Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(MARK
ONE)
x ANNUAL
REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT
OF 1934
FOR
THE FISCAL YEAR ENDED MARCH 31, 2007
OR
o TRANSITION
REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
COMMISSION
FILE NUMBER: 1-11906
MEASUREMENT
SPECIALTIES, INC.
(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
New
Jersey
|
|
22-2378738
|
(STATE
OR OTHER JURISDICTION OF
INCORPORATION
OR ORGANIZATION)
|
|
(I.R.S.
EMPLOYER
IDENTIFICATION
NO. )
|
1000
LUCAS WAY, HAMPTON, VA 23666
(ADDRESS
OF PRINCIPAL EXECUTIVE OFFICES)
(757)
766-1500
(REGISTRANT’S
TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITES
REGISTERED UNDER SECTION 12(b) OF THE ACT:
TITLE
OF EACH CLASS:
|
|
NAME
OF EACH EXCHANGE
ON
WHICH REGISTERED:
|
COMMON
STOCK, NO PAR VALUE
|
|
NASDAQ
|
SECURITES
REGISTERED UNDER SECTION 12(g) OF THE ACT: NONE
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes o No
x
.
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o
No x
.
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x
No o
.
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of ‘accelerated
filer and large accelerated filer’ in Rule 12b-2 of the Securities Exchange Act
of 1934. (Check one):
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act of 1934). Yes o
No x
.
At
September 30, 2006, the last business day of the Registrant’s most recently
completed second fiscal quarter, the aggregate market value of the voting and
non-voting common equity held by non-affiliates of the Registrant was
approximately $169,691,520 (based on the closing price of the registrant’s
common stock on the Nasdaq Global Market on such date).
At
May
31, 2007, the number of shares outstanding of the Registrant’s common stock was
14,292,267.
Documents
Incorporated by Reference:
The
information required to be furnished pursuant to Part III of this Form 10-K
is
set forth in, and is hereby incorporated by reference herein from, the
registrant’s definitive proxy statement for the annual meeting of shareholders
to be held on or about September 19, 2007 to be filed by the registrant with
the
Securities and Exchange Commission pursuant to Regulation 14A not later than
120
days after the fiscal year ended March 31, 2007.
MEASUREMENT
SPECIALTIES, INC.
FORM
10-K
TABLE
OF
CONTENTS
MARCH
31,
2007
PART
I
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|
ITEM
1. BUSINESS
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3
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ITEM
1A. RISK FACTORS
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14
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ITEM
1B. UNRESOLVED STAFF COMMENTS
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17
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ITEM
2. PROPERTIES
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18
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ITEM
3. LEGAL PROCEEDINGS
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18
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ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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19
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PART
II
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|
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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20
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ITEM
6. SELECTED FINANCIAL DATA
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21
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ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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22
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ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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42
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ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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43
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ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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43
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ITEM
9A. CONTROLS AND PROCEDURES
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43
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ITEM
9B. OTHER INFORMATION
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46
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PART
III
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ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERANCE
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46
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ITEM
11. EXECUTIVE COMPENSATION
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46
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ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND
RELATED STOCKHOLDER MATTERS
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47
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ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
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47
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ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
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47
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PART
IV
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ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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47
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PART
I
ITEM
1. BUSINESS
INTRODUCTION
NOTES:
(1)
OUR
FISCAL YEAR BEGINS ON APRIL 1 AND ENDS ON MARCH 31. REFERENCES IN THIS ANNUAL
REPORT ON FORM 10-K TO THE YEAR 2006 OR FISCAL YEAR 2006 REFER TO THE 12-MONTH
PERIOD FROM APRIL 1, 2005 THROUGH MARCH 31, 2006 AND REFERENCES TO THE YEAR
2007
OR FISCAL YEAR 2007 REFER TO THE 12-MONTH PERIOD FROM APRIL 1, 2006 THROUGH
MARCH 31, 2007.
(2)
ALL
DOLLAR AMOUNTS IN THIS REPORT ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND
PRODUCT PRICES.
Measurement
Specialties, Inc. (the “Company” or “we”) is a global leader in designing and
manufacturing sensors for original equipment manufacturers and end users.
The
Company has eight primary manufacturing facilities strategically located in
the
United States, China, France, Ireland and Germany enabling the Company to
produce and market world-wide a broad range of sensors that use advanced
technologies to measure precise ranges of physical characteristics including
pressure, position, force, vibration, humidity, photo-optics and temperature.
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, piezoelectric polymer film
sensors, custom microstructures, load cells, accelerometers, optical sensors,
humidity and temperature sensors.
As more
fully described below under “Changes to our Business,” we discontinued the
remainder of our Consumer products business during the fiscal year ended March
31, 2006. Except as otherwise noted, the descriptions of our business, and
results and operations contained in this report reflect only our continuing
operations.
OUR
SENSORS
The
majority of our sensors are devices, sense elements and transducers that convert
mechanical information into a proportionate electronic signal for display,
processing, interpretation or control. Sensors are essential to the accurate
measurement, resolution and display of pressure, force, linear or rotary
position, tilt, vibration, motion, humidity or temperature.
Our
advanced technologies include piezo-resistive silicon sensors,
application-specific integrated circuits, micro-electromechanical systems
(“MEMS”), piezoelectric polymers, foil strain gauges, force balance systems,
fluid capacitive devices, linear and rotational variable differential
transformers, electromagnetic displacement sensors, ultrasonic sensors,
hygroscopic capacitive and negative temperature co-efficient thermistors
(“NTC”). These technologies allow our sensors to operate precisely and cost
effectively.
We
are a
global operation with engineering and manufacturing facilities located in North
America, Europe and Asia. By functioning globally, we have been able to enhance
our applications engineering capabilities, increase our geographic proximity
to
our customers and leverage our cost structure.
RECENT
ACQUISITIONS AND DIVESTITURES
The
Consumer Products segment designed and manufactured sensor-based consumer
products, primarily as an original equipment manufacturer (“OEM”), that were
sold to retailers and distributors in the United States and Europe. Consumer
products included bathroom and kitchen scales, tire pressure gauges and distance
estimators.
We
have
made the following acquisitions which are included in the consolidated financial
statements as of the effective date of acquisition (See Notes 2 and 5 to the
Consolidated Financial Statements of the Company included in this Annual Report
on Form 10-K):
Acquired
Company
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|
Effective
Date of Acquisition
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|
Country
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Elekon
Industries U.S.A., Inc. (‘Elekon’)
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June
24, 2004
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|
U.S.A.
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Entran
Devices, Inc. And Entran SA (‘Entran’)
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July
16, 2004
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U.S.A.
and France
|
Encoder
Devices, LLC (‘Encoder’)
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July
16, 2004
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|
USA
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Humirel,
SA (‘Humirel’)
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December
1, 2004
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France
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MWS
Sensorik GmbH (‘MWS’)
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January
1, 2005
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Germany
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Polaron
Components Ltd (‘Polaron’)
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February
1, 2005
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United
Kingdom
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HL
Planartechnik GmbH (‘HLP’)
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November
30, 2005
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Germany
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Assistance
Technique Experimentale (‘ATEX’)
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January
19, 2006
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France
|
YSIS
Incorporated (‘YSI Temperature’)
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April
1, 2006
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U.S.A.
and Japan
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BetaTherm
Group Ltd. (‘BetaTherm’)
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April
1, 2006
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Ireland
and USA
|
The
above
companies, except for Encoder and Polaron, which were asset purchases, became
direct or indirect wholly-owned subsidiaries of the Company upon consummation
of
their respective acquisitions.
These
acquisitions increased our revenues, technology base, share of the addressable
sensor marketplace and presence in Europe. Humirel, a Toulouse, France-based
company with a proprietary technology for measuring relative humidity, was
a new
platform for the Company. Humirel’s OEM customers in the automotive, industrial
and medical marketplaces are synergistic with our existing customer
base.
Entran,
with operations in the United States and France, increased our business with
end
users who purchase miniature pressure transducers, accelerometers and load
cells
for test and measurement applications. Elekon brought to the Company a new
technology platform with photo optic and X-ray sensing as well as an established
customer base for pulse oximetry (“SpO2”)
sensors. Encoder, a start-up company, offered us an emerging technology platform
in magnetic encoders, which is a robust, low cost capability well suited to
our
OEM customer base.
Two
smaller acquisitions in 2005 further added to our capabilities in Europe. MWS
Sensorik had been a distributor and value-added reseller of our piezoresistive
accelerometers and pressure sensors in Germany with a solid customer base in
the
auto crash and road test markets. We also acquired certain assets of Polaron,
reuniting us with the foil strain gage pressure business formerly owned
by the Company and providing an additional customer base in
Europe.
HLP,
which specializes in thin-film metallization processes, produces sensors in
four
main categories: (1) infrared thermopiles used in appliance, automobile, medical
and other applications for non-contacting temperature measurement; (2) magneto
-resistive (“MR”) sensors that measure changes in magnetic fields to determine
position, angle, rotation, or current; (3) mass air flow (“MAF”) sensors to
measure the changes in air flow and other gases for use in automotive, medical
and industrial applications; and (4) electrolytic fluid conductive-based
inclination sensors for the precise measurement of level, angle or tilt in
construction equipment, automobile and aerospace applications. ATEX specializes
in providing vibration sensors to the Formula One racing market.
The
acquisitions of YSI Temperature and BetaTherm in fiscal 2007 expanded our
product line-up to include precision thermistors, and as a substantial product
group, complemented our existing customer base with applications in aerospace,
biomedical, automotive, industrial and consumer goods. YSI Temperature and
BetaTherm augmented our operations with manufacturing in Ireland, United States
and China, as well as provided a presence in Japan with Nikisso-YSI, our 50%
joint venture with Nikisso Co., Ltd. (“Nikisso”).
MARKETS
Many
aspects of day-to-day life continue to be profoundly influenced by the pervasive
application of sensors to transportation, energy, security, communications
and
medical technologies. Manufacturers are including more sensors in their products
to improve performance, reduce energy consumption and improve control. Sensor
companies are moving towards more sophisticated sensors that take advantage
of
new lower cost, digital-based electronics to provide more accurate measurement
and control.
The
shift
toward sensors utilizing digital signal processing technologies has enhanced
applications in the automotive, industrial, medical, military and consumer
products markets. Examples of our sensor applications include:
·
|
automotive
applications for electronic stability control, occupant safety, proper
airbag deployment, fogging prevention, systems controls, cabin comfort,
anti-theft systems and engine performance and
management;
|
·
|
truck,
off-road vehicle and marine applications for critical fluid level,
oil
pressure, diesel engine management, pressure and position for hydraulics
systems, brake by wire, throttle position and equipment
leveling;
|
·
|
industrial
sensors for regulating flow in paint sprayers and agricultural equipment,
monitoring pressure, humidity and temperature in heating, ventilating,
air
conditioning and refrigeration compressors, flow measurement, factory
automation and robotics, high purity wafer fab flow control, pressure
measurement for hydraulics and pneumatics, tank liquid level, oil
and well
drilling and monitoring, and process control valves such as those
used in
turbines for power generation
equipment;
|
·
|
medical
sensors for invasive blood pressure measurement, drug infusion pump
flow
monitoring, electronic stethoscopes, cardiovascular health diagnostics,
surgery applications, sleep apnea sensing, ultrasound bone density
measurement, kidney dialysis, respirators, environmental monitoring
for
patient breathing and body activity sensor for implantable heart
pacemakers;
|
·
|
military
and aerospace applications, which continue to drive sensor development
with new systems requiring small, high performance sensors for aircraft
controls and testing, navigation, weapons control systems, hydrophones
and
traffic collision avoidance systems
(“TCAS”);
|
·
|
consumer
products applications including the measurement of weight, distance,
and
movement, digitizing information for electronic white boards and
pen input
devices for laptops, acoustic pick-ups for musical instruments and
directional speakers, keypads, load imbalance sensors for washing
machines, and systems controls for other household
appliances;
|
·
|
test
and measurement applications including automotive crash and crash
test
dummy accelerometers, vibration, force and pressure sensors for European
and US motorsport racing teams, high-accuracy pressure and position
transducers for instrumentation devices, and miniature pressure,
force and
acceleration sensors used to verify system design and
performance;
|
·
|
commercial,
retail and building equipment including flow measurement of dispensed
beverages, gasoline pump monitoring, ATM (automatic teller machines)
currency control, elevator feedback, oxygen systems in hospitals,
anti-tamper panel sensors for data protection and ultrasonic sensors
for
perimeter security systems;
|
·
|
traffic
sensors used for real time traffic monitoring, weigh-in-motion, vehicle
speed and red light enforcement and toll booth collection
monitoring.
|
TECHNOLOGY
The
Company has a broad and robust portfolio of technologies available to solve
client sensing needs, some of which are proprietary to the Company. Our sensor
technologies include:
·
|
PIEZORESISTIVE
TECHNOLOGY. This technology is widely used for the measurement of
pressure, load and acceleration, and we believe its use in these
applications is expanding significantly. Piezoresistive materials,
most
often silicon, respond to changes in applied mechanical variables
such as
stress, strain, or pressure by changing electrical conductivity
(resistance). Changes in electrical conductivity can be readily detected
in circuits by changes in current with a constant applied voltage,
or
conversely by changes in voltage with a constant supplied
current.
|
·
|
APPLICATION
SPECIFIC INTEGRATED CIRCUITS (“ASICS”). These circuits convert analog
electrical signals into digital signals for measurement, computation
or
transmission. Application specific integrated circuits are well suited
for
use in both consumer and new sensor products because they can be
designed
to operate from a relatively small power source, are inexpensive
and can
improve system accuracy.
|
·
|
MICRO-ELECTROMECHANICAL
SYSTEMS (“MEMS”). Micro-electromechanical systems and related silicon
micromachining technology are used to manufacture components for
physical
measurement and control. Silicon micromachining is an ideal technology
to
use in the construction of miniature systems involving electronic,
sensing, and mechanical components because it is inexpensive and
has
excellent physical properties. Micro-electromechanical systems have
several advantages over their conventionally manufactured counterparts.
By
leveraging existing silicon manufacturing technology,
micro-electromechanical systems allow for the cost-effective manufacture
of small devices with high reliability and superior
performance.
|
·
|
PIEZOELECTRIC
POLYMER TECHNOLOGY. Piezoelectric materials (such as polyvinylidene
floride, “PVDF”) convert mechanical stress or strain into proportionate
electrical energy, and conversely, these materials mechanically expand
or
contract when voltages of opposite polarities are applied. Piezoelectric
polymer films are also pyroelectric, converting heat into electrical
charge. These polymer films offer unique sensor design and performance
opportunities because they are thin, flexible, inert, broadband,
and
relatively inexpensive. This technology is ideal for applications
where
the use of rigid sensors would not be possible or
cost-effective.
|
·
|
STRAIN
GAUGE TECHNOLOGY. A strain gauge consists of a base substrate material
that will change its electrical properties with induced stress or
strain
(such as bulk silicon). The foil is etched to produce a grid pattern
that
is sensitive to changes in geometry, usually length, along the sensitive
axis producing a change in resistance. The gauge is bonded to a sensing
element surface which it will monitor. The gauge operates through
a direct
conversion of strain to a change in gauge resistance. This technology
is
useful for the construction of reliable pressure and force sensors.
The
Company also manufactures a proprietary strain gauge called Microfused™ in
which the diaphragm in contact with the media is fused to a silicon
sensing element with glass at high temperatures for a hermetic seal
appropriate for harsh environments.
|
·
|
FORCE
BALANCE TECHNOLOGY. A force-balanced accelerometer is a mass referenced
device that under the application of tilt or linear acceleration,
detects
the resulting change in position of the internal mass by a position
sensor
and an error signal is produced. This error signal is passed to a
servo
amplifier and a current developed is fed back into a moving coil.
This
current is proportional to the applied tilt angle or applied linear
acceleration and will balance the mass back to its original position.
These devices are used in military and industrial applications where
high
accuracy is required.
|
·
|
FLUID
CAPACITIVE TECHNOLOGY. This technology is also referred to as fluid
filled, variable capacitance. The output from the sensing element
is two
variable capacitance signals per axis. Rotation of the sensor about
its
sensitive axis produces a linear change in capacitance. This change
in
capacitance is electronically converted into angular data, and provides
the user with a choice of ratiometric, analog, digital, or serial
output
signals. These signals can be easily interfaced to a number of readout
and/or data collection systems.
|
·
|
LINEAR
VARIABLE DIFFERENTIAL TRANSFORMERS (“LVDT”). An LVDT is an
electromechanical sensor that produces an electrical signal proportional
to the displacement of a separate movable core. LVDT’s are widely used as
measurement and control sensors wherever displacements of a few micro
inches to several feet can be measured directly, or where mechanical
input, such as force or pressure, can be converted into linear
displacement. LVDT’s are capable of extremely accurate and repeatable
measurements in severe
environments.
|
·
|
MAGNETO-RESISTIVE
(MR) TECHNOLOGY. MR sensors are used to measure small changes in
magnetic
fields.
A
rotation of the magnetization of thin film stripes made of magnetic
permalloy (Ni81FE19)
in x-direction takes place when a magnetic field in y-direction is
applied
due to
the magnetoresistive effect. MR sensors are highly sensitive, stable,
repeatable and relatively low cost. MR sensing technology can be
packaged
as low field sensors (i.e., electronic compass), angle sensors such
as
magnetic encoders, position sensors, or current sensors (eg. for
battery
management).
|
·
|
ELECTROLYTIC
FLUID TECHNOLOGY. To create an inclination sensor, a small chamber
is
partially filled with an electrolytic liquid. Platinum electrodes
are deposited in pairs on the base of the sensor’s cell parallel to
the sensitive axis. When an alternating voltage is passed between two
electrodes, the electric current will create a dispersed field. By
tilting
the sensor and thereby reducing the level of the liquid, it is possible
to
confine this stray field. Because of the constant, specific conductivity
of the electrolytes, a variance of resistance is formed in relation
to the
liquid level. A basic differential principle will yield an angle
of
inclination from the polarity signs. This technology is durable,
highly
repeatable and relatively low cost compared with alternate
technologies.
|
·
|
INFRARED
SENSING. Measurement Specialties uses thermopiles to measure temperature
without contact through infrared (IR) radiation. All objects emit
IR
radiation, with energy increasing based on increased surface temperatures
(Planck’s law). Thermopiles are created by lining up multiple
thermocouples in series. If a temperature difference is induced between
a
hot junction connecting two thermocouples and their open ends (cold
junctions), a voltage is created, allowing the thermopile to transduce
the
IR radiation into a voltage measure (while factoring for ambient
temperature). Miniaturization and batch fabrication on micro-machined
silicon wafers enable low cost devices, which can also be used for
gas
detection.
|
·
|
VARIABLE
CAPACITIVE. Humidity technology is based upon variable capacitive
affecting a sensitive polymer layer under changing ambient humidity
conditions. This technology is uniquely designed for high volume
OEM
applications in consumer markets, automotive, home appliance and
environmental control.
|
·
|
PHOTO
OPTICS. Photo-Optic sensors use light to measure different parameters
such
as position, reflectance, color and many others. At present our main
application is in non-invasive medical sensing, specifically pulse
oximetry, also known as SpO2.
|
|
ULTRASONIC
TECHNOLOGY. Ultrasonic sensors measure distance by calculating the
time
delay between transmitting and receiving an acoustic signal that
is
inaudible to the human ear. This technology allows for the quick,
easy,
and accurate measurement of distances between two points without
physical
contact.
|
·
|
TEMPERATURE.
Negative temperature co-efficient (“NTC”) thermistors offer high-end
precision temperature sensors by exhibiting a change in electrical
resistance in response to a change in ambient temperature conditions.
|
BUSINESS
SEGMENTS
As
a
result of the sale of our Consumer Products business segment, the Sensor
business segment is our sole segment.
PRODUCTS
The
Company has one business segment, the Sensor segment, with global engineering
resources organized into eight key product families: pressure, force, position,
vibration, humidity, temperature, photo optics and Piezo film. Each product
family is supported by a research and design center (or centers) as well as
manufacturing on a global basis. Product teams are also supported by global
specialists with expertise in the use of sensors for various industries:
medical, automotive, aerospace, test and measurement, manufacturing, power
generation, HVAC/refrigeration, oil and gas, consumer goods and appliances.
Regional account management, organized into three hubs (US, Europe/Middle East,
Asia), brings the Company diverse capabilities to local companies throughout
the
world.
To
improve the ownership and accountability on top-to-bottom results, the Company
has recently organized effective April 1, 2007 the eight product families into
four business “Groups”, with each Group having responsibility for sales,
engineering, operations and customer service of their respective products.
A
Group Vice President has been assigned overall strategic and profit/loss
responsibility for the particular Group, with finance/accounting, supply
chain/information systems and strategic sourcing remaining functional, shared
resources. The four business groups are PFG (Pressure and Force), PVG
(Position/Piezo and Vibration), TPG (Temperature/Optical) and HCG (Humidity
Chemical Gas). Prior to and after the aforementioned organization changes from
eight product families to four business groups, the Company continues to have
one reporting segment, a sensor business, under the guidelines established
with
SFAS 131, Disclosures
about Segments of an Enterprise and Related Information,
because, among other things, the criteria for aggregation.
A
summary
of our Sensor business product offerings as of March 31, 2007 is presented
in
the following table.
Group
|
|
Product
Family
|
|
Product
|
|
Technology
|
|
Applications
|
|
|
|
|
|
|
|
|
|
PFG
|
|
Pressure
|
|
Pressure
Components, Sensors and Transducers
|
|
Micro-Electromechanical
Systems
|
|
Disposable
catheter blood pressure altimeter, dive tank pressure, process
instrumentation, fluid level, measurement and intravenous drug
administration monitoring, racing engine performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Microfused
TM
Piezoresistive Silicon Strain Gauge
|
|
Automotive
electronic stability control systems, paint spraying machines, fertilizer
dispensers, hydraulics, refrigeration and automotive
transmission
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonded
Foil Strain Gauge
|
|
Instrumentation-grade
aerospace and weapon control systems, sub-sea pressure, ship cargo
level,
steel mills
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonded
Gauge
|
|
Miniature
and subminiature transducers for test and measurement applications
in
aerospace, auto testing and
industry
|
PFG
|
|
Force
|
|
Load
Cells
|
|
Microfused
TM
Piezoresistive Silicon Strain Gauge
|
|
Automotive
occupancy weight sensing, bathroom scales, exercise equipment, appliance
monitoring, intravenous drug administration monitoring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Micro-Electromechanical
Systems instrumentation
|
|
Crash
test sensors, anthropomorphic dummy sensors, road load dynamics,
aerospace
traffic alert and collision avoidance systems,
instrumentation
|
|
|
|
|
|
|
|
|
|
PVG
|
|
Position
|
|
Linear
Variable Displacement Transducers
|
|
Inductive
Electromagnetic
|
|
Aerospace,
machine control systems, knitting machines, industrial process control,
hydraulic actuators, instrumentation
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Rotary
Position Transducers
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Inductive
Electromagnetic
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Machine
control systems, instrumentation
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MR
sensors and Magnetic Encoders
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Magneto-Resistive
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Automotive
systems controls, pump counting and control, school bus stop sign
arm
position
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Tilt/Angle
Sensors
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Fluid
Capacitive or Electrolytic Fluid
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Heavy
equipment level measurement, auto security systems, tire balancing,
instrumentation
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PVG
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Piezo
Film
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Traffic
Sensors
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Piezoelectric
Polymer
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Traffic
survey, speed and traffic light enforcement, toll, and truck
weigh-in-motion
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Custom
Piezoelectric Film Sensors
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Piezoelectric
Polymer
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Medical
diagnostics, ultrasonic pen digitizers, musical instrument pickups,
electronic stethoscope, security systems, anti-tamper sensors for
data
protection, electronic water meters
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PVG
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Vibration
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Accelerometers
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Micro-Electromechanical
Systems instrumentation
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Crash
test sensors, anthropomorphic dummy sensors, road load dynamics,
aerospace
traffic alert and collision avoidance systems,
instrumentation
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Accelerometers
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Piezoelectric
Polymer
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Cardiac
activity sensors, audio speaker feedback, appliance load
balancing
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HCG
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Humidity
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Relative
Humidity Sensors
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Capacitive
Film
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Auto
anti-fogging systems, diesel engine controls, air climate systems,
reprography machines, respirators
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TPG
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Temperature
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Thermistors
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Negative
Temperature Co-efficient (NTC) Thermistors, Infrared (IR)
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Patient
monitoring and diagnostics, gas chromatography, HVAC & R, and
non-contacting thermometers, microwave and convection oven controls,
gas
detection
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TPG
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Photo
Optics
|
|
Pulse
Oximetry Sensors (SpO2);
X-Ray Detection
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Photo
optic infra-red light absorption
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Reusable
and disposable patient blood oxygen and pulse sensors, security system
and
CT scanner sensor arrays
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CUSTOMERS
We
sell
our sensor products throughout the world. We design, manufacture and market
sensors for original equipment manufacturer applications and for end users who
use them for instrumentation and test applications. Our extensive customer
base
consists of manufacturers of electronic, automotive, medical, military,
industrial and consumer products. Our largest customer, Sensata, a large OEM
automotive supplier, accounted for approximately 15.0% of our net sales during
fiscal 2007, approximately 18.1% of our net sales during fiscal 2006, and
approximately 15.3% of our sales during fiscal 2005. No other customers
accounted for more than 10% during the fiscal years ended March 31, 2007,
2006 and 2005.
