Part
I.
Financial Information
ITEM
1. FINANCIAL
STATEMENTS
MEASUREMENT
SPECIALTIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
For
the three months
|
|
For
the six months
|
|
|
|
ended
September 30,
|
|
ended
September 30,
|
|
(Dollars
in thousands, except per share amounts )
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
sales
|
|
$
|
44,405
|
|
$
|
36,211
|
|
$
|
84,912
|
|
$
|
64,231
|
|
Cost
of goods sold
|
|
|
26,950
|
|
|
21,082
|
|
|
51,366
|
|
|
36,525
|
|
Gross
profit
|
|
|
17,455
|
|
|
15,129
|
|
|
33,546
|
|
|
27,706
|
|
Operating
expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
9,118
|
|
|
8,474
|
|
|
19,405
|
|
|
15,748
|
|
Research
and development
|
|
|
918
|
|
|
848
|
|
|
1,862
|
|
|
1,657
|
|
Customer
funded development
|
|
|
(184
|
)
|
|
(43
|
)
|
|
(240
|
)
|
|
(138
|
)
|
Amortization
of acquired intangibles
|
|
|
402
|
|
|
8
|
|
|
830
|
|
|
16
|
|
Total
operating expenses
|
|
|
10,254
|
|
|
9,287
|
|
|
21,857
|
|
|
17,283
|
|
Operating
income
|
|
|
7,201
|
|
|
5,842
|
|
|
11,689
|
|
|
10,423
|
|
Interest
expense, net
|
|
|
486
|
|
|
108
|
|
|
958
|
|
|
97
|
|
Other
expense (income)
|
|
|
(64
|
)
|
|
67
|
|
|
(21
|
)
|
|
50
|
|
Income
before income taxes
|
|
|
6,779
|
|
|
5,667
|
|
|
10,752
|
|
|
10,276
|
|
Income
taxes
|
|
|
2,434
|
|
|
1,613
|
|
|
3,472
|
|
|
2,927
|
|
Net
income
|
|
$
|
4,345
|
|
$
|
4,054
|
|
$
|
7,280
|
|
$
|
7,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share - Basic
|
|
$
|
0.32
|
|
$
|
0.30
|
|
$
|
0.53
|
|
$
|
0.55
|
|
Net
income per common share - Diluted
|
|
$
|
0.30
|
|
$
|
0.29
|
|
$
|
0.51
|
|
$
|
0.52
|
|
Weighted
average shares outstanding - Basic
|
|
|
13,642,981
|
|
|
13,326,843
|
|
|
13,621,764
|
|
|
13,297,197
|
|
Weighted
average shares outstanding - Diluted
|
|
|
14,293,355
|
|
|
14,188,500
|
|
|
14,293,723
|
|
|
14,168,655
|
|
SEE
ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MEASUREMENT
SPECIALTIES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
September
30,
|
|
March
31,
|
|
(Dollars
in thousands)
|
|
2005
|
|
2005
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,973
|
|
$
|
4,402
|
|
Accounts
receivable, trade, net of allowance for
|
|
|
|
|
|
|
|
doubtful
accounts of $516 and $390, respectively
|
|
|
23,209
|
|
|
20,369
|
|
Inventories,
net
|
|
|
23,304
|
|
|
20,282
|
|
Deferred
income taxes
|
|
|
4,261
|
|
|
4,284
|
|
Prepaid
expenses and other current assets
|
|
|
3,572
|
|
|
3,029
|
|
Total
current assets
|
|
|
60,319
|
|
|
52,366
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
16,210
|
|
|
14,924
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
Goodwill
|
|
|
40,600
|
|
|
40,010
|
|
Acquired
intangible assets, net
|
|
|
9,459
|
|
|
10,583
|
|
Deferred
income taxes
|
|
|
6,429
|
|
|
7,190
|
|
Other
assets
|
|
|
1,444
|
|
|
931
|
|
Total
other assets
|
|
|
57,932
|
|
|
58,714
|
|
Total
Assets
|
|
$
|
134,461
|
|
$
|
126,004
|
|
SEE
ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MEASUREMENT
SPECIALTIES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
September
30,
|
|
March
31,
|
|
(Dollars
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
|
|
|
2,574
|
|
|
1,720
|
|
Short-term
debt
|
|
|
2,941
|
|
|
2,085
|
|
Current
portion of long-term debt
|
|
|
2,247
|
|
|
2,310
|
|
Accounts
payable
|
|
|
17,140
|
|
|
13,394
|
|
Accrued
expenses and other current liabilities
|
|
|
3,551
|
|
|
4,525
|
|
Accrued
compensation
|
|
|
2,408
|
|
|
2,231
|
|
Income
taxes payable
|
|
|
3,474
|
|
|
1,165
|
|
Deferred
gain on sale of assets, current
|
|
|
1,418
|
|
|
2,925
|
|
Total
current liabilities
|
|
|
36,753
|
|
|
31,555
|
|
|
|
|
|
|
|
|
|
Other
liabilities:
|
|
|
|
|
|
|
|
Deferred
gain on sale of assets, net of current portion
|
|
|
-
|
|
|
839
|
|
Promissory
notes payable, net of current portion
|
|
|
600
|
|
|
1,100
|
|
Long-term
debt, net of current portion
|
|
|
17,753
|
|
|
18,928
|
|
Deferred
acquisition payments, net of current portion
|
|
|
1,747
|
|
|
4,069
|
|
Other
liabilities
|
|
|
2,387
|
|
|
1,497
|
|
Total
liabilities
|
|
|
59,240
|
|
|
57,988
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
Serial
preferred stock; 221,756 shares authorized; none
outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, no par; 20,000,000 shares authorized; 13,712,880
and
|
|
|
|
|
|
|
|
13,257,084
shares issued and outstanding, respectively
|
|
|
5,502
|
|
|
5,502
|
|
Additional
paid-in capital
|
|
|
57,773
|
|
|
56,285
|
|
Accumulated
earnings
|
|
|
14,009
|
|
|
6,729
|
|
Accumulated
other comprehensive loss
|
|
|
(2,063
|
)
|
|
(500
|
)
|
Total
shareholders' equity
|
|
|
75,221
|
|
|
68,016
|
|
Total
liabilities and shareholders' equity
|
|
$
|
134,461
|
|
$
|
126,004
|
|
SEE
ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MEASUREMENT
SPECIALTIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For
the six months ended September 30, 2005 and 2004
(UNAUDITED)
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Accumulated
|
|
Other
|
|
|
|
|
|
|
|
Common
|
|
paid-in
|
|
Earnings
|
|
Comprehensive
|
|
|
|
Comprehensive
|
|
(Dollars
in thousands)
|
|
stock
|
|
capital
|
|
(Deficit)
|
|
Loss
|
|
Total
|
|
Income
|
|
Balance,
April 1, 2004
|
|
$
|
5,502
|
|
$
|
53,509
|
|
$
|
(8,097
|
)
|
$
|
(74
|
)
|
$
|
50,840
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
7,349
|
|
|
|
|
|
7,349
|
|
$
|
7,349
|
|
Currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
(7
|
)
|
|
(7
|
)
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,342
|
|
Proceeds
from exercise of stock options
|
|
|
|
|
|
573
|
|
|
|
|
|
|
|
|
573
|
|
|
|
|
Tax
benefit from exercise of stock options
|
|
|
|
|
|
279
|
|
|
|
|
|
|
|
|
279
|
|
|
|
|
Balance,
September 30, 2004
|
|
$
|
5,502
|
|
$
|
54,361
|
|
$
|
(748
|
)
|
$
|
(81
|
)
|
$
|
59,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
April 1, 2005
|
|
$
|
5,502
|
|
$
|
56,285
|
|
$
|
6,729
|
|
$
|
(500
|
)
|
$
|
68,016
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
7,280
|
|
|
|
|
|
7,280
|
|
$
|
7,280
|
|
Currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
(1,563
|
)
|
|
(1,563
|
)
|
|
(1,563
|
)
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,717
|
|
Proceeds
from exercise of stock options
|
|
|
|
|
|
1,031
|
|
|
|
|
|
|
|
|
1,031
|
|
|
|
|
Tax
benefit from exercise of stock options
|
|
|
|
|
|
457
|
|
|
|
|
|
|
|
|
457
|
|
|
|
|
Balance,
September 30, 2005
|
|
$
|
5,502
|
|
$
|
57,773
|
|
$
|
14,009
|
|
$
|
(2,063
|
)
|
$
|
75,221
|
|
|
|
|
SEE
ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MEASUREMENT
SPECIALTIES, INC
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
For
the six months
|
|
(Dollars
in thousands)
|
|
ended
September,
|
|
|
|
2005
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
7,280
|
|
$
|
7,349
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,900
|
|
|
1,402
|
|
Deferred
rent
|
|
|
-
|
|
|
5
|
|
Amortization
of deferred gain
|
|
|
(2,346
|
)
|
|
(1,454
|
)
|
Provision
for doubtful accounts
|
|
|
|
|
|
238
|
|
Loss
on disposal of fixed assets
|
|
|
(20
|
)
|
|
151
|
|
Provision
for inventory obsolescence
|
|
|
1,098
|
|
|
358
|
|
Deferred
income taxes
|
|
|
732
|
|
|
1,777
|
|
Tax
benefit on exercise of stock options
|
|
|
457
|
|
|
279
|
|
Net
changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable, trade
|
|
|
(2,974
|
)
|
|
(2,656
|
)
|
Inventories
|
|
|
(4,234
|
)
|
|
(4,443
|
)
|
Prepaid
expenses and other current assets
|
|
|
(568
|
)
|
|
1,089
|
|
Other
assets
|
|
|
(480
|
)
|
|
(191
|
)
|
Accounts
payable, trade
|
|
|
4,746
|
|
|
(322
|
)
|
Accrued
expenses and other liabilities
|
|
|
646
|
|
|
130
|
|
Accrued
litigation expenses
|
|
|
-
|
|
|
(2,100
|
)
|
Income
taxes payable
|
|
|
2,009
|
|
|
394
|
|
Net
cash provided by operating activities
|
|
|
9,246
|
|
|
2,006
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(3,389
|
)
|
|
(1,152
|
)
|
Acquisition
of business, net of cash acquired
|
|
|
(2,735
|
)
|
|
(15,953
|
)
|
Net
cash used in investing activities
|
|
|
(6,124
|
)
|
|
(17,105
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Payments
under short-term debt and notes payable
|
|
|
(6,406
|
)
|
|
-
|
|
Borrowings
under short-term debt
|
|
|
7,000
|
|
|
5,613
|
|
Payments
on long-term debt
|
|
|
(1,788
|
)
|
|
-
|
|
Payments
on deferred acquisition payments
|
|
|
(1,400
|
)
|
|
-
|
|
Proceeds
from exercise of options
|
|
|
1,031
|
|
|
573
|
|
Net
cash provided by (used in) financing activities
|
|
|
(1,563
|
)
|
|
6,186
|
|
Effect
of exchange rates
|
|
|
12
|
|
|
(2
|
)
|
Net
change in cash and cash equivalents
|
|
|
1,571
|
|
|
(8,915
|
)
|
Cash
and cash equivalents, beginning of year
|
|
|
4,402
|
|
|
19,274
|
|
Cash
and cash equivalents, end of period
|
|
$
|
5,973
|
|
$
|
10,359
|
|
Supplemental
Cash Flow Information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
932
|
|
$
|
30
|
|
Income
taxes
|
|
|
89
|
|
|
-
|
|
Noncash
investing and financing transactions
|
|
|
|
|
|
|
|
Notes
from acquisitions
|
|
|
-
|
|
|
3,000
|
|
Deferred
acquisition payments
|
|
|
-
|
|
|
3,654
|
|
Purchases
of property in accounts payable
|
|
|
-
|
|
|
230
|
|
Fair
value of assets acquired less liabilities assumed
|
|
|
-
|
|
|
7,708
|
|
SEE
ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MEASUREMENT
SPECIALTIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR
THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2005
(Dollars
in thousands, except share and per share amounts)
1.
BASIS
OF PRESENTATION:
Interim
financial statements:
The
information presented as of September 30, 2005 and for the three and
six month
periods ended September 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 September 30, 2005 and the results of its operations and
cash
flows for the six month periods ended September 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, position, force, vibration, humidity
and
photo-optics. The Company has two segments, a Sensor business and a Consumer
Products business.
The
Sensor segment designs and manufactures sensors for original equipment
manufacturers and end users. These sensors are used for automotive, medical,
consumer, military/aerospace and industrial applications. The Company's
sensor
products include pressure and electromagnetic displacement
sensors, transducers and 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 primarily as an original equipment manufacturer (OEM) that are
sold to
retailers and distributors primarily in 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 financial statement 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 or six months ended September 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
|
|
For
the six months
|
|
|
|
ended
September 30,
|
|
ended
September 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
4,345
|
|
$
|
4,054
|
|
$
|
7,280
|
|
$
|
7,349
|
|
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
|
|
|
(320
|
)
|
|
(163
|
)
|
|
(1,006
|
)
|
|
(328
|
)
|
Pro
forma net income
|
|
$
|
4,025
|
|
$
|
3,891
|
|
$
|
6,274
|
|
$
|
7,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
0.32
|
|
$
|
0.30
|
|
$
|
0.53
|
|
$
|
0.55
|
|
Basic
- pro forma
|
|
|
0.30
|
|
|
0.29
|
|
|
0.46
|
|
|
0.53
|
|
Diluted
- as reported
|
|
|
0.30
|
|
|
0.29
|
|
|
0.51
|
|
|
0.52
|
|
Diluted
- pro forma
|
|
|
0.28
|
|
|
0.27
|
|
|
0.44
|
|
|
0.50
|
|
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 of inventory reserves, consists of the following:
|
|
September
30,
|
|
March
31,
|
|
|
|
2005
|
|
2005
|
|
Raw
Materials
|
|
$
|
12,247
|
|
$
|
12,645
|
|
Work-in-Process
|
|
|
2,470
|
|
|
2,008
|
|
Finished
Goods
|
|
|
8,587
|
|
|
5,629
|
|
|
|
$
|
23,304
|
|
$
|
20,282
|
|
Inventory
reserves were $4,208 at September 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 $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, 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 quarterly installments of $500 beginning on March
1, 2005
with the final installment due on 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 September 30, 2005, the Company
was in
compliance with applicable debt covenants.
As
of
September 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
September 30, 2005, the outstanding borrowings on the term loan and revolver
were $18,500 and $2,500, respectively, and the Company had the right
to borrow
an additional $12,500 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 7.89%
for the
six months ended September 30, 2005. The average amount outstanding under
the
agreements for the six months ended September 30, 2005 was $19,761.
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
$1,600 was outstanding and $1,000 was considered current at September
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 September 30, 2005, $441 of this
assumed
short-term borrowing remains outstanding and is included in short-term
debt in
the accompanying condensed consolidated balance sheet.
Long-term
debt and promissory notes
Below
is
a summary of the long-term debt and promissory notes outstanding at September
30, 2005:
Prime
or LIBOR plus 2.75% five-year term loan with a final installment
due on
December 17, 2009.
|
|
$
|
18,500
|
|
|
|
|
|
|
Governmental
loans from French agencies at no interest and payable based
on R&D
expenditures.
|
|
|
563
|
|
|
|
|
|
|
Term
credit facility with six banks at an interest rate of 4% payable
through
2010.
|
|
|
937
|
|
|
|
|
|
|
6%
Promissory Notes payable in twelve equal quarterly installments
through
September 20, 2007
|
|
|
1,600
|
|
|
|
|
21,600
|
|
Less
long-term debt and promissory notes due currently
|
|
|
3,247
|
|
|
|
$
|
18,353
|
|
5.
PROPERTY AND EQUIPMENT:
Property
and equipment are summarized as follows:
|
|
September
30,
|
|
March
31,
|
|
|
|
|
|
2005
|
|
2005
|
|
Useful
Life
|
|
Production
machinery and equipment
|
|
$
|
21,902
|
|
$
|
20,083
|
|
|
3-10
years
|
|
Building
|
|
|
1,375
|
|
|
750
|
|
|
39
years
|
|
Tooling
costs
|
|
|
4,491
|
|
|
4,635
|
|
|
3-7
years
|
|
Furniture
and equipment
|
|
|
6,548
|
|
|
6,348
|
|
|
3-10
years
|
|
Leasehold
improvements
|
|
|
1,686
|
|
|
2,219
|
|
|
Lesser
of useful life or remaining term of lease
|
|
Construction
in progress
|
|
|
1,788
|
|
|
1,299
|
|
|
-
|
|
Total
|
|
|
37,790
|
|
|
35,334
|
|
|
|
|
Less:
accumulated depreciation and amortization
|
|
|
(21,580
|
)
|
|
(20,410
|
)
|
|
|
|
|
|
$
|
16,210
|
|
$
|
14,924
|
|
|
|
|
Depreciation
expense was $1,053 and $752 for the three months ended September 30,
2005 and
2004, respectively, and depreciation expense was $2,070 and $1,402 for
the six
months ended September 30, 2005 and 2004, respectively.
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 September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Basic
per share information
|
|
$
|
4,345
|
|
|
13,642,981
|
|
$
|
0.32
|
|
Effect
of dilutive securities
|
|
|
|
|
|
650,374
|
|
|
(0.02
|
)
|
Diluted
per-share information
|
|
$
|
4,345
|
|
|
14,293,355
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, 2004:
|
|
|
|
|
|
|
|
|
|
|
Basic
per share information
|
|
$
|
4,054
|
|
|
13,326,843
|
|
$
|
0.30
|
|
Effect
of dilutive securities
|
|
|
|
|
|
861,657
|
|
|
(0.01
|
)
|
Diluted
per-share information
|
|
$
|
4,054
|
|
|
14,188,500
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Basic
per share information
|
|
$
|
7,280
|
|
|
13,621,764
|
|
$
|
0.53
|
|
Effect
of dilutive securities
|
|
|
|
|
|
671,959
|
|
|
(0.02
|
)
|
Diluted
per-share information
|
|
$
|
7,280
|
|
|
14,293,723
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended September 30, 2004:
|
|
|
|
|
|
|
|
|
|
|
Basic
per share information
|
|
$
|
7,349
|
|
|
13,297,197
|
|
$
|
0.55
|
|
Effect
of dilutive securities
|
|
|
|
|
|
871,458
|
|
|
(0.03
|
)
|
Diluted
per-share information
|
|
$
|
7,349
|
|
|
14,168,655
|
|
$
|
0.52
|
|
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
September 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
years
|
|
|
775
|
|
Proprietary
technology
|
|
|
10
years
|
|
|
510
|
|
Covenants
not-to-compete
|
|
|
3
years
|
|
|
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 $10,724 ($6,000 in cash at the closing,
$1,195 in
certain liabilities discharged at closing, $3,254 in deferred payments
and $275
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 September 30, 2005. The Company’s final
allocation recorded goodwill of $7,341. Included in the goodwill 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
years
|
|
$
|
700
|
|
Backlog
|
|
|
1
year
|
|
|
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
|
|
|
979
|
|
Others
|
|
|
264
|
|
|
|
|
5,139
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accounts
payable
|
|
|
(2,013
|
)
|
Others
|
|
|
(225
|
)
|
|
|
|
(2,238
|
)
|
Net
Assets Acquired
|
|
$
|
2,901
|
|
Encoder:
On
July
16, 2004, the Company acquired the assets of Encoder Devices, LLC ("Encoder")
for $4,601 ($4,000 in cash at the closing, $400 in deferred payment and
$201 in
acquisition costs). The Company paid the deferred payment of $400 on
July 16,
2005. Encoder, based in Plainfield, IL, is a designer and manufacturer
of
rotational sensors (encoders) utilizing magnetic encoding technology.
The
transaction was recorded as a purchase and is included in the consolidated
financial results from the date of acquisition through September 30,
2005. The
Company’s final allocation recorded goodwill of $3,883. 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
years
|
|
$
|
137
|
|
Covenants
not-to-compete
|
|
|
3
years
|
|
|
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
|
|
|
245
|
|
Others
|
|
|
36
|
|
|
|
|
511
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accounts
payable
|
|
|
(204
|
)
|
Others
|
|
|
(9
|
)
|
|
|
|
(213
|
)
|
Net
Assets Acquired
|
|
$
|
298
|
|
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
the September 30, 2005 exchange rate was $24,388 ($21,609 at close,
$1,747 in deferred payment, and $1,032 in acquisition costs). The deferred
payment is due payable on the second anniversary of the closing date (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 $7,585,
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. 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 $18,069 for the acquisition. Included in the goodwill
is
$654 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
years
|
|
$
|
2,446
|
|
Patents
|
|
|
13
years
|
|
|
1,359
|
|
Tradename
|
|
|
3
years
|
|
|
216
|
|
Backlog
|
|
|
1
year
|
|
|
244
|
|
|
|
|
|
|
$
|
4,265
|
|
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 $1,261 ($879 at close, $320
in
deferred payments, and $62 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 of the closing date. 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 September 30, 2005. The Company has recorded goodwill of $504
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
years
|
|
$
|
700
|
|
Backlog
|
|
|
1
year
|
|
|
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 September 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
years
|
|
$
|
900
|
|
Backlog
|
|
|
1
year
|
|
|
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
|
|
Six
months ended
|
|
|
|
September
30, 2004
|
|
September
30, 2004
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
38,261
|
|
$
|
73,925
|
|
Net
income
|
|
|
3,381
|
|
|
6,519
|
|
Net
income per common share:
|
|
|
|
|
|
|
|
Basic
|
|
|
0.25
|
|
|
0.49
|
|
Diluted
|
|
|
0.24
|
|
|
0.46
|
|
Acquired
Intangibles:
In
connection with current and previous acquisitions, the Company acquired
certain
identifiable intangible assets, including customer relationships, proprietary
technology, patents, trade names, covenants not-to-compete 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:
|
|
|
|
September
30, 2005
|
|
March
31, 2005
|
|
|
|
Life
in years
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Amortizable
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
|
7-8
|
|
$
|
4,746
|
|
|
($516
|
)
|
$
|
4,230
|
|
$
|
4,923
|
|
|
($230
|
)
|
$
|
4,693
|
|
Patents
|
|
|
6-19.5
|
|
|
2,462
|
|
|
(324
|
)
|
|
2,138
|
|
|
2,559
|
|
|
(221
|
)
|
|
2,338
|
|
Tradenames
|
|
|
3
|
|
|
216
|
|
|
(60
|
)
|
|
156
|
|
|
232
|
|
|
(41
|
)
|
|
191
|
|
Backlogs
|
|
|
1
|
|
|
498
|
|
|
(410
|
)
|
|
88
|
|
|
515
|
|
|
(177
|
)
|
|
338
|
|
Covenants
not-to-compete
|
|
|
3
|
|
|
903
|
|
|
(372
|
)
|
|
531
|
|
|
903
|
|
|
(222
|
)
|
|
681
|
|
Proprietary
technology
|
|
|
10
|
|
|
510
|
|
|
(64
|
)
|
|
446
|
|
|
510
|
|
|
(38
|
)
|
|
472
|
|
|
|
|
|
|
|
9,335
|
|
|
(1,746
|
)
|
|
7,589
|
|
|
9,642
|
|
|
(929
|
)
|
|
8,713
|
|
Unamortizable
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Customer
relationships
|
|
|
Indefinite
|
|
|
1,870
|
|
|
-
|
|
|
1,870
|
|
|
1,870
|
|
|
-
|
|
|
1,870
|
|
|
|
|
|
|
$
|
11,205
|
|
|
($1,746
|
)
|
$
|
9,459
|
|
$
|
11,512
|
|
|
($929
|
)
|
$
|
10,583
|
|
Annual
amortization expense is expected to approximate as follows:
Fiscal
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 September 30, 2005:
|
|
Current
|
|
Long-term
|
|
Total
|
|
Entran
|
|
$
|
2,254
|
|
|
|
|
$
|
2,254
|
|
Humirel
|
|
|
-
|
|
|
1,747
|
|
|
1,747
|
|
MWS
Sensorik
|
|
|
320
|
|
|
-
|
|
|
320
|
|
|
|
$
|
2,574
|
|
$
|
1,747
|
|
$
|
4,321
|
|
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 and end users. 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 sells primarily as an
original
equipment manufacturer (OEM) to retailers and distributors.
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:
|
|
Three
months ended September 30,
|
|
Six
months ended September 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sensors
|
|
$
|
29,570
|
|
$
|
23,553
|
|
$
|
54,848
|
|
$
|
40,694
|
|
Consumer
Products
|
|
|
14,835
|
|
|
12,658
|
|
|
30,064
|
|
|
23,537
|
|
Total
|
|
|
44,405
|
|
|
36,211
|
|
|
84,912
|
|
|
64,231
|
|
Operating
income :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sensors
|
|
|
6,326
|
|
|
5,444
|
|
|
10,651
|
|
|
10,917
|
|
Consumer
Products
|
|
|
2,550
|
|
|
2,060
|
|
|
4,777
|
|
|
3,374
|
|
Total
segment operating income
|
|
|
8,876
|
|
|
7,504
|
|
|
15,428
|
|
|
14,291
|
|
Corporate
expenses
|
|
|
(1,675
|
)
|
|
(1,662
|
)
|
|
(3,739
|
)
|
|
(3,868
|
)
|
Total
operating income
|
|
|
7,201
|
|
|
5,842
|
|
|
11,689
|
|
|
10,423
|
|
Interest
expense, net
|
|
|
486
|
|
|
108
|
|
|
958
|
|
|
97
|
|
Other
expense (income), net
|
|
|
(64
|
)
|
|
67
|
|
|
(21
|
)
|
|
50
|
|
Income
before income taxes
|
|
|
6,779
|
|
|
5,667
|
|
|
10,752
|
|
|
10,276
|
|
Income
taxes
|
|
|
2,434
|
|
|
1,613
|
|
|
3,472
|
|
|
2,927
|
|
Net
income
|
|
$
|
4,345
|
|
$
|
4,054
|
|
$
|
7,280
|
|
$
|
7,349
|
|
|
|
September
30,
|
|
March
31,
|
|
|
|
2005
|
|
2005
|
|
Segment
Assets
|
|
|
|
|
|
|
|
Consumer
Products
|
|
$
|
19,968
|
|
$
|
16,812
|
|
Sensors
|
|
|
79,586
|
|
|
74,029
|
|
Unallocated
|
|
|
34,907
|
|
|
35,163
|
|
Total
|
|
$
|
134,461
|
|
$
|
126,004
|
|
The
following is geographic information related to net sales and long-lived
assets.
Net sales are specific to the 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.
|
|
Six
months ended September 30,
|
|
|
|
2005
|
|
2004
|
|
Net
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
35,107
|
|
$
|
31,783
|
|
Europe
|
|
|
8,197
|
|
|
2,698
|
|
Asia
and Other
|
|
|
41,608
|
|
|
29,750
|
|
Total:
|
|
$
|
84,912
|
|
$
|
64,231
|
|
|
|
September
30, 2005
|
|
March
31, 2005
|
|
Long
lived assets:
|
|
|
|
United
States
|
|
$
|
3,740
|
|
$
|
2,904
|
|
Europe
|
|
|
3,036
|
|
|
3,182
|
|
China
|
|
|
9,434
|
|
|
8,838
|
|
Total:
|
|
$
|
16,210
|
|
$
|
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 the Company’s Schaevitz Division, filed a lawsuit
against the Company and certain officers and directors of the Company
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 our 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 was 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 an order allowing written discovery
in the
form of interrogatories and requests for production of documents to begin.
All
other discovery remains stayed. The action alleged 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 the Company’s 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 we
would have received if the cases were cases under Chapter 7 of the United
States
Bankruptcy Code. The action sought to disgorge the sum of approximately
$645
from the Company. During the quarter ended September 30, 2005, the Company
settled the SMC suit by paying $303, which was approximately the amount
that had
been accrued for this matter.
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 the
Company’s
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 our 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. On September 26, 2005, the Company filed reply pleadings
with the Tribunal addressing the matters raised by SEB in its reply dated
June
13, 2005, and again requested the Tribunal nullify claims of the SEB
patent,
declare the infringement action groundless, and provide a ruling of
non-infringement of the SEB patent with respect to the "M" design. 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. We currently are 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.
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 $7,585), if the maximum performance targets are achieved.
10.
DERIVATIVE INSTRUMENTS
The
Company has a number of forward purchase currency contracts with exercise
dates
through September 30, 2006 with a total notional amount of $8,428 at
an average
exchange rate of $1.26 (in US dollars) to hedge Humirel’s exposure to
fluctuation in the US dollar relative to the Euro. As of September 30,
2005, the
fair value of the currency contracts was a loss of $28.
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 six months ended September 30, 2005 and 2004 were $263
($200 for
executive services and $63 for expenses), and $241 ($200 for executive
services
and $41 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 and end users. 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 primarily as an original equipment manufacturer
to
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 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 of which
$12,500
was available at September 30, 2005. It is our expectation and intent
to use
cash and add additional debt as appropriate to finance future acquisitions,
generally staying within a two times senior debt to EBITDA (defined as
“earnings
before interest, taxes, depreciation and amortization”) ratio. Additionally, to
fund future acquisitions we would consider the issuance of subordinated
debt, or
the sale of equity securities, or the sale of existing Company assets, and
are actively pursuing sale of assets in our Consumer Products segment.
Consistent
with our Vision and Strategy to transition to a sensor-only business,
we are
currently engaged in preliminary discussions with a potential buyer to
sell our
Consumer Products segment, subject to the satisfactory completion of
the
negotiations and the drafting of a definitive agreement.
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 September 30,
|
|
For
six months ended September 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sensors
|
|
|
66.6
|
%
|
|
65.0
|
%
|
|
64.6
|
%
|
|
63.4
|
%
|
Consumer
Products
|
|
|
33.4
|
|
|
35.0
|
|
|
35.4
|
|
|
36.6
|
|
Total
net sales
|
|
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
60.7
|
|
|
58.2
|
|
|
60.5
|
|
|
56.9
|
|
Gross
profit
|
|
|
39.3
|
|
|
41.8
|
|
|
39.5
|
|
|
43.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative
|
|
|
20.5
|
|
|
23.4
|
|
|
22.8
|
|
|
24.5
|
|
Research
and development, net
|
|
|
2.1
|
|
|
2.3
|
|
|
2.2
|
|
|
2.6
|
|
Customer
funded development
|
|
|
(0.4
|
)
|
|
(0.1
|
)
|
|
(0.3
|
)
|
|
(0.2
|
)
|
Amortization
of acquired intangibles
|
|
|
0.9
|
|
|
-
|
|
|
1.0
|
|
|
-
|
|
Interest
expense, net
|
|
|
1.0
|
|
|
0.3
|
|
|
1.1
|
|
|
0.2
|
|
Other
expenses (income), net
|
|
|
(0.1
|
)
|
|
0.2
|
|
|
(0.0
|
)
|
|
0.0
|
|
|
|
|
24.0
|
|
|
26.1
|
|
|
26.8
|
|
|
27.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
15.3
|
|
|
15.6
|
|
|
12.7
|
|
|
16.0
|
|
Income
tax expense
|
|
|
5.5
|
|
|
4.5
|
|
|
4.1
|
|
|
4.6
|
|
Net
income
|
|
|
9.8
|
%
|
|
11.1
|
%
|
|
8.6
|
%
|
|
11.4
|
%
|
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 46% 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 as an OEM supplier 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 for Conair, non-Conair scales, and tire
gauge
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 CONDENSED CONSOLIDATED
STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND
2004,
RESPECTIVELY:
|
|
For
the three months
|
|
|
|
ended
September 30,
|
|
(Dollars
in thousands)
|
|
2005
|
|
2004
|
|
Net
Sales - Sensor
|
|
$
|
29,570
|
|
$
|
23,553
|
|
Net
Sales - Consumer Products
|
|
|
14,835
|
|
|
12,658
|
|
Net
sales
|
|
|
44,405
|
|
|
36,211
|
|
Cost
of goods sold
|
|
|
26,950
|
|
|
21,082
|
|
Gross
profit
|
|
|
17,455
|
|
|
15,129
|
|
Operating
expenses (income):
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
9,118
|
|
|
8,474
|
|
Research
and development
|
|
|
918
|
|
|
848
|
|
Customer
funded development
|
|
|
(184
|
)
|
|
(43
|
)
|
Amortization
of acquired intangibles
|
|
|
402
|
|
|
8
|
|
Total
operating expenses
|
|
|
10,254
|
|
|
9,287
|
|
Operating
income
|
|
|
7,201
|
|
|
5,842
|
|
Interest
expense, net
|
|
|
486
|
|
|
108
|
|
Other
expense, net
|
|
|
(64
|
)
|
|
67
|
|
Income
before taxes
|
|
|
6,779
|
|
|
5,667
|
|
Income
taxes
|
|
|
2,434
|
|
|
1,613
|
|
Net
income
|
|
$
|
4,345
|
|
$
|
4,054
|
|
THREE
MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30,
2004
The
consolidated financial statements for the three month periods ended September
30, 2005 and September 30, 2004 include the results of the ongoing operations
of
Measurement Specialties, Inc. and its subsidiaries.
Net
Sales.
Sensor
Business. Net
sales of the Sensor business increased 25.5% or $6,017 from $23,553 to
$29,570. Excluding net sales from acquisitions completed during the year
ended
March 31, 2005, of $8,340 and $4,556 for quarters ended September 30,
2005 and
2004, respectively, net sales increased $2,233, or 11.8%. The increase
in net
sales for our base Sensor business for the quarter ended September 30,
2005 is
primarily a result of increased demand in our Pressure product line,
the
Company’s largest.
This
increased demand is primarily in the automotive sector, the result of
continued
platform expansion of our existing Microfused™ pressure products. In addition,
we are seeing adoption of MSI's proprietary Microfused™ load cell technology
(force sensors) for occupant weight sensing in automobiles. We would
expect sales growth in this sector to continue to grow as compared to last
year. We are also seeing moderate growth in the Pressure line for a variety
of
applications in the non-automotive segment, as our customer base grows
and key
customer’s ramp up production. Sales in our Position product line decreased due
to one time shipments made in the prior year. However, we expect the
Position
portion of our business to pick up slightly in the remaining months of
fiscal
2006. The Sensor business remains very healthy and we anticipate growth
prospects for both new and existing product lines.
Consumer
Products Business.
Net
sales for our Consumer Products business increased 17.2% or $2,177 in
the
quarter ended September 30, 2005. Net sales were strong for bath scales to
U.S. and European customers. Worldwide tire gauge business increased
7%, or
$238. Worldwide bath scale business increased 17% or $1,939. On
an
overall basis, we expect full year net sales for the Consumer Products
business
to be up slightly as compared to fiscal year 2005.
Gross
Margin.
Gross
margin as a percent of net sales decreased to 39.3% for the quarter ended
September 30, 2005 from 41.8% for the quarter ended September 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 49.4% for the quarter ended
September
30, 2005 from 50.6% for the quarter ended September 30, 2004. This decline
in
margin is mainly 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 46.5%
from
48.6%. Average gross margin of the acquired businesses is approximately
39.4%
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 25.0% for the quarter ended September 30, 2005 from 27.6%
for the
quarter ended September 30, 2004. The decrease in margin was the result of
declining prices for products due to competitive pressures in the bath
scale
business, and changing product and customer mix in the tire gauge business.
Declining prices for bath scales were offset somewhat by the sourcing
of some
finished goods at lower cost factories in China.
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,
foreign currency exchange rates, and other factors.
Selling
, General and Administrative.
Selling,
General and Administrative (SG&A) expenses increased from $8,474 for the
quarter ended September 30, 2004 to $9,118 for the quarter ended September
30,
2005. Excluding SG&A expenses specifically associated with the acquired
companies, SG&A expenses increased by approximately $300, which is due
mainly to an increase in wage and benefit expense.
Research
and Development.
Customer-funded development for the quarter ended September 30, 2005
increased
to $184 compared to $43 for the quarter ended September 30, 2004. On
a net
basis, research and development costs decreased $71. The overall decrease
on a
net basis is due to higher customer funded development associated with
related
research and development costs, which more than offset the increase in
related
engineering costs.
Amortization
of acquired intangibles.
The
$394 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.
Interest
Expense, Net.
The
increase in interest expense is attributable to an increase in average
debt
outstanding from $3,681 for the quarter ended September 30, 2004 to $19,584
for
the quarter ended September 30, 2005, as well as higher interest rates.
The
increase in debt was due to the acquisitions.
Income
Taxes.
The
increase in the effective tax rate from 28.5% during the quarter ended
September
30, 2004 to approximately 35.9% during the quarter ended September 30,
2005
primarily reflects the impact of an adjustment to reduce the net deferred
tax
assets resulting from a lower US tax rate. Excluding the effects of the
adjustments described below, the Company’s effective tax rate during the quarter
ended September 30, 2005 would have been approximately 25.45%.
During
the quarter ended September 30, 2005, there was a larger apportionment
to a
state with a lower tax rate, since the Company has centralized the principal
headquarters and much of the manufacturing operations in the U.S. to
Hampton,
Virginia from New Jersey. This has resulted in a lower effective tax
rate for
the U.S. The effective tax rate in the United States has decreased from
40% to
approximately 38.20%. Accordingly, there was a $695 adjustment to write-down
the
related net deferred tax assets based on this lower U.S. tax rate, as
well as a
$14 adjustment related to a change in foreign 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 U.S. 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.
THE
FOLLOWING TABLE SETS FORTH CERTAIN ITEMS IN OUR CONDENSED CONSOLIDATED
STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2005 AND
2004,
RESPECTIVELY:
|
|
For
the six months
|
|
|
|
ended
September 30,
|
|
(Dollars
in thousands)
|
|
2005
|
|
2004
|
|
Net
Sales - Sensor
|
|
$
|
54,848
|
|
$
|
40,694
|
|
Net
Sales - Consumer Products
|
|
|
30,064
|
|
|
23,537
|
|
Net
sales
|
|
|
84,912
|
|
|
64,231
|
|
Cost
of goods sold
|
|
|
51,366
|
|
|
36,525
|
|
Gross
profit
|
|
|
33,546
|
|
|
27,706
|
|
Operating
expenses (income):
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
19,405
|
|
|
15,748
|
|
Research
and development
|
|
|
1,862
|
|
|
1,657
|
|
Customer
funded development
|
|
|
(240
|
)
|
|
(138
|
)
|
Amortization
of acquired intangibles
|
|
|
830
|
|
|
16
|
|
Total
operating expenses
|
|
|
21,857
|
|
|
17,283
|
|
Operating
income
|
|
|
11,689
|
|
|
10,423
|
|
Interest
expense, net
|
|
|
958
|
|
|
97
|
|
Other
expense, net
|
|
|
(21
|
)
|
|
50
|
|
Income
before taxes
|
|
|
10,752
|
|
|
10,276
|
|
Income
taxes
|
|
|
3,472
|
|
|
2,927
|
|
Net
income
|
|
$
|
7,280
|
|
$
|
7,349
|
|
SIX
MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO SIX MONTHS ENDED SEPTEMBER
30, 2004
The
consolidated financial statements for the six month period ended September
30,
2005 and September 30, 2004 include the results of the ongoing operations
of
Measurement Specialties, Inc. and its subsidiaries.
Net
Sales.
Sensor
Business. Net
sales for our Sensor business increased 34.8% or $14,154 from $40,694 to
$54,848. Excluding fiscal 2006 net sales for fiscal 2005 acquisitions
of
$14,980, and fiscal 2005 net sales for fiscal 2005 acquisitions of $4,639,
net
sales for the six months ended September 30, 2005 and 2004,
respectively, increased $3,813, or 10.6%. The increase in net sales for our
base Sensor business in the six months ended September 30, 2005 is primarily
a
result of increased demand in our Pressure product line.
This
increased demand is primarily in the automotive sector, the result of
continued
platform expansion of our existing Microfused™ pressure products. In addition,
we are seeing adoption of our proprietary Microfused™ load cell
technology (force sensors) for occupant weight sensing in automobiles.
We expect
this growth to continue and perhaps accelerate this year’s net sales as
compared to last year's net sales for this sector. We are also seeing
moderate growth in the Pressure line for a variety of applications in
the
non-automotive segment as our customer base grows and key customer’s ramp up
production. Sales in our Position product line decreased due to one time
shipments made in the prior year. However, we expect the Position portion
of our
business to pick up slightly in the remaining months of fiscal 2006.
The Sensor
business remains very healthy and we anticipate growth prospects for both
new and existing product lines.
Consumer
Products Business
Net
sales for our Consumer Products business increased 27.7%, or $6,527 for
the six
month period ended September 30, 2005. Net sales of bathroom scales were
strong
for both quarters as compared with the prior year, as Conair and other
large
customers continue to win more new placements with our designs. On an
overall basis, we expect full year net sales for the Consumer Products
business
to be up slightly as compared to fiscal year 2005.
Gross
Margin.
Gross
margin as a percent of net sales for the six months ended September 30,
2005
decreased to 39.5% from 43.1% for the six months ended September 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 51.1% for the six months ended
September 30, 2005 from 53.5% for the six months ended September 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 and industrial customers,
and the
resulting increase in net sales of these automotive sensors, which carry
a lower
gross margin than our average sensor business. Also contributing to the
margin
decline is higher raw material costs in our core sensors business, as
well as the change in the US dollar/Chinese renminbi currency exchange
rate.
Including acquisition sales, gross margin as a percent of sales for our
Sensor
business decreased to 48.0% from 52.0%. Average gross margin of the acquired
businesses is approximately 39.9% which is significantly less than the
core
sensor business.
Consumer
Products Business.
Gross margin as a percent of net sales in the Consumer Products business
decreased to 24.1% for the six month period ended September 30, 2005
from 26.1%
for the six month period ended September 30, 2004. The decrease in margin
was the result of declining prices for products due to competitive pressures
and
customer mix, as outlined for the three month period ending September
30, 2005
above.
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,
foreign currency exchange rates and other factors.
Selling
, General and Administrative.
Selling,
General and Administrative (SG&A) expenses increased from $15,748 for the
six months ended September 30, 2004 to $19,405 for the six months ended
September 30, 2005. Excluding SG&A expenses specifically associated with the
acquired companies, SG&A expenses increased by approximately $650. The prior
year SG&A costs were lower than normal due to several miscellaneous items
including a $200 insurance refund received during the six months ended
September
30, 2004. Additionally, SG&A expenses were higher than normal because of
severance and relocation costs incurred during the six months ended September
30, 2005.
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.
Research
and Development.
Customer-funded development for the six months ended September 30, 2005
increased to $240 compared to $138 for the six months ended September
30, 2004.
On a net basis, research and development costs increased $103. 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.
Amortization
of acquired intangibles.
The
$814 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.
Interest
Expense, Net.
The
increase in interest expense is attributable to an increase in average
debt
outstanding from $2,103 for the six months ended September 30, 2004 to
$19,761
for the six months ended September 30, 2005, as well as higher interest
rates.
The increase in debt was due to the acquisitions.
Income
Taxes. The
increase in the effective tax rate from 28.5% during the six months ended
September 30, 2004 to approximately 32.3% during the six months ended
September 30, 2005 primarily reflects the impact of an adjustment to
reduce the
net deferred tax assets resulting from a lower U.S. tax rate.
During
the six months ended September 30, 2005, there was a larger apportionment
to a
state with a lower tax rate, since the Company has centralized the
principal headquarters and much of the manufacturing operations in the
U.S. to
Hampton, Virginia from New Jersey. This has resulted in a lower effective
tax rate for the U.S. The effective tax rate in the United States has
decreased
from 40% to approximately 38.2%. Accordingly, there was a $695
adjustment that increased income tax expense to write-down the related
U.S. net deferred tax assets based on this lower U.S. tax rate, as well as
a $14 adjustment related to a change in foreign tax rates.
Excluding
the effects of the above adjustments, the Company’s effective tax rate during
the six months ended September 30, 2005 would have been approximately
25.50%.
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 U.S. 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 U.S. 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 U.S. dollar (assuming no associated cost increases or currency
hedging). The July 21, 2005 revaluation has resulted in a realized foreign
exchange currency loss of approximately $60 included in "Other expenses."
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)
increased by $2,116 from $27,257 as of March 31, 2005 to $29,373 as of
September
30, 2005. The increase in operating working capital was attributable
to a
increase in accounts receivable of $2,840 from $20,369 at March 31, 2005
to
$23,209 at September 30, 2005, an increase in inventory of $3,022 from
$20,282
at March 31, 2005 to $23,304 at September 30, 2005, and slightly offset
by the
increase in accounts payable of $3,746 to $17,140 at September 30, 2005
from
$13,394 at March 31, 2005. The increase in accounts payable is due mainly
to the
overall increase in sales.
Cash
provided from operating activities was $9,246 for the six months ended
September
30, 2005, as compared to $2,006 provided for the six months ended September
30,
2004. The increase in cash provided by operations is mainly due to the
increase
in trade payables and income tax payable, higher collections from customers
resulting from higher sales, as well as higher than normal payments last
year
for litigation expenses and larger non-cash amortization/depreciation
and tax
benefit on the exercise of stock options in fiscal 2006 as compared to
the same
period last year.
Net
cash
used in investing activities for the six months ended September 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 six months ended September 30, 2004, the Company
made
three acquisitions. The current year activity for acquisitions of businesses
mainly reflects the final adjustments for related costs and purchase
accounting.
In addition, capital spending increased to $3,389 for the six months
ended
September 30, 2005 from $1,152 for the six months ended September 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 six months ended September 30, 2005 used $1,563, reflecting
payments for promissory notes, term loan and deferred acquisition payments,
which was partially offset by proceeds from the exercise of employee
stock
options and short-term debt borrowings.
On
December 17, 2004, the Company entered into a $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 to the Condensed Consolidated Financial Statements), 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 September 30, 2005, the Company was in compliance with applicable
debt
covenants.
As
of
September 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
September 30, 2005, the outstanding borrowings on the term loan and revolver
were $18,500 and $2,500, respectively, and the Company had the right
to borrow
an additional $12,500 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 7.89%
for the
six months ended September 30, 2005. The average amount outstanding under
the
agreements for the six months ended September 30, 2005 was $19,761. As
of
September 30, 2005, the Company accrued interest of $269 in accrued expenses
and
other current liabilities in the accompanying condensed consolidated
balance
sheet.
Promissory
Notes
In
connection with the acquisition of Elekon Industries USA, Inc. (See Note
7 to
the Condensed Consolidated Financial Statements), the Company issued
unsecured
Promissory Notes (“Notes”) totaling $3,000, of which $1,600 was outstanding and
$1,000 was considered current at September 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 September 30, 2005, $441 of this
assumed
short-term borrowing remains outstanding and is included in short-term
debt in
the accompanying condensed consolidated balance sheet.
Liquidity:
At
November 1, 2005, we had approximately $8,236 of available cash and $12,500
of
borrowing capacity under our revolving credit facility. This amount includes
the
increased borrowing capacity resulting from the acquisitions.
OTHER
COMPREHENSIVE INCOME
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 U.S. dollar relative to the Euro for the Euro
denominated operations of Humirel and Entran, as well as the recent fluctuation
in the Chinese renminbi relative to the U.S. dollar.
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. During the six months ended September 30, 2005, the Company recognized
$2,346 of the deferred revenue, and at September 30, 2005, there remained
$1,418
in deferred revenue. As this deferred revenue becomes fully utilized,
the
Company expects to transition this business to products with higher prices,
but
there remains the risk that margins may decline after the deferred revenue
is
fully recognized.
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
September 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
|
|
$
|
2,862
|
|
$
|
2,445
|
|
$
|
2,359
|
|
$
|
10,640
|
|
$
|
47
|
|
$
|
21,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Obligation on Long-term Debt
|
|
|
1,665
|
|
|
1,404
|
|
|
1,215
|
|
|
1,035
|
|
|
|
|
|
|
|
|
5,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Lease Obligations
|
|
|
182
|
|
|
318
|
|
|
197
|
|
|
39
|
|
|
5
|
|
|
-
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Lease Obligations
|
|
|
1,939
|
|
|
1,998
|
|
|
1,082
|
|
|
1,050
|
|
|
1,076
|
|
|
2,978
|
|
|
10,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
Obligations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Acquisition Payments
|
|
|
2,254
|
|
|
2,067
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Long-Term Liabilities Reflected on the Registrant's Balance
Sheet Under
GAAP
|
|
|
2,941
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,228
|
|
$
|
8,649
|
|
$
|
4,939
|
|
$
|
4,483
|
|
$
|
11,721
|
|
$
|
3,025
|
|
$
|
45,045
|
|
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. dollars compared with that of our foreign customers'
currencies. U.S. net sales were approximately $35,100, or 41.3% of consolidated
net sales for the six months ended September 30, 2005. Net sales from
our China
facility were approximately $24,300 (inclusive of approximately $11,500
intercompany sales) or 28.6% of consolidated net sales for the six months
ended
September 30, 2005. Net sales from our Hong Kong operation were approximately
$28,800 or 33.9% of consolidated net sales for the six months ended September
30, 2005. Net sales from our European operations were approximately $8,200
or
approximately 9.7% of consolidated net sales for the six months ended
September
30, 2005. 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
September 30, 2005 and March 31, 2005, we had net assets of approximately
$49,100 and $48,000, respectively, in the United States. At September
30, 2005,
we had net assets of $185 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 in
Europe. The change in the value of the U.S. dollar relative to the Euro
from
March 31, 2005 to September 30, 2005 resulted in a translation decrease
in total
assets and total liabilities of approximately $2,000. At September 30,
2005 and
March 31, 2005, we had net assets of approximately $14,300 and $9,500,
respectively, in Hong Kong subject to fluctuations in the value of the
Hong Kong
dollar. At September 30, 2005 and March 31, 2005, we had net assets of
approximately $11,700 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 U.S. dollar (assuming no associated cost increases or currency
hedging). 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 U.S. dollars for the quarter ended
September
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 $8,428
with exercise dates through September 30, 2006 at an average exchange
rate of
$1.26 (Euro to U.S. dollar conversion rate) with a fair value of a loss
of
approximately $28 at September 30, 2005. The fair value and the change
in the
fair value of these currency contracts are not material to the condensed
consolidated financial statements.
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 September 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 September
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 Humirel, and MWS Sensorik as of September 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 Humirel and MWS Sensorik acquisitions
represents
approximately $5,846 in net sales; operating income of $800 for the six
months
ended September 30, 2005 and $6,049 in total assets and $5,669 in total
liabilities at September 30, 2005, which are included as part of the
Company's
Condensed Consolidated Financial Statements included in this Quarterly
Report on
Form 10-Q.