
|
|
0.16
|
|
|
0.22
|
|
Recent
Accounting Pronouncements:
In
December 2004, the Financial
Accounting Standards Board (“FASB”) issued FASB
Statement No. 123R (Revised 2004), Share-Based
Payment.
The new
FASB rule requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements, rather than disclosed
in the
footnotes to the financial statements. That cost will be measured based
on the
fair value of the equity or liability instruments issued. The scope of
FASB
Statement 123R includes a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards,
share
appreciation rights, and employee share purchase plans. FASB Statement
123R
replaces FASB Statement No. 123, Accounting
for Stock-Based Compensation,
and
supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees. FASB
Statement 123, as originally issued in 1995, established as preferable
a
fair-value-based method of accounting for share-based payment transactions
with
employees. However, that statement permitted entities the option of continuing
to apply the guidance in APB Opinion 25, as long as the footnotes to the
financial statements disclosed what net income would have been had the
preferable fair-value-based method been used. Under the effective date
provisions included in FASB Statement 123R, registrants would have been
required
to implement the Statement’s requirements as of the beginning of the first
interim or annual period beginning after June 15, 2005, or after December
15,
2005 for small business issuers. The new rule allows registrants to implement
FASB Statement 123R at the beginning of their next
fiscal year,
instead
of the next interim period, that begins after June 15, 2005, or December
15,
2005 for small business issuers. The Company will be required to apply
FASB 123R
beginning with the quarter ending June 30, 2006. The Company is currently
quantifying the impact of FASB 123R, however, the Company does believe
the
adoption of FASB Statement 123R will have a material effect on its financial
position and results of operations consistent with the pro-forma
disclosures.
On
November 24, 2004, the FASB issued FASB Statement No. 151,
Inventory Costs - An amendment of ARB No. 43, Chapter 4.
This new
standard is the result of a broader effort by the FASB to improve financial
reporting by eliminating differences between GAAP in the United States
and GAAP
developed by the International Accounting Standards Board (“IASB”). As part of
this effort, the FASB and the IASB identified opportunities to improve
financial
reporting by eliminating certain narrow differences between their existing
accounting standards. FASB Statement 151 clarifies that abnormal amounts
of idle
facility expense, freight, handling costs and spoilage should be expensed
as
incurred and not included in overhead. Further, FASB Statement 151 requires
that
allocation of fixed production overheads to conversion costs should be
based on
normal capacity of the production facilities. The provisions in FASB Statement
151 are effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. Companies must apply the standard prospectively.
The
Company does not believe the adoption of FASB Statement 151 will have a
material
effect on its financial position or results of operations.
On
December 17, 2004, the FASB issued FASB Statement No. 153,
Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No.
29.
This new
standard is the result of a broader effort by the FASB to improve financial
reporting by eliminating differences between GAAP in the United States
and GAAP
developed by the IASB. As part of this effort, the FASB and the IASB identified
opportunities to improve financial reporting by eliminating certain narrow
differences between their existing accounting standards. FASB Statement
153
amends APB Opinion No. 29, Accounting
for Nonmonetary Transactions, that
was
issued in 1973. The amendments made by FASB Statement 153 are based on
the
principle that exchanges of nonmonetary assets should be measured based
on the
fair value of the assets exchanged. Further, the amendments eliminate the
narrow
exception for nonmonetary exchanges of similar productive assets and replace
it
with a broader exception for exchanges of nonmonetary assets that do not
have
"commercial substance." Previously, APB Opinion 29 required that the accounting
for an exchange of a productive asset for a similar productive asset or
an
equivalent interest in the same or similar productive asset should be based
on
the recorded amount of the asset relinquished. The provisions in FASB Statement
153 are effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. Early application is permitted and companies
must
apply the standard prospectively. The
Company does not believe the adoption of FASB Statement 153 will have a
material
effect on its financial position or results of operations.
In
May
2005, the FASB issued FASB Statement No. 154, Accounting
Changes and Error Corrections.
This new
standard replaces APB Opinion No. 20, Accounting
Changes,
and FASB
Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements,
and
represents another step in the FASB's goal to converge its standards with
those
issued by the IASB. Among other changes, Statement 154 requires that a
voluntary
change in accounting principle be applied retrospectively with all prior
period
financial statements presented on the new accounting principle, unless
it is
impracticable to do so. FASB Statement 154 also provides that (1) a change
in
method of depreciating or amortizing a long-lived nonfinancial asset be
accounted for as a change in estimate (prospectively) that was effected
by a
change in accounting principle, and (2) correction of errors in previously
issued financial statements should be termed a "restatement." The new standard
is effective for accounting changes and correction of errors made in fiscal
years beginning after December 15, 2005. Early adoption of this standard
is
permitted for accounting changes and correction of errors made in fiscal
years
beginning after June 1, 2005. The
Company does not believe the adoption of FASB Statement 154 will have a
material
effect on its financial position or results of operations.
In
December 2004, the FASB issued FASB Staff Position No. 109-1 ("FSP 109-1"),
"Application of SFAS No. 109, "Accounting for Income Taxes", related to
the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004." FSP 109-1 is effective immediately. FSP 109-1 states
that
the tax deduction of qualified domestic production activities, which is
provided
by the American Jobs Creation Act of 2004 (the "Jobs Act"), will be treated
as a
special deduction as described in SFAS No. 109. Consequently, the impact
of the
deduction, which is effective January 1, 2005, will be reported in the
period in
which the deduction is claimed on the Company's income tax returns. The
Company
does not expect FSP 109-1 to have a material effect on its financial
statements.
In
December 2004, the FASB issued FASB Staff Position No. 109-2 ("FSP
109-2"),"Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004" (“Jobs
Act”). FSP 109-2 provides accounting and disclosure guidance related to the
Jobs
Act provision for the limited time 85% dividends received deduction on
the
repatriation of certain foreign earnings. Although adoption is effective
immediately, FSP 109-2 states that a company is allowed time beyond the
financial reporting period to evaluate the effect of the Jobs Act on its
plan
for reinvestment or repatriation of foreign earnings. The Company is evaluating
the impact of the repatriation provisions of the Jobs Act and will complete
its
review by December 31, 2005. It is not expected that these provisions will
have
a material impact on the Company's financial statements. Accordingly, as
provided for in FSP 109-2, the Company has not adjusted its tax expense
or net
deferred tax assets to reflect the repatriation provisions of the Jobs
Act.
3.
INVENTORIES:
Inventories
net, consists of the following:
|
|
June
30,
|
|
March
31,
|
|
|
|
2005
|
|
2005
|
|
Raw
Materials
|
|
$
|
11,884
|
|
$
|
10,679
|
|
Work-in-Process
|
|
|
2,122
|
|
|
2,008
|
|
Finished
Goods
|
|
|
9,174
|
|
|
7,595
|
|
|
|
$
|
23,180
|
|
$
|
20,282
|
|
Inventory
reserves were $3,641 at June 30, 2005 and $ 3,603 at March 31, 2005.
4.
SHORT
AND LONG-TERM DEBT:
Term
Loan and Revolving Credit Facility
On
December 17, 2004, the Company entered into a new, $35,000 five-year credit
agreement with GE Commercial Finance, Commercial & Industrial Finance (“GE”
or “GECC”), comprised of a $20,000 term loan and $15,000 revolving credit
facility. JP Morgan Chase Bank, N.A. and Wachovia Bank, National Association,
participated in the syndication. Interest accrues on the principal amount
of
borrowings at a rate based on either a London Inter-bank Offered Rate (LIBOR)
rate plus a LIBOR margin or at an Index (a prime based) Rate plus an Index
Margin. The LIBOR or Index Rate is at the election of the borrower. From
the
closing date to the second anniversary date of the closing, the applicable
LIBOR
and Index Margins are 4.50% and 2.75%, respectively, and from the second
anniversary, the applicable LIBOR and Index Margins are 4.25% and 2.50%,
respectively, subject to a 2% increase upon the occurrence of an event
of
default under the credit agreement. The term loan is payable in nineteen
equal
quarterly installments beginning on March 1, 2005 through December 17,
2009.
Proceeds
from the new credit facility were primarily used to support the acquisition
of
Humirel (See Note 7), for ordinary working capital and general corporate
needs
and to replace the $15,000 revolving credit facility with Bank of America
Business Capital (formerly Fleet Capital Corporation). The Company has
provided
a security interest in substantially all of the Company’s assets as collateral
for the new credit facilities. Borrowings under the line are subject to
certain
financial covenants and restrictions on indebtedness, dividend payments,
financial guarantees, and other related items.
At
June
30, 2005, the Company was in compliance with applicable debt covenants.
As
of
June 30, 2005, the Company utilized the LIBOR based rate for the term loan
and
the prime based Index Rate for the revolving credit facility. As of June
30,
2005, the outstanding borrowings on the term loan and revolver were $19,000
and
zero, respectively, and the Company had the right to borrow an additional
$15,000 under the revolving credit facility. The revolving credit facility
is
not directly based on any borrowing base requirements.
The
weighted average interest rate for the above credit facilities was 7.77%
for the
quarter ended June 30, 2005. The average amount outstanding under the agreements
for the quarter ended June 30, 2005 was $19,938. As of June 30, 2005, the
Company accrued interest of $244 in accrued expenses and other current
liabilities in the accompanying condensed balance sheet.
Promissory
Notes
In
connection with the acquisition of Elekon Industries USA, Inc. (See Note
7), the
Company issued unsecured Promissory Notes (“Notes”) totaling $3,000, of which
$1,850 was outstanding and $1,000 was considered current at June 30, 2005.
The
Notes amortize over a period of three years, are payable quarterly and
bear
interest at 6%.
Other
Short-Term Debt
In
connection with the acquisition of Entran and Humirel, the Company assumed
outstanding short-term borrowings. At June 30, 2005, $674 of this assumed
short-term borrowing remains outstanding and is included in short-term
debt in
the accompanying condensed consolidated balance sheet.
Below
is
a summary of the long-term debt and promissory notes outstanding at June
30,
2005:
Prime
or LIBOR plus 2.75% five-year term loan payable in nineteen quarterly
installments of $500 through 2009 with a final installment due
on December
17, 2009.
|
|
$
|
19,000
|
|
|
|
|
|
|
Governmental
loans from French agencies at no interest and payable based on
R&D
expenditures.
|
|
|
555
|
|
|
|
|
|
|
Term
credit facility with six banks at an interest rate of 4% payable
through
2010.
|
|
|
983
|
|
|
|
|
|
|
6%
Promissory Notes payable in twelve equal quarterly installments
through
September 20, 2007
|
|
|
1,850
|
|
|
|
|
22,388
|
|
Less
long-term debt and promissory notes due currently
|
|
|
3,247
|
|
|
|
$
|
19,141
|
|
The
principal payments of long-term debt and promissory notes are
as
follows:
|
|
|
|
|
|
|
|
|
|
Year
|
|
Term
|
Notes
Payable
|
Other
|
Total
|
1
|
|
$2,000
|
$1,000
|
$247
|
$3,247
|
2
|
|
2,000
|
800
|
264
|
3,064
|
3
|
|
2,000
|
50
|
445
|
2,495
|
4
|
|
2,000
|
-
|
359
|
2,359
|
5
|
|
11,000
|
-
|
140
|
11,140
|
Thereafter
|
|
-
|
-
|
83
|
83
|
Total
|
|
$
19,000
|
$
1,850
|
$
1,538
|
$
22,388
|
5.
PROPERTY AND EQUIPMENT:
Property
and equipment are summarized as follows:
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
March
31,
|
|
|
|
|
|
2005
|
|
2005
|
|
Useful
Life
|
|
Production
machinery and equipment
|
|
$
|
20,452
|
|
$
|
20,083
|
|
|
3-10
years
|
|
Building
|
|
|
867
|
|
|
750
|
|
|
39
years
|
|
Tooling
costs
|
|
|
4,686
|
|
|
4,635
|
|
|
3-7
years
|
|
Furniture
and equipment
|
|
|
6,145
|
|
|
6,348
|
|
|
3-10
years
|
|
Leasehold
improvements
|
|
|
2,425
|
|
|
2,219
|
|
|
Lesser
of useful life or remaining lease term
|
|
Construction
in progress
|
|
|
1,356
|
|
|
1,299
|
|
|
-
|
|
Total
|
|
|
35,931
|
|
|
35,334
|
|
|
|
|
Less:
accumulated depreciation and amortization
|
|
|
(20,892
|
)
|
|
(20,410
|
)
|
|
|
|
|
|
$
|
15,039
|
|
$
|
14,924
|
|
|
|
|
Depreciation
expense was $1,017 and $636 for the three months ended June 30, 2005 and
2004,
respectively. Included in property and equipment is $1,162 in capital leases
with a net book value of approximately $900.
6.
PER
SHARE INFORMATION AND STOCK OPTIONS ISSUED:
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 and warrants, less the shares that may be repurchased with the
funds
received from their exercise. There were no significant anti-dilutive shares
in
the periods presented.
The
computation of the basic and diluted net income per share is as follows:
|
|
Net
Income (Numerator)
|
|
Weighted
Average Shares (Denominator)
|
|
Per-Share Amount
|
|
Three
months ended June 30, 2005:
|
|
|
|
|
|
|
|
Basic
per share information
|
|
$
|
2,936
|
|
|
13,582,488
|
|
$
|
0.22
|
|
Effect
of dilutive securities
|
|
|
|
|
|
719,620
|
|
|
(0.01
|
)
|
Diluted
per-share information
|
|
$
|
2,936
|
|
|
14,302,108
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended June 30, 2004:
|
|
|
|
|
|
|
|
|
|
|
Basic
per share information
|
|
$
|
3,295
|
|
|
13,267,552
|
|
$
|
0.25
|
|
Effect
of dilutive securities
|
|
|
|
|
|
928,124
|
|
|
(0.02
|
)
|
Diluted
per-share information
|
|
$
|
3,295
|
|
|
14,195,676
|
|
$
|
0.23
|
|
7.
ACQUISITIONS, GOODWILL AND ACQUIRED INTANGIBLES:
Recent
Acquisitions:
As
part
of its growth strategy in the Sensors segment, the Company made six acquisitions
during the year ended March 31, 2005. Proforma financial statements are
presented below for the aggregate of the acquisitions of Elekon, Entran,
Encoder, Humirel, MWS and Polaron.
Elekon:
On
June
24, 2004, the Company acquired 100% of the capital stock of Elekon Industries
USA, Inc. ("Elekon") for $7,797 ($4,500 in cash at the closing, $3,000
in
unsecured Promissory Notes ("Notes") and $297 in acquisition costs). The
terms
of the Notes amortize over a period of three years, are payable quarterly
and
bear interest at a rate of 6%. If certain performance targets were achieved,
an
additional $3,000 could have been paid to the principals of Elekon. However,
the
performance targets for additional payments were not achieved, and accordingly,
no additional payment will be made. Elekon is based in Torrance, California
where it designs and manufactures optical sensors primarily for the medical
and
security markets. The transaction was recorded as a purchase, and is included
in
the consolidated financial results from the date of acquisition through
June 30,
2005. The Company’s final allocation recorded goodwill of $5,708. Included in
the goodwill is $1,200 resulting from the recording of deferred tax liabilities
as part of the acquisition. Set forth below is a summary of the amount
of
purchase price allocated to intangibles related to the Elekon
acquisition:
Description
|
|
Life
|
|
Value
|
Customer
relationships
|
|
Indefinite
|
|
$
1,870
|
Patents
|
|
18.5
|
|
775
|
Proprietary
technology
|
|
10
|
|
510
|
Covenants
not-to-compete
|
|
3
|
|
620
|
|
|
|
|
$
3,775
|
Below
is
a condensed balance sheet for the acquired business on the date of
acquisition:
ELEKON
INDUSTRIES, INC.
|
|
CONDENSED
BALANCE SHEET
|
|
OF
ACQUIRED ENTITY AT
|
|
JUNE
24, 2004
|
|
|
|
|
|
Assets:
|
|
|
|
Accounts
Receivable
|
|
$
|
501
|
|
Inventory
|
|
|
442
|
|
Property
and equipment
|
|
|
169
|
|
Others
|
|
|
20
|
|
|
|
|
1,132
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accounts
Payable
|
|
|
(1,516
|
)
|
Others
|
|
|
(102
|
)
|
|
|
|
(1,618
|
)
|
Net
Assets Acquired
|
|
$
|
(486
|
)
|
Entran:
On
July
16, 2004, the Company acquired 100% of the capital stock of Entran Devices,
Inc.
and Entran SA ("Entran") for $10,754 ($6,000 in cash at the closing, $1,195
in
certain liabilities discharged at closing, $3,254 in deferred payments
and $305
in acquisition costs). The Company will pay a deferred payment of $2,254
on July
16, 2006, and an additional $1,000 was paid in July 2005 upon the elimination
of
the lease expense and certain other expenses related to the Fairfield,
NJ
Facility. Entran, based in Fairfield, NJ and Les Clayes-sous-Bois, France,
is a
designer/manufacturer of acceleration, pressure and force sensors sold
primarily
to the automotive crash test and motor sport racing markets. The transaction
was
recorded as a purchase, and is included in the consolidated financial results
from the date of acquisition through June 30, 2005. Included in total goodwill
of $7,270 for Entran is $320 resulting from the recording of deferred tax
liabilities as part of the acquisition. Set forth below is a summary of
the
amount of purchase price allocated to intangibles related to the Entran
acquisition:
Description
|
|
Life
|
|
Value
|
Customer
relationships
|
|
7
|
|
$
700
|
Backlog
|
|
1
|
|
100
|
|
|
|
|
$
800
|
Below
is
a condensed balance sheet for the acquired business on the date of
acquisition:
ENTRAN
DEVICES, INC. AND ENTRAN SA
|
|
CONDENSED
BALANCE SHEET
|
|
OF
ACQUIRED ENTITY AT
|
|
JULY
16, 2004
|
|
|
|
|
|
Assets:
|
|
|
|
Cash
|
|
$
|
246
|
|
Accounts
Receivable
|
|
|
2,002
|
|
Inventory
|
|
|
1,648
|
|
Property
and equipment
|
|
|
1,073
|
|
Others
|
|
|
273
|
|
|
|
|
5,242
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accounts
Payable
|
|
|
(2,013
|
)
|
Others
|
|
|
(225
|
)
|
|
|
|
(2,238
|
)
|
Net
Assets Acquired
|
|
$
|
3,004
|
|
Encoder:
On
July
16, 2004, the Company acquired the assets of Encoder Devices, LLC ("Encoder")
for $4,593 ($4,000 in cash at the closing, $400 in deferred payment and
$193 in
acquisition costs). The Company paid the deferred payment of $400 on July
16,
2005. Encoder, based in Plainfield, IL, is a designer /manufacturer of
rotational sensors (encoders) utilizing magnetic encoding technology. The
Company recorded $ 3,869 of goodwill associated with the Encoder acquisition.
The transaction was recorded as a purchase and is included in the consolidated
financial results from the date of acquisition through June 30, 2005. Set
forth
below is a summary of the amount of purchase price allocated to intangibles
related to the Encoder acquisition:
Description
|
|
Life
|
|
Value
|
Patents
|
|
19.5
|
|
$
137
|
Covenants
not-to-compete
|
|
3
|
|
283
|
|
|
|
|
$
420
|
Below
is
a condensed balance sheet for the acquired business on the date of
acquisition:
ENCODER
DEVICES LLC
|
|
CONDENSED
BALANCE SHEET
|
|
OF
ACQUIRED ENTITY AT
|
|
JULY
16, 2004
|
|
|
|
|
|
Assets:
|
|
|
|
Accounts
Receivable
|
|
$
|
96
|
|
Inventory
|
|
|
134
|
|
Property
and equipment
|
|
|
251
|
|
Others
|
|
|
36
|
|
|
|
|
517
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accounts
Payable
|
|
|
(204
|
)
|
Others
|
|
|
(9
|
)
|
|
|
|
(213
|
)
|
Net
Assets Acquired
|
|
$
|
304
|
|
Humirel:
Effective
on December 1, 2004, the Company acquired the stock of Humirel SA ("Humirel"),
a
designer/manufacturer of humidity sensors and assemblies based in France,
for
19,000 Euro. The total purchase price in U.S. dollars based on June 30,
2005 exchange rate was $24,383 ($21,645 at close, $1,696 in deferred
payment, and $1,042 in acquisition costs). The deferred payment is due
payable
on the second anniversary (less any applicable offsets) and bears interest
at
the rate of 3% per annum. In addition, the sellers can earn up to an additional
6,300 Euro, or $7,600, if certain performance hurdles, including achieving
established net sales and gross margin levels in 2005, are achieved. Included
in
the purchase price is $476 for the 20,000 shares of restricted stock of
the
Company received by management shareholders as part of the closing
consideration. The transaction was financed with a term credit facility
issued
by a syndicate of lending institutions, led by a new lender for the Company
(See
Note 4). The transaction was recorded as a purchase, and is included in
the
consolidated financial results from the date of acquisition through June
30,
2005. Set forth below is a summary of the amount of purchase price allocated
to
intangibles related to the Humirel acquisition. The Company has recorded
goodwill of $18,058 for the acquisition. Included in the goodwill is $655
resulting from the recording of deferred tax liabilities as part of the
acquisition. Set forth below is a summary of the amount of purchase price
allocated to intangibles related to the Humirel acquisition:
Description
|
Life
|
Value
|
Customer
relationships
|
8
|
$2,450
|
Patents
|
13
|
1,361
|
Tradename
|
3
|
217
|
Backlog
|
1
|
244
|
|
|
$4,272
|
Below
is
a condensed balance sheet for the acquired business on the date of
acquisition:
HUMIREL
SA
|
|
CONDENSED
BALANCE SHEET
|
|
OF
ACQUIRED ENTITY AT
|
|
DECEMBER
1, 2004
|
|
|
|
|
|
Assets:
|
|
|
|
Cash
|
|
$
|
994
|
|
Accounts
Receivable
|
|
|
1,513
|
|
Inventory
|
|
|
1,755
|
|
Property
and equipment
|
|
|
1,472
|
|
Others
|
|
|
744
|
|
|
|
|
6,478
|
|
Liabilities:
|
|
|
|
|
Accounts
Payable
|
|
|
(1,268
|
)
|
Current
portion of long-term debt
|
|
|
(588
|
)
|
Long-term
debt, net of current
|
|
|
(1,914
|
)
|
|
|
|
(3,770
|
)
|
Net
Assets Acquired
|
|
$
|
2,708
|
|
MWS
Sensorik:
Effective
January 1, 2005, the Company acquired 100% of the capital stock of MWS
Sensorik
GmbH ("MWS" or "Sensorik"), for 900 Euro, or $1,262 ($879 at close, $320
in
deferred payments, and $63 in acquisition costs). The Company has placed
this
deferred payment into escrow at closing. The deferred payment will be released
from escrow on the first anniversary. MWS, based in Pfaffenhofen, Germany,
integrates and distributes accelerometers and other sensors, sold primarily
to
the automotive crash test market. MWS has historically used MSI's silicon
micromachined accelerometer as their die for piezoresistive sensors. The
transaction was recorded as a purchase, and is included in the consolidated
financial results from the date of acquisition through June 30, 2005. The
Company has recorded goodwill of $505 and intangibles of $751 for the
acquisition. Included in the goodwill is $257 resulting from the recording
of
deferred tax liabilities as part of the acquisition. Set forth below is
a
summary of the amount of purchase price allocated to intangibles related
to the
MWS acquisition:
Description
|
|
Life
|
|
Value
|
Customer
relationships
|
|
8
|
|
$
700
|
Backlog
|
|
1
|
|
51
|
|
|
|
|
$
751
|
Below
is
a condensed balance sheet for the acquired business on the date of
acquisition:
MWS
SENSORIK GMBH
|
|
CONDENSED
BALANCE SHEET
|
|
OF
ACQUIRED ENTITY AT
|
|
JANUARY
1, 2005
|
|
|
|
|
|
Assets:
|
|
|
|
Accounts
Receivable
|
|
$
|
252
|
|
Inventory
|
|
|
189
|
|
Property
and equipment
|
|
|
49
|
|
Others
|
|
|
6
|
|
|
|
|
496
|
|
Liabilities:
|
|
|
|
|
Accounts
Payable
|
|
|
(58
|
)
|
Others
|
|
|
(175
|
)
|
|
|
|
(233
|
)
|
Net
Assets Acquired
|
|
$
|
263
|
|
Polaron:
Effective
February 1, 2005, the Company has acquired certain assets of the industrial
pressure sensing business of Polaron Components Limited in the United Kingdom,
for GBP 1,200 or approximately $2,491 ($2,460 at close and $31 in acquisition
costs). The assets were acquired by the Company's Chinese subsidiary, MSI
Sensors (China) Limited. The transaction is a vertical integration move
for the
Company, as Polaron distributed certain of the Company's products in the
UK and
the Company distributed Polaron products in North America and Asia. MSI
had been
manufacturing Polaron pressure products in its wholly owned subsidiary
in China.
The transaction was recorded as a purchase, and is included in the consolidated
financial results from the date of acquisition through June 30, 2005. The
Company has recorded goodwill of $1,093 and intangibles of $1,003 for the
acquisition. Set forth below is a summary of the amount of purchase price
allocated to intangibles related to the Polaron acquisition:
Description
|
|
Life
|
|
Value
|
Customer
relationships
|
|
8
|
|
$
900
|
Backlog
|
|
1
|
|
103
|
|
|
|
|
$1,003
|
Below
is
a condensed balance sheet for the acquired business on the date of
acquisition:
POLARON
COMPONENTS LTD.
|
|
CONDENSED
BALANCE SHEET
|
|
OF
ACQUIRED ENTITY AT
|
|
FEBRUARY
1, 2005
|
|
|
|
|
|
Assets:
|
|
|
|
Inventory
|
|
$
|
388
|
|
Property
and equipment
|
|
|
7
|
|
Net
Assets Acquired
|
|
$
|
395
|
|
The
following represents the Company's pro forma consolidated results of operations
for the period assuming all the above acquisitions had occurred as of April
1,
2004, 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, 2004.
|
|
Three
months ended
|
|
|
|
June
30, 2004
|
|
|
|
|
|
Net
sales
|
|
$
|
35,664
|
|
Net
income
|
|
|
3,138
|
|
Net
income per common share:
|
|
|
|
|
Basic
|
|
$
|
0.24
|
|
Diluted
|
|
$
|
0.22
|
|
Acquired
Intangibles:
In
connection with current and previous acquisitions, the Company acquired
certain
identifiable intangible assets, including customer relationships, proprietary
technology, patents, trade names, and order backlogs. The gross amounts
and
accumulated amortization of acquired and existing intangible assets, along
with the range of amortizable lives are as follows:
|
|
|
June
30, 2005
|
March
31, 2005
|
|
Life
|
|
Gross
Amount
|
Accumulated Amortization
|
Net
|
Gross Amount
|
Accumulated
Amortization
|
Net
|
Amortizable
intangible assets:
|
|
|
|
|
|
|
|
|
Customer
relationships
|
7-8
|
|
$4,750
|
($365)
|
$4,385
|
$4,923
|
($230)
|
$4,693
|
Patents
|
6-19.5
|
|
2,465
|
(278)
|
2,187
|
2,559
|
(221)
|
2,338
|
Trade
names
|
3
|
|
217
|
(42)
|
175
|
232
|
(41)
|
191
|
Backlogs
|
1
|
|
498
|
(307)
|
191
|
515
|
(177)
|
338
|
Covenants
not-to-compete
|
3
|
|
903
|
(297)
|
606
|
903
|
(222)
|
681
|
Proprietary
technology
|
10
|
|
510
|
(51)
|
459
|
510
|
(38)
|
472
|
|
|
|
9,343
|
(1,340)
|
8,003
|
9,642
|
(929)
|
8,713
|
Un-amortizable
intangible assets:
|
|
|
|
|
|
|
|
-
|
Customer
relationships
|
Indefinite
|
|
1,870
|
-
|
1,870
|
1,870
|
-
|
1,870
|
|
|
|
$11,213
|
($1,340)
|
$9,873
|
$11,512
|
($929)
|
$10,583
|
Annual
amortization expense is expected to be as follows:
Year
|
|
Amortization
Expense
|
|
2006
|
|
$
|
1,571
|
|
2007
|
|
|
1,220
|
|
2008
|
|
|
973
|
|
2009
|
|
|
840
|
|
2010
|
|
|
839
|
|
Thereafter
|
|
|
3,270
|
|
Deferred
Acquisition Payments:
In
connection with the acquisitions, following is a summary of the deferred
acquisition payments outstanding at June 30, 2005:
|
|
Current
|
|
Long-term
|
|
Total
|
|
Entran
|
|
$
|
1,000
|
|
$
|
2,254
|
|
$
|
3,254
|
|
Encoder
|
|
|
400
|
|
|
-
|
|
|
400
|
|
Humirel
|
|
|
-
|
|
|
1,696
|
|
|
1,696
|
|
MWS
Sensorik
|
|
|
320
|
|
|
-
|
|
|
320
|
|
|
|
$
|
1,720
|
|
$
|
3,950
|
|
$
|
5,670
|
|
8.
SEGMENT INFORMATION:
The
Company has two business segments, a Sensor segment and a Consumer Products
segment.
The
Company's Sensor segment designs and manufactures sensors for original
equipment
manufacturers. These sensors are used for automotive, medical, consumer,
military/aerospace and industrial applications. These sensor products include
pressure and electromagnetic displacement sensors, piezoelectric polymer
film
sensors, panel sensors, custom microstructures, load cells, accelerometers,
optical sensors, and humidity sensors.
The
Company's Consumer Products segment designs and manufactures sensor-based
consumer products that are sold to retailers and distributors in both the
United
States and Europe. Consumer products include bathroom and kitchen scales,
tire
pressure gauges and distance estimators. The Company sold its branded bathroom
and kitchen scale business to Conair Corporation on January 30, 2004.
Accordingly, in the scale business, the Company now sells exclusively to
the
original equipment manufacturer market.
Segment
data have been presented on a basis consistent with how business activities
are
reported internally to management. The Company has no material inter-segment
sales. The following is information related to industry segments:
|
|
For
the three months ended June 30,
|
|
|
|
2005
|
|
2004
|
|
Net
sales:
|
|
|
|
|
|
Sensors
|
|
$
|
25,278
|
|
$
|
17,141
|
|
Consumer
Products
|
|
|
15,229
|
|
|
10,879
|
|
Total
|
|
|
40,507
|
|
|
28,020
|
|
Operating
income :
|
|
|
|
|
|
|
|
Consumer
Products
|
|
|
2,225
|
|
|
1,314
|
|
Sensors
|
|
|
4,505
|
|
|
5,473
|
|
Total
segment operating income
|
|
|
6,730
|
|
|
6,787
|
|
Corporate
expenses
|
|
|
(2,242
|
)
|
|
(2,198
|
)
|
Total
operating income
|
|
|
4,488
|
|
|
4,589
|
|
Interest
expense, net of interest income
|
|
|
472
|
|
|
(11
|
)
|
Other
expense (income)
|
|
|
43
|
|
|
(9
|
)
|
Income
before income taxes
|
|
|
3,973
|
|
|
4,609
|
|
Income
taxes
|
|
|
1,037
|
|
|
1,314
|
|
Net
income
|
|
$
|
2,936
|
|
$
|
3,295
|
|
|
|
June
30,
|
|
March
31,
|
|
|
|
2005
|
|
2005
|
|
Segment
Assets:
|
|
|
|
|
|
Consumer
Products
|
|
$
|
17,013
|
|
$
|
16,812
|
|
Sensors
|
|
|
73,847
|
|
|
74,029
|
|
Unallocated
|
|
|
36,917
|
|
|
35,163
|
|
Total
|
|
$
|
127,777
|
|
$
|
126,004
|
|
The
following is geographic information related to net sales and long-lived
assets.
Net sales are specific to country from which the product is invoiced. Long-lived
assets include net property, plant and equipment, but exclude net intangible
assets and goodwill, based on respective location of the Company’s operation.
|
|
Three
months ended June 30,
|
|
|
|
2005
|
|
2004
|
|
Net
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
16,217
|
|
$
|
13,953
|
|
Europe
|
|
|
4,103
|
|
|
-
|
|
Asia
and Other
|
|
|
20,187
|
|
|
14,067
|
|
Total:
|
|
$
|
40,507
|
|
$
|
28,020
|
|
|
|
|
June
30, 2005
|
|
|
|
|
Long
lived assets:
|
|
|
|
United
States
|
|
$
|
3,703
|
|
$
|
2,904
|
|
Europe
|
|
|
2,375
|
|
|
3,182
|
|
China
|
|
|
8,961
|
|
|
8,838
|
|
Total:
|
|
$
|
15,039
|
|
$
|
14,924
|
|
9.
COMMITMENTS AND CONTINGENCIES:
Legal
Proceedings
Pending
Matters
Robert
L. DeWelt v. Measurement Specialties, Inc. et al., Civil Action No.
02-CV-3431.
On July
17, 2002, Robert DeWelt, the former acting Chief Financial Officer and
former
acting general manager of its Schaevitz Division, filed a lawsuit against
the
Company and certain of its officers and directors in the United States
District
Court of the District of New Jersey. Mr. DeWelt resigned on March 26, 2002
in
disagreement with management’s decision not to restate certain of its financial
statements. The lawsuit alleges a claim for constructive wrongful discharge
and
violations of the New Jersey Conscientious Employee Protection Act. Mr.
DeWelt
seeks an unspecified amount of compensatory and punitive damages. The Company
filed a Motion to Dismiss this case, which was denied on June 30, 2003.
The
Company has answered the complaint and is engaged in the discovery process.
This
litigation is ongoing and the Company cannot predict its outcome at this
time.
In
re
Service Merchandise Company, Inc. (Service Merchandise Company, Inc. v.
Measurement Specialties, Inc.), United States Bankruptcy Court for the
Middle
District of Tennessee, Nashville Division, Case No. 399-02649, Adv. Pro.
No.
301-0462A. The
Company is currently
the defendant in a lawsuit filed in March 2001 by Service Merchandise Company,
Inc. ("SMC") and its related debtors (collectively, the "Debtors") in the
United
States District Court for the Middle District of Tennessee in the context
of the
Debtors' Chapter 11 bankruptcy proceedings. The Bankruptcy Court entered
a stay
of the action in May 2001, which was lifted in February 2002. On March
30, 2004,
the court entered on order allowing written discovery in the form of
interrogatories and requests for production of documents to begin. All
other
discovery remains stayed. The action alleges that the Company received
approximately $645 from one or more of the Debtors during the ninety (90)
day
period before the Debtors filed their bankruptcy petitions, that the transfers
were to its benefit, were for or on account of an antecedent debt owed
by one or
more of the Debtors, made when one or more of the Debtors were insolvent,
and
that the transfers allowed the Company to receive more than the Company
would
have received if the cases were cases under Chapter 7 of the United States
Bankruptcy Code. The action seeks to disgorge the sum of approximately
$645 from
the Company. It is not possible at this time to predict the outcome of
the
litigation or estimate the extent of any damages that could be awarded
in the
event that the Company is found liable to the estates of SMC or the other
Debtors.
SEB
Patent Issue.
On
December 12, 2003, Babyliss, SA, a wholly owned subsidiary of Conair
Corporation, received notice from the SEB Group ("SEB") alleging that certain
bathroom scales manufactured by the Company and sold by Babyliss in France
violated certain patents owned by SEB. On May 19, 2004, SEB issued a Writ
of
Summons to Babyliss and the Company, alleging patent infringement and requesting
the Tribunal de Grande Instance de Paris to grant them unspecified monetary
damages and injunctive relief. Pursuant to the indemnification provisions
of the
Conair transaction, the Company has assumed defense of this matter.
After thorough review, the Company believes SEB's allegations of patent
infringement are without merit and the Company intends to defend its position
vigorously. On November 9, 2004, the Company requested of
the Tribunal de Grande Instance de Paris a declaration of non-infringement
of
the SEB patent with regard to certain weighing sensor design
known as an "M" design included in certain of the Company’s bathroom
scales other than those to which SEB has alleged infringement. On
March 14, 2005, the Company filed pleadings with the Tribunal seeking
nullity of the SEB patent and a ruling of non-infringement of the SEB patent
with respect to the "M" design. On June 13, 2005, SEB filed a
reply with the Tribunal arguing validity of its patent, requesting dismissal
of
the request for nullity of the SEB patent and the request for the declaration
of
non-infringement with regard to the "M" design, and again requesting a
ruling
and relief on the patent infringement charge. At this time, the Company
cannot
predict the outcome of this matter.
From
time
to time, the Company is subject to other legal proceedings and claims in
the
ordinary course of business. The Company is currently 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 its business, financial
condition, or operating results.
Warranty
Reserve
The
Company's sensor products generally have a warranty period of 1 year, and
consumer products generally are marketed under warranties to retailers
up to
five years. Factors affecting the Company's warranty liability include
the
number of products sold and historical and anticipated rates of claims
and cost
per claim. The Company provides for estimated product warranty obligations
at
the time of sale, based on its historical warranty claims experience and
assumptions about future warranty claims. This estimate is susceptible
to
changes in the near term based on introductions of new products, product
quality
improvements and changes in end user application and/or behavior.
Acquisition
Earn-outs
As
disclosed in Note 7 above, in connection with the Humirel acquisition,
the
Company has potential performance based earn-outs totaling 6,300 Euro (or
approximately $7,600), if the maximum performance targets are achieved.
10.
DERIVATIVE INSTRUMENTS
As
part
of the acquisition of Humirel, the Company has a number of forward purchase
currency contracts with exercise dates beginning January 25, 2005 through
March
31, 2006 with a total notional amount of $12,000 at an average exchange
rate of
$1.23 (in US dollars) to hedge Humirel’s exposure to fluctuation in the US
dollar relative to the Euro. As of June 30, 2005, the fair value of the
currency
contracts was ($24), and this unrealized loss was recorded in Other
Comprehensive Income. The Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," on April 1, 2001. SFAS
No. 133,
as amended by SFAS No. 138 and SFAS No. 149, establishes accounting and
reporting standards for derivative instruments and hedging activities.
11.
RELATED PARTY TRANSACTIONS:
Executive
Services and Non-Cash Equity Based Compensation
On
April
21, 2003, the Compensation Committee of the Company's Board of Directors
reached
a verbal agreement with Frank Guidone regarding his long term retention
as Chief
Executive Officer. Definitive agreements memorializing this arrangement
were
entered into on July 22, 2003, between the Company and Four Corners Capital
Partners, LP ("Four Corners"), a limited partnership of which Mr. Guidone
is a
principal. Pursuant to this arrangement, Four Corners will make Mr. Guidone
available to serve as the Company's Chief Executive Officer for which it
will
receive an annual fee of $400 (plus travel costs for Mr. Guidone) and will
be
eligible to receive a performance-based bonus. The agreement is for an
indefinite period of time and both parties have the right to terminate
the
agreement on sixty day's advance notice. Payments under this agreement
to Four
Corners in the three months ended June 30, 2005 and 2004 were $132 ($100
for
executive services and $32 for expenses), and $116 ($100 for executive
services
and $16 for expenses), respectively.
In
addition, in connection with this arrangement, Mr. Guidone entered into
a
non-competition agreement.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
(DOLLARS
IN THOUSANDS, EXCEPT PER SHARE DATA)
FORWARD-LOOKING
STATEMENTS
This
discussion includes forward-looking statements within the meaning of Section
27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
and
Exchange Act of 1934, as amended. Forward looking statements may be identified
by such words or phrases as "believe," "expect," "intend," "estimate,"
"anticipate," "project," "will," "may" and similar expressions. All statements
that address operating performance, events or developments that we expect
or
anticipate will occur in the future are forward-looking statements. The
forward-looking statements below are not guarantees of future performance
and
involve a number of risks and uncertainties. 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 and in the markets served by
us;
|
· |
Competitive
factors, such as price pressures and the potential emergence
of rival
technologies;
|
· |
Interruptions
of suppliers' operations or the refusal of our suppliers to provide
us
with component materials;
|
· |
Timely
development, market acceptance and warranty performance of new
products;
|
· |
Changes
in product mix, costs and yields and fluctuations in foreign
currency
exchange rates;
|
· |
Uncertainties
related to doing business in Europe, Hong Kong and
China;
|
· |
The
continued decline in the European consumer products
market;
|
· |
A
decline in the United States consumer products
market;
|
· |
Legal
proceedings described below under "Part II. Item 1 - Legal Proceedings";
and
|
· |
The
risk factors listed from time to time in our SEC
reports.
|
This
list
is not exhaustive. Except as required under federal securities laws and
the
rules and regulations promulgated by the SEC, we do not have any intention
or
obligation 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
We
are a
designer and manufacturer of sensors and sensor-based consumer products.
We
produce a wide variety of sensors that use advanced technologies to measure
precise ranges of physical characteristics including pressure, position,
force,
vibration, humidity and photo optics. We have two segments, the Sensor
and
Consumer Products.
Our
Sensor segment designs and manufactures sensors for original equipment
manufacturers. These sensors are used for automotive, medical, consumer,
military/aerospace and industrial applications. Our sensor products include
pressure and electromagnetic displacement sensors, piezoelectric polymer
film
sensors, panel sensors, custom microstructures, load cells, accelerometers,
optical sensors and humidity sensors.
Our
Consumer Products segment designs and manufactures sensor-based consumer
products that we sell to original equipment manufacturers, retailers and
distributors in both the United States and Europe. Consumer products include
bathroom and kitchen scales, tire pressure gauges and distance
estimators.
OUR
VISION AND STRATEGY
Our
Vision as a Company is to become a leading, global provider of sensors
and
sensor-based solutions to the OEM and end-user markets. Our Strategy to
achieve
this Vision is to:
- |
Provide
application specific solutions - not simply products - to our
customers
with respect to their needs regarding sensing physical
characteristics;
|
- |
Focus
on OEM, medium-to-high volume, application-engineered opportunities,
where
our design strength can make the
difference;
|
- |
Take
market share by leveraging the breadth of our technology portfolio
and
low-cost operating model. Grow 15% organically per year
by:
|
o |
Our
willingness to customize (standard platforms, custom
solutions)
|
o |
Being
a cost and service leader
|
o |
Expanding
our share in Europe and Asia
|
o |
Efficiently
servicing the low volume/end-user
market
|
- |
Expand
our addressable market by acquiring additional sensing technologies
and
expanding horizontally in the marketplace (versus vertically
integrating).
These acquisitions will allow us to address a larger portion
of the sensor
market, and increase our effectiveness cross-selling various
sensor
solutions to the same customer.
|
Our
Sensor Division’s net sales grew organically by 15% during fiscal year 2004 as
compared to fiscal year 2003, and by 23% during fiscal year 2005 as compared
to
fiscal year 2004. We estimate the market growth at approximately 5%. While
this
implies we are taking market share, we estimate our addressable market
at $3 to
$4 billion worldwide, and as such, our share of market is relatively small
(approximately 3%). Consistent with our expansion strategy, we acquired
six
companies in fiscal year 2005. Of these, three were considered “tuck”
acquisitions, where we acquired similar technology, but gained new customers.
In
these cases, we look to leverage our existing assets as much as possible
and
drive operational synergies. The remaining three acquisitions represented
technology expansions, where we acquired a new technology that allowed
us to
expand our total addressable market. We intend to continue to focus on
small,
accretive acquisitions in the future, and leverage the fragmentation in
the
marketplace.
To
finance our acquisitions, we have used a combination of cash, seller financing
(including earn-out structures) and bank debt. We currently have a $35
million
credit facility with General Electric Capital Corporation, which includes
a $20
million term loan and a $15 million revolving credit facility. It is our
expectation and intent to use cash and add additional debt as appropriate
to
finance future acquisitions, generally staying within a 2 times senior
debt to
EBITDA (defined as “earnings before interest, taxes, depreciation and
amortization”) ratio. Additionally, to fund future acquisitions we would
consider subordinated debt, the sale of equity securities, or the sale
of
existing Company assets, including assets in our Consumer Products
segment.
The
following table sets forth, for the periods indicated, certain items in
our
consolidated statements of operations as a percentage of net sales:
|
|
For
three months ended June 30,
|
|
|
|
2005
|
|
2004
|
|
Net
Sales:
|
|
|
|
|
|
Sensors
|
|
|
62.4
|
%
|
|
61.2
|
%
|
Consumer
Products
|
|
|
37.6
|
|
|
38.8
|
|
Total
net sales
|
|
|
100.0
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
60.3
|
|
|
55.1
|
|
Gross
profit
|
|
|
39.7
|
|
|
44.9
|
|
|
|
|
|
|
|
|
|
Operating
expenses (income)
|
|
|
|
|
|
|
|
Selling,
general, and administrative
|
|
|
25.4
|
|
|
25.9
|
|
Research
and development, net
|
|
|
2.3
|
|
|
2.9
|
|
Customer
funded development
|
|
|
(0.1
|
)
|
|
(0.3
|
)
|
Amortization
of acquired intangibles
|
|
|
1.1
|
|
|
0.0
|
|
Interest
expense, net
|
|
|
1.2
|
|
|
(0.0
|
)
|
Other
expenses (income)
|
|
|
0.0
|
|
|
(0.0
|
)
|
|
|
|
29.9
|
|
|
28.5
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
9.8
|
|
|
16.4
|
|
Income
tax expense
|
|
|
2.6
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
7.2
|
%
|
|
11.8
|
%
|
Trends.
Sensor
Business: As discussed above, the sensors market is highly fragmented with
hundreds of niche players. While the worldwide sensors market that we serve
is
expected to have a 5% Compound Annual Growth Rate (CAGR), we expect to
gain
share and grow our Sensor business in excess of the market. As a result
of this
growth strategy, we anticipate pursuing high volume sensor business that
will
carry lower gross margins than our traditional averages, which may influence
our
overall sensor gross margins. Accordingly, we anticipate average gross
margins
in the sensor division to decline to 47% from 50% for the fiscal year ending
March 31, 2006.
Consumer
Products Business: As a result of the Conair transaction, we now supply
bath and
kitchen scales solely to OEM manufacturers for sale under their labels.
As OEM
margins historically have been lower than retail margins, including the
effect
of the amortized gain related to the Conair transaction, we anticipate
gross
margins in the Consumer Products business to be in the 21% - 22% range
for the
fiscal year ending March 31, 2006.
RESULTS
OF OPERATIONS
THE
FOLLOWING TABLE SETS FORTH CERTAIN ITEMS IN OUR CONSOLIDATED STATEMENTS
OF
INCOME FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004, RESPECTIVELY:
|
|
|
|
For
the three months
|
|
|
|
ended
June 30,
|
|
($
in thousands, except share and per share amounts)
|
|
2005
|
|
2004
|
|
Net
Sales - Sensor
|
|
$
|
25,278
|
|
$
|
17,141
|
|
Net
Sales - Consumer Products
|
|
|
15,229
|
|
|
10,879
|
|
Net
sales
|
|
|
40,507
|
|
|
28,020
|
|
Cost
of goods sold
|
|
|
24,416
|
|
|
15,443
|
|
Gross
profit
|
|
|
16,091
|
|
|
12,577
|
|
Operating
expenses (income):
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
10,292
|
|
|
7,266
|
|
Research
and development
|
|
|
939
|
|
|
809
|
|
Customer
funded development
|
|
|
(56
|
)
|
|
(95
|
)
|
Amortization
of acquired intangibles
|
|
|
428
|
|
|
8
|
|
Total
operating expenses
|
|
|
11,603
|
|
|
7,988
|
|
Operating
income
|
|
|
4,488
|
|
|
4,589
|
|
Interest
expense, net
|
|
|
472
|
|
|
(11
|
)
|
Other
expense (income)
|
|
|
43
|
|
|
(9
|
)
|
Income
before taxes
|
|
|
3,973
|
|
|
4,609
|
|
Income
taxes
|
|
|
1,037
|
|
|
1,314
|
|
Net
income
|
|
$
|
2,936
|
|
$
|
3,295
|
|
|
|
|
|
|
|
|
|
Income
per common share - Basic
|
|
$
|
0.22
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
Income
per common share - Diluted
|
|
$
|
0.21
|
|
$
|
0.23
|
|
Weighted
average shares outstanding - Basic
|
|
|
13,582,488
|
|
|
13,267,552
|
|
Weighted
average shares outstanding - Diluted
|
|
|
14,302,108
|
|
|
14,195,676
|
|
THREE
MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE MONTHS ENDED JUNE 30, 2004
The
consolidated financial statements for the three month periods ended June
30,
2005 and June 30, 2004 include the results of the ongoing operations of
Measurement Specialties, Inc.
Net
Sales.
Sensor
Business.
Sensor
sales increased 47.5% or $8,137, from $17,141 to $25,278. Excluding sales
from
recent acquisitions of $6,679, sales increased $1,458, or 8.5%. The increase
in
net sales for our base Sensor business in the quarter ended June 30, 2005
is
primarily a result of increased demand in our Pressure product line. This
increased demand is primarily in the automotive sector and is a result
of
continued platform expansion of our existing pressure products as well
as a new
application being introduced that also uses MSI's proprietary Microfused™
based sensing technology (for occupant weight sensing). We
would
expect this growth to continue and perhaps accelerate this year’s sales as
compared to last year's sales for this sector. We are also seeing
moderate growth in the Pressure line for the non-automotive segment, for
a
variety of applications as our customer base grows and some customer’s ramp up
production. Excluding acquisitions, sales in our Position product line
decreased
slightly due to several one time shipments and an older product being phase
out
of production by one customer. However we expect the Position portion of
our
business to pick up slightly in the following months of fiscal 2006. The
Sensor
business remains very healthy and we see very exciting growth prospects
for both
new and existing product lines.
Consumer
Products Business.
Net
sales increased 40% or $4,350 in the quarter ended June 30, 2005. The OEM
bath scale business increased $2,308. This increase was primarily through
increased sales revenue to Conair of approximately $2,800, slightly offset
by a
decline in the Consumer scale business. There was a $1,996 increase in
revenue in the Tire Gauge product line, primarily due to increased business
with
an existing customer of $1,600. On an overall basis, we expect full year
sales
for the Consumer Products business to be up slightly as compared to fiscal
year
2005.
Gross
Margin.
Gross
margin as a percent of sales for the quarter ended June 30, 2005 decreased
to
39.7% from 44.9% for the quarter ended June 30, 2004.
Sensor
Business.
Gross
margin as a percent of net sales for our base Sensor business (which excludes
the effects of acquisitions) decreased to 52.9% for the quarter ended June
30,
2005 from 57.0% for the quarter ended June 30, 2004. This decline in margin
is
due to the decrease in pricing in order to secure a larger volume of business
with a major automotive customer, and the resulting increase in sales of
these
automotive sensors, which carry a lower gross margin than our average sensor
business. Also contributing to the margin decline is higher commodity costs
in
our core sensors business. Including acquisition sales, gross margin as
a
percent of sales for our Sensor business decreased to 49.7% from 56.9%.
Average
gross margin of the acquired businesses is approximately 39.8% which is
significantly less than the core sensor business.
Consumer
Products Business.
Gross margin as a percent of net sales in our Consumer Products business
decreased to 23.2% for the quarter ended June 30, 2005 from 24.3% for the
quarter ended June 30, 2004. Margins in our tire gauge product line
decreased by a nominal 0.3% to 29.7%. Due to continued pricing pressure
with our OEM customers and increases in commodity costs, particularly increases
in steel and resin costs, margins in our bath scale business decreased
by 2.3%
to 21.4%. The Company attempts to mitigate the increases in costs through
various alternatives, including process improvements and
purchasing.
On
a
continuing basis our gross margin in the Sensor and Consumer Products businesses
may vary due to product mix, sales volume, availability of raw materials
and
other factors.
Selling
, General and Administrative.
Selling,
General and Administrative (SG&A) expenses increased from $7,266 in the
quarter ended June 30, 2004 to $10,292 in the quarter ended June 30, 2005.
Excluding SG&A expenses specifically associated with the acquired companies,
SG&A expenses increased to approximately $7,692. During the quarter ended
June 30, 2005, the Company executed certain cost reduction efforts to reduce
operating expenses, including fully vacating the Entran facility in the
U.S., as
well as an overall staff reduction at other locations, resulting in severance
and other related costs of approximately $379. The positive effect of these
efforts will not be fully realized until later quarters in fiscal 2006.
Additionally, professional fees increased largely to support the continued
efforts associated with Sarbanes Oxley compliance and the Acquisitions.
Amortization
of acquired intangibles.
The
$420 increase in amortization expense is due to the amortization of the
acquired
intangibles, such as customer relationships, patents and trade-names, directly
related to the acquisitions during fiscal 2005.
Research
and Development.
Customer-funded development for the quarter ended June 30, 2005 decreased
to $56
compared to $95 for the quarter ended June 30, 2004. On a net basis, research
and development costs increased $169. The overall increase has occurred
as
additional engineering resources have been utilized in order to support
anticipated growth, as well as the effect of Acquisitions.
Interest
Expense, Net.
The
increase in interest expense is attributable to an increase in average
debt
outstanding from $0 for the quarter ended June 30, 2004 to $19,938 for
the
quarter ended June 30, 2005. The increase in debt was due to the acquisitions.
Income
Taxes.
The
decrease in the effective tax rate from 28.5% to 26.1% primarily reflects
a
larger portion of income generated in jurisdictions with lower tax
rates.
Our
provision for income taxes differs from the statutory U.S. federal income
tax
rate due to our estimation and distribution of the full year's tax rate
based
upon the expected taxable income taxed at the applicable jurisdiction tax
rates.
The aforementioned expectations and other estimates utilized in calculating
the
tax provision and our effective tax rate on a quarterly basis involve complex
domestic and foreign tax issues and are monitored closely and subject to
change
based on ultimate circumstances. The utilization of a portion of the Company's
net operating loss carry forward will reduce the Company's cash payment
for the
U.S. portion of the provision for income taxes.
We
continue to evaluate the implications of the recently enacted American
Jobs
Creation Act of 2004. Due to, among other things, the volume of manufacturing
in
the US and our net operating loss carry-forwards, we do not expect this
Act to
have an immediate or significant impact on our effective tax rates.
Chinese
Renminbi Revaluation.
On
July
21, 2005, the renminbi increased in value by approximately 2.1% as compared
to
the U.S. dollar. The Chinese government announced that it will no longer
peg the
renminbi to the US dollar, but established a currency policy letting the
renminbi trade in a narrow band against a basket of currencies. Based on
our net
exposure of renminbi to US dollars for the fiscal year ended March 31,
2005 and
forecast information for fiscal 2006, we estimate a negative operating
income
impact of approximately $135 for every 1% appreciation in renminbi against
the
U.S. dollar (assuming no associated cost increases or currency hedging).
The
July 21, 2005 revaluation is not expected to result in a realized foreign
exchange currency loss relative to our net working capital exposure for
our
Chinese operations. The Company continues to consider various alternatives
to
hedge this exposure, and has considered, but does not currently use, foreign
currency contracts as a hedging strategy. The Company is attempting to
manage
this exposure through, among other things, pricing and monitoring balance
sheet
exposures for payables and receivables. See Item 3 below, “Quantitative and
Qualitative Disclosures about Market Risk”, for additional details regarding the
Company’s exposure to fluctuations in foreign currency exchange
rates.
LIQUIDITY
AND CAPITAL RESOURCES
Operating
working capital (accounts receivable plus inventory less accounts payable)
decreased by $2,678 from $27,257 as of March 31, 2005 to $24,579 as of
June 30,
2005. The decrease in working capital was attributable to a decrease in
accounts
receivable of $3,335 from $20,369 at March 31, 2005 to $17,034 at June
30, 2005,
and an increase in accounts payable of $2,241 from $15,635 at June 30,
2005 to
$13,394 at March 31, 2005, offset by an increase in inventory of $2,898
from
$20,282 at March 31, 2005 to $23,180 at June 30, 2005.
Cash
provided from operating activities was $5,911 for the quarter ended June
30,
2005, as compared to $1,801 provided for the quarter ended June 30, 2004.
The
increase in cash provided by operations is mainly due to the decrease in
accounts receivable and the increases in accounts payable and accrued expenses,
as well as attributable to a larger non-cash amortization in the first
quarter
of fiscal 2006 versus the same period last year.
Net
cash
used in investing activities for the three months ended June 30, 2005 decreased
relative to the corresponding period last year, primarily because there
was no
major activity for acquisitions of businesses during the current fiscal
year.
During the quarter ended June 30, 2004, the Company made one acquisition.
The
current year activity for acquisition of businesses mainly reflects the
final
adjustments for related costs and purchase accounting. In addition, capital
spending increased to $1,318 for the quarter ended June 30, 2005 from $580
for
the quarter ended June 30, 2004. Capital spending is expected to be in
the range
of $5,500 to $6,500 for the fiscal year ended March 31, 2006. Financing
activities for the quarter ended June 30, 2005 amounted to $2,461, reflecting
payments for promissory notes and the revolver, which was partially offset
by
proceeds from the exercise of employee stock options.
On
December 17, 2004, we entered into a new, $35,000 five-year credit agreement
with GE Commercial Finance, Commercial & Industrial Finance (“GE” or
“GECC”), comprised of a $20,000 term loan and $15,000 revolving credit facility.
JP Morgan Chase Bank, N.A. and Wachovia Bank, National Association, participated
in the syndication. Interest accrues on the principal amount of borrowings
at a
rate based on either a London Inter-bank Offered Rate (LIBOR) rate plus
a LIBOR
margin or at an Index (a prime based) Rate plus an Index Margin. The LIBOR
or
Index Rate is at the election of the borrower. From the closing date to
the
second anniversary date of the closing, the applicable LIBOR and Index
Margins
are 4.50% and 2.75%, respectively, and from the second anniversary, the
applicable LIBOR and Index Margins are 4.25% and 2.50%, respectively, subject
to
a 2% increase upon the occurrence of an event of default under the credit
agreement. The term loan is payable in thirteen equal quarterly installments
beginning on March 1, 2005 through December 17, 2009. Proceeds
from the new credit facility were primarily used to support the acquisition
of
Humirel (See Note 7), ordinary working capital and general corporate needs
and
replaced the $15,000 revolving credit facility with Bank of America Business
Capital (formerly Fleet Capital Corporation). We have provided a security
interest in substantially all of our assets as collateral for the new credit
facilities. Borrowings under the line are subject to certain financial
covenants
and restrictions on indebtedness, dividend payments, financial guarantees,
and
other related items.
At
June
30, 2005, we were in compliance with applicable debt covenants.
As
of
June 30, 2005, we utilized the LIBOR based rate for the term loan and the
prime
based Index Rate for the revolver. The interest rate applicable to borrowings
under the revolving credit facility was 8.75%. As of June 30, 2005, the
outstanding borrowings on the term loan and revolver were $19,000 and zero,
respectively, and we had the right to borrow an additional $15,000 under
the
revolving credit facility. The revolving credit facility is not directly
based
on any borrowing base requirements.
The
weighted average interest rate for the above credit facilities was 7.77%
for the
quarter ended June 30, 2005. The average amount outstanding under the agreements
for the quarter ended June 30, 2005 was $19,937. As of June 30, 2005, we
had
interest of $244 accrued in Accrued Expenses and other Current
Liabilities.
Promissory
Notes
In
connection with the acquisition of Elekon Industries USA, Inc. (See Note
7 to
the Condensed Consolidated Financial Statements), we issued unsecured Promissory
Notes (“Notes”) totaling $3,000, of which $1,850 was outstanding and $1,000
considered current at June 30, 2005. The Notes amortize over a period of
three
years, are payable quarterly and bear interest at 6%.
Other
Short-Term Debt
In
connection with the acquisition of Entran and Humirel, we assumed outstanding
short-term borrowing. $674 of this assumed short-term borrowing remains
outstanding at June 30, 2005 and is included in short-term debt in the
condensed
consolidated balance sheet.
Liquidity:
At
August
1, 2005, we had approximately $3,705 of available cash and $15,000 of borrowing
capacity under our revolving credit facility. This amount includes the
increased
borrowing capacity resulting from the Acquisitions.
OTHER
COMPREHENSIVE INCOME (LOSS)
Other
comprehensive income consists primarily of foreign currency translation
adjustments. The increase in other comprehensive loss is due to the changes
in
the exchange rate of the US dollar relative to the Euro for the Euro denominated
operations of Humirel and Entran .
DEFERRED
REVENUE
On
January 30, 2004, Conair Corporation purchased certain assets of our Thinner®
branded bathroom and kitchen scale business, and now owns worldwide rights
to
the Thinner® brand name and exclusive rights to the Thinner® designs in North
America. We accounted for the sale of this business under the guidance
of EITF
00-21.
DIVIDENDS
We
have
not declared cash dividends on our common equity. The payment of dividends
is
prohibited under the existing credit agreement with GE. We may, in the
future,
declare dividends under certain circumstances.
At
present, there are no material restrictions on the ability of our Hong
Kong
subsidiary to transfer funds to us in the form of cash dividends, loans,
advances, or purchases of materials, products, or services. Chinese laws
and
regulations, including currency exchange controls, restrict distribution
and
repatriation of dividends by our China subsidiary.
SEASONALITY
Our
sales
of consumer products are seasonal, with highest sales during the second
and
third fiscal quarters. Sales of sensor products are not seasonal.
INFLATION
We
compete on the basis of product design, features, and value. Accordingly,
our
revenues 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 and
may
continue to experience some significant increases in materials costs, in
particular increases in steel and resin costs in our consumer business,
and as a
result have suffered a decline in margin.
OFF
BALANCE SHEET ARRANGEMENTS
We
do not
have any financial partnerships with unconsolidated entities, such as entities
often referred to as structured finance, special purpose entities or variable
interest 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.
AGGREGATE
CONTRACTUAL OBLIGATIONS
As
of
June 30, 2005, the Company's contractual obligations, including payments
due by
period, are as follows:
Contractual
Obligations
|
|
Payment
due by period
|
|
|
|
|
|
|
|
|
|
Year
1
|
|
Year
2
|
|
Year
3
|
|
Year
4
|
|
Year
5
|
|
Thereafter
|
|
Total
|
|
Long-Term
Debt Obligations
|
|
$
|
3,247
|
|
$
|
3,064
|
|
$
|
2,495
|
|
$
|
2,359
|
|
$
|
11,140
|
|
$
|
83
|
|
$
|
22,388
|
|
Capital
Lease Obligations
|
|
|
301
|
|
|
278
|
|
|
177
|
|
|
49
|
|
|
5
|
|
|
-
|
|
|
810
|
|
Operating
Lease Obligations
|
|
|
1,992
|
|
|
1,348
|
|
|
777
|
|
|
686
|
|
|
696
|
|
|
717
|
|
|
6,216
|
|
Purchase
Obligations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Deferred
Acquisition Payments
|
|
|
1,720
|
|
|
3,950
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,670
|
|
Other
Long-Term Liabilities Reflected on the Registrant's Balance Sheet
Under
GAAP
|
|
|
674
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
674
|
|
Total
|
|
$
|
7,934
|
|
$
|
8,640
|
|
$
|
3,449
|
|
$
|
3,094
|
|
$
|
11,841
|
|
$
|
800
|
|
$
|
35,758
|
|
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Dollars
in Thousands)
Foreign
Currency Exchange Risk
We
are
exposed to a certain level of foreign currency exchange risk.
Most
of
our revenues are priced in U.S. dollars. Most of our costs and expenses
are
priced in U.S. dollars, with the remaining priced in Chinese renminbi,
Euros and
Hong Kong dollars. Accordingly, the competitiveness of our products relative
to
products produced locally (in foreign markets) may be affected by the percentage
of net sales in U.S. dollar’s compared with that of our foreign customers'
currencies. U.S. net sales were $16,217 and $13,953, or 39.9%, and 49.8%
of
consolidated net sales, for the quarters ended June 30, 2005 and 2004,
respectively. Net sales from our China facility were $5,435 and $3,936
or 13.4%
and 14.0% of net sales, for the quarters ended June 30, 2005 and 2004,
respectively. Net sales from our Hong Kong operation were $14,752 and $9,819
or
36.5%, and 35.0% of consolidated net sales, for the quarters ended June
30, 2005
and 2004, respectively. Net sales from our European operations were $4,103
and
zero or approximately 10.1%, and 0% of consolidated net sales, for the
quarters
ended June 30, 2005 and 2004, respectively. We are exposed to foreign currency
transaction and translation losses, which might result from adverse fluctuations
in the value of the Euro, Hong Kong dollar and Chinese renminbi.
At
June
30, 2005 and March 31, 2005, we had net assets of $47,368 and $48,009,
respectively, in the United States. At June 30, 2005, we had net liabilities
of
$14 in Europe, subject to fluctuations in the value of the Euro against
the U.S.
dollar, and at March 31, 2005, we had net assets of $49. The change in
the value
of the US dollar relative to the Euro from March 31, 2005 to June 30, 2005
resulted in a translation decrease in total assets and total liabilities
of
approximately $2,019. At June 30, 2005 and March 31, 2005, we had net assets
of
$12,602 and $9,503, respectively, in Hong Kong subject to fluctuations
in the
value of the Hong Kong dollar. At June 30, 2005 and March 31, 2005, we
had net
assets of $9,687 and $10,455, respectively, in China subject to fluctuations
in
the value of the Chinese renminbi.
On
July
21, 2005, the renminbi increased in value by approximately 2.1% as compared
to
the U.S. dollar. The Chinese government announced that it will no longer
peg the
renminbi to the US dollar, but established a currency policy letting the
renminbi trade in a narrow band against a basket of currencies. Based on
our net
exposure of renminbi to U.S. dollars for the fiscal year ended March 31,
2005
and forecast information for fiscal 2006, we estimate a negative operating
income impact of approximately $135 for every 1% appreciation in renminbi
against the US dollar (assuming no associated cost increases or currency
hedging). The July 21, 2005 revaluation is not expected to result in a
realized
foreign exchange currency loss relative to our net working capital exposure
for
our Chinese operations. We continue to consider various alternatives to
hedge
this exposure, and have considered, but do not currently use, foreign currency
contracts as a hedging strategy. The Company is attempting to manage this
exposure through, among other things, 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 United States dollar. However, there can be no assurance that
the
value of the Hong Kong dollar will continue to be tied to that of the United
States dollar. China adopted a floating currency system on January 1, 1994,
unifying the market and official rates of foreign exchange. China approved
current account convertibility of the Chinese renminbi on July 1, 1996,
followed
by formal acceptance of the International Monetary Fund's Articles of Agreement
on December 1, 1996. These regulations eliminated the requirement for prior
government approval to buy foreign exchange for ordinary trade transactions,
though approval is still required to repatriate equity or debt, including
interest thereon.
Based
on
the net exposures of Euros to the US dollars for the quarter ended June
30,
2005, we estimate a positive operating income impact of $95 for every 1%
appreciation in Euros relative to the US dollar (assuming no associated
costs
increases or currency hedging).
We
have
acquired a number of foreign currency exchange contracts with the purchase
of
Humirel. We have currency contracts which have a total notional amount
of
$12,000 with exercise dates through March 31, 2006 at an average exchange
rate
of $1.23 (Euro to US dollar conversion rate). These derivatives are designated
as cash-flow hedges, and changes in their fair value are carried in accumulated
other comprehensive income until the hedged transaction affects earnings.
When
the hedged transaction affects earnings, the appropriate gain or loss from
the
derivative designated as a hedge of the transaction is reclassified from
accumulated other comprehensive income to cost of sales. As of June 30,
2005,
the amount that will be reclassified from accumulated other comprehensive
income
to cost of sales over the next twelve months is an unrealized loss of $24.
There
is no ineffective portion of the derivatives.
There
can
be no assurance that these currencies will remain stable or will fluctuate
to
our benefit. To manage our exposure to foreign currency transaction and
translation risks, we may purchase currency exchange forward contracts,
currency
options, or other derivative instruments, provided such instruments may
be
obtained at suitable prices. However, to date, other than for the foreign
currency exchange contracts acquired with the purchase of Humirel, we have
not
done so.
Interest
Rate Risk
We
are
exposed to a certain level of interest rate risk. Interest on the principal
amount of our borrowings under our revolving credit facility accrues at
a rate
based on either a London Inter-bank Offered Rate (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, for every $1,000 of debt outstanding,
an annual interest rate increase of 100 basis points would increase interest
expense and decrease our after tax profitability by $10. We do not currently
hedge this interest rate exposure.
ITEM
4. CONTROLS AND PROCEDURES
The
Company's management, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of
the
Company's disclosure controls and procedures as of June 30, 2005. Based
on this
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective
for gathering, analyzing and disclosing the information the Company is
required
to disclose in the reports it files under the Securities Exchange Act of
1934,
within the time periods specified in the SEC's rules and forms. Such evaluation
did not identify any change in the Company's internal control over financial
reporting that occurred during the quarter ended June 30, 2005 that has
materially affected, or is reasonably likely to materially affect, the
Company's
internal control over financial reporting, except that relating to the
acquisitions of Entran, Encoder, Humirel, and MWS Sensorik as of June 30,
2005
(See Note 2 to the condensed consolidated financial statements included
in this
Quarterly Report Filed on Form 10-Q.). The Company will be making changes
to the
internal controls of these newly acquired companies as part of the integration
into the Company. However, for purposes of this evaluation, the impact
of these
acquisitions on the Company's internal controls over financial reporting
have
been excluded. The total of the Entran S.A., Humirel and MWS Sensorik
acquisitions represents approximately $4,103 in net sales; operating loss
of
$128 for the three months ended June 30, 2005 and $28,989 in total assets
and
$29,003 in total liabilities at June 30, 2005, which are included as part
of the
Company's Condensed Consolidated Financial Statements included in this
Quarterly
Report on Form 10-Q.