SALES
AND DISTRIBUTION
We
sell
our sensor products through a combination of experienced regional sales
managers, distributors and generally exclusive sales relationships with outside
sales representatives throughout the world. Our engineering teams work directly
with our global customers to tailor our sensors to meet their specific
application requirements.
We
sell
our products primarily in North America and Western Europe. The international
component of our sales has grown with recent acquisitions. In addition, we
believe the growing Asian market represents a significant opportunity for our
business. Sales into foreign countries primarily from our foreign facilities
accounted for 31.8% of net sales for the fiscal year ended March, 31, 2007,
45.2% of net sales for the fiscal year ended March 31, 2006, and 39.5% of net
sales for the fiscal year ended March 31, 2005.
SUPPLIERS
We
procure components and finished products from a variety of suppliers as needed
through purchase orders. We actively manage this process to ensure component
quality, steady supply and best costing, while managing hazardous materials
content for compliance with European Restrictions on Hazardous Substances
(“ROHS”) regulations. We source our assembly of photo optic products from a
single contract manufacturer.
RESEARCH
AND DEVELOPMENT
Our
research and development efforts are focused on expanding our core technologies,
improving our existing products, developing new products and designing custom
sensors for specific customer applications. To maintain and improve our
competitive position, our research, design, and engineering teams work in close
association with customers to design custom sensors for specific applications.
Research and development costs approximated $9,235 or 4.6% of net sales for
fiscal 2007, $6,450 or 5.3% of net sales for fiscal 2006, and $4,491 or 4.9%
of
net sales for fiscal 2005. Prior year disclosure of research and development
costs excluded salaries of certain engineers whose activities qualify as
research and development costs under Statement of Financial Accounting Standards
(“SFAS”) No.2, Research
and Development.
Research and development costs disclosed in prior years were $2,567 and $2,130
in 2006 and 2005, respectively. Customer funded research and development was
$786, $448, and $268 for the fiscal years ended March 31, 2007, 2006, and 2005,
respectively.
COMPETITION
The
global market for sensors includes many diverse products and technologies,
is
highly fragmented and is subject to moderate pricing pressures. Our
piezo-resistive, MEMS and Micro-fused™ pressure sensing technologies compete
directly within the largest and fastest growing segments in the global market
for industrial pressure sensors. For some of our more mature technologies such
as LVDTs and IR thermopiles, we compete with a number of regional providers
or
divisions of larger companies, also with moderate pricing pressure. Most of
our
competitors are small companies or divisions of large corporations such as
Danaher, General Electric, Schneider-Electric and Honeywell. The principal
elements of competition in the sensor market are production capability, price,
quality, service, and the ability to design unique applications to meet specific
customer needs.
Although
we believe that we compete favorably, new product introductions by our
competitors could cause a decline in sales or loss of market acceptance for
our
existing products. If competitors introduce more technologically advanced
products, the demand for our products would likely be reduced.
INTELLECTUAL
PROPERTY
We
rely
in part on patents to protect our intellectual property. We own 42 United States
utility patents and 40 foreign patents to protect our rights in certain
applications of our core technology. We have 7 patent applications
pending.
These
patent applications may never result in issued patents. Even if these
applications result in patents being issued, taken together with our existing
patents, they may not be sufficiently broad to protect our proprietary rights,
or they may prove unenforceable. We have not obtained patents for all of our
innovations, nor do we plan to do so.
We
also
rely on a combination of copyrights, trademarks, service marks, trade secret
laws, confidentiality procedures, and licensing arrangements to establish and
protect our proprietary rights. In addition, we seek to protect our proprietary
information by using confidentiality agreements with certain employees, sales
representatives, consultants, advisors, customers and others. We cannot be
certain that these agreements will adequately protect our proprietary rights
in
the event of any unauthorized use or disclosure, that our employees, sales
representatives, consultants, advisors, customers or others will maintain the
confidentiality of such proprietary information, or that our competitors will
not otherwise learn about or independently develop such proprietary information.
Despite our efforts to protect our intellectual property, unauthorized third
parties may copy aspects of our products, violate our patents or use our
proprietary information. In addition, the laws of some foreign countries do
not
protect our intellectual property to the same extent as the laws of the United
States. The loss of any material trademark, trade name, trade secret, patent
right, or copyright could harm our business, results of operations and financial
condition.
We
believe that our products do not infringe on the rights of third parties.
However, we cannot be certain that third parties will not assert infringement
claims against us in the future or that any such assertion will not result
in
costly litigation or require us to obtain a license to third party intellectual
property. In addition, we cannot be certain that such licenses will be available
on reasonable terms or at all, which could harm our business, results of
operations and financial condition.
FOREIGN
OPERATIONS
We
manufacture the majority of our sensor products in leased premises located
in
Shenzhen, China. Sensors are also manufactured at our U.S. facilities in
Hampton, VA, Dayton, OH and Fremont, CA, as well as our European facilities
in
Galway, Ireland, Toulouse, France, Les Clayes-sous-Bois, France, Guyancourt,
France, and Dortmund, Germany. Additionally, certain key management, sales
and
engineering activities are conducted at leased premises in Wayne, PA, Aliso
Viejo, CA, and Shrewsbury, MA. The Company manufactures the bulk of its NTC
thermistors, but a large portion of our discrete and probe assemblies are
manufactured in China by Betacera Inc., a subcontractor with a long-standing
relationship with the Company. Our pulse oximetry sensors are sourced from
a
single supplier, Opto Circuits India Limited, (“Opto”), in Karnatake, India.
There are no agreements which would require us to make minimum payments to
Opto,
nor is Opto obligated to maintain capacity available for our benefit.
Additionally, most of our products contain key components that are obtained
from
a limited number of sources. These concentrations in external and foreign
sources of supply present risks of interruption for reasons beyond our control,
including political and other uncertainties regarding China and
India.
The
Chinese government has continued to pursue economic reforms hospitable to
foreign investment and free enterprise, although the continuation and success
of
these efforts is not assured. Our operations could be adversely affected by
changes in Chinese laws and regulations, including those relating to taxation
and currency exchange controls, by the imposition of economic austerity measures
intended to reduce inflation, and by social and political unrest. China became
a
member of the World Trade Organization (WTO) on December 11, 2001. Such
membership requires China and other members of the WTO to grant one another
reciprocal “Normal Trade Relations” (NTR) status (formerly known as Most Favored
Nation). Accordingly, China’s preferred trading status with the United States
(and other WTO members) is no longer subject to annual review and Chinese goods
exported to the United States are subject to a low tariff and receive other
favorable treatment.
A
substantial portion of our revenues are priced in United States dollars. Most
of
our costs and expenses are priced in United States dollars, with the remaining
priced in Chinese renminbi and Euros. Accordingly, the competitiveness of our
products relative to products produced locally (in foreign markets) may be
affected by the performance of the United States dollar compared with that
of
our foreign customers’ currencies. Sales from our facilities in the United
States were $106,476,
$68,704, and $64,772, or 53.2%, 56.6%, and 70.2% of net sales, for the fiscal
years ended March 31, 2007, 2006, and 2005, respectively. Sales from our foreign
facilities were $93,774, $52,713, and $27,496, or 46.8%, 43.4%, and 29.8% of
net
sales, for the fiscal years ended March 31, 2007, 2006, and 2005, respectively.
We are exposed to foreign currency transaction and translation losses, which
might result from adverse fluctuations in the value of the Euro and Chinese
renminbi.
At
March
31, 2007, 2006, and 2005 we had net assets of $43,561, $46,956, and $48,009,
respectively, in the United States. At March 31, 2007, 2006, and 2005 we had
net
assets of $23,810, $18,503, and $10,455, respectively, in China subject to
fluctuations in the value of the Chinese renminbi against the United States
dollar. At March 31, 2007, 2006, and 2005 we had net assets of $40,981, $30,269,
and $9,503, respectively, in Hong Kong subject to fluctuations in the value
of
the Hong Kong dollar against the United States dollar. At March 31, 2007,
2006, and 2005 we had net assets (liabilities) of $12,285, $(231), and $49,
respectively, in Europe, subject to fluctuations in the value of the Euro
against the United States dollar.
On
July
21, 2005, the renminbi increased in value by approximately 2.1% as compared
to
the U.S. dollar, and since this initial change in value, the renminbi has
appreciated by an additional 0.57% and 4.0% during 2006 and 2007, respectively.
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, 2007 and forecast
information for fiscal 2008, we estimate a negative operating income impact
of
approximately $184 for every 1% appreciation in renminbi against the U.S. dollar
(assuming no price increases passed to customers, and no associated cost
increases or currency hedging). We continue to consider various alternatives
to
hedge this exposure, and have considered, but do not currently use, foreign
currency contracts as a hedging strategy. We are attempting to manage this
exposure through, among other things, pricing and monitoring balance sheet
exposures for payables and receivables.
Based
on
the net exposures of Euros to the US dollars for the fiscal year ended March
31,
2007, we estimate a positive operating income impact of $66 for every 1%
appreciation in Euros relative to the US dollar (assuming no price increases
passed to customers, and associated cost increases or currency hedging).
There
can
be no assurance that these currencies will remain stable or will fluctuate
to
our benefit. To manage our exposure to potential 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. We do have a number of foreign exchange currency
contracts in Europe, as disclosed in Note 7 to the Consolidated Financial
Statements in this Annual Report on Form 10-K.
EMPLOYEES
As
of
March 31, 2007, we had 2,191 employees, including 322 in the United States,
361
in the European Union, and 1,508 in Asia. As of March 31, 2007, 1,553 employees
were engaged in manufacturing, 274 were engaged in administration, 265 were
engaged in engineering and 99 were engaged in sales and marketing.
Our
employees in the U.S., Europe and Asia are not covered by collective bargaining
agreements. We believe our employee relations are good.
ENVIRONMENTAL
MATTERS
We
are
subject to comprehensive and changing foreign, federal, state, and local
environmental requirements, including those governing discharges to the air
and
water, the handling and disposal of solid and hazardous wastes, and the
remediation of contamination associated with releases of hazardous substances.
We believe that we are in compliance with current environmental requirements.
Nevertheless, we use hazardous substances in our operations, and as is the
case
with manufacturers in general, if a release of hazardous substances occurs
on or
from our properties, we may be held liable, and may be required to pay the
cost
of remedying the condition. The amount of any resulting liability could be
material.
We
believe we are in compliance with the European and UK Restrictions on Hazardous
Substances (“RoHS”) environmental directive which became effective July 1, 2006
for "the restriction of the use of certain hazardous substances in
electrical and electronic equipment.”
Our
business and our customers may be subject to new requirements under the European
Commission’s Proposal for the Registration, Evaluation and Authorization of
Chemicals (“REACH”). REACH will impose obligations on European Union
manufacturers and importers of chemicals and other products into the European
Union to compile and file comprehensive reports, including testing data, on
each
chemical substance, and perform chemical safety assessments. Additionally,
substances of high concern will be subject to an authorization process per
application. Authorization may result in restrictions in the use of products
by
application or even prohibitions on the manufacture or importation of products.
REACH came into effect on June 1, 2007. The regulations impose additional
burdens on chemical producers, importers, downstream users of chemical
substances and preparations, and the entire supply chain. We are evaluating
the
impact of REACH on the Company. However, our manufacturing presence and sales
activities in the European Union will likely require us to incur additional
compliance costs and may result in increases in the costs of raw materials
we
purchase and the products we sell.
We
do not
believe there is any substantial risk to our business resulting from these
new
regulations at this time.
BACKLOG
At
March
31, 2007, the dollar amount of backlog orders believed to be firm was
approximately $62,826.
Backlog
from acquisitions completed during fiscal 2007 that were not included as part
of
the March 31, 2006 backlog disclosure below account for $16,612 of this backlog.
We
include in backlog orders that have been accepted from customers that have
not
been filled or shipped and are supported with a purchase order. It is expected
that the majority of these orders will be shipped during the next 12 months.
At
March 31, 2006, our backlog of unfilled orders was approximately $39,346. All
orders are subject to modification or cancellation by the customer. We believe
that backlog may not be indicative of actual sales for the current fiscal year
or any succeeding period.
SEASONALITY
There
is
no significant seasonality to our sales.
We
maintain an Internet website at the following address: www.meas-spec.com. The
information on our website is not incorporated by reference into this Annual
Report on Form 10-K. We make available on or through our website certain reports
and amendments to those reports that we file with or furnish to the Securities
and Exchange Commission (the “SEC”) in accordance with the Securities Exchange
Act of 1934. These include our annual reports on Form 10-K, our quarterly
reports on Form 10-Q and our current reports on Form 8-K. We make this
information available on our website free of charge as soon as reasonably
practicable after we electronically file the information with, or furnish it
to,
the SEC.
FORWARD-LOOKING
STATEMENTS
This
report 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 used herein are not guarantees of future performance
and involve a number of risks and uncertainties, many of which are beyond our
control. 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 and
China;
|
·
|
Legal
proceedings described below under “Item 3 -Legal Proceedings;”
and
|
·
|
The
risk factors listed from time to time in our SEC reports, including
those
described below under “Risk
Factors”.
|
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 Annual Report on Form 10-K, whether as a result of new information, future
events, changes in assumptions or otherwise.
ITEM
1A. RISK FACTORS
An
investment in our common stock is speculative in nature and involves a high
degree of risk. No investment in our common stock should be made by any person
who is not in a position to lose the entire amount of such
investment.
In
addition to being subject to the risks described elsewhere in this Annual Report
on Form 10-K, including those risks described below under “Liquidity and Capital
Resources,” an investment in our common stock is subject to the risks and
uncertainties described below.
Other
risks include the impact of new or changes to accounting and reporting rules
and
standards issued by the Financial Accounting Standards Board, the SEC, and
other
accounting oversight bodies, the impact of rulings by the Internal Revenue
Service and/or state tax authorities, and the enactment of additional state,
federal or foreign regulatory and tax laws and regulations pertaining to our
subsidiaries and foreign investments.
IF
WE DO
NOT DEVELOP AND INTRODUCE NEW PRODUCTS IN A TIMELY MANNER, WE MAY NOT BE ABLE
TO
MEET THE NEEDS OF OUR CUSTOMERS AND OUR NET SALES MAY DECLINE.
Our
success depends upon our ability to develop and introduce new sensor products
and product line extensions. If we are unable to develop or acquire new products
in a timely manner, our net sales will suffer. The development of new products
involves highly complex processes, and at times we have experienced delays
in
the introduction of new products. Since many of our sensor products are designed
for specific applications, we must frequently develop new products jointly
with
our customers. We are dependent on the ability of our customers to successfully
develop, manufacture and market products that include our sensors. Successful
product development and introduction of new products depends on a number of
factors, including the following:
·
|
accurate
product specification;
|
|
|
·
|
timely
completion of design;
|
|
|
·
|
achievement
of manufacturing yields;
|
|
|
·
|
timely,
quality and cost-effective production; and
|
|
|
·
|
effective
marketing.
|
RAPID
GROWTH BRINGS RISKS AND CHALLENGES ASSOCIATED WITH GROWTH.
The
rapid
growth of our business through a combination of organic and acquisitive means
creates a unique set of challenges which include:
·
|
managing
inventory from acquired companies as well as inventory required for
new
programs;
|
|
|
·
|
prioritizing
the right engineering programs so new opportunities are harvested
without
losing business in smaller, more stable lines of
business;
|
|
|
·
|
managing
a growing end user business alongside a robust and larger OEM
business;
|
|
|
·
|
building
infrastructure and the management team to support growth of the business
in new geographies, especially Europe and Asia;
|
|
|
·
|
maintaining
a pipeline of increasingly larger opportunities to achieve comparable
year
over year growth rates; and
|
|
|
·
|
maintaining
a rapidly changing balance sheet to optimize debt to equity and working
capital ratios.
|
WE
HAVE
SUBSTANTIAL NET SALES AND OPERATIONS OUTSIDE OF THE UNITED STATES, INCLUDING
SIGNIFICANT OPERATIONS IN CHINA AND EUROPE, THAT EXPOSE US TO INTERNATIONAL
RISKS.
Our
international sales accounted for approximately 46.8% and 43.4% of our net
sales
in the fiscal years ended March 31, 2007 and 2006, respectively. At March
31, 2007, our foreign subsidiaries’ assets totaled $163,758, of which $34,717
was in China, $50,205 was in Hong Kong and $78,836 was in Europe. We are
subject to the risks of foreign currency transaction and translation losses,
which might result from fluctuations in the values of the Chinese renminbi,
the
Hong Kong dollar and the Euro against the United States dollar. At March
31,
2007, we had net assets of $23,810 subject to fluctuations in the value of
the
Chinese renminbi, net assets of $40,981 subject to fluctuations in the value
of
the Hong Kong dollar, and net assets of $12,285 subject to fluctuations in
the
Euro. Our foreign subsidiaries’ operations reflect intercompany transfers of
costs and expenses, including interest on intercompany trade receivables,
at
amounts established by us. We manufacture the majority of our sensor products
in
China. Our China subsidiary is subject to certain government regulations,
including currency exchange controls, which limit the subsidiary’s ability to
pay cash dividends or lend funds to us. The inability to operate in China
or the
imposition of significant restrictions, taxes, or tariffs on our operations
in
China would impair our ability to manufacture products in a cost-effective
manner and could reduce our profitability significantly.
Risks
specific to our international operations include:
·
|
political
conflict and instability in the relationships among Hong-Kong, Taiwan,
China, the United States and in our target international
markets;
|
|
|
·
|
political
instability and economic turbulence in Asian markets;
|
|
|
·
|
changes
in United States and foreign regulatory requirements resulting in
burdensome controls, tariffs and import and export
restrictions;
|
|
|
·
|
changes
in foreign currency exchange rates, which could make our products
more
expensive as stated in local currency, as compared to competitive
products
priced in the local currency;
|
|
|
·
|
enforceability
of contracts and other rights or collectability of accounts receivable
in
foreign countries due to distance and different legal
systems;
|
·
|
delays
or cancellation of production and delivery of our products due to
the
logistics of international shipping, which could damage our relationships
with our customers;
|
|
|
·
|
a
recurrence of the outbreak of Severe Acute Respiratory Syndrome (“SARS”)
or Avian Flu and the associated risks to our operations in China;
and
|
|
|
·
|
tax
policy change in China, which could affect the profitability of our
operations in China. China has enacted higher tax rates effective
January
1, 2008. If the Company does not receive the annual special tax status
in
China, our rates could be between 15% and
25%.
|
COMPETITION
IN THE MARKETS WE SERVE IS INTENSE AND COULD REDUCE OUR NET SALES AND HARM
OUR
BUSINESS.
Highly
fragmented markets and high levels of competition characterize our business.
Despite recent consolidations, including the acquisition of several smaller
competitors of ours by larger competitors like General Electric, Honeywell,
Schneider-Electric and Danaher Corporation, the sensor industry remains highly
fragmented. Some of our competitors and potential competitors may have a number
of significant advantages over us, including:
·
|
greater
financial, technical, marketing, and manufacturing
resources;
|
|
|
·
|
preferred
vendor status with our existing and potential customer
base;
|
|
|
·
|
more
extensive distribution channels and a broader geographic
scope;
|
|
|
·
|
larger
customer bases; and
|
|
|
·
|
a
faster response time to new or emerging technologies and changes
in
customer requirements.
|
OUR
TRANSFER PRICING PROCEDURES MAY BE CHALLENGED, WHICH MAY SUBJECT US TO HIGHER
TAXES AND ADVERSELY AFFECT OUR EARNINGS.
Transfer
pricing refers to the prices that one member of a group of related companies
charges to another member of the group for goods, services, or the use of
intellectual property. If two or more affiliated companies are located in
different countries, the laws or regulations of each country generally will
require that transfer prices be the same as those charged by unrelated companies
dealing with each other at arm’s length. If one or more of the countries in
which our affiliated companies are located believes that transfer prices were
manipulated by our affiliate companies in a way that distorts the true taxable
income of the companies, the laws of countries where our affiliated companies
are located could require us to re-determine transfer prices and thereby
reallocate the income of our affiliate companies in order to reflect these
transfer prices. Any reallocation of income from one of our companies in a
lower
tax jurisdiction to an affiliated company in a higher tax jurisdiction would
result in a higher overall tax liability to us.
Moreover,
if the country from which the income is being reallocated does not agree to
the
reallocation, the same income could be subject to taxation by both
countries.
We
have
adopted transfer-pricing procedures with our subsidiaries to regulate
inter-company transfers. Our procedures call for the transfer of goods,
services, or intellectual property from one company to a related company at
prices that we believe are arm’s length. We have established these procedures
due to the fact that some of our assets, such as intellectual property developed
in the United States, are transferred among our affiliated companies. If the
United States Internal Revenue Service or the taxing authorities of any other
jurisdiction were to successfully require changes to our transfer pricing
practices, we could become subject to higher taxes and our earnings would be
adversely affected. Any determination of income reallocation or modification
of
transfer pricing laws can result in an income tax assessment on the portion
of
income deemed to be derived from the United States or other taxing
jurisdiction.
PRESSURE
BY OUR CUSTOMERS TO REDUCE PRICES MAY CAUSE OUR NET SALES OR PROFIT MARGINS
TO
DECLINE.
Our
customers are under pressure to reduce prices of their products. Therefore,
we
expect to experience pressure from our customers to reduce the prices of our
products. We believe that we must reduce our manufacturing costs and obtain
larger orders to offset declining average sales prices. If we are unable to
offset declining average sales prices, our gross profit margins will
decline.
AS
PART
OF OUR BUSINESS STRATEGY, WE HAVE ENTERED INTO AND MAY ENTER INTO OR SEEK TO
ENTER INTO BUSINESS COMBINATIONS AND ACQUISITIONS THAT MAY BE DIFFICULT AND
COSTLY TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR DIVERT
MANAGEMENT’S ATTENTION.
We
made
ten acquisitions during fiscal years 2007, 2006 and 2005. As a part of our
business strategy, we may enter into additional business combinations and
acquisitions. Acquisitions are typically accompanied by a number of risks,
including the difficulty of integrating the operations and personnel of the
acquired companies, the potential disruption of our ongoing business and
distraction of management, expenses related to the acquisition and potential
unknown liabilities associated with acquired businesses. If we are not
successful in completing acquisitions that we may pursue in the future, we
may
be required to reevaluate our growth strategy, and we may incur substantial
expenses and devote significant management time and resources in seeking to
complete proposed acquisitions that will not generate benefits for
us.
In
addition, with future acquisitions, we could use substantial portions of our
available cash as all or a portion of the purchase price. We could also issue
additional securities as consideration for these acquisitions, which could
cause
significant stockholder dilution. Our prior acquisitions and any future
acquisitions may not ultimately help us achieve our strategic goals and may
pose
other risks to us.
As
a
result of our previous acquisitions, we have added several different
decentralized operating and accounting systems, resulting in a complex reporting
environment. While we strive to integrate all of our acquired companies except
for BetaTHERM into our enterprise resource planning (ERP) and management
reporting/analysis information systems as quickly as possible after their
acquisition, we expect that we will need to continue to modify our accounting
policies, internal controls, procedures and compliance programs to provide
consistency across all of our operations, in order to increase efficiency
and
operating effectiveness and improve corporate visibility into our decentralized
operations. BetaTHERM will remain on the ERP which existed prior to acquisition,
because this system’s functionality was determined to be within the established
requirements.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
As
of
March 31, 2007, we leased all but two of our properties under operating leases,
as follows:
Location
|
|
|
|
Sq.
Ft.
|
|
|
Wayne,
PA
|
|
Research
and development, sales and marketing
|
|
2,529
|
|
Dec-2008
|
|
|
|
|
|
|
|
Fremont,
CA
|
|
Manufacturing,
research and development, sales and marketing
|
|
11,951
|
|
Mar-2015
|
|
|
|
|
|
|
|
Shenzhen,
China
|
|
Asian
headquarters, manufacturing and support
|
|
149,523
|
|
Apr-2008
and
Feb-2009
|
|
|
|
|
|
|
|
Hampton,
VA*
|
|
Worldwide
Corporate and US headquarters, research and development, manufacturing
and
distribution facility
|
|
120,000
|
|
Jul-2011
|
|
|
|
|
|
|
|
Hong
Kong, China
|
|
Sales
|
|
355
|
|
Feb-2008
|
|
|
|
|
|
|
|
Toulouse,
France
|
|
European
headquarters and manufacturing, research and development, sales and
marketing
|
|
27,000
|
|
Requires
6 month's notice
|
|
|
|
|
|
|
|
Aliso
Viejo, CA
|
|
Research
and development
|
|
2,283
|
|
Dec-2007
|
|
|
|
|
|
|
|
Dortmund,
Germany
|
|
Manufacturing,
research and development, sales and marketing
|
|
28,000
|
|
Dec-2009
|
|
|
|
|
|
|
|
Guyancourt,
France
|
|
Manufacturing,
marketing and sales
|
|
1,800
|
|
Sep-2007
|
|
|
|
|
|
|
|
Abingdon,
UK
|
|
Sales
|
|
1,200
|
|
Dec-2007
|
|
|
|
|
|
|
|
Dayton,
OH
|
|
Manufacturing,
research and development, sales and marketing
|
|
31,600
|
|
Feb-2014
|
|
|
|
|
|
|
|
India
|
|
Materials
Engineer
|
|
600
|
|
May-2007
|
|
|
|
|
|
|
|
Shrewsbury,
MA
|
|
Research
and development, sales and marketing
|
|
4,568
|
|
Apr-2010
|
|
|
|
|
|
|
|
Galway,
Ireland
|
|
Manufacturing,
research and development, administrative, sales and marketing
|
|
4,053
|
|
Jan-2026
|
|
|
|
|
|
|
|
Owned
Properties:
|
|
|
|
|
|
|
Les
Clayes-sous-Bois, France
|
|
Manufacturing,
marketing, and sales
|
|
12,378
|
|
|
|
|
|
|
|
|
|
Galway,
Ireland
|
|
Manufacturing,
research and development, sales and marketing
|
|
16,426
|
|
|
*Our
distribution and warehouse space in Hampton, VA was partially vacant due to
the
complete divestiture of the Consumer business. We have subleased a portion
of
the unused space.
We
have a
facility under construction in Shenzhen, Guang Dong Province, China. Our primary
sensor manufacturing facilities are ISO 9001 certified, but we also have
registration under FDA (Federal Drug Administration) regulations at our Dayton,
Ohio facility and a number of facilities are TS 16949 (Technical Standards)
registered, as well as AS9100 and ISO 13485. We believe that these premises
are
suitable and adequate for our present operations.
ITEM
3. LEGAL PROCEEDINGS
Pending
Matters
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 us 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 us, 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, we have assumed defense of this matter. On January 4, 2006, the
Tribunal ruled in our favor, invalidating the claims of the SEB patent that
SEB
had asserted. Although the time for appeal has not yet expired, we are unaware
of any appeal of this decision by SEB.
Settled
Matters
The
Honorable Dan Samuel v. Measurement Specialties, Inc., Case No. 3:06 cv
1005.
On June
29, 2006, we were sued by a former director of the Company in the United States
District Court for the District of Connecticut. In this matter, the plaintiff,
The Honorable Dan Samuel, a former director of the Company, allowed his stock
options to terminate before he attempted to exercise them. Mr. Samuel claimed
that we misled him with respect to when his options terminated/expired and
asserts claimed against us for negligent misrepresentation, fraud, breach of
contract, and conversion and sought damages in an amount not less than $450
plus
interest and costs. On August 30, 2006, we filed a motion to dismiss. At a
conference before the Court, the Court suggested that Mr. Samuel file an amended
complaint and that we, instead of moving to dismiss, answer the amended
complaint, take some discovery and then renew our motion to dismiss as a motion
for summary judgment at the conclusion of discovery. Consistent with the Court's
direction, on October 12, 2006, Mr. Samuel filed an amended complaint which
contained counts asserting negligent misrepresentation, fraud, breach of
contract, conversion and promissory estoppel. We answered the amended complaint
and asserted numerous affirmative defenses. On April 16, 2007, we reached an
agreement in principle to settle this lawsuit. Pursuant to the agreement, the
case was settled on a no fault basis in exchange for a payment by us in the
amount of $225 to Mr. Samuel. On May 7, 2007, a Stipulation of Dismissal of
with
Prejudice and without cost as to all causes of action by Dan Samuel was filed
with the United States District Court for the District of
Connecticut.
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 our Schaevitz Division, filed a lawsuit against
us and
certain of our officers and directors in the United States District Court
of the
District of New Jersey. Mr. DeWelt resigned on March 26, 2002 in disagreement
with our 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. We filed a Motion
to
Dismiss this case, which was denied on June 30, 2003. We answered the complaint
and engaged in the discovery process, which has now concluded. On December
1,
2006, we filed a motion for summary judgment seeking dismissal of all claims.
The Court denied the motion, but pursuant to the election of remedies provision
of the New Jersey Conscientious Employee Protection Act, two of the common
law
claims were waived by Mr. DeWelt and dismissed by the Court. The trial of
this
case was scheduled for June, 2007. On June 1, 2007, Mr. DeWelt voluntarily
dismissed his claim for breach of contract, intending to proceed to trial
on
only his claim under the New Jersey Conscientious Employee Protection Act.
However, the parties orally agreed to a confidential settlement in the amount
of
$1,050 and the Court cancelled the trial. The parties have now executed a
settlement agreement and will file a stipulation dismissing the lawsuit with
prejudice once the settlement payment is issued. Accordingly, the Company
accrued liability for the DeWelt matter in the amount of $1,050 at March
31,
2007.
From
time
to time, we are 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 we believe will have, individually or in the aggregate, a material
adverse effect on our business, financial condition, or operating results.
No
matter
was submitted to a vote of our security holders during the fourth quarter of
fiscal year 2007.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
(A)
Market Information
On
September 13, 2005, we moved the listing of our common stock from the American
Stock Exchange to The Nasdaq Global Market. Our common stock, no par value,
is
now traded under the symbol NASDAQ: MEAS. The following table presents high
and
low sales prices of our common stock as reported on the NASDAQ or AMEX, as
appropriate, for the periods indicated:
|
|
HIGH
|
|
LOW
|
|
YEAR
ENDED MARCH 31, 2007
|
|
|
|
|
|
Quarter
ended June 30, 2006
|
|
$
|
30.00
|
|
$
|
22.27
|
|
Quarter
ended September 30, 2006
|
|
|
23.21
|
|
|
17.75
|
|
Quarter
ended December 31, 2006
|
|
|
24.28
|
|
|
18.09
|
|
Quarter
ended March 31, 2007
|
|
|
24.50
|
|
|
19.01
|
|
|
|
|
|
|
|
|
|
YEAR
ENDED MARCH 31, 2006
|
|
|
|
|
|
|
|
Quarter
ended June 30, 2005
|
|
$
|
24.15
|
|
$
|
19.25
|
|
Quarter
ended September 30, 2005
|
|
|
27.18
|
|
|
20.10
|
|
Quarter
ended December 31, 2005
|
|
|
26.44
|
|
|
20.02
|
|
Quarter
ended March 31, 2006
|
|
|
27.00
|
|
|
22.62
|
|
(B)
Approximate Number of Holders of Common Stock
At
May
31, 2007, there were approximately 2,475 shareholders of record of our common
stock.
(C)
Dividends
We
have
not declared cash dividends on our common equity. Additionally, the payment
of
dividends is prohibited under our credit agreement with General Electric Capital
Corporation (“GECC” or “GE”). We intend to retain earnings to support our growth
strategy and we do not anticipate paying cash dividends in the foreseeable
future.
At
present, there are no material restrictions on the ability of our Hong Kong
or
European subsidiaries 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.
(D)
Securities Authorized for Issuance under Equity Compensation Plans
See
Item
12 of this Annual Report on Form 10-K for information about our equity
compensation plans.
The
following graph compares our cumulative total stockholder return since March
31,
2002 with the Russell 2000 Index and SIC Code 3823 peer group index. The graph
assumes that the value of the investment in our common stock and each index
(including reinvestment of dividends) was $100.00 on March 31,
2002.
|
|
3/2002
|
|
3/2003
|
|
3/2004
|
|
3/2005
|
|
3/2006
|
|
3/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurement
Specialties, Inc.
|
|
|
100.00
|
|
|
41.01
|
|
|
278.85
|
|
|
330.94
|
|
|
376.26
|
|
|
324.60
|
|
Russell
2000
|
|
|
100.00
|
|
|
73.04
|
|
|
119.66
|
|
|
126.13
|
|
|
158.73
|
|
|
168.11
|
|
SIC
Code 3823
|
|
|
100.00
|
|
|
76.15
|
|
|
109.23
|
|
|
122.76
|
|
|
161.20
|
|
|
170.16
|
|
(F)
Recent Sales of Unregistered Securities; Use of Proceeds from Registered
Securities
None.
None.
ITEM
6. SELECTED FINANCIAL DATA
The
following selected financial data should be read in conjunction with our
Consolidated Financial Statements and the related Notes to the Consolidated
Financial Statements included in this Annual Report on Form 10-K.
|
|
YEARS
ENDED MARCH 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Results
of operations:
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
200,250
|
|
$
|
121,417
|
|
$
|
92,268
|
|
$
|
60,247
|
|
$
|
52,326
|
|
Income
(loss) from continuing operations
|
|
|
11,957
|
|
|
10,327 |
|
|
9,780 |
|
|
13,594
|
|
|
(14,657
|
)
|
Net
income (loss)
|
|
|
14,234
|
|
|
24,534 |
|
|
14,826 |
|
|
21,586
|
|
|
(9,097 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning
(loss) from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.85
|
|
$
|
0.75
|
|
$
|
0.73
|
|
$
|
1.10
|
|
$
|
(1.23
|
)
|
Diluted
|
|
|
0.83
|
|
|
0.72 |
|
|
0.69 |
|
|
0.97 |
|
|
(1.23 |
) |
Net
Income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1.01
|
|
|
1.79 |
|
|
1.11 |
|
|
1.75 |
|
|
(0.76 |
) |
Diluted
|
|
|
0.99
|
|
|
1.71 |
|
|
1.05 |
|
|
1.54 |
|
|
(0.76 |
) |
Cash
dividends declared
|
|
|
-
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Position at Year-End:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
225,128
|
|
$
|
152,424
|
|
$
|
126,004
|
|
$
|
77,000
|
|
$
|
46,168
|
|
Long-term
debt and revolver, net of current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
maturities
|
|
|
59,571
|
|
|
16,794 |
|
|
18,928 |
|
|
- |
|
|
2,000 |
|
Shareholders'
equity
|
|
|
120,637
|
|
|
95,497 |
|
|
68,016 |
|
|
50,840
|
|
|
18,946 |
|
(1)
Fiscal year 2003 and 2004 reflect $955, $1,219 and $506, respectively, of
charges resulting from the restructuring of the business. Fiscal year 2003
and 2004 reflect $3,550 and $1,550, respectively, of charges taken as a result
of a prior class action lawsuit and SEC investigation (See Note 15 to the
Consolidated Financial Statements of the Company included in this Annual Report
on Form 10-K). Fiscal year 2004 reflects the favorable impact of reversing
$15,400 million tax valuation allowance for the deferred tax assets and a $6,483
charge for non-cash equity based compensation. In fiscal 2007, there was $1,275
in litigation settlement costs. Net income for fiscal years 2003, 2004, 2005,
2006 and 2007, includes income from discontinued operations of $5,560, $7,992,
$5,046, $14,207 and $2,277, respectively.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion of our results of operations and financial condition should
be read together with the other financial information and Consolidated Financial
Statements and related Notes included in this Annual Report on Form 10-K. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in the forward-looking statements as a result of a variety of
factors.
Our
fiscal year begins on April 1 and ends on March 31. References in this report
to
the year 2006 or fiscal 2006 refer to the 12-month period from April 1, 2005
through March 31, 2006 and references in this report to the year 2007 or fiscal
2007 refer to the 12-month period from April 1, 2006 through March 31,
2007.
OVERVIEW
The
Company is a global leader in the design and manufacture of sensors and
sensor-based systems for original equipment manufacturers and end users. The
Company continues to expand the business at a relatively high rate through
organic growth and through acquisitions. With the sale of our Consumer business
effective December 1, 2005, the Company had one reportable segment during 2007
and 2006, formerly the Sensor Division. Accordingly, all comparisons in
Management’s Discussion and Analysis for each of the fiscal periods ended March
31, 2007, 2006 and 2005 exclude the results of discontinued operations, except
as otherwise noted.
We
have
eight primary manufacturing facilities strategically located in the United
States, China, France, Germany and Ireland, enabling the Company to produce
and
market world-wide a broad range of sensors that use advanced technologies to
measure precise ranges of physical characteristics including pressure, position,
force, vibration, humidity, temperature and photo-optics. These sensors are
used
for industrial, automotive, medical, consumer and military/aerospace
applications. The Company’s sensor products include pressure and electromagnetic
displacement sensors, transducers, piezoelectric polymer film sensors, custom
microstructures, load cells, accelerometers, optical sensors, humidity and
temperature sensors.
The
following table sets forth, for the periods indicated, certain items in our
consolidated statements of income as a percentage of net sales:
|
|
For
the years ended March 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of goods sold
|
|
|
56.3
|
|
|
53.4
|
|
|
49.0
|
|
Gross
profit
|
|
|
43.7
|
|
|
46.6
|
|
|
51.0
|
|
Operating
expenses:
|
|
|
|
|
|
-
|
|
|
-
|
|
Selling,
general, and administrative
|
|
|
28.1
|
|
|
32.1
|
|
|
36.0
|
|
Non-cash
equity based compensation (SFAS 123R)
|
|
|
1.4
|
|
|
-
|
|
|
-
|
|
Amortization
of acquired intangibles
|
|
|
2.2
|
|
|
1.5
|
|
|
0.9
|
|
Litigation
settlment expenses
|
|
|
0.6
|
|
|
-
|
|
|
-
|
|
Total
operating expenses
|
|
|
32.3
|
|
|
33.6
|
|
|
36.9
|
|
Operating
income
|
|
|
11.4
|
|
|
13.0
|
|
|
14.1
|
|
Interest
expense, net
|
|
|
3.0
|
|
|
1.7
|
|
|
0.7
|
|
Other
expense (income)
|
|
|
0.4
|
|
|
0.1
|
|
|
(0.1
|
)
|
Income
from continuing operations before minority interest and income
taxes
|
|
|
7.8
|
|
|
11.2
|
|
|
13.5
|
|
Minority
interest, net of income taxes
|
|
|
0.3
|
|
|
-
|
|
|
-
|
|
Income
tax expense from continuing operations
|
|
|
1.6
|
|
|
2.7
|
|
|
2.9
|
|
Income
from continuing operations
|
|
|
6.0
|
|
|
8.5
|
|
|
10.6
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations before income taxes
|
|
|
0.1
|
|
|
5.6
|
|
|
7.2
|
|
Income
tax expense from discontinued operations
|
|
|
-
|
|
|
1.3
|
|
|
1.7
|
|
Income
from discontinued operations, before gain
|
|
|
0.1
|
|
|
4.3
|
|
|
5.5
|
|
Gain
on disposition of discontinued operations (net of income
tax)
|
|
|
1.1
|
|
|
7.4
|
|
|
-
|
|
Income
from discontinued operations
|
|
|
1.1
|
|
|
11.7
|
|
|
5.5
|
|
Net
income
|
|
|
7.1
|
%
|
|
20.2
|
%
|
|
16.1
|
%
|
EXECUTIVE
SUMMARY
The
Company has seen a significant amount of change over the last several years.
In
May 2002, we embarked upon an aggressive restructuring effort to improve the
operating performance of the Company. A key component of this restructuring
was
the elimination of underutilized facilities to consolidate our operations in
Shenzhen, China and Hampton, Virginia. In fiscal year 2004, the Company made
the
strategic decision to focus on aggressively growing the Sensor Division through
acquisition and organic growth. To that end, the Company made eight acquisitions
during fiscal 2005 and 2006, and two acquisitions in fiscal 2007 (the
“Acquisitions”) (See Notes 2 and 5 to the Consolidated Financial Statements
included in this Annual Report on Form 10-K). The results of operations of
these
Acquisitions are included in our consolidated statement of operations as of
and
since their respective dates of purchase. To finance the Acquisitions, we
expanded our $35,000 credit facility to $75,000 (See Notes 5 and 8 to the
Consolidated Financial Statements included in this Annual Report on Form 10-K).
Having completed the restructuring and acquisitions, the Company is now a global
sensor solutions company with a broad range of technologies and capabilities.
Our focus remains on engineered solutions where we can use our engineering
and
manufacturing talent and depth of knowledge and experience in sensors to provide
a complete solution to our customers, as well as “bundle” products together. We
also have a substantial end user business for high quality “off the shelf”
sensors and transducers used for test, instrumentation and process control.
A
key to our manufacturing strategy is leveraging the significant infrastructure
we now have in Shenzhen, China. This infrastructure has enabled us to reduce
costs and improve financial performance while continuing to provide our
customers with low cost, highly reliable products.
GROWTH
STRATEGY
Having
divested the low-margin Consumer business, the Company is now wholly engaged
in
pursuing aggressive growth in the Sensor business, with an established goal
of
achieving annual revenues of $250,000 by the end of fiscal year 2009. From
fiscal 2003 to fiscal 2007, the Company has grown annual revenues at a 40%
Compound Annual Growth Rate (“CAGR”) through a combination of organic growth and
acquisitions. To achieve our fiscal 2009 sales goal, the Company is targeting
an
average annual organic growth of 15%, which is consistent with historical
demonstrated performance. The Company targets custom-engineered medium to high
volume OEM applications for which the typical development cycle lasts from
6 to
24 months.
In
addition to the Company’s traditional OEM business, the Company has a growing
end user business as a result of recent acquisitions. Accelerometers, pressure
transducers, linear variable differential transformers (LVDTs) and derivative
linear displacement products made by the Company are all used by customers
for
applications in test and measurement, instrumentation and process control.
These
devices are packaged products (sense elements with amplification, compensation
and sometimes value-added) which carry a higher average selling price. The
Company is pursuing these sales through direct selling to high volume users,
new
distribution channels to small and medium volume users including private-label
agreements with established brands and through e-commerce on its own
website.
In
addition to the organic growth, management still believes there is room on
the
balance sheet to support the leveraged acquisition of companies that can provide
entry into new technologies, geographies and customer segments. The Company
will
continue to pursue acquisitions that make a good strategic fit without specific
timetables for closure.
Work
continues on integrating acquisitions for inherent synergies in sales and
marketing, engineering and manufacturing. To improve the ownership and
accountability on top-to-bottom results, the Company has recently organized
the
eight product families into four business “Groups”, with each Group having
responsibility for sales, engineering, operations and customer service of their
respective products. A Group Vice President has been assigned overall strategic
and profit/loss responsibility for the particular Group, with
finance/accounting, supply chain/information systems and strategic sourcing
remaining functional, shared resources.
The
organization of each Group, and associated Group VP is as follows:
·
|
PFG/Glen
MacGibbon: Pressure/Force
|
·
|
PVG/Vic
Chatigny: Position/Vibration/Piezo
|
·
|
TPG/Terence
Monaghan: Temperature/Optical
|
·
|
HCG/Jean-Francois
Allier: Humidity/Chemical/Gas
|
We
have been finalizing and testing this structure in fourth fiscal quarter of
2007, and will officially operate under this organization in fiscal
2008.
Trends.
We
are
expecting to maintain our organic and overall growth rates in net sales to
meet
or exceed the forecasted annual revenues of $250,000 by the end of fiscal 2009.
Additionally, sales and results of operations could be impacted by additional
acquisitions, though there is no specific timetable for such
transactions.
We
anticipate our overall average gross margins for our Sensor business to stay
within a range of approximately 42% to 44% in fiscal year 2008 as compared
to
gross margins of 43.7% and 46.6% for fiscal years 2007 and 2006,
respectively.
There
are
several factors impacting margins, including sales growth strategies, product
sales mix, exchange rates and our overall cost structure. 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%-7% CAGR, we expect to gain share
and grow our Sensor business through our willingness to customize, broad
technology portfolio and through our cost competitive structure. As a result
of
this growth strategy, we anticipate pursuing larger programs that may carry
lower gross margins than our historical business, which could influence our
overall sensor gross margins. The growth of our automotive applications would
be
an example of such a business. The continued appreciation of the Chinese
renminbi (“RMB”) relative to the U.S. dollar has resulted in lower margins since
a large portion of our products is manufactured in our China facility, where
a
large volume of our costs are denominated in RMB but sold in U.S. dollars.
Similarly, depreciation of the Euro relative to the dollar could create similar
pressure on gross margins on products sold in Europe. The Company continually
monitors costs and pursues various cost control measures and sales initiatives
to improve margins to offset increases to the aforementioned items impacting
our
margins.
While
we
expect gross margin to slowly decline as compared to previous years, we expect
operating margin to improve as a result of improved Selling, General and
Administrative expenses (i.e., “SGA” leverage). SGA as a percent of net sales
have declined to 28.1% in fiscal 2007, as compared to 32.1% and 36.1% in fiscal
2006 and 2005, respectively. It is through this leverage of operating
expenses that we expect to realize improved overall operating
margin.
Certain
expenses are expected to increase, including income taxes, applications
engineering and development expenses and compensation expense associated with
our variable compensation plan, which are anticipated to be partially offset
by
decreases in amortization of acquired intangible assets and interest expense.
The decrease in income tax expense is primarily a function of a lower overall
effective tax rate due to a larger portion of anticipated earnings to taxing
jurisdictions with lower tax rates and the recently announced increase in the
China tax rate from 10% to 15% effective January 2008. The impact of the
increase in the China tax rate during the year ended March 31, 2007 resulted
in
a decrease in income tax of approximately $187 due to the calculation of the
deferred tax assets at the higher rate. The increased applications engineering
and development costs reflect the Company’s continued focus on developing new
innovative products through internal research and development, and certain
identified programs which are forecasted to result in higher expenses in 2008
prior to generating sales revenue. Under the previous profit sharing incentive
plan, the Company did not make any accruals during the first half of fiscal
2007; however, with modifications to the plan, the Company accrued certain
amounts during the second half of fiscal 2007, and such accruals are expected
to
continue throughout 2008. We expect modest declines in amortization of acquired
intangibles and interest expense in future quarters as compared to the previous
quarters. The Company’s operations are expected to support these higher costs
and generate sufficient cash flows to both service and reduce our
debt.
Foreign
currency exchange gains and losses will impact the financial results of the
Company due to changes in foreign currency exchange rates relative to the US
dollar, especially with the RMB and Euro, which are likely to continue to
fluctuate. The Company has implemented certain risk management and hedging
strategies and the Company closely monitors exchange rates, but there is no
assurance that such financial impact will be mitigated.
The
Company currently manufactures from a leased facility in China. In order to,
among other things, control costs and to provide reliable and adequate capacity,
the Company is in the process of building a factory in China to replace the
current leased facility. The overall cost of the factory is expected to be
in
the range of $10,000 to $12,000 and should be constructed over the next year.
In
connection with the construction of the new facility, on March 1, 2006, the
Company entered into a definitive 50 year lease agreement for land in
Shenzhen, Guang Dong Province, China for a total cost of approximately $530.
The
Company broke ground and began construction in March 2007. The Company plans
to
finance the new facility through a combination of sources, including cash
generated from operations and through additional borrowings.
Please
refer to Item 1. Business in this Annual Report on Form 10-K for additional
details regarding the basis of the trends described above.
Establishment
of Offshore Holding Companies.
In the
quarter ended June 30, 2004, the Company reorganized its Asian operations under
an offshore holding company, Kenabell Holding Limited, a British Virgin Island
Company (“Kenabell Holding BVI”). As part of the reorganization, a new entity
was formed under Kenabell Holding BVI in the Cayman Islands, Measurement Limited
(“ML Cayman”). A significant portion of the Consumer business in Asia was
transferred into ML Cayman during the quarter ended June 30, 2004. These
holding companies were formed as part of a foreign tax planning restructuring,
and to facilitate the sale of assets of our Consumer Products business.
Accordingly, the gain on sale of the Consumer business was effectively not
taxed, since Kenabell Holdings BVI did not conduct business directly in Hong
Kong.
Measurement
Specialties Sensors (Asia) Limited (formerly named Measurement Limited,
organized in Hong Kong) owns all of the shares of Measurement Specialties
Sensors (China) Ltd. (formerly named Jingliang Electronics (Shenzhen) Co. Ltd,
organized in the Peoples Republic of China). Kenabell Holding BVI owns all
of
the shares of MSI Sensors (Asia) Limited and ML Cayman was subsequently sold
to
Fervent Group Limited effective December 1, 2005.
In
the
quarter ended March 31, 2005, as part of a foreign tax planning restructuring,
the Company completed the reorganization of its European subsidiaries, which
includes Entran SA and Humirel SA. This reorganization involved transferring
ownership of these subsidiaries to a Cyprus holding company under Kenabell
Holding BVI, named Acalon Holding Limited. In conjunction with this
reorganization, the ownership of Kenabell Holding BVI was also transferred
to
Measurement Specialties Foreign Holdings Corporation, a Delaware corporation.
All the companies are included in the consolidated financial statements of
the
group.
As
of
September 1, 2006, pursuant to a restructuring of certain of the Company’s
European operations, the Company established two new entities: MEAS Europe SAS
and its wholly-owned subsidiary MEAS France SAS. MEAS France SAS is the primary
French holding company and is the result of the consolidating and merging of
the
operations of Entran, Humirel, and ATEX. The reorganization was effected to
facilitate improved statutory reporting.
The
Company executed a restructuring of BetaTHERM Ireland Limited (“BetaTHERM
Ireland”) during the quarter ended March 31, 2007, whereby the ownership of
BetaTHERM’s U.S. operation was transferred to Measurement Specialties, Inc. from
BetaTHERM Ireland. This reorganization was part of the acquisition, a
requirement under our credit facility and provided a more efficient
organizational structure for operational and tax purposes
CHANGES
IN OUR BUSINESS
DISCONTINUED
OPERATIONS:
Effective
December 1, 2005, we completed the sale of the Consumer segment to Fervent
Group
Limited (FGL), including its Cayman Island subsidiary, ML Cayman. FGL is a
company controlled by the owners of River Display Limited (RDL), our long time
partner and primary supplier of consumer products in Shenzhen, China.
Accordingly, the related financial statements for the Consumer segment are
reported as discontinued operations.
All
comparisons in Management’s Discussion and Analysis for consolidated statements
of operations and consolidated statements of cash flows for each of the fiscal
years ended March 31, 2007, 2006 and 2005, and consolidated balance sheets
as of
March 31, 2007 and 2006, exclude the results of these discontinued operations
except as otherwise noted.
RECENT
ACCOUNTING PRONOUNCEMENTS
Recently
Adopted Accounting Standards:
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123R (Revised 2004), Share-Based
Payment.
SFAS
123R requires that the compensation cost relating to share-based payment
transactions be recognized in the financial statements, rather than disclosed
in
the footnotes to the financial statements. Effective April 1, 2006, the Company
adopted SFAS No. 123R using the modified-prospective transition method as
disclosed in Notes 1 and 15 to the consolidated financial statements include
in
the Annual Report on Form 10-K.
On
November 24, 2004, the FASB issued SFAS No. 151, Inventory
Cost - 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 generally accepted accounting
principles (“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. SFAS No. 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, SFAS No. 151 requires that allocation of fixed production overheads
to
conversion costs should be based on normal capacity of the production
facilities. The provisions in SFAS No. 151 are effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Companies must
apply
the standard prospectively. The adoption of SFAS No. 151 did not have a material
effect the Company’s financial position or results of operations.
Effective
April 1, 2006, the Company adopted disclosure requirements of Emerging Issues
Task Force (“EITF”) Issue No. 06-03,
How
Taxes Collected from Customers and Remitted to Governmental Authorities Should
be Presented in the Income Statement,
for tax
receipts on the face of their income statements. The scope of this guidance
includes any tax assessed by a governmental authority that is directly imposed
on a revenue-producing transaction between a seller and a customer and may
include, but is not limited to, sales, use, value added and some excise taxes.
The Company has historically presented such taxes on a net basis in net
sales.
In
May
2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections.
This
new standard replaces APB Opinion No. 20, Accounting
Changes,
and
SFAS 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, SFAS No. 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. SFAS No. 154 also provides that (1) a change in method
of depreciating or amortizing a long-lived non-financial 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 adoption of SFAS No. 154 did not have a material effect
on the Company’s financial position or results of operations.
On
September 13, 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) Topic
No. 108, “Financial Statements — Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements” (“SAB 108”). SAB 108 addresses how a registrant should evaluate
whether an error in its financial statements is material. The SEC staff
concluded in SAB 108 that materiality should be evaluated using both the
“rollover” and “iron curtain” methods. Registrants are required to comply with
the guidance in SAB 108 in financial statements for fiscal years ending after
November 15, 2006. The adoption of SAB 108 did not have a material effect on
the
Company’s financial position or results of operations.
Recently
Issued Accounting Pronouncements:
In
September 2006, the FASB issued No. 157, Fair
Value Measurements
. This
new standard provides guidance for using fair value to measure assets and
liabilities. The FASB believes the standard also responds to investors' requests
for expanded information about the extent to which companies measure assets
and
liabilities at fair value, the information used to measure fair value, and
the
effect of fair value measurements on earnings. SFAS 157 applies whenever other
standards require (or permit) assets or liabilities to be measured at fair
value
but does not expand the use of fair value in any new circumstances.
Currently,
over 40 accounting standards within GAAP require (or permit) entities to measure
assets and liabilities at fair value. Prior to SFAS 157, the methods for
measuring fair value were diverse and inconsistent, especially for items that
are not actively traded. The standard clarifies that for items that are not
actively traded, such as certain kinds of derivatives, fair value should reflect
the price in a transaction with a market participant, including an adjustment
for risk, not just the company's mark-to-market value. SFAS 157 also requires
expanded disclosure of the effect on earnings for items measured using
unobservable data.
Under
SFAS 157, fair value refers to the price that would be received to sell an
asset
or paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts. In this
standard, the FASB clarifies the principle that fair value should be based
on
the assumptions market participants would use when pricing the asset or
liability. In support of this principle, SFAS 157 establishes a fair value
hierarchy that prioritizes the information used to develop those assumptions.
The fair value hierarchy gives the highest priority to quoted prices in active
markets and the lowest priority to unobservable data, for example, the reporting
entity's own data. Under the standard, fair value measurements would be
separately disclosed by level within the fair value hierarchy.
The
provisions of SFAS 157 are effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. Earlier application is encouraged, provided that the reporting entity
has
not yet issued financial statements for that fiscal year, including any
financial statements for an interim period within that fiscal year. The Company
is currently quantifying the impact of SFAS No. 157.
On
July
13, 2006, Financial Accounting Standards Board Interpretation No. 48 (“FIN 48”),
Accounting
for Uncertainty in Income Taxes - An Interpretation of FASB Statement No.
109,
was
issued. FIN 48 clarifies the accounting for uncertainty in income tax recognized
in an enterprise's financial statements in accordance with FASB Statement No.
109, Accounting
for Income Taxes
(“SFAS
No. 109”) .
FIN 48
also prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The new FASB standard also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition.
The
evaluation of a tax position in accordance with FIN 48 is a two-step process.
The first step is a recognition process whereby the enterprise determines
whether it is more likely than not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. In evaluating whether
a tax position has met the more-likely-than-not recognition threshold, the
enterprise should presume that the position will be examined by the appropriate
taxing authority that has full knowledge of all relevant information. The second
step is a measurement process whereby a tax position that meets the
more-likely-than-not recognition threshold is calculated to determine the amount
of benefit to recognize in the financial statements. The tax position is
measured at the largest amount of benefit that is greater than 50% likely of
being realized upon ultimate settlement. The provisions of FIN 48 are effective
for fiscal years beginning after December 15, 2006. Earlier application is
permitted as long as the enterprise has not yet issued financial statements,
including interim financial statements, in the period of adoption. The
provisions of FIN 48 are to be applied to all tax positions upon initial
adoption of this standard. Only tax positions that meet the more-likely-than-not
recognition threshold at the effective date may be recognized or continue to
be
recognized upon adoption of FIN 48. The cumulative effect of applying the
provisions of FIN 48 should be reported as an adjustment to the opening balance
of retained earnings (or other appropriate components of equity or net assets
in
the statement of financial position) for that fiscal year. The Company is in
the
process of assessing the impact of adopting FIN 48, but based on preliminary
procedures, the Company does not expect the adoption of FIN 48 to have a
material impact on its results of operations and financial condition.
APPLICATION
OF CRITICAL ACCOUNTING POLICIES
The
preparation of financial statements and related disclosures in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of
the financial statements and revenues and expenses during the periods reported.
The following accounting policies involve “critical accounting estimates”
because they are particularly dependent on estimates and assumptions made by
management about matters that are highly uncertain at the time the accounting
estimates are made. In addition, while we have used our best estimates based
on
facts and circumstances available to us at the time, different estimates
reasonably could have been used in the current period, or changes in the
accounting estimates we used are reasonably likely to occur from period to
period which may have a material impact on the presentation of our financial
condition and results of operations. We review these estimates and assumptions
periodically and reflect the effects of revisions in the period that they are
determined to be necessary.
REVENUE
RECOGNITION:
Revenue
is recognized when earned, which occurs when the following four conditions
are
met: (i) persuasive evidence of an arrangement exists; (ii) delivery has
occurred or services have been rendered; (iii) the price to the buyer is fixed
or determinable; and (iv) collectability is reasonably assured. Certain products
may be sold with a provision allowing the customer to return a portion of
products. The Company provides for allowances for returns based upon historical
and estimated return rates. The amount of actual returns could differ from
estimates. Changes in estimated returns would be accounted for in the period
of
change.
The
Company utilizes manufacturing representatives as sales agents for certain
of
its products. Such representatives do not receive orders directly from
customers, take title to or physical possession of products, or invoice
customers. Accordingly, revenue is recognized upon shipment to the
customer.
On
January 30, 2004, Conair Corporation purchased certain assets of the Company’s
Thinner® branded bathroom and kitchen scale business, including worldwide rights
to the Thinner® brand name and exclusive rights to the Thinner® designs in North
America. The Company has accounted for the sale of this business under the
guidance of EITF 00-21. As a significant portion of the proceeds from the sale
was in fact an up-front payment for future lost margins, the majority of the
gain on sale has been deferred and was amortized into revenues in future periods
over the estimated remaining lives for those products sold to Conair. (See
Note
6 to the Consolidated Financial Statements of the Company included in this
Annual Report on Form 10-K for a discussion of the sale of the business to
Conair).
ACCOUNTS
RECEIVABLE:
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The majority of the Company’s accounts receivable is due from
manufacturers of electronic, automotive, military and industrial products.
Credit is extended based on an evaluation of a customer’s financial condition
and, generally, collateral is not required. Accounts receivable are generally
due within 30 to 90 days and are stated at amounts due from customers net of
allowances for doubtful accounts and other sales allowances. Accounts receivable
outstanding longer than the contractual payment terms are considered past due.
Amounts collected on trade accounts receivable are included in net cash provided
by operating activities in the consolidated statements of cash flows. The
allowance for doubtful accounts is the Company’s best estimate of the amount of
probable credit losses in the Company’s existing accounts receivable. The
Company determines its allowance by considering a number of factors, including
the length of time trade accounts receivable are past due, the Company’s
previous loss history, the customer’s current ability to pay its obligation to
the Company, and the condition of the general economy and the industry as a
whole. The Company reviews its allowance for doubtful accounts quarterly. Actual
uncollectible accounts could exceed the Company’s estimates and changes to its
estimates will be accounted for in the period of change. Account balances are
charged against the allowance after all means of collection have been exhausted
and the potential for recovery is considered remote. The Company does not have
any off-balance-sheet credit exposure related to its customers.
INVENTORIES:
Inventories
are valued at the lower of cost or market (‘LCM’). For purposes of analyzing the
LCM, market is current replacement cost. Cost is determined on a standard cost
basis which approximates historical cost. Market cannot exceed the net
realizable value (i.e., estimated selling price in the ordinary course of
business less reasonably predicted costs of completion and disposal) and market
shall not be less than net realizable value reduced by an allowance for an
approximately normal profit margin. In evaluating LCM, management also
considers, if applicable, other factors as well, including known trends, market
conditions, currency exchange rates and other such issues. If the utility of
goods is impaired by damage, deterioration, obsolescence, changes in price
levels or other causes, a loss shall be charged as cost of sales in the period
which it occurs.
The
Company makes purchasing decisions principally based upon firm sales orders
from
customers, the availability and pricing of raw materials and projected customer
requirements. Future events that could adversely affect these decisions and
result in significant charges to our operations include slowdown in customer
demand, customer delay in the issuance of sales orders, miscalculation of
customer requirements, technology changes that render raw materials and finished
goods obsolete, loss of customers and/or cancellation of sales orders. The
Company establishes reserves for its inventories to recognize estimated
obsolescence and unusable items on a continual basis.
Products
that have existed in inventory for one calendar year with no usage and that
have
no current demand or no expected demand, will be considered obsolete and
reserved. Obsolete inventory approved for disposal is written-off against the
reserve. Furthermore, consideration is given to ultimate circumstances when
recording inventory reserves and the disposal of inventory considered obsolete.
Market conditions surrounding products are also considered periodically to
determine if there are any net realizable valuation matters, which would require
a write-down of any related inventories. If market or technological conditions
change, it may result in additional inventory reserves and write-downs, which
would be accounted for in the period of change. The level of inventory reserves
reflects the nature of the industry whereby technological and other changes,
such as customer buying requirements, result in impairment of
inventory.
GOODWILL
IMPAIRMENT:
Goodwill
represents the excess of the aggregate purchase price over the fair value of
the
net assets acquired in a purchase business combination. As of March 31, 2007,
the Company has tested its goodwill for impairment under the provisions of
SFAS
No. 142, and no impairment charges were deemed necessary. See Note 1 to the
Consolidated Financial Statements of the Company included in this Annual Report
on Form 10-K for further discussion of the impact of SFAS No. 142 on the
Company’s financial position and results of operations.
Per
SFAS
No. 142, management assesses goodwill for impairment at the reporting unit
level
on an annual basis at fiscal year end or more frequently under certain
circumstances. The goodwill impairment test is a two step test. Under the first
step, the fair value of the reporting unit is compared to its carrying value
(including goodwill). If the fair value of the reporting unit is less than
its
carrying value, an indication of goodwill impairment exists for the reporting
unit, and the enterprise must perform step two of the impairment test
(measurement). Under step two, an impairment loss is recognized for any excess
of the carrying amount of the reporting unit’s goodwill over the implied fair
value. The implied fair value of goodwill is determined by allocating the fair
value of the reporting unit in a manner similar to a purchase price allocation,
in accordance with SFAS No. 141, Business Combinations. The residual fair value
after this allocation is the implied fair value of the reporting unit goodwill.
Fair value of the reporting unit is determined using a discounted cash flow
analysis. If the fair value of the reporting unit exceeds its carrying value,
step two does not need to be performed.
In
evaluating goodwill for impairment, the fair value of the Company’s reporting
unit exceeded its carrying value in the fiscal years ended March 31, 2007,
2006
and 2005, and accordingly, there was no impairment of the Company’s
goodwill.
ACQUISITIONS:
Acquisitions
are recorded as of the purchase date, and are included in the consolidated
financial statements from the date of acquisition. In all acquisitions, the
purchase price of the acquired business is allocated to the assets acquired
and
liabilities assumed at their fair values on the date of the acquisition. The
fair values of these items are based upon management’s best estimates. Certain
of the acquired assets are intangible in nature, including customer
relationships, patented and proprietary technology, covenants not to compete,
trade names and order backlog, which are stated at purchase date fair value
less
accumulated amortization. Amortization is computed by the straight-line method
over the estimated useful lives of the assets. The excess purchase price over
the amounts allocated to the assets is recorded as goodwill. All such valuation
methodologies, including the determination of subsequent amortization periods,
involve significant judgments and estimates. Different assumptions and
subsequent actual events could yield materially different results.
Purchased
intangibles and goodwill are usually not deductible for tax purposes with stock
acquisitions. However, purchase accounting requires for the establishment of
deferred tax liabilities on purchased intangible assets (excluding goodwill)
to
the extent the carrying value for the financial reporting exceeds the tax
basis.
LONG
LIVED ASSETS:
The
Company accounts for the impairment of long-lived assets and purchased
intangible assets subject to amortization in accordance with SFAS No. 144,
‘Accounting for the Impairment of Disposal or Long-Lived Assets’. Long-lived
assets, such as property, plant, and equipment, and purchased intangibles
subject to amortization are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of
an
asset exceeds its estimated future cash flows, an impairment charge is
recognized in the amount by which the carrying amount of the asset exceeds
the
fair value of the asset. Assets to be disposed of would be separately presented
in the consolidated balance sheets and reported at the lower of the carrying
amount or fair value less costs to sell, and are no longer depreciated. The
assets and liabilities of a disposed group classified as held for sale would
be
presented separately in the appropriate asset and liability sections of the
consolidated balance sheets.
Management
assesses the recoverability of long-lived assets whenever events or changes
in
circumstance indicate that the carrying value may not be recoverable. The
following factors, if present, may trigger an impairment review:
· Significant
underperformance relative to expected historical or projected future
operating results;
|
|
· Significant
negative industry or economic
trends;
|
· Significant
decline in stock price for a sustained period; and
|
|
· A
change in market capitalization relative to net book
value.
|
If
the
recoverability of these assets is unlikely because of the existence of one
or
more of the above-mentioned factors, an impairment analysis is performed using
a
projected discounted cash flow method at the lowest level at which cash flows
is
identifiable. In the event impairment is indicated, fair value is determined
using the discounted cash flow method, appraisal or other accepted
techniques.
Management
must make assumptions regarding estimated future cash flows and other factors
to
determine the fair value of these assets. Other factors could include, among
other things, quoted market prices, or other valuation techniques considered
appropriate based on the circumstances. If these estimates or related
assumptions change in the future, an impairment charge may need to be recorded.
Impairment charges would be included in our consolidated statements of
operations, and would result in reduced carrying amounts of the related assets
on our consolidated balance sheets.
This
process was completed in the fiscal years ended March 31, 2007, 2006 and 2005
for asset values as of these respective dates. According to the guidelines
established under SFAS 144, there was no impairment.
FOREIGN
CURRENCY TRANSLATION AND TRANSACTIONS:
The
functional currency of the Company’s foreign operations is the applicable local
currency. The foreign subsidiaries’ assets and liabilities are translated into
United States dollars using exchange rates in effect at the balance sheet date
and their operations are translated using the average exchange rates prevailing
during the year. The resulting translation adjustments are recorded as a
component of other comprehensive income (loss). Accumulated comprehensive income
(loss) consists of net income for the period and the cumulative impact of
unrealized foreign currency translation adjustments.
The
Company is subject to foreign exchange risk for foreign currency denominated
transactions, such as receivables and payables. Foreign currency transaction
gains and losses are recorded in other income and expenses in the Company’s
consolidated statements of operations.
INCOME
TAXES:
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry-forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
Realization
of a deferred tax asset is dependent on generating future taxable income, which
is reviewed annually. The Company evaluates all positive and negative evidence
in evaluating whether a valuation allowance is required. Consideration of
current and expected results of the Company, as well as the status of
litigation, indicated that a valuation allowance is not needed. (See Notes
12
and 15 to the Consolidated Financial Statements of the Company in this Annual
Report on Form 10-K for a discussion regarding income taxes and the status
of
the Company’s litigation.) The Company annually evaluates positive and negative
evidence in determining whether a valuation allowance on deferred tax assets
is
required. This evaluation is primarily based upon projected future earnings
and
various tax strategies.
Transfer
pricing refers to the prices that one member of a group of related companies
charges to another member of the group for goods, services, or the use of
intellectual property. If two or more affiliated companies are located in
different countries, the laws or regulations of each country generally will
require that transfer prices be the same as those charged by unrelated companies
dealing with each other at arm’s length. If one or more of the countries in
which our affiliated companies are located believes that transfer prices were
manipulated by our affiliate companies in a way that distorts the true taxable
income of the companies, the laws of countries where our affiliated companies
are located could require us to redetermine transfer prices and thereby
reallocate the income of our affiliate companies in order to reflect these
transfer prices. Any reallocation of income from one of our companies in a
lower
tax jurisdiction to an affiliated company in a higher tax jurisdiction would
result in a higher overall tax liability to us. Moreover, if the country from
which the income is being reallocated does not agree to the reallocation, the
same income could be subject to taxation by both countries.
WARRANTY
RESERVE:
The
Company’s sensor products generally are marketed to end users under warranties
of up to one year. 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.
CONTINGENCIES
AND LITIGATION:
Liabilities
for loss contingencies arising from claims, assessments, litigation, fines,
and
penalties and other sources are recorded when it is probable that a liability
has been incurred and the amount of the assessment and/or remediation can be
reasonably estimated. Legal costs incurred in connection with loss contingencies
are expensed as incurred. Such accruals are adjusted as further information
develops or circumstances change.
We
periodically assess the potential liabilities related to any lawsuits or claims
brought against us. While it is typically very difficult to determine the timing
and ultimate outcome of these actions, we use our best judgment to determine
if
it is probable that we will incur an expense related to a settlement for such
matters and whether a reasonable estimation of such probable loss, if any,
can
be made. Given the inherent uncertainty related to the eventual outcome of
litigation, it is possible that all or some of these matters may be resolved
for
amounts materially different from any estimates that we may have made with
respect to their resolution.
STOCK
BASED COMPENSATION:
The
Company has three active share-based compensation plans, which are more fully
described in Note 15 to the Consolidated Financial Statements of the Company
in
this Annual Report on Form 10-K. Prior to fiscal 2007, the Company applied
the
intrinsic value method prescribed in Accounting Principles Board (APB) Opinion
No. 25, Accounting
for Stock Issued to Employees,
and
accordingly, recognized no compensation expense for stock option grants to
employees. There was no employee compensation expense recognized in the income
from continuing operations in fiscal 2006 and 2005 as a result of options issued
to employees.
Effective
April 1, 2006, the Company adopted SFAS No. 123R, Share-Based
Payment,
utilizing the modified prospective approach. This statement replaces SFAS 123,
Accounting
for Stock-Based Compensation
and
supersedes APB 25. Under the modified prospective approach, SFAS 123R applies
to
new awards and to awards that were outstanding and not vested on April 1, 2006,
as well as those that are subsequently modified, repurchased or cancelled.
Under
the modified prospective approach, compensation cost recognized in the year
ended March 31, 2007 includes compensation cost for all share-based payments
granted prior to, but not yet vested as of April 1, 2006, based on the
grant-date fair value estimated in accordance with the original provisions
of
SFAS 123, and compensation cost for all share-based payments granted subsequent
to April 1, 2006, based on the grant-date fair value using the Black-Scholes
option pricing model in accordance with the provisions of SFAS 123R. Prior
periods were not restated to reflect the impact of adopting the new
standard.
The
Company receives a tax deduction for certain stock options and stock option
exercises during the period the options are exercised, generally for the excess
of the fair value of the stock over the exercise price of the options at the
exercise date. Prior to adoption of SFAS 123R, the Company reported all tax
benefits resulting from the award of equity instruments as operating cash flows
in its consolidated statements of cash flows. In accordance with SFAS 123R,
the
Company is required to report excess tax benefits from the award of equity
instruments as financing cash flows. Since the Company is currently in a net
operating loss carry-forward position, the Company applies the tax-law-ordering
approach, whereby the tax benefits are considered realized for current-year
exercises of share-based compensation awards. These amounts are considered
realized because such deductions offset taxable income on the Company’s tax
return, thereby reducing the amount of income subject to tax. The current-year
stock compensation deduction is used to offset taxable income before the NOL
carry-forwards because all current-year deductions take priority over NOL
carry-forwards. When the tax deduction exceeds the compensation expense, the
tax
benefit associated with any excess deduction is considered an excess tax
benefit, or “windfall”. The windfall portion of the share-based compensation
deduction reduces income tax payable and is credited to additional paid-in
capital (“APIC”). The windfall credited to APIC increases the Company’s APIC
pool available to offset future tax deficiencies (“shortfalls”). Shortfalls are
the amount the compensation expense exceeds the tax deduction.
RESULTS
OF OPERATIONS
FISCAL
YEAR ENDED MARCH 31, 2007 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2006 (in
thousands, except percentages)
ANALYSIS
OF CONSOLIDATED STATEMENT OF OPERATIONS
|
|
For
the years ended Mar 31,
|
|
Percent
|
|
(Amounts
in thousands, except per share amounts )
|
|
2007
|
|
2006
|
|
Change
|
|
Change
|
|
Net
sales
|
|
$
|
200,250
|
|
$
|
121,417
|
|
$
|
78,833
|
|
|
64.9
|
%
|
Cost
of goods sold
|
|
|
112,803
|
|
|
64,791
|
|
|
48,012
|
|
|
74.1
|
%
|
Gross
profit
|
|
|
87,447
|
|
|
56,626
|
|
|
30,821
|
|
|
54.4
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative
|
|
|
56,346
|
|
|
39,075
|
|
|
17,271
|
|
|
44.2
|
%
|
Non-cash
equity based compensation (SFAS 123R)
|
|
|
2,887
|
|
|
-
|
|
|
2,887
|
|
|
100.0
|
%
|
Amortization
of acquired intangibles
|
|
|
4,464
|
|
|
1,767
|
|
|
2,697
|
|
|
152.6
|
%
|
Litigation
settlment expenses
|
|
|
1,275
|
|
|
-
|
|
|
1,275
|
|
|
100.0
|
%
|
Total operating
expenses
|
|
|
64,972
|
|
|
40,842
|
|
|
24,130
|
|
|
59.1
|
%
|
Operating
income
|
|
|
22,475
|
|
|
15,784
|
|
|
6,691
|
|
|
42.4
|
%
|
Interest
expense, net
|
|
|
6,106
|
|
|
2,066
|
|
|
4,040
|
|
|
195.5
|
%
|
Other
expense (income)
|
|
|
761
|
|
|
167
|
|
|
594
|
|
|
355.7
|
%
|
Income
from continuing operations before minority interest and income
taxes
|
|
|
15,608
|
|
|
13,551
|
|
|
2,057
|
|
|
15.2
|
%
|
Minority
interest, net of income taxes
|
|
|
524
|
|
|
|
|
|
524
|
|
|
100.0
|
%
|
Income
tax expense from continuing operations
|
|
|
3,127
|
|
|
3,224
|
|
|
(97
|
)
|
|
-3.0
|
%
|
Income
from continuing operations
|
|
|
11,957
|
|
|
10,327
|
|
|
1,630
|
|
|
15.8
|
%
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations before income taxes
|
|
|
115
|
|
|
6,695
|
|
|
(6,580
|
)
|
|
-98.3
|
%
|
Income
tax expense from discontinued operations
|
|
|
(6
|
)
|
|
1,527
|
|
|
(1,533
|
)
|
|
-100.4
|
%
|
Income
from discontinued operations, before gain
|
|
|
121
|
|
|
5,168
|
|
|
(5,047
|
)
|
|
-97.7
|
%
|
Gain
on disposition of discontinued operations (net of income
taxes)
|
|
|
2,156
|
|
|
9,039
|
|
|
(6,883
|
)
|
|
-76.1
|
%
|
Income
from discontinued operations
|
|
|
2,277
|
|
|
14,207
|
|
|
(11,930
|
|
|
-84.0
|
%
|
Net
income
|
|
|
14,234
|
|
|
24,534
|
|
$ |
(10,300
|
)
|
|
-42.0
|
%
|
Net
Sales.
Consolidated net sales hit a record annual level in fiscal 2007, and increased
$78,833 or
64.9%
from $121,417 to $200,250. Net sales from 2007 and 2006 Acquisitions totaled
$60,771, and organic net sales increased $21,969 or 18.7%, defined as “organic
growth”.
The
strong organic growth for the year was primarily the result of growth in sales
with our largest customer, Sensata, as well as higher sales in the piezo panels,
force, optical, humidity and vibration product lines. Growth with Sensata was
primarily a result of their continued penetration of sensors used in Electronic
Stability Control (ESC) systems and direct gas injection applications, as well
as the introduction of force sensors used in occupant weight sensing, all of
which utilize the Company’s proprietary Micro-fused technology. We enjoyed
strong growth in our Humidity products, largely as a result of continued
penetration of windshield fogging prevention applications, as well as diesel
engine management applications for heavy truck and off-road equipment. Growth
in
our Piezo/Panels product line was primarily due to strong sales of sensors
used
in medical applications and computer/business equipment products as compared
to
last year, as well as strong sales of our recently introduced penetration panels
used in security applications and our piezo-based traffic sensors. Optical
sales
increased reflecting higher order demand and broader adoption by a number of
medical end-use customers. Growth in our Vibration products reflected our
continued success with our newly introduced line of accelerometers targeting
the
automotive crash test market and vibration monitoring applications. Finally,
with the sale of the Consumer business, the sale of our load cells for consumer
scale applications are now included in our third party sensor sales, boosting
sales for our Force products.
Gross
Margin.
Overall, gross margin (gross profit as a percent of net sales) decreased to
43.7% for the fiscal year ended March 31, 2007 from 46.6% for the fiscal year
ended March 31, 2006.
The
decline in margin is primarily due to sales mix, resulting from, among other
things, higher sales with our largest customer, Sensata, which serves the
automotive market and carries lower gross margin than our average, as well
as
increased optical sales which also carry a lower gross margin. Additionally,
we
have moved selected low volume, high pressure and/or difficult to manufacture
oil-filled products from our China operation to the Fremont operation which
has
decreased the gross margin in the pressure line, but should result in improved
service to our customers. The change in exchange rate of the RMB relative to
the
US dollar, along with increased commodity costs, also negatively impacted
margins.
On
an
ongoing basis our gross margin for Sensors will fluctuate due to product mix,
sales volume, raw material costs, foreign currency exchange rates and other
such
factors. The increases in costs should be partially offset by sales growth
in
OEM platforms for automotive and in medical applications, increased prices
and
improved supply chain dynamics. Overall, margins are expected to remain within
a
range 42% to 44% next fiscal year.
Operating
Expense.
Operating expenses increased $24,130 from $40,842 to $64,972. As a percent
of
net sales, operating expense declined to 32.4% from 33.6%. Approximately
$14,294
of the $24,130 increase was associated with companies acquired in fiscal
2006 or
2007, as well as the increase in stock-based compensation expense of $2,887
with
the adoption of SFAS 123R, $2,697 increase in amortization of acquired
intangible assets, approximately $1,600 of compensation expense under the
incentive compensation plan and $1,275 in costs associated with the settlement
of legal matters.
Selling,
General and Administrative.
Selling,
general and administrative (“SG&A”) expenses, which includes application and
development engineering expense, increased $17,271 to $56,346 in fiscal 2007
from $39,075 in fiscal 2006. As a percent of net sales, SG&A decreased from
32.1% to 28.1% of net sales. Approximately $14,534 of the increase in SG&A
reflects the impact of SG&A due to acquired companies. The majority of the
remaining increase is associated with the approximately $1,600 incentive
compensation expense in fiscal 2007.
Litigation
Settlement Expenses. At
March
31, 2007, the Company accrued $1,275 in litigation settlement expenses
associated with the settlement of the DeWelt and Samuel litigation (See Note
15
to the Consolidated Financial Statements included in this Annual Report filed
on
Form 10-K). Additionally, the Company incurred approximately $200 in legal
fees
during 2007 specifically associated with these two matters which are included
in
SG&A expenses and not included in the litigation settlement
expenses.
Amortization
of Acquired Intangibles.
The
$2,697 increase in amortization of acquired intangibles subject to amortization
to $4,464 for the year ended March 31, 2007, directly relates to the increase
in
acquired intangible assets and the timing of the Acquisitions. Effective April
1, 2006, the Company purchased YSI Temperature and BetaTHERM, and approximately
$10,751 in acquired intangible assets were assigned as part of these two
acquisitions. The amortization of intangibles for 2007 represents a full year
of
amortization. Acquisitions in fiscal 2006 were effective at different dates
and
at the end of fiscal 2006, and the prior year amortization was lower because
it
did not represent a full twelve months of amortization of acquired intangible
assets.
Interest
Expense, Net.
The
$4,040 increase in interest expense to $6,106 for the year ended March 31,
2007
is primarily attributed to the increase in average debt outstanding. Overall,
average borrowings during fiscal 2007 increased to $67,407 from $20,213 for
fiscal 2006. Average interest rates decreased to 8.40% from 9.45%. The increase
in debt was due to the Acquisitions.
Other
Expense/Income, Net.
Other
expense increased to $761 for the year ended March 31, 2007 from $167 for the
same period last year. The fluctuation is mainly attributed to the increase
in
foreign currency exchange losses of approximately $767 during fiscal 2007,
as
compared to $300 the prior year, which was mostly due to the change in the
RMB
exchange rate relative to the US dollar.
Income
Taxes.
Our overall effective tax rate from continuing operations was approximately
20.7% during the year ended March 31, 2007, as compared to 23.8% last year.
The
overall decrease in the effective income tax rate reflects certain adjustments
recorded during the prior year increasing income tax expenses and a higher
portion of taxable income earned during the current fiscal year in tax
jurisdictions with lower tax rates. During the second quarter of fiscal 2006,
the Company recorded a $680 adjustment, which increased income tax expense,
to
revalue U.S. net deferred tax assets based on a lower estimated U.S. effective
tax rate resulting from larger apportionment to a state with a lower tax rate.
The impact of the adjustments recorded during the prior year increased the
overall tax rate by 5 points.
The
Company’s overall effective rate in 2007 was impacted by a higher portion of
taxable income earned in tax jurisdictions with lower tax rates. The
statutory
tax rates for trading operations in China and Ireland are 10% and 12%,
respectively. Additionally, there was a decrease in profitability in
the U.S.,
which carries a higher tax rate, with the added operating expenses associated
with the implementation of SFAS 123R, litigation settlement charges and
higher
interest expense. More than offsetting the impact of the jurisdictions
with lower tax rates, the Company accrued an additional $620 in income tax
expense during the quarter ended March 31, 2007 in conjunction with the
finalization of the BetaTHERM reorganization in the fourth quarter, and the
evaluation of the final structure and tax elections.
Due
to,
among other things, the volume of manufacturing in the U.S. and our net
operating loss carry-forwards, we do not expect the American Jobs Creation
Act
of 2004 to have an immediate or significant impact on our effective tax
rates.
Discontinued
Operations.
As part
of the sale agreement of the Consumer Products segment to Fervent Group
Limited
(FGL), the Company could have earned an additional $5,000 if certain performance
criteria (sales and margin targets) were met within the first year. At
December
31, 2006, the Company recorded $2,156 of the earn-out, because a portion
of the
earn-out targets were met. This amount is net of imputed interest, payable
over
eight quarters, reported in the consolidated statements of operations as
the
gain on disposition of discontinued operations, and the related receivable
is
included in the condensed consolidated balance sheets as current and non-current
portions of promissory note receivable. Cash flows from discontinued operations
are reported separately in the statement of cash flows, and the absence
of cash
flows from discontinued operations is not expected to have a material adverse
affect on the future liquidity and capital resources of the
Company.
FISCAL
YEAR ENDED MARCH 31, 2006 COMPARED TO FISCAL YEAR ENDED MARCH 31,
2005
(in
thousands, except percentages)
ANALYSIS
OF CONSOLIDATED STATEMENT OF OPERATIONS:
|
|
|
|
|
|
|
|
Percent
|
|
(Amounts
in thousands)
|
|
2006
|
|
2005
|
|
Change
|
|
Change
|
|
Net
sales
|
|
$
|
121,417
|
|
$
|
92,268
|
|
$
|
29,149
|
|
|
31.6
|
%
|
Cost
of goods sold
|
|
|
64,791
|
|
|
45,226
|
|
|
19,565
|
|
|
43.3
|
%
|
Gross
profit
|
|
|
56,626
|
|
|
47,042
|
|
|
9,584
|
|
|
20.4
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative
|
|
|
39,075
|
|
|
33,253
|
|
|
5,822
|
|
|
17.5
|
%
|
Amortization
of acquired intangibles
|
|
|
1,767
|
|
|
774
|
|
|
993
|
|
|
128.3
|
%
|
Total
operating expenses
|
|
|
40,842
|
|
|
34,027
|
|
|
6,815
|
|
|
20.0
|
%
|
Operating
income
|
|
|
15,784
|
|
|
13,015
|
|
|
2,769
|
|
|
21.3
|
%
|
Interest
expense, net
|
|
|
2,066
|
|
|
637
|
|
|
1,429
|
|
|
224.3
|
%
|
Foreign
currency exchange and other expense (income)
|
|
|
167
|
|
|
(90
|
)
|
|
257
|
|
|
-285.6
|
%
|
Income
from continuing operations before minority interest and income
taxes
|
|
|
13,551
|
|
|
12,468
|
|
|
1,083
|
|
|
8.7
|
%
|
Minority
interest, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense from continuing operations
|
|
|
3,224
|
|
|
2,688
|
|
|
536
|
|
|
19.9
|
%
|
Income
from continuing operations
|
|
|
10,327
|
|
|
9,780
|
|
|
547
|
|
|
5.6
|
%
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations before income taxes
|
|
|
6,695
|
|
|
6,608
|
|
|
87
|
|
|
1.3
|
%
|
Income
tax expense from discontinued operations
|
|
|
1,527
|
|
|
1,562
|
|
|
(35
|
)
|
|
-2.2
|
%
|
Income
from discontinued operations, before gain
|
|
|
5,168
|
|
|
5,046
|
|
|
122
|
|
|
2.4
|
%
|
Gain
on disposition of discontinued operations (net of income
tax)
|
|
|
9,039
|
|
|
-
|
|
|
9,039
|
|
|
-
|
|
Income
from discontinued operations
|
|
|
14,207
|
|
|
5,046
|
|
|
9,161
|
|
|
181.5
|
%
|
Net
income
|
|
|
24,534
|
|
|
14,826
|
|
|
9,708
|
|
|
65.5
|
%
|
The
consolidated financial statements for the fiscal years ended March 31, 2006
and
2005 include the results of the continuing operations of the Company. The
Company sold the Consumer business effective December 1, 2005, and accordingly,
the Consumer business is classified as discontinued operations in the
consolidated financial results for all periods presented.
Net
Sales.
Net
sales for 2006 increased $29,149 or 31.6% from $92,268 to $121,417. Net sales
from fiscal 2005 and fiscal 2006 acquisitions totaled $18,078 and $34,789,
respectively, and organic net sales increased $12,438, or 16.8%. The increase
in
net sales in the fiscal year ended March 31, 2006 is primarily the result of
increased demand in our pressure, force, humidity, Piezo Film and traffic sensor
product lines. Contributing significantly to the growth of pressure
and humidity lines was continued expansion of existing and new platforms in
automotive and off-road vehicles. The Company’s pressure products were
also capturing increasing market share in medical applications. Piezo Film
growth was occurring in the consumer goods applications and in anti-tamper
devices used in encryption security and in automatic teller machines
(“ATMs”).
Gross
Margin.
Overall, gross margin decreased to 46.6% for the fiscal year ended March 31,
2006 from 51.0% for the fiscal year ended March 31, 2005. Gross margin as a
percent of net sales for our base Sensor business (which excludes the effects
of
Acquisitions in 2006 and 2005) decreased to 51.5% for the fiscal year ended
March 31, 2006 from 53.4% for the fiscal year ended March 31, 2005. The decline
in our overall margins and margins of our traditional Sensor business was due
to
several factors, including Acquisitions and a shift in sales to products with
lower margins and reductions in pricing to secure a higher volume of business,
as well as the impact of the appreciation of the RMB.
Operating
Expense.
Operating expenses in 2006 increased $6,815 or 20.0% from $34,027 to $40,842
primarily as a result of the Acquisitions. As a percent of net sales, operating
expense declined to 33.6% from 36.9%. Approximately $1,965 of the $6,815
increase was associated with companies acquired in fiscal 2006, as well as
the
increase in wages to support the increase in sales.
Selling,
General and Administrative.
SG&A
expenses increased $5,822 or 17.5% from $33,253 in fiscal 2005 to $39,075 in
fiscal 2006. The increase in SG&A costs mainly reflect the impact of the
Acquisitions and related integration costs, and additional sales and engineering
staff to support higher sales. As a percentage of net sales, SG&A costs
actually declined from 36.1% to 32.2%, reflecting net sales increasing at a
higher rate than costs, improved leverage by consolidating operations, and
various cost control measures, including lower employee profit sharing and
lower
professional fees. The prior year’s professional fees were higher than normal
primarily because of the costs associated with the initial implementation of
Sarbanes-Oxley requirements.
Amortization
of Acquired Intangibles.
The $993
increase in amortization of acquired intangibles subject to amortization to
$1,767 for the year ended March 31, 2006 directly relates to the Acquisitions
and the timing of the Acquisitions. The amortization for 2006 represents a
full
year of amortization for the intangibles from the Acquisitions occurring in
fiscal 2005, since the Acquisitions were effective at different dates throughout
2005. The prior year amortization does not represent a full twelve months of
amortization.
Interest
Expense, Net.
The
$1,429 increase in interest expense to $2,066 for the year ended March 31,
2006
is primarily attributable to the increase in average debt outstanding and an
increase in interest rates. Overall, average borrowings during fiscal 2006
increased to $20,213 from $8,455 for fiscal 2005. Average interest rates
increased to 9.45% from 7.26%. The increase in debt was due to the
Acquisitions.
Other
Expense/Income, Net.
Other
expense/income fluctuated to an expense of $167 for the year ended March 31,
2006 from income of $90 for the prior fiscal year. The fluctuation to an expense
from income is mainly attributed to the foreign currency exchange loss of
approximately $300 incurred during fiscal 2006, which was mainly due to the
change in the RMB rate relative to the US dollar.
Income
Taxes.
Our overall effective tax rate from continuing operations was approximately
23.8% during the year ended March 31, 2006. Partially offsetting the impact
of
the of the adjustments noted below which increased income tax expense and our
overall tax rate, the shift in earnings before taxes to jurisdictions with
lower
tax rates contributed to lowering our tax rate.
There
was
an adjustment of approximately $680 during 2006 that increased income tax
expenses. This adjustment was the revaluation of the related U.S. net
deferred tax assets based on a lower estimated effective U.S. tax rate. The
lower overall U.S. effective tax rate was the result of a larger apportionment
to a state with a lower tax rate, which was mainly due to centralizing
the Company’s principal headquarters and much of the manufacturing operations in
the U.S. to Hampton, Virginia from New Jersey. As a result of this change in
apportionment, the effective tax rate in the United States decreased from 40%
to approximately 37%.
The
shift
in earnings can be attributed to, among other things, the changes in our
business with the sale of the Consumer business and the impact of the
acquisitions during the two prior years, specifically with regard to the
amortization of acquired intangibles and higher interest expense.
Discontinued
Operations.
The
income from discontinued operations for the fiscal year ended March 31, 2006
consists of the gain from the sale of the Consumer business and the income
from
the Consumer business prior to the sale. Aside from this gain, income from
discontinued operations was relatively flat year over year, reflecting slightly
higher income in fiscal 2006. The higher income in fiscal 2006 is the result
of
higher bathroom scale sales.
LIQUIDITY
AND CAPITAL RESOURCES
Operating
working capital for continuing operations (accounts receivable plus inventory
less accounts payable) increased by $21,120 from $33,143 as of March 31, 2006
to
$54,263 as of March 31, 2007. As a percent of net sales, operating working
capital decreased slightly to 27.1% at March 31, 2007 from 27.3% at March 31,
2006. The overall increase in operating working capital was attributable to
the
increase in accounts receivable of $15,393 from $19,381 at March 31, 2006 to
$34,774 at March 31, 2007, an increase in inventory of $12,132 from $25,099
at
March 31, 2006 to $37,231 at March 31, 2007, and slightly offset by the $6,405
increase in accounts payable from $11,337 at March 31, 2006 to $17,742 at March
31, 2007. The increases in the respective balance sheet accounts, including
accounts receivable, inventory and accounts payable, are due mainly to the
Acquisitions, as well as to support increased sales. The Company acquired
operating working capital of $7,865 effective April 1, 2006 with the purchase
of
BetaTHERM and YSI Temperature.
Cash
provided from operating activities was $13,974 for the year ended March 31,
2007, as compared to $11,726 provided for the fiscal year ended March 31,
2006.
The $2,248 increase in cash provided by operations is mainly due to the increase
in income from continuing operations. The total of all adjustments to reconcile
income from continuing operations to net cash provided by operating activities
from continuing operations was a net use of cash of $2,017 for the year ended
March 31, 2007, representing the uses of cash from such items as increases
in
receivables and inventories, which were mostly offset by the net cash provided
from such items as increases in trade payables and the adjustments for
depreciation and non-cash equity compensation.
Net
cash
used in investing activities was $53,002 for the year ended March 31, 2007
as
compared to $14,730 relative to the corresponding period last year. The increase
in net cash used in investing activities is primarily due to the acquisitions
of
YSI Temperature and BetaTHERM, which were much larger acquisitions than HLP
and
ATEX during the prior year. In addition, capital spending decreased to $7,305
for the year ended March 31, 2007 from $8,011 for the twelve months ended
March
31, 2006.
Financing
activities for the year ended March 31, 2007 provided $35,022 of net cash
mainly
reflecting the net proceeds from the amended and expanded credit facilities
and
short-term debt.
Long-term
Debt
To
support the financing of the acquisitions of YSI Temperature and BetaTherm
(See
Note 5 to the Consolidated Financial Statements of the Company included in
this
Annual Report on Form 10-K), effective April 1, 2006, the Company entered
into
an Amended and Restated Credit Agreement (“Amended Credit Facility”) with GECC
which, among other things, increased the Company’s existing credit facility from
$35,000 to $75,000 and lowered the applicable LIBOR or Index Margin from
4.50%
and 2.75%, respectively, to LIBOR and Index Margins of 2.75% and 1%,
respectively. The term portion of the Amended Credit Facility totaled $20,000,
and the revolver totaled $55,000. Interest accrues on the principal amount
of
the borrowings at a rate based on either LIBOR plus a LIBOR margin or, at
the
election of the borrower, at an Index Rate (prime based rate) plus an Index
Margin. Beginning on September 30, 2006, the applicable margins may be adjusted
quarterly on a prospective basis based on a change in specified financial
ratios. The term loan is payable in $500 quarterly installments plus interest
beginning June 1, 2006 through March 1, 2011, with a final payment of $10,500
payable on April 3, 2011. Borrowings under the line are subject to certain
financial covenants and restrictions on indebtedness, dividend payments,
financial guarantees, annual capital expenditures, and other related items.
The
availability of the revolving credit facility is not based on any borrowing
base
requirements, but borrowings may be limited by certain financial covenants.
The
Company has provided a security interest in substantially all of the Company’s
U.S. based assets as collateral for the Amended Credit Facility. At March
31,
2007, the Company was in compliance with applicable financial
covenants.
As
of
March 31, 2007, the Company utilized the LIBOR based rate for approximately
$54,000, and the balance utilized the Index based rate. The interest rate
applicable to borrowings under the revolving credit facility was approximately
8.1% at March 31, 2007. As of March 31, 2007, the outstanding borrowings
on the
revolver, which is classified as long-term debt, were $42,010, and the Company
had the right to borrow an additional $12,990 under the revolving credit
facility. Commitment fees on the unused balance were equal to .375% per annum
of
the average amount of unused balances.
Promissory
Notes
In
connection with the acquisition of Elekon Industries USA, Inc. (See Note
5 to
the Consolidated Financial Statements of the Company included in this Annual
Report on Form 10-K), the Company issued unsecured Promissory Notes (the
Notes)
totaling $3,000, of which $100 and $1,100 were outstanding at March 31, 2007
and
2006, respectively. At March 31, 2007 and 2006, $100 and $1,000, respectively,
were considered current. 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, Humirel, HLP, and ATEX, the Company
assumed outstanding short-term borrowings. At March 31, 2006, $277 of this
assumed short-term borrowing was outstanding and was included in short-term
debt
in the accompanying consolidated balance sheets, and these amounts were paid
during 2007. Additionally, the Company had $3,500 in short-term debt at March
31, 2006, which was refinanced by the revolver during 2007.
Liquidity.
At March
31, 2007, we had approximately $7,709 of available cash and $12,990
of
borrowing capacity under our amended revolving credit facility. This cash
balance includes cash of $8,656 in China which is subject to
certain restrictions on the transfer to another country because of
currency control regulations. We believe the Company’s financial position and
ability to generate cash will be sufficient to meet funding of day-to-day and
material short and long-term commitments for the foreseeable
future.
OTHER
COMPREHENSIVE INCOME
Comprehensive
income consists of net income for the period and the impact of unrealized
foreign currency translation adjustments. The increase in other comprehensive
income from the changes in the exchange rates is primarily due to the changes
in
the value of the US dollar relative to the Euro and RMB.
DIVIDENDS
We
have
not declared cash dividends on our common equity. The payment of dividends
is
prohibited under the Amended Credit Facility. We may, in the future, declare
dividends under certain circumstances.
At
present, there are no material restrictions on the ability of our Hong Kong
and
European subsidiaries to transfer funds to us in the form of cash dividends,
loans, advances, or purchases of materials, products, or services. Chinese
laws
and regulations, including currency exchange controls, restrict distribution
and
repatriation of dividends by our China subsidiary.
SEASONALITY
Sales
of
our 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 some
significant increases in materials costs, and as a result, we 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
March 31, 2007, the Company’s contractual obligations, including payments due by
period, are as follows:
Contractual
Obligations
|
|
Payment
due by period
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
Thereafter
|
|
Total
|
|
Long-term
debt obligations
|
|
$
|
2,853
|
|
$
|
3,105
|
|
$
|
2,242
|
|
$
|
1,673
|
|
$
|
52,535
|
|
$
|
16
|
|
|
-
|
|
$ |
62,424 |
|
Interest
obligation on long-term debt
|
|
|
5,618
|
|
|
5,361
|
|
|
5,082
|
|
|
4,880
|
|
|
4,730
|
|
|
2
|
|
|
-
|
|
|
25,673 |
|
Capital
lease obligations
|
|
|
811
|
|
|
694
|
|
|
634
|
|
|
26
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,165 |
|
Operating
lease obligations *
|
|
|
3,945
|
|
|
3,354
|
|
|
2,447
|
|
|
1,791
|
|
|
1,094
|
|
|
761
|
|
|
2,433 |
|
|
15,826 |
|
Deferred
acquisition payments
|
|
|
1,973
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,973 |
|
Capital
additions (China facility)
|
|
|
7,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7,000 |
|
Total
|
|
$
|
22,200
|
|
$
|
12,514
|
|
$
|
10,405
|
|
$
|
8,370
|
|
$
|
58,359
|
|
$
|
779
|
|
|
2,433 |
|
$ |
115,061 |
|
*
Operating lease obligations are not reduced for annual sublease rentals of
approximately $150.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We
are
exposed to a certain level of foreign currency exchange risk.
Most
of
our revenues are priced in United States dollars. Most of our costs and expenses
are priced in United States dollars, with the remaining priced in RMB, Euros
and
Hong Kong dollars. Accordingly, the competitiveness of our products relative
to
products produced locally (in foreign markets) may be affected by the
performance of the United States dollar compared with that of our foreign
customers’ currencies. United States net sales were $106,476, $68,704, and
$64,772, or 53.2%, 56.6%, and 70.2% of net sales, for the fiscal years ended
March 31, 2007, 2006 and 2005, respectively. Net sales from our foreign
facilities were $93,774, $52,713, and $27,496, or 46.8%, 43.4%, and 29.8%
of net
sales, for the fiscal years ended March 31, 2007, 2006, and 2005, respectively.
We are exposed to foreign currency transaction and translation losses, which
might result from adverse fluctuations in the value of the Euro, Hong Kong
dollar and RMB.
At
March
31, 2007, 2006, and 2005 we had net assets of $43,561, $46,956, and $48,009,
respectively, in the United States. At March 31, 2007, 2006, and 2005 we
had net
assets of $23,810, $18,503, and $10,455, respectively, in China subject to
fluctuations in the value of the RMB against the United States dollar. At
March
31, 2007, 2006, and 2005 we had net assets of $40,981, $30,269, and $9,503,
respectively, in Hong Kong subject to fluctuations in the value of the Hong
Kong
dollar against the United States dollar. At March 31, 2007, 2006, and 2005
we
had net assets (liabilities) of $12,285, $(231), and $49, respectively, in
Europe, subject to fluctuations in the value of the Euro against the United
States dollar.
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.
On
July
21, 2005, the RMB increased in value by approximately 2.1% as compared to the
U.S. dollar, and during 2007 and 2006, the RMB appreciated by an additional
4%
and 0.57%, respectively. The Chinese government announced that it will no longer
peg the RMB to the US dollar, but established a currency policy letting the
RMB
trade in a narrow band against a basket of currencies. Based on our net exposure
of RMB to U.S. dollars for the fiscal year ended March 31, 2007 and forecast
information for fiscal 2008, we estimate a negative gross
margin income impact of approximately $184 for every 1% appreciation in
renminbi against the U.S. dollar (assuming no price increases passed to
customers, and no associated cost increases or currency hedging). We continue
to
consider various alternatives to hedge this exposure, and have considered,
but
do not currently use, foreign currency contracts as a hedging strategy. We
are
attempting to manage this exposure through, among other things, pricing and
monitoring balance sheet exposures for payables and receivables.
Based
on
the net exposures of Euros to the US dollars for the fiscal year ended March
31,
2007, we estimate a positive gross margin impact of $143 for every 1%
appreciation in Euros relative to the US dollar (assuming no price increases
passed to customers, and associated cost increases or currency
hedging).
The
Company has a number of foreign currency exchange contracts in Europe. These
currency contracts have a total notional amount of $5,088 with exercise dates
through March 2008 at an average exchange rate of $1.275
(Euro to
US dollar conversion rate). Since these derivatives are not designated as
cash-flow hedges under FASB 133, changes in their fair value are recorded
in
earnings, not in other comprehensive income. As of March 31, 2007 and 2006,
the
fair value of these contracts was an asset (liability) of $102
and
($59), respectively.
There
can
be no assurance that these currencies will remain stable or will fluctuate
to
our benefit. To manage our exposure to potential 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. We do have a number of foreign exchange currency
contracts in Europe, as disclosed in Note 7 to the Consolidated Financial
Statements in this Annual Report on Form 10-K.
Under
our
term and revolving credit facilities, we are exposed to a certain level of
interest rate risk. Interest on the principal amount of our borrowings under
our
revolving credit facility 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, based on the $61,571 of total debt outstanding under these facilities
at March 31, 2007, an annual interest rate increase of 100 basis points
would increase interest expense and decrease our pre tax profitability by $616.
We do not hedge this interest rate exposure.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
financial statements and supplementary data are listed below in Item 15:
Exhibits, Financial Statement Schedules and are filed with this
report.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
(a)
EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
The
Company’s management, with the participation of our Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of our disclosure controls
and procedures as of March 31, 2007. The term “disclosure controls and
procedures,” as defined in Rules 13(a)-15(e) and 15(d)-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls
and other procedures of a company that are designed to ensure that information
required to be disclosed by the company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the company’s management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment
in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures as of March
31, 2007, our Chief Executive Officer and Chief Financial Officer concluded
that, as of such date, our disclosure controls and procedures were
effective.
(b)
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over
financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated
under the Exchange Act as a process designed by, or under the supervision of,
the company’s principal executive and principal financial officers and effected
by the company’s board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:
·
|
Pertain
to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of the assets of
the
company;
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the
company
are being made only in accordance with authorizations of management
and
directors of the Company; and
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management’s
assessment of and conclusion on the effectiveness of internal control over
financial reporting does not include the internal controls of YSI Temperature
or
BetaTHERM, which were acquired in April 2006, and are included in the 2007
consolidated financial statements of the Company. At March 31, 2007, and for
the
year then ended, total assets and total sales of YSI Temperature and BetaTHERM
were $64,971 and $44,596, respectively, and represented 28.9% of total assets
and 22.3% total sales, respectively.
Our
management assessed the effectiveness of our internal control over financial
reporting as of March 31, 2007. In making this assessment, management used
the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal
Control-Integrated Framework.
Based
on
our assessment, management believes that, as of March 31, 2007, the Company’s
internal controls over financial reporting is effective based on those criteria.
Our
management’s assessment of the effectiveness of our internal control over
financial reporting as of March 31, 2007 has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in their report which
appears below and under Item 15 of this Annual Report on Form 10-K.
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Shareholders
Measurement
Specialties, Inc.:
We
have
audited management's assessment, included in the accompanying Management’s
Annual Report on Internal Control Over Financial Reporting, that
Measurement Specialties, Inc. (the Company) maintained effective internal
control over financial reporting as of March 31, 2007, based on criteria
established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Measurement
Specialties, Inc.'s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness
of
internal control over financial reporting. Our responsibility is to express
an
opinion on management's assessment and an opinion on the effectiveness of the
Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management's assessment that Measurement Specialties, Inc. maintained
effective internal control over financial reporting as of March 31, 2007, is
fairly stated, in all material respects, based on criteria established in
Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Also,
in
our opinion, Measurement Specialties, Inc. maintained, in all material respects,
effective internal control over financial reporting as of March 31, 2007, based
on criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
The
Company acquired YSIS Incorporated and BetaTHERM Group Ltd. during the year
ended March 31, 2007, and management excluded from its assessment of the
effectiveness of the company’s internal control over financial reporting as of
March 31, 2007, YSIS Incorporated and BetaTHERM Group Ltd.’s internal control
over financial reporting associated with approximately $64,971 of total assets
and $44,596 of net sales included in the Company’s consolidated financial
statements as of and for the year ended March 31, 2007. Our audit of internal
control over financial reporting of the Company also excluded an evaluation
of
the internal control over financial reporting of YSIS Incorporated and BetaTHERM
Group Ltd.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Measurement
Specialties, Inc. and subsidiaries as of March 31, 2007 and 2006, and the
related consolidated statements of operations, shareholders’ equity and
comprehensive income, and cash flows for each of the years in the two-year
period ended March 31, 2007, and our report dated June 12, 2007 expressed
an unqualified opinion on those consolidated financial statements.
/s/
KPMG
LLP
Norfolk,
Virginia
June
12,
2007
(d)
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There
were changes in our internal control over financial reporting (as defined in
Rules 13(a)-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during
the quarter ended March 31, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting, including the implementation of certain remedial actions, including
additional staffing, implementing a standardized global software tax reporting
platform, preparation of account reconciliations and roll-forwards over
accounting for income taxes in response to the material control weakness
identified in the prior year Annual Report. Management continues to implement
internal controls in the integration process with respect to the Company’s
acquisitions of YSI Temperature and BetaTHERM.
Management
believes that the accompanying consolidated financial statements fairly present,
in all material respects, the financial condition, results of operations
and
cash flows for the fiscal years presented in this Annual Report on Form
10-K.
ITEM
9B. OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Apart
from certain information concerning our Code of Conduct which is set forth
below, other information required by this Item is incorporated herein by
reference to the applicable information in the proxy statement for our annual
meeting of shareholders to be held on or about September 19, 2007, including
the
information set forth under the captions “Election of Directors”, “Committees of
the Board of Directors”, and “Executive Officers”, which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than
120
days after the fiscal year ended March 31, 2007.
We
have a
Code of Conduct that applies to all of our directors, officers and employees,
including our principal executive officer, principal financial officer and
principal accounting officer. The Code of Conduct is available to shareholders
at our website, www.meas-spec.com.
ITEM
11. EXECUTIVE COMPENSATION
The
information required by this Item is incorporated herein by reference to the
applicable information in the proxy statement for our annual meeting of
shareholders to be held on or about September 19, 2007, including the
information set forth under the captions “Executive Compensation” and
“Compensation Committee Interlocks and Insider Participation”, which will be
filed with the Securities and Exchange Commission pursuant to Regulation 14A
not
later than 120 days after the fiscal year ended March 31, 2007.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
following table provides information with respect to the equity securities
that
are authorized for issuance under our compensation plans as of March 31,
2007:
EQUITY
COMPENSATION PLAN INFORMATION
For
the
Year Ended March 31, 2007:
|
|
NUMBER
OF SECURITIES TO BE ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS,
WARRANTS
AND RIGHTS
|
|
WEIGHTED-
AVERAGE EXERCISE PRICE OF OUTSTANDING OPTIONS, WARRANTS AND
RIGHTS
|
|
NUMBER
OF SHARES REMAINING FOR FUTURE ISSUANCE UNDER EQUITY COMPENSATION
PLANS
(EXCLUDING SECURITIES REFLECTED IN COLUMN(A))
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
COMPENSATION PLANS APPROVED BY SECURITY HOLDERS
|
|
|
1,909,662
|
|
$
|
21.46
|
|
|
407,165
|
|
EQUITY
COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS
|
|
|
-
|
|
|
-
|
|
|
-
|
|
The
other
information required by this Item is incorporated by reference to the applicable
information in the proxy statement for our annual meeting of shareholders to
be
held on or about September 19, 2007, including the information set forth under
the caption “Beneficial Ownership of Measurement Specialties Common
Stock.”
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The
information required by this Item is incorporated by reference to the applicable
information in the proxy statement for our annual meeting of shareholders to
be
held on or about September 19, 2007, including the information set forth under
the captions “Executive Agreements and Related Transactions”, “Committees of the
Board of Directors” and “Election of Directors” which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than
120
days after the fiscal year ended March 31, 2007.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
information required by this Item is incorporated by reference to the applicable
information in the proxy statement for our annual meeting of shareholders to
be
held on or about September 19, 2007, including the information set forth under
the caption “Fees Paid to Our Independent Auditors”, which will be filed with
the Securities and Exchange Commission pursuant to Regulation 14A not later
than
120 days after the fiscal year ended March 31, 2007.
PART
IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
The following consolidated financial statements and schedules are filed
at the end of this report, beginning on page F-l. Other schedules are omitted
because they are not required or are not applicable or the required information
is shown in the consolidated financial statements or notes thereto.
(b)
See Exhibit Index following this Annual Report on Form 10-K.
DOCUMENT
|
|
PAGES
|
Consolidated
Statements of Operations for the Years Ended
|
|
|
March
31, 2007, 2006 and 2005
|
|
F-1
|
Consolidated
Balance Sheets as of March 31, 2007 and 2006
|
|
F-2
to F-3
|
Consolidated
Statements of Shareholders’ Equity for the Years Ended
|
|
|
March
31, 2007, 2006 and 2005
|
|
F-4
|
Consolidated
Statements of Cash Flows for the Years Ended
|
|
|
March
31, 2007, 2006 and 2005
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-6
|
Schedule
II -Valuation and Qualifying Accounts, for the Years
|
|
|
Ended
March 31, 2007, 2006 and 2005
|
|
S-1
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
MEASUREMENT
SPECIALTIES, INC.
By:
/s/
FRANK
GUIDONE
Frank
Guidone
Chief
Executive Officer
Date:
June 12, 2007
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Frank Guidone
|
|
President,
Chief Executive Officer and
|
|
June
12, 2007
|
Frank
Guidone
|
|
Director
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/
Mark Thomson
|
|
Chief
Financial Officer (Principal Financial
|
|
June
12, 2007
|
Mark
Thomson
|
|
Officer
and Principal Accounting Officer)
|
|
|
|
|
|
|
|
/s/
Morton L. Topfer
|
|
Chairman
of the Board
|
|
June
12, 2007
|
Morton
L. Topfer
|
|
|
|
|
|
|
|
|
|
/s/
John D. Arnold
|
|
Director
|
|
June
12, 2007
|
John
D. Arnold
|
|
|
|
|
|
|
|
|
|
/s/
Satish Rishi
|
|
Director
|
|
June
12, 2007
|
Satish
Rishi
|
|
|
|
|
|
|
|
|
|
/s/
R. Barry Uber
|
|
Director
|
|
June
12, 2007
|
R.
Barry Uber
|
|
|
|
|
|
|
|
|
|
/s/
Kenneth E. Thompson
|
|
Director
|
|
June
12, 2007
|
Kenneth
E. Thompson
|
|
|
|
|
EXHIBIT
INDEX
EXHIBIT
INDEX
NUMBER
|
|
DESCRIPTION
|
|
|
|
3.1#
|
|
Second
Restated Certificate of Incorporation of Measurement Specialties,
Inc.
|
|
|
|
3.2##
|
|
Bylaws
of Measurement Specialties, Inc.
|
|
|
|
4.1###
|
|
Specimen
Certificate for shares of common stock of Measurement Specialties,
Inc.
|
|
|
|
10.1####
|
|
Measurement
Specialties, Inc. 2006 Stock Option Plan
|
|
|
|
10.2####
|
|
Measurement
Specialties, Inc. 2006 Employee Stock Purchase Plan
|
|
|
|
10.3###
|
|
Measurement
Specialties, Inc. 1995 Stock Option Plan
|
|
|
|
10.4*
|
|
Measurement
Specialties, Inc. 1998 Stock Option Plan
|
|
|
|
10.5**
|
|
Measurement
Specialties, Inc. 2003 Stock Option Plan
|
|
|
|
10.6##
|
|
Lease
dated August 4, 2000 between Kelsey-Hayes Company and Measurement
Specialties, Inc. for property in Hampton, Virginia
|
|
|
|
10.7##
|
|
First
Amendment dated February 1, 2001 to Lease between Kelsey-Hayes Company
and
Measurement Specialties, Inc. for property in Hampton,
Virginia
|
|
|
|
10.8##
|
|
Lease
Agreement dated May 20, 1986 between Semex, Inc. and Pennwalt Corporation
and all amendments for property in Valley Forge,
Pennsylvania
|
|
|
|
10.9##
|
|
Lease
Agreement dated January 10, 1986 between Creekside Industrial Associates
and I.C. Sensors and all amendments for property in Milpitas,
California
|
|
|
|
10.10##
|
|
Lease
Agreements for property in Shenzhen, China
|
|
|
|
10.11####
|
|
Agreement
of Lease, commencing October 1, 2002, between Liberty Property Limited
Partnership and Measurement Specialties, Inc.
|
|
|
|
10.12####
|
|
Sublease
Agreement, dated August 1, 2002, between Quicksil, Inc. and Measurement
Specialties, Inc.
|
|
|
|
10.13***
|
|
Share
Purchase and Transfer Agreement dated November 30, 2005 by and among
the
Sellers and MWS Sensorik GmbH
|
|
|
|
10.14
***
|
|
Agreement
for the Sale and Purchase of the Entire Issued Share Capital of
Measurement Ltd. by and between Fervent Group Limited and Kenabell
Holding
Limited
|
|
|
|
10.15****
|
|
Agreement
of Purchase and Sale dated April 3, 2006 by and between Measurement
Specialties, Inc. and YSI Incorporated
|
|
|
|
10.16****
|
|
Agreement
for the purchase of the entire issued share capital of BetaTHERM
Group
Ltd. dated April 3, 2006 by and among the parties Named in the First
Schedule thereto and Measurement Specialties,
Inc.
|
10.17****
|
|
Amended
and Restated Credit Agreement dated April 3, 2006 by and among
Measurement
Specialties, Inc., the other US Credit Parties signatory thereto,
Wachovia
Bank, National Association, JPMorgan Chase Bank, N.A. and General
Electric
Capital Corporation
|
|
|
|
10.18*****
|
|
Executive
Employment Agreement dated March 31, 2006 by and between Measurement
Specialties, Inc. and Frank Guidone
|
|
|
|
10.19
|
|
Employment
Agreement dated March 13, 2007 by and between Measurement Specialties,
Inc. and Mark Thomson
|
|
|
|
|
|
Subsidiaries
|
|
|
|
23.1
|
|
Consent
of KPMG LLP
|
|
|
|
23.2
|
|
Consent
of Grant Thornton LLP
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Rule 13(a)-14(a)/15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Rule 13(a)-14(a)/15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant
to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
#
|
|
Previously
filed with the Securities and Exchange Commission as an Exhibit
to the
Quarterly Report on Form 10-Q filed on February 3, 1998 and incorporated
herein by reference.
|
|
|
|
##
|
|
Previously
filed with the Securities and Exchange Commission as an Exhibit
to the
Annual Report on Form 10-K filed on July 5, 2001 and incorporated
herein
by reference.
|
|
|
|
###
|
|
Previously
filed with the Securities and Exchange Commission as an Exhibit
to the
Registration Statement on Form S-1 (File No. 333-57928) and incorporated
herein by reference.
|
|
|
|
####
|
|
Previously
filed with the Securities and Exchange Commission as an Exhibit
to the
Annual Report on Form 10-K filed on October 29, 2002 and incorporated
herein by reference.
|
|
|
|
#####
|
|
Previously
filed with the Securities and Exchange Commission as an Exhibit
to the
Registration Statement on Form S-1 (File No. 333-137650) and incorporated
herein by reference.
|
|
|
|
*
|
|
Previously
filed with the Securities and Exchange Commission as an Exhibit
to the
Proxy Statement for the Annual Meeting of Shareholders filed on
August 18,
1998 and incorporated herein by reference.
|
|
|
|
**
|
|
Previously
filed with the Securities and Exchange Commission as an Exhibit
to the
Proxy Statement for the Annual Meeting of Shareholders filed on
July 29,
2003 and incorporated herein by reference.
|
|
|
|
***
|
|
Previously
filed with the Securities and Exchange Commission as an Exhibit
to the
Quarterly Repost on Form 10-Q filed on February 9, 2006 and incorporated
herein by reference.
|
****
|
|
Previously
filed with the Securities and Exchange Commission as an Exhibit to
the
Current Report on Form 8-K filed on April 6, 2006 and incorporated
herein
by reference.
|
|
|
|
*****
|
|
Previously
filed with the Securities and Exchange Commission as an Exhibit to
the
Quarterly Report on Form 10-Q filed on August 9, 2006 and incorporated
herein by reference.
|
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Shareholders
Measurement
Specialties, Inc.:
We
have
audited the accompanying consolidated balance sheets of Measurement Specialties,
Inc. and subsidiaries as of March 31, 2007 and 2006, and the related
consolidated statements of operations, shareholders’ equity and comprehensive
income, and cash flows for each of the years in the two-year period ended March
31, 2007. In connection with our audits of the consolidated financial
statements, we also have audited financial statement schedule II for the years
ended March 2007 and 2006. These consolidated financial statements and financial
statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We
conducted our audits in accordance with the standards
of
the
Public Company Accounting Oversight Board (United
States).
Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Measurement Specialties,
Inc. and subsidiaries as of March 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the two-year period
ended March 31, 2007, in conformity with U.S. generally
accepted accounting
principles.
Also in
our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
As
discussed in note 2 to the consolidated financial statements, effective April
1,
2006, Measurement Specialties, Inc. adopted the provisions of Statement of
Financial Accounting Standards No. 123(R), Share-Based
Payment.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Measurement Specialties,
Inc.’s internal control over financial reporting as of March 31, 2007, based on
criteria established in Internal Control—Integrated
Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated June
12,
2007 expressed an unqualified opinion on management’s assessment of, and the
effective operation of, internal control over financial reporting.
/s/
KPMG
LLP
Norfolk,
Virginia
June
12,
2007
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and Shareholders
Measurement
Specialties, Inc.
We
have
audited the accompanying consolidated statement of income, shareholders’ equity
and cash flows for the year ended March 31, 2005. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provide a reasonable
basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated result of its operations and its
consolidated cash flow for the year ended March 31, 2005, in conformity
with accounting principles generally accepted in the United States of
America.
As
more
fully described in Note 6, the accompanying consolidated financial statements
as
of and for the year period ended March 31, 2005 have been restated. The effect
of the restatement is disclosed in Note 6.
Our
audit
was conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The Schedule II - Valuation
and Qualifying Accounts
is
presented for purposes of additional analysis and is not a required part
of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in
our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/
Grant Thornton
New
York,
New York
June
10,
2005 (except with respect to the matters described in
Note
6 as
to which the date is June 14, 2006)
Consolidated
Statements of Operations
|
|
|
For
the years ended March
31,
|
|
(Amounts
in thousands, except per share amounts )
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net
sales
|
|
$
|
200,250
|
|
$
|
121,417
|
|
$
|
92,268
|
|
Cost
of goods sold
|
|
|
112,803
|
|
|
64,791
|
|
|
45,226
|
|
Gross
profit
|
|
|
87,447
|
|
|
56,626
|
|
|
47,042
|
|
Total
operating expenses
|
|
|
64,972
|
|
|
40,842
|
|
|
34,027
|
|
Operating
income
|
|
|
22,475
|
|
|
15,784
|
|
|
13,015
|
|
Interest
expense, net
|
|
|
6,106
|
|
|
2,066
|
|
|
637
|
|
Foreign
currency exchange and other expense (income)
|
|
|
761
|
|
|
167
|
|
|
(90
|
)
|
Income
from continuing operations before minority interest and income
taxes
|
|
|
15,608
|
|
|
13,551
|
|
|
12,468
|
|
Minority
interest, net of income taxes of $362
|
|
|
524
|
|
|
-
|
|
|
-
|
|
Income
tax expense from continuing operations
|
|
|
3,127
|
|
|
3,224
|
|
|
2,688
|
|
Income
from continuing operations
|
|
|
11,957
|
|
|
10,327
|
|
|
9,780
|
|
Discontinued
operations (Note 6):
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations before income taxes
|
|
|
115
|
|
|
6,695
|
|
|
6,608
|
|
Income
tax expense (benefit) from discontinued operations
|
|
|
(6
|
)
|
|
1,527
|
|
|
1,562
|
|
Income
from discontinued operations, before gain
|
|
|
121
|
|
|
5,168
|
|
|
5,046
|
|
Gain
on disposition of discontinued operations (net of income taxes
of $0 and
$118, respectively)
|
|
|
2,156
|
|
|
9,039
|
|
|
-
|
|
Income
from discontinued operations
|
|
|
2,277
|
|
|
14,207
|
|
|
5,046
|
|
Net
income
|
|
$
|
14,234
|
|
$
|
24,534
|
|
$
|
14,826
|
|
Net
income per common share - Basic:
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.85
|
|
$
|
0.75
|
|
$
|
0.73
|
|
Income
from discontinued operations
|
|
|
0.01
|
|
|
0.38
|
|
|
0.38
|
|
Gain
from disposition of discontinued operations (net of income taxes)
|
|
|
0.15
|
|
|
0.66
|
|
|
-
|
|
Net
income per common share - Basic
|
|
$
|
1.01
|
|
$
|
1.79
|
|
$
|
1.11
|
|
Net
income per common share - Diluted:
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.83
|
|
$
|
0.72
|
|
$
|
0.69
|
|
Income
from discontinued operations
|
|
|
0.01
|
|
|
0.36
|
|
|
0.36
|
|
Gain
from disposition of discontinued operations (net of income taxes)
|
|
|
0.15
|
|
|
0.63
|
|
|
-
|
|
Net
income per common share - Diluted
|
|
$
|
0.99
|
|
$
|
1.71
|
|
$
|
1.05
|
|
Weighted
average shares outstanding - Basic
|
|
|
14,156
|
|
|
13,704
|
|
|
13,392
|
|
Weighted
average shares outstanding - Diluted
|
|
|
14,423
|
|
|
14,356
|
|
|
14,095
|
|
See
accompanying notes to the consolidated financial
statements.
|
MEASUREMENT
SPECIALTIES, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
|
|
March
31,
|
|
March
31,
|
|
(Amounts
in thousands)
|
|
2007
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
7,709
|
|
$
|
9,166
|
|
Accounts
receivable, trade, net of allowance for
|
|
|
|
|
|
|
|
doubtful
accounts of $516 and $447, respectively
|
|
|
34,774
|
|
|
19,381
|
|
Inventories,
net
|
|
|
37,231
|
|
|
25,099
|
|
Deferred
income taxes, net
|
|
|
4,718
|
|
|
1,510
|
|
Prepaid
expenses and other current assets
|
|
|
3,057
|
|
|
1,821
|
|
Other
receivables
|
|
|
420
|
|
|
3,409
|
|
Other
receivable due from joint venture partner
|
|
|
1,456
|
|
|
-
|
|
Current
portion of promissory note receivable
|
|
|
2,465
|
|
|
1,900
|
|
Current
assets of discontinued operations
|
|
|
-
|
|
|
1,111
|
|
Total
current assets
|
|
|
91,830
|
|
|
63,397
|
|
Property,
plant and equipment, net
|
|
|
27,559
|
|
|
22,086
|
|
Goodwill
|
|
|
77,397
|
|
|
41,848
|
|
Acquired
intangible assets, net
|
|
|
17,006
|
|
|
11,250
|
|
Deferred
income taxes, net
|
|
|
8,360
|
|
|
10,785
|
|
Promissory
note receivable, net of current portion
|
|
|
851
|
|
|
1,397
|
|
Other
assets
|
|
|
1,688
|
|
|
1,542
|
|
Other
assets of discontinued operations
|
|
|
-
|
|
|
119
|
|
Total
Assets
|
|
$
|
224,691
|
|
$
|
152,424 |
|
See
accompanying notes to the consolidated financial statements.
MEASUREMENT
SPECIALTIES, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
|
|
March
31,
|
|
March
31,
|
|
(Amounts
in thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
LIABILITIES,
MINORITY INTEREST AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Current
portion of promissory notes payable
|
|
$
|
100
|
|
$
|
1,000
|
|
Current
portion of deferred acquisition obligation
|
|
|
1,973
|
|
|
3,972
|
|
Short-term
debt
|
|
|
-
|
|
|
3,777
|
|
Current
portion of long-term debt
|
|
|
2,753
|
|
|
2,553
|
|
Accounts
payable
|
|
|
17,742
|
|
|
11,337
|
|
Accrued
expenses
|
|
|
2,447
|
|
|
2,190
|
|
Accrued
compensation
|
|
|
6,616
|
|
|
3,116
|
|
Income
taxes payable
|
|
|
3,089
|
|
|
789
|
|
Current
portion of capital lease obligation
|
|
|
811
|
|
|
606
|
|
Other
current liabilities
|
|
|
4,089
|
|
|
1,731
|
|
Accrued
litigation settlement expense
|
|
|
1,275
|
|
|
-
|
|
Current
liabilities of discontinued operations
|
|
|
-
|
|
|
1,266
|
|
Total
current liabilities
|
|
|
40,895
|
|
|
32,337
|
|
|
|
|
|
|
|
|
|
Revolver
|
|
|
42,010
|
|
|
-
|
|
Promissory
notes payable, net of current portion
|
|
|
-
|
|
|
100
|
|
Long-term
debt, net of current portion
|
|
|
17,561
|
|
|
16,794
|
|
Contingency
consideration provision
|
|
|
-
|
|
|
3,517
|
|
Capital
lease obligation, net of current portion
|
|
|
1,354
|
|
|
2,180
|
|
Other
liabilities
|
|
|
606
|
|
|
1,999
|
|
Total
liabilities
|
|
|
102,426
|
|
|
56,927
|
|
|
|
|
|
|
|
|
|
Minority
Interest
|
|
|
1,628
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
Serial
preferred stock; 221,756 shares authorized; none
outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, no par; 20,000,000 shares authorized; 14,280,364
|
|
|
|
|
|
|
|
and
13,970,033 shares issued and outstanding, respectively
|
|
|
-
|
|
|
-
|
|
Additional
paid-in capital
|
|
|
73,399
|
|
|
66,371
|
|
Retained
earnings
|
|
|
45,497
|
|
|
31,263
|
|
Accumulated
other comprehensive income (loss)
|
|
|
1,741
|
|
|
(2,137
|
)
|
Total
shareholders' equity
|
|
|
120,637
|
|
|
95,497
|
|
Total
liabilities, minority interest and shareholders' equity
|
|
$
|
224,691
|
|
$
|
152,424
|
|
See
accompanying notes to the consolidated financial statements.
Consolidated
Statements of Shareholders' Equity and Comprehensive
Income
For
the years ended March 31, 2007, 2006 and 2005
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Other
|
|
|
|
|
|
|
|
paid-in
|
|
Retained
|
|
Comprehensive
|
|
|
|
Comprehensive
|
|
(Amounts
in thousands)
|
|
capital
|
|
Earnings
|
|
Income
(Loss)
|
|
Total
|
|
Income
|
|
Balance,
March 31, 2004
|
|
$
|
59,011
|
|
|
(8,097
|
)
|
|
(74
|
)
|
$
|
50,840
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
14,826
|
|
|
|
|
|
14,826
|
|
$
|
14,826
|
|
Currency
translation adjustment
|
|
|
|
|
|
|
|
|
(426
|
)
|
|
(426
|
)
|
|
(426
|
)
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,400
|
|
Issuance
of common stock for acquisition of Humirel
|
|
|
476
|
|
|
|
|
|
|
|
|
476
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
1,200
|
|
|
|
|
|
|
|
|
1,200
|
|
|
|
|
Tax
benefit from exercise of stock options
|
|
|
1,100
|
|
|
|
|
|
|
|
|
1,100
|
|
|
|
|
Balance,
March 31, 2005
|
|
$
|
61,787
|
|
$
|
6,729
|
|
$
|
(500
|
)
|
$
|
68,016
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
24,534
|
|
|
|
|
|
24,534
|
|
$
|
24,534
|
|
Currency
translation adjustment
|
|
|
|
|
|
|
|
|
(1,637
|
)
|
|
(1,637
|
)
|
|
(1,637
|
)
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,897
|
|
Options
issued related to sale of Consumer
|
|
|
913
|
|
|
|
|
|
|
|
|
913
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
2,887
|
|
|
|
|
|
|
|
|
2,887
|
|
|
|
|
Tax
benefit from exercise of stock options
|
|
|
784
|
|
|
|
|
|
|
|
|
784
|
|
|
|
|
Balance,
March 31, 2006
|
|
$
|
66,371
|
|
$
|
31,263
|
|
$
|
(2,137
|
)
|
$
|
95,497
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
14,234
|
|
|
|
|
|
14,234
|
|
$
|
14,234
|
|
Currency
translation adjustment, net of income taxes
of
$188
|
|
|
|
|
|
|
|
|
3,878
|
|
|
3,878
|
|
|
3,878
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,112
|
|
Non-cash
equity based compensation (SFAS 123R)
|
|
|
2,887
|
|
|
|
|
|
|
|
|
2,887
|
|
|
|
|
Issuance
of common stock for acquisition of BetaTherm
|
|
|
1,000
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
1,865
|
|
|
|
|
|
|
|
|
1,865
|
|
|
|
|
Tax
benefit from exercise of stock options
|
|
|
1,276
|
|
|
|
|
|
|
|
|
1,276
|
|
|
|
|
Balance,
March 31, 2007
|
|
$
|
73,399
|
|
$
|
45,497
|
|
$
|
1,741
|
|
$
|
120,637
|
|
|
|
|
See
accompanying notes to the consolidated financial statements.
MEASUREMENT
SPECIALTIES, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
|
|
For
the years ended
|
|
|
|
March
31,
|
|
(Amounts
in thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
14,234
|
|
$
|
24,534
|
|
$
|
14,826
|
|
Less:
Income (loss) from discontinued operations - Consumer
|
|
|
121
|
|
|
5,168
|
|
|
5,046
|
|
Less:
Gain on sale of discontinued operations - Consumer
|
|
|
2,156
|
|
|
9,039
|
|
|
|
|
Income
from continuing operations
|
|
|
11,957
|
|
|
10,327
|
|
|
9,780
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
|
provided
by (used in) operating activities from continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
9,668
|
|
|
5,516
|
|
|
3,047
|
|
Loss
(gain) on sale of assets
|
|
|
(80
|
)
|
|
80
|
|
|
-
|
|
Provision
for doubtful accounts
|
|
|
258
|
|
|
250
|
|
|
(70
|
)
|
Provision
for inventory reserve
|
|
|
1,508
|
|
|
1,561
|
|
|
(79
|
)
|
Provision
for warranty
|
|
|
432
|
|
|
32
|
|
|
(73
|
)
|
Minority
interest
|
|
|
524
|
|
|
-
|
|
|
-
|
|
Non-cash
equity based compensation (SFAS 123R)
|
|
|
2,887
|
|
|
-
|
|
|
-
|
|
Deferred
income taxes
|
|
|
(573
|
)
|
|
2,096
|
|
|
3,162
|
|
Net
change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, trade
|
|
|
(8,780
|
)
|
|
(2,135
|
)
|
|
(4,420
|
)
|
Inventories
|
|
|
(8,409
|
)
|
|
(7,642
|
)
|
|
(5,905
|
)
|
Prepaid
expenses and other current assets and receivables
|
|
|
1,160
|
|
|
(876
|
)
|
|
418
|
|
Other
assets
|
|
|
(1,464
|
)
|
|
227
|
|
|
65
|
|
Accounts
payable
|
|
|
3,264
|
|
|
(323
|
)
|
|
3,947
|
|
Accrued
expenses and other liabilities
|
|
|
11
|
|
|
1,864
|
|
|
(1,683
|
)
|
Accrued
litigation settlement expenses
|
|
|
1,275
|
|
|
-
|
|
|
(4,984
|
)
|
Tax
benefit on exercise of stock options
|
|
|
(1,276
|
)
|
|
784
|
|
|
1,100
|
|
Income
taxes payable
|
|
|
1,612
|
|
|
(35
|
)
|
|
1,165
|
|
Net
cash provided by operating activities from continuing
operations
|
|
|
13,974
|
|
|
11,726
|
|
|
5,470
|
|
Cash
flows used in investing activities from continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(7,305
|
)
|
|
(8,011
|
)
|
|
(3,681
|
)
|
Proceeds
from sale of equipment
|
|
|
188
|
|
|
105
|
|
|
-
|
|
Acquisition
of business, net of cash acquired
|
|
|
(45,885
|
)
|
|
(6,824
|
)
|
|
(43,691
|
)
|
Net
cash used in investing activities from continuing
operations
|
|
|
(53,002
|
)
|
|
(14,730
|
)
|
|
(47,372
|
)
|
Cash
flows from financing activities from continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
Borrowing
under long-term debt
|
|
|
20,000
|
|
|
-
|
|
|
20,000
|
|
Repayments
under long-term debt
|
|
|
(19,576
|
)
|
|
(3,629
|
)
|
|
(500
|
)
|
Borrowings
under short-term debt, revolver and notes payable
|
|
|
59,587
|
|
|
12,500
|
|
|
14,095
|
|
Payments
under short-term debt, revolver, leases and notes payable
|
|
|
(25,850
|
)
|
|
(11,621
|
)
|
|
(12,695
|
)
|
Sale
lease-back financing transaction
|
|
|
1,917
|
|
|
-
|
|
|
-
|
|
Payments
under deferred acquisition payments
|
|
|
(4,052
|
)
|
|
(1,742
|
)
|
|
-
|
|
Minority
interest payments
|
|
|
(145
|
)
|
|
-
|
|
|
-
|
|
Tax
benefit on exercise of stock options
|
|
|
1,276
|
|
|
-
|
|
|
-
|
|
Proceeds
from exercise of options
|
|
|
1,865
|
|
|
2,887
|
|
|
1,200
|
|
Net
cash provided (used in) financing activities from continuing
operations
|
|
|
35,022
|
|
|
(1,605
|
)
|
|
22,100
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities of discontinued
operations
|
|
|
(62
|
)
|
|
5,061
|
|
|
4,906
|
|
Net
cash provided by investing activities of discontinued
operations
|
|
|
2,276
|
|
|
4,348
|
|
|
50
|
|
Net
cash provided by discontinued operations
|
|
|
2,214
|
|
|
9,409
|
|
|
4,956
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
(1,792
|
)
|
|
4,800
|
|
|
(14,846
|
)
|
Effect
of exchange rate changes on cash
|
|
|
335
|
|
|
(36
|
)
|
|
(26
|
)
|
Cash,
beginning of year
|
|
|
9,166
|
|
|
4,402
|
|
|
19,274
|
|
Cash,
end of year
|
|
$
|
7,709
|
|
$
|
9,166
|
|
$
|
4,402
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
(6,088
|
)
|
$
|
(1,986
|
)
|
$
|
(529
|
)
|
Income
taxes
|
|
|
(827
|
)
|
|
(2,267
|
)
|
|
(1,987
|
)
|
Income
taxes refunded
|
|
|
-
|
|
|
-
|
|
|
109
|
|
Non-cash
investing and financing transactions:
|
|
|
|
|
|
|
|
|
|
|
Deferred
acquisition obligation
|
|
|
1,787
|
|
|
-
|
|
|
5,789
|
|
Promissory
note receivable from sale of discontinued operations
|
|
|
-
|
|
|
3,800
|
|
|
-
|
|
Promissory
note payable from acquisition
|
|
|
-
|
|
|
-
|
|
|
3,000
|
|
Promissory
note receivable from earn-out on sale of discontinued operations
-
Consumer
|
|
|
2,156
|
|
|
-
|
|
|
-
|
|
Contingent
consideration provision
|
|
|
-
|
|
|
3,517
|
|
|
-
|
|
Financing
receivable (Note 2(g))
|
|
|
-
|
|
|
1,811
|
|
|
-
|
|
Liabilities
sold
|
|
|
-
|
|
|
9,881
|
|
|
-
|
|
Issuance
of stock in connection with acquisition
|
|
|
1,000
|
|
|
-
|
|
|
476
|
|
Issuance
of stock options in connection with sale of Consumer
|
|
|
-
|
|
|
913
|
|
|
-
|
|
Earn-out
in connection with acquisition
|
|
|
933
|
|
|
725
|
|
|
-
|
|
See
accompanying notes to the consolidated
financial statements
MEASUREMENT
SPECIALTIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2007 and 2006
(Amounts
in thousands, except share and per share amounts)
1.
DESCRIPTION OF BUSINESS:
Measurement
Specialties, Inc. (the “Company”) is a global leader in designing and
manufacturing sensors for original equipment manufacturers and end users. The
Company has eight primary manufacturing facilities strategically located in
the United States, China, France, Ireland and Germany, enabling the Company
to produce and market world-wide a broad range of sensors that use advanced
technologies to measure precise ranges of physical characteristics including
pressure, position, force, vibration, humidity, photo-optics and temperature.
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, piezoelectric polymer film
sensors, custom microstructures, load cells, accelerometers, optical sensors,
humidity and temperature sensors.
As
more
fully described below in Note 6, the Company sold the Consumer business during
the quarter ended December 31, 2005. As a result, assets, liabilities, results
of operations and cash flows of the Consumer business have been presented as
discontinued operations as of and for the periods presented. The Consumer
Products segment designed and manufactured sensor-based consumer products,
primarily as an original equipment manufacturer (“OEM”), that were sold to
retailers and distributors in the United States and Europe. Consumer products
included bathroom and kitchen scales, tire pressure gauges and distance
estimators. Except as otherwise noted, the descriptions of our business and
results of operations contained in this report reflect only our continuing
operations.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a)
Principles of Consolidation:
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries (the ‘Subsidiaries’) and its joint venture in Japan.
In accordance with Financial Accounting Standards Bard (“FASB”) Interpretation
No. 46R, Consolidation of Variable Interest Entities, the Company consolidates
its one variable interest entity (“VIE”) for which the Company is the primary
beneficiary. All significant intercompany balances and transactions have been
eliminated in consolidation.
The
Company established a holding company structure for foreign operations, whereby
Measurement Specialties Foreign Holding Corporation owns Kenabell Holding
Limited, the primary foreign holding company for the Company’s foreign entities.
In
the
quarter ended June 30, 2004, the Company reorganized its Asian operations under
an offshore holding company, Kenabell Holding Limited, a British Virgin Island
Company (‘Kenabell Holding BVI’). As part of the asset reorganization, a new
entity was formed under Kenabell Holding BVI in the Cayman Islands, Measurement
Limited (‘ML Cayman’). A significant portion of the Consumer business in Asia
was transferred into ML Cayman during the quarter ended June 30, 2004. These
holding companies were formed as part of a foreign tax planning restructuring,
and to facilitate any potential sale of assets of our Consumer business. ML
Cayman was subsequently sold to Fervent Group Limited effective December 1,
2005
as part of the sale of the Consumer business.
MSI
Sensors (Asia) Limited (formerly named Measurement Limited, organized in Hong
Kong) owns all of the shares of MSI Sensors (China) Limited (formerly named
Jingliang Electronics (Shenzhen) Co. Ltd, organized in the Peoples Republic
of
China). Kenabell Holding BVI owns all of the shares of MSI Sensors (Asia)
Limited.
In
the
quarter ended March 31, 2005, as part of a foreign tax planning restructuring,
the Company completed the reorganization of its European subsidiaries which
included Entran SA and Humirel SA. This reorganization involved transferring
ownership of these subsidiaries to a Cyprus holding company under Kenabell
Holding BVI, named Acalon Holdings Limited. In conjunction with this
reorganization, the ownership of Kenabell Holding BVI was also transferred
to
Measurement Specialties Foreign Holdings Corporation, a Delaware corporation.
As
of
September 1, 2006, pursuant to a restructuring of certain of the Company’s
European operations, the Company established two new entities: MEAS Europe
SAS
and its wholly-owned subsidiary MEAS France SAS. MEAS France SAS is the primary
French holding company and is the result of the consolidating and merging of
the
operations of Entran, Humirel, and ATEX. The reorganization was effected to
facilitate improved statutory reporting.
The
Company executed a restructuring of BetaTHERM Ireland Limited (“BetaTHERM
Ireland”) during the quarter ended March 31, 2007, whereby the ownership of
BetaTHERM’s U.S. operation was transferred to Measurement Specialties, Inc. from
BetaTHERM Ireland. This reorganization was planned as part of the acquisition,
a
requirement under our credit facility and provided an efficient organizational
structure for operational and tax purposes.
There
was
no significant effect on the consolidated financial statements as a result
of
the above reorganizations.
IC
Sensors Inc., a California corporation (‘IC Sensors’) continues as a
wholly-owned subsidiary of the Company.
The
Company has made the following acquisitions which are included in the
consolidated financial statements as of the effective date of acquisition (See
Note 5):
Acquired
Company
|
|
Effective
Date of Acquisition
|
|
Country
|
Elekon
Industries U.S.A., Inc. (‘Elekon’)
|
|
June
24, 2004
|
|
U.S.A.
|
Entran
Devices, Inc. and Entran SA (‘Entran’)
|
|
July
16, 2004
|
|
U.S.A.
and France
|
Encoder
Devices, LLC (‘Encoder’)
|
|
July
16, 2004
|
|
U.S.A.
|
Humirel,
SA (‘Humirel’)
|
|
December
1, 2004
|
|
France
|
MWS
Sensorik GmbH (‘MWS’)
|
|
January
1, 2005
|
|
Germany
|
Polaron
Components Ltd (‘Polaron’)
|
|
February
1, 2005
|
|
United
Kingdom
|
HL
Planartechnik GmbH (‘HLP’)
|
|
November
30, 2005
|
|
Germany
|
Assistance
Technique Experimentale (‘ATEX’)
|
|
January
19, 2006
|
|
France
|
YSIS
Incorporated (‘YSI Temperature’)
|
|
April
1, 2006
|
|
U.S.A.
and Japan
|
BetaTherm
Group Ltd. (‘BetaTherm’)
|
|
April
1, 2006
|
|
Ireland
and U.S.A.
|
The
above
companies, except for Encoder and Polaron, which were asset purchases, became
direct or indirect wholly-owned subsidiaries of the Company, upon consummation
of their respective acquisitions.
(b)
Reclassifications:
The
presentation of certain prior year information has been reclassified to conform
to the current year presentation, which includes the consolidation of operating
expenses into one caption.
(c)
Use of Estimates:
The
preparation of the consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions which affect the reported amounts of assets and liabilities
and
the disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Significant
items subject to such estimates and assumptions include the carrying amount
of
property, plant and equipment, acquired intangibles and goodwill, valuation
allowances for receivables, inventories and deferred income tax assets and
liabilities, warranties, valuation of derivative financial instruments and
stock
based compensation. Actual results could differ from those
estimates.
(d)
Cash and Cash Equivalents:
For
purposes of the consolidated statements of cash flows, the Company considers
highly liquid investments with original maturities of up to three months, when
purchased, to be cash equivalents. At March 31, 2007, approximately $4,771
of
the Company’s cash balances were maintained in China, which are subject to
certain restrictions and are not freely transferable to another country without
adverse tax consequences because of exchange control regulations, but can be
used without such restrictions for general business purposes in
China.
(e)
Accounts Receivable:
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The majority of the Company’s accounts receivable is due from
manufacturers of electronic, automotive, military and industrial products.
Credit is extended based on an evaluation of a customers’ financial condition
and, generally, collateral is not required. Accounts receivable are generally
due within 30 to 90 days and are stated at amounts due from customers net of
allowances for doubtful accounts and other sales allowances. Accounts receivable
outstanding longer than the contractual payment terms are considered past due.
Amounts collected on trade accounts receivable are included in net cash provided
by operating activities in the consolidated statements of cash flows. The
allowance for doubtful accounts is the Company’s best estimate of the amount of
probable credit losses in the Company’s existing accounts receivable. The
Company determines its allowance by considering a number of factors, including
the length of time trade accounts receivable are past due based on contractual
terms, the Company’s previous loss history, the customer’s current ability to
pay its obligation to the Company, and the condition of the general economy
and
the industry as a whole. The Company reviews its allowance for doubtful accounts
quarterly. Actual uncollectible accounts could exceed the Company’s estimates
and changes to its estimates will be accounted for in the period of change.
Account balances are charged against the allowance after all means of collection
have been exhausted and the potential for recovery is considered remote. The
Company does not have any off-balance-sheet credit exposure related to its
customers.
(f)
Inventories:
Inventories
are valued at the lower of cost or market (‘LCM’). In evaluating LCM,
management also considers, if applicable, other factors as well, including
known
trends, market conditions, currency exchange rates and other such issues. If
the
utility of goods is impaired by damage, deterioration, obsolescence, changes
in
price levels or other causes, a loss shall be charged as cost of sales in the
period which it occurs.
The
Company makes purchasing decisions principally based upon firm sales orders
from
customers, the availability and pricing of raw materials and projected customer
requirements. Future events that could adversely affect these decisions and
result in significant charges to our operations include slowdown in customer
demand, customer delay in the issuance of sales orders, miscalculation of
customer requirements, technology changes that render raw materials and finished
goods obsolete, loss of customers and/or cancellation of sales orders. The
Company establishes reserves for its inventories to recognize estimated
obsolescence and unusable items on a continual basis.
Generally,
products that have existed in inventory for 12 months with no usage and that
have no current demand or no expected demand, will be considered obsolete and
fully reserved. Obsolete inventory approved for disposal is written-off against
the reserve. Market conditions surrounding products are also considered
periodically to determine if there are any net realizable valuation matters,
which would require a write-down of any related inventories. If market or
technological conditions change, it may result in additional inventory reserves
and write-downs, which would be accounted for in the period of change. The
level
of inventory reserves reflects the nature of the industry whereby technological
and other changes, such as customer buying requirements, result in impairment
of
inventory. Cash flows from the purchase and sale of inventory are included
in
cash flows from operating activities.
(g)
Other Receivables:
Other
receivables consist of various non-trade receivables such as value added tax
(VAT) receivables due to our European operations. In addition, approximately
$1,811 of the March 31, 2006 balance consisted of funds receivable from
financing executed prior to March 31, 2006.
(h)
Other Current Liabilities:
Other
current liabilities consist of various non-trade payable liabilities such as
commissions, warranties, interest, dilapidation liability, sales and property
taxes payable.
(i)
Promissory Note Receivable:
Promissory
note receivable is recorded net of imputed interest and relates to the financing
arrangement with the sale of the Consumer business (See Note 6). The note is
unsecured. The Company has not and does not intend to sell this promissory
note
receivable. Amounts collected on this promissory note receivable will be
included in net cash provided by investing activities from discontinued
operations in the consolidated statements of cash flows. No allowance for
doubtful accounts is provided because, based on the Company’s best estimate,
credit loss is not considered probable.
(j)
Property, Plant and Equipment:
Property,
plant and equipment are stated at cost less accumulated depreciation. Plant
and
equipment under capital leases are stated at the present value of the minimum
lease payments, and are amortized on a straight-line basis over the shorter
of
the lease term or estimated useful life of the asset. Depreciation is computed
by the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the shorter of the lease terms or
the
estimated useful lives of the assets. Normal maintenance and repairs of property
and equipment are expensed as incurred. Renewals, betterments and major repairs
that materially extend the useful life of property and equipment are
capitalized.
(k)
Income Taxes:
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry-forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
Prior
to
the implementation of Statement of Financial Accounting Standards (“SFAS”) No.
123R, Share
Based Payment,
tax
benefits from early disposition of the stock acquired by employees from the
exercise of incentive stock options or exercise of non-qualified stock options
were credited to additional paid-in capital. Since the Company is currently in a
net operating loss carry-forward position, the Company has consistently applied
the tax-law-ordering approach, whereby the tax benefits are considered realized
for current-year exercises of share-based compensation awards.
(l)
Foreign Currency Translation and Transactions:
The
functional currency of the Company’s foreign operations is the applicable local
currency. The foreign subsidiaries’ assets and liabilities are translated into
United States dollars using exchange rates in effect at the balance sheet date
and their operations are translated using the average exchange rates prevailing
during the year. The resulting translation adjustments are recorded as a
component of accumulated other comprehensive income (loss).
The
Company is subject to foreign exchange risk for foreign currency denominated
transactions, such as receivables and payables. Foreign currency transaction
gains and losses are recorded in foreign currency exchange and other income
and
expenses in the Company’s consolidated statements of operations.
(m)
Goodwill:
Goodwill
represents the excess of the aggregate purchase price over the fair value of
the
net assets acquired in a purchase business combination. See Note 5 for further
discussion of the impact of SFAS No. 142 on the Company’s financial position and
results of operations.
Per
SFAS
No. 142, management assesses goodwill for impairment at the reporting unit
level
on an annual basis at fiscal year end or more frequently under certain
circumstances. The goodwill impairment test is a two step test. Under the first
step, the fair value of the reporting unit is compared to its carrying value
(including goodwill). If the fair value of the reporting unit is less than
its
carrying value, an indication of goodwill impairment exists for the reporting
unit, and the enterprise must perform step two of the impairment test
(measurement). Under step two, an impairment loss is recognized for any excess
of the carrying amount of the reporting unit’s goodwill over the implied fair
value. The implied fair value of goodwill is determined by allocating the fair
value of the reporting unit in a manner similar to a purchase price allocation,
in accordance with SFAS No. 141, Business Combinations. The residual fair value
after this allocation is the implied fair value of the reporting unit goodwill.
Fair value of the reporting unit is determined using a discounted cash flow
analysis. If the fair value of the reporting unit exceeds its carrying value,
step two does not need to be performed.
In
evaluating goodwill for impairment, the fair value of the Company’s reporting
unit was determined using the implied fair value approach. This process was
completed in the fiscal years ended March 31, 2007, 2006 and 2005 for asset
values as of these respective dates. According to the guidelines established
under SFAS 142, there was no impairment for of the Company’s
goodwill.
(n)
Business Combinations:
Acquisitions
are recorded as of the purchase date, and are included in the consolidated
financial statements from the date of acquisition. In all acquisitions, the
purchase price of the acquired business is allocated to the assets acquired
and
liabilities assumed at their fair values on the date of the acquisition. The
fair values of these items are based upon management’s best estimates. Certain
of the acquired assets are intangible in nature, including customer
relationships, patented and proprietary technology, covenants not to compete,
trade names and order backlog, which are stated at cost less accumulated
amortization. Amortization is computed by the straight-line method over the
estimated useful lives of the assets. The excess purchase price over the amounts
allocated to the assets is recorded as goodwill. All such valuation
methodologies, including the determination of subsequent amortization periods,
involve significant judgments and estimates. Different assumptions and
subsequent actual events could yield materially different results.
Purchased
intangibles and goodwill are usually not deductible for tax purposes in stock
acquisitions. However, purchase accounting requires for the establishment of
deferred tax liabilities on purchased intangible assets (excluding goodwill)
to
the extent the carrying value for financial reporting exceeds the tax
basis
(o)
Long-Lived Assets:
The
Company accounts for the impairment of long-lived assets and amortizing
intangible assets in accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
Long-lived assets, such as property, plant, and equipment, and purchased
intangibles subject to amortization are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by
a comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of
an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds
the
fair value of the asset. Assets to be disposed of are separately presented
in
the consolidated balance sheets and reported at the lower of the carrying amount
or fair value less costs to sell, and are no longer depreciated. The assets
and
liabilities of a disposed group classified as held for sale are presented
separately in the appropriate asset and liability sections of the balance
sheet.
(p)
Revenue Recognition:
Revenue
is recognized when earned, which occurs when the following four conditions
are
met: (i) persuasive evidence of an arrangement exists; (ii) delivery has
occurred or services have been rendered; (iii) the price to the buyer is fixed
or determinable; and (iv) collectability is reasonably assured. Certain products
may be sold with a provision allowing the customer to return a portion of
products. The Company provides for allowances for returns based upon historical
and estimated return rates. The amount of actual returns could differ from
these
estimates. Changes in estimated returns are accounted for in the period of
change.
The
Company utilizes manufacturing representatives as sales agents for certain
of
its products. Such representatives do not receive orders directly from
customers, take title to or physical possession of products, or invoice
customers. Accordingly, revenue is recognized upon shipment to the
customer.
(q)
Shipping and Handling:
Shipping
and handling costs are recorded in cost of sales in the Company’s consolidated
statement of operations.
(r)
Research and Development and Advertising Costs:
Research
and development and advertising costs are expensed as incurred. Research and
development costs amounted to $9,235, $6,450 and $4,491, for the years ended
March 31, 2007, 2006 (restated) and 2005 (restated), respectively. Prior year
disclosure of research and development costs excluded certain salaries of
engineers whose activities qualify as research and development costs under
SFAS
No.2, Research
and Development.
Research and development costs disclosed in prior years were $2,567 and $2,130
in 2006 and 2005, respectively. Customer funded research and development was
$786, $448, and $268 for the fiscal years ended March 31, 2007, 2006, and 2005,
respectively. Advertising costs are included in operating expenses in the
Company’s consolidated statement of operations and are expensed when the
advertising or promotion is published. Advertising expenses for the years ended
March 31, 2007, 2006, and 2005 were approximately $242, $205, and $246,
respectively.
(s)
Warranty Reserve:
The
Company’s sensor products generally are marketed under warranties to end users
of up to one year. 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.
The
following table summarizes the warranty reserve:
|
|
Years
ended March 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Total
Warranty Reserve - Beginning
|
|
$
|
146
|
|
$
|
70
|
|
$
|
89
|
|
Warranties
issued during the period
|
|
|
491
|
|
|
124
|
|
|
99
|
|
Costs
to repair products
|
|
|
(36
|
)
|
|
(53
|
)
|
|
(86
|
)
|
Costs
to replace products
|
|
|
(200
|
)
|
|
5
|
|
|
(32
|
)
|
Total
Warranty Reserve - Ending
|
|
$
|
401
|
|
$
|
146
|
|
$
|
70
|
|
(t)
Commitments and Contingencies:
Liabilities
for loss contingencies
arising
from claims, assessments, litigation, fines, and penalties and other sources
are
recorded when it is probable that a liability has been incurred and the amount
of the assessment and/or remediation can be reasonably estimated. Legal costs
incurred in connection with loss contingencies are expensed as incurred. Such
accruals are adjusted as further information develops or circumstances
change.
(u)
Comprehensive Income:
Comprehensive
income consists of net income for the period and the impact of unrealized
foreign currency translation adjustments, net of income taxes.
(v)
Stock Based Compensation:
On
December 16, 2004, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standard No. 123 (revised 2004) (SFAS 123(R)), Share-Based
Payment,
which is
a revision of SFAS No. 123. SFAS 123(R) supersedes Accounting Principles Board
Opinion No. 25, Accounting
for Stock Issued to Employees, (APB
Opinion No. 25), Statement of Financial Accounting Standards No. 148,
Accounting
for Stock Based Compensation and
amends Statement of Financial Accounting Standards No. 95, Statement
of Cash Flows. Prior
to
fiscal 2007, the Company applied the intrinsic value method prescribed in APB
Opinion No. 25 and accordingly, recognized no compensation expense for stock
option grants to employees.
Effective
April 1, 2006, the Company adopted SFAS 123(R), utilizing the modified
prospective approach. Under the modified prospective approach, SFAS 123(R)
applies to new awards and to unvested awards that were outstanding on April
1,
2006, as well as those that are subsequently modified, repurchased or cancelled.
Compensation cost recognized in the year ended March 31, 2007 includes
compensation cost for all share-based payments granted prior to, but not yet
vested as of April 1, 2006, based on the grant-date fair value estimated in
accordance with the original provisions of SFAS 123, and compensation cost
for
all share-based payments granted subsequent to April 1, 2006, based on the
grant-date fair value using the Black-Scholes-Merton option pricing model in
accordance with the provisions of SFAS 123(R). Prior periods were not restated
to reflect the impact of adopting the new standard. The Company’s results for
the year ended March 31, 2007 include $2,887 before income taxes and $1,813
after income taxes of operating expenses related to the adoption of SFAS 123(R).
For the year ended March 31, 2007, stock compensation expense (after income
taxes) decreased net income by approximately $0.13 per share on a basic and
diluted basis as compared to if the Company had continued to account for
share-based compensation under APB Opinion No. 25 for its stock option
grants.
The
Company receives a tax deduction for certain stock options and stock option
exercises during the period the options are exercised, generally for the excess
of the fair value of the stock over the exercise price of the options at the
exercise date. Prior to adoption of SFAS 123(R), the Company reported all tax
benefits resulting from the exercise of equity instruments as an operating
cash
inflow in its consolidated statements of cash flows. In accordance with SFAS
123(R), the Company has elected to report the entire tax benefit from the
exercise of equity instruments as a financing cash inflow. Since the
Company is currently in a net operating loss carry-forward position, the Company
has consistently applied the tax-law-ordering approach, whereby the tax benefits
are considered realized for current-year exercises of share-based compensation
awards.
Net
cash
proceeds from the exercise of stock options were $1,865, $2,887 and $1,200
for
the years ended March 31, 2007, 2006 and 2005, respectively, and the income
tax
benefit realized for the year ended March 31, 2007, 2006 and 2005 from stock
option exercises was $1,276, $784 and $1,100, respectively.
The
following table illustrates the effect on net income for the years ended March
31, 2006 and 2005 as if the Company had applied the fair value recognition
provisions of Statement 123 to options granted under the Company’s stock plans
prior to adoption of Statement 123(R) on April 1, 2006. No pro forma
disclosure has been made for periods subsequent to April 1, 2006 as all
stock-based compensation has been recognized in net income. For purposes
of this pro forma disclosure, the value of the options is estimated using a
Black-Scholes-Merton option-pricing model and amortized to expense over the
options’ service periods with forfeitures recognized as they
occurred.
|
|
March
31, 2006
|
|
March
31, 2005
|
|
Net
income, as reported:
|
|
$
|
24,534
|
|
$
|
14,826
|
|
Add:
Share-based employee compensation reported in net income,
|
|
|
|
|
|
|
|
net
of income taxes
|
|
|
-
|
|
|
-
|
|
Deduct:
Share-based employee compensation under the fair value
|
|
|
|
|
|
|
|
method
for all awards, net of income taxes
|
|
|
2,143
|
|
|
1,399
|
|
Pro
forma net income
|
|
$
|
22,391
|
|
$
|
13,427
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic-as
reported
|
|
$
|
1.79
|
|
$
|
1.11
|
|
Basic-pro
forma
|
|
|
1.63
|
|
|
1.00
|
|
Diluted-as
reported
|
|
|
1.71
|
|
|
1.05
|
|
Diluted-pro
forma
|
|
|
1.56
|
|
|
0.95
|
|
In
connection with the sale of the Consumer business discussed in Note 6, the
Company issued options to former Consumer employees transferred to Fervent
Group
Limited. The Company recorded an expense of $913 related to the issuance of
these options which is included in the net gain on disposition of discontinued
operations in fiscal 2006.
(w)
Leases:
The
Company follows SFAS No. 13, Accounting
for Leases,
to
account for its operating leases. In accordance with SFAS No. 13, lease costs,
including escalations, are provided for using the straight-line basis over
the
lease period. The Company leases certain production equipment and automobiles
which under SFAS No. 13 are considered capital lease arrangements. SFAS No.
13
requires the capitalization of leases meeting certain criteria, with the related
asset being recorded in property, plant and equipment, and an offsetting amount
recorded as a liability.
The
Company’s distribution and warehouse space in Hampton, Virginia was vacant due
to the Conair transaction (see Note 6), as the Company no longer sells the
Thinner® brand of bath and kitchen scales to retailers. The Company subleased
the unused space in 2007. The accounting for the Hampton lease was in accordance
with the requirements for SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities, whereby
the Company did not record a liability for the lease as part of the consummation
of the transaction with Conair because the Company still derives economic
benefit from the lease.
(x)
Derivative Instruments:
SFAS
No.
133, Accounting
for Derivative Instruments and Hedging Activities,
as
amended by SFAS No. 138 and SFAS No. 149, establishes accounting and
reporting standards for derivative instruments and hedging activities and
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial condition and measures those
instruments at fair value. Changes in the fair value of those instruments will
be reported in earnings or other comprehensive income depending on the use
of
the derivative and whether it qualifies for hedge accounting. The accounting
for
gains and losses associated with changes in the fair value of the derivative
and
the effect on the consolidated financial statements will depend on its hedge
designation and whether the hedge is highly effective in achieving offsetting
changes in the fair value of cash flows of the asset or liability
hedged.
The
Company has a number of forward purchase currency contracts to manage the
Company’s exposures to fluctuations in the U.S. dollar relative to the Euro. As
of March 31, 2007 and 2006, the notional amount of these currency contracts
total $5,088 and $7,300, respectively, and the fair values of these contracts
was an asset of $102 at March 31, 2007 and a liability of $59 at March 31,
2006.
These currency contracts are entered into to hedge foreign exchange exposure,
although they are undesignated for accounting purposes. Since these currency
contracts do not meet the requirements of SFAS No. 133 for hedge accounting
purposes, changes in the fair value of these instruments are recognized in
earnings as gains and losses, rather than in other comprehensive
income.
(y)
Recently Adopted Accounting Standards:
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123R (Revised 2004), Share-Based
Payment.
SFAS
123R 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. Effective April 1, 2006, the Company
adopted SFAS No. 123R using the modified-prospective-transition method as
disclosed in Note 2.
On
November 24, 2004, the FASB issued SFAS No. 151, Inventory
Cost - 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 No. 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, SFAS No. 151 requires that
allocation of fixed production overheads to conversion costs should be based
on
normal capacity of the production facilities. The provisions in SFAS No. 151
are
effective for inventory costs incurred during fiscal years beginning after
June
15, 2005. Companies must apply the standard prospectively. The adoption of
SFAS
No. 151 did not effect the Company’s financial position or results of
operations.
Effective
April 1, 2006, the Company adopted disclosure requirements of Emerging Issues
Task Force (“EITF”) Issue No. 06-03,
How
Taxes Collected from Customers and Remitted to Governmental Authorities Should
be Presented in the Income Statement,
for tax
receipts on the face of their income statements. The scope of this guidance
includes any tax assessed by a governmental authority that is directly imposed
on a revenue-producing transaction between a seller and a customer and may
include, but is not limited to, sales, use, value added and some excise taxes.
The Company has historically represented such taxes on a net basis in net
sales.
In
May
2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections.
This
new standard replaces APB Opinion No. 20, Accounting
Changes,
and
SFAS 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, SFAS No. 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. SFAS No. 154 also provides that (1) a change in method
of depreciating or amortizing a long-lived non-financial 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 adoption of SFAS No. 154 did not have a material effect
on the Company’s financial position or results of operations.
On
September 13, 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) Topic
No. 108, Financial
Statements — Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements
(“SAB
108”). SAB 108 addresses how a registrant should evaluate whether an error in
its financial statements is material. The SEC staff concludes in SAB 108 that
materiality should be evaluated using both the “rollover” and “iron curtain”
methods. Registrants are required to comply with the guidance in SAB 108 in
financial statements for fiscal years ending after November 15, 2006.
Registrants that have evaluated financial statement errors contrary to the
views
of the SEC staff and have not adopted the provisions of SAB 108 should consider
disclosure of same following the guidance in SAB Topic 11M, Miscellaneous
Disclosure — Disclosure of the Impact That Recently Issued Accounting Standards
Will Have on the Financial Statements of the Registrant When Adopted in a Future
Period
(SAB
74). The adoption of SAB 108 did not have a material effect on the Company’s
financial position or results of operations.
(z)
Recently Issued Accounting Pronouncements:
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements.
This
new standard provides guidance for using fair value to measure assets and
liabilities. The FASB believes the standard also responds to investors' requests
for expanded information about the extent to which companies measure assets
and
liabilities at fair value, the information used to measure fair value, and
the
effect of fair value measurements on earnings. SFAS No. 157 applies whenever
other standards require (or permit) assets or liabilities to be measured at
fair
value but does not expand the use of fair value in any new
circumstances.
Currently,
over 40 accounting standards within GAAP require (or permit) entities to measure
assets and liabilities at fair value. Prior to SFAS No. 157, the methods for
measuring fair value were diverse and inconsistent, especially for items that
are not actively traded. The standard clarifies that for items that are not
actively traded, such as certain kinds of derivatives, fair value should reflect
the price in a transaction with a market participant, including an adjustment
for risk, not just the company's mark-to-market value. SFAS 157 also requires
expanded disclosure of the effect on earnings for items measured using
unobservable data.
Under
SFAS No. 157, fair value refers to the price that would be received to sell
an
asset or paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts. In this
standard, the FASB clarifies the principle that fair value should be based
on
the assumptions market participants would use when pricing the asset or
liability. In support of this principle, SFAS No. 157 establishes a fair value
hierarchy that prioritizes the information used to develop those assumptions.
The fair value hierarchy gives the highest priority to quoted prices in active
markets and the lowest priority to unobservable data, for example, the reporting
entity's own data. Under the standard, fair value measurements would be
separately disclosed by level within the fair value hierarchy.
The
provisions of SFAS No. 157 are effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within
those
fiscal years. Earlier application is encouraged, provided that the reporting
entity has not yet issued financial statements for that fiscal year, including
any financial statements for an interim period within that fiscal year. The
Company is currently quantifying the impact of SFAS No. 157.
On
July
13, 2006, Financial Accounting Standards Board Interpretation No. 48 (“FIN 48”),
Accounting
for Uncertainty in Income Taxes - An Interpretation of SFAS No.
109,
was
issued. FIN 48 clarifies the accounting for uncertainty in income tax recognized
in an enterprise's financial statements in accordance with SFAS No. 109,
Accounting
for Income Taxes.
FIN 48
also prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The new FASB standard also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition.
The
evaluation of a tax position in accordance with FIN 48 is a two-step process.
The first step is a recognition process whereby the enterprise determines
whether it is more likely than not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. In evaluating whether
a tax position has met the more-likely-than-not recognition threshold, the
enterprise should presume that the position will be examined by the appropriate
taxing authority that has full knowledge of all relevant information. The second
step is a measurement process whereby a tax position that meets the
more-likely-than-not recognition threshold is calculated to determine the amount
of benefit to recognize in the financial statements. The tax position is
measured at the largest amount of benefit that is greater than 50% likely of
being realized upon ultimate settlement. The provisions of FIN 48 are effective
for fiscal years beginning after December 15, 2006. Earlier application is
permitted as long as the enterprise has not yet issued financial statements,
including interim financial statements, in the period of adoption. The
provisions of FIN 48 are to be applied to all tax positions upon initial
adoption of this standard. Only tax positions that meet the more-likely-than-not
recognition threshold at the effective date may be recognized or continue to
be
recognized upon adoption of FIN 48. The cumulative effect of applying the
provisions of FIN 48 should be reported as an adjustment to the opening balance
of retained earnings (or other appropriate components of equity or net assets
in
the statement of financial position) for that fiscal year. The Company is in
the
process of assessing the impact of adopting FIN 48, but based on preliminary
procedures, the Company does not expect the adoption of FIN 48 to have a
material impact on its results of operations and financial condition.
Inventories,
net of inventory reserves, consist of the following:
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
Raw
Materials
|
|
$
|
18,328
|
|
$
|
13,586
|
|
Work-in-Process
|
|
|
5,099
|
|
|
4,392
|
|
Finished
Goods
|
|
|
13,804
|
|
|
7,121
|
|
|
|
$
|
37,231
|
|
$
|
25,099
|
|
Inventory
Reserves:
|
|
$
|
3,158
|
|
$
|
3,296
|
|
4.
PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment are stated at cost. Equipment under capital leases is stated
at the present value of minimum lease payments. Property, plant and equipment
are summarized as follows:
|
|
March
31,
|
|
|
|
|
|
2007
|
|
2006
|
|
Useful
Life
|
|
Production
equipment & tooling
|
|
$
|
32,435
|
|
$
|
27,156
|
|
|
3-10
years
|
|
Building
and leasehold improvements
|
|
|
7,524
|
|
|
3,914
|
|
|
39
years or lesser of useful life or remaining term
of lease
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture
and equipment
|
|
|
9,103
|
|
|
7,135
|
|
|
3-10
years
|
|
Construction-in-progress
|
|
|
2,603
|
|
|
1,999
|
|
|
|
|
Total
|
|
|
51,665
|
|
|
40,204
|
|
|
|
|
Less:
accumulated depreciation and amortization
|
|
|
(24,106
|
)
|
|
(18,118
|
)
|
|
|
|
|
|
$
|
27,559
|
|
$
|
22,086
|
|
|
|
|
Total
depreciation and amortization from continuing operations was $5,204, $3,383,
and
$2,277 for the years March 31, 2007, 2006, and 2005, respectively. Depreciation
expense for discontinued operations for the years ended March 31, 2006 and
2005
was $563 and $818, respectively. Property and equipment included $2,165 and
$2,786 in capital leases at March 31, 2007 and 2006, respectively.
5.
ACQUISITIONS, GOODWILL AND ACQUIRED INTANGIBLES
Recent
Acquisitions:
As
part
of its growth strategy, the Company made six acquisitions during the year ended
March 31, 2005, two acquisitions during the year ended March 31, 2006, and
two
acquisitions during the year ended March 31, 2007.
Changes
to goodwill relate to new acquisitions, earn-out payments, final purchase price
allocations and translation adjustments due to changes in foreign currency
exchange rates. Goodwill balances presented in the consolidated balance sheets
of foreign acquisitions are translated at the exchange rate in effect at each
balance sheet date; however, opening balance sheets used to calculate goodwill
and acquired intangible assets are based on purchase date exchange rates, except
for earn-out payments which are recorded at the exchange rates in effect on
the
date the earn-out is accrued. The following acquisition summaries represent
acquisitions from fiscal 2005 forward. Therefore, goodwill for each acquisition
presented below does not aggregate to reported amounts. Goodwill recorded for
the years ended March 31, 2007 and 2006 was $35,549 and $1,838,
respectively.
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%. Elekon was based in Torrance, California where it
designed and manufactured optical sensors primarily for the medical and security
markets. The Company’s final allocation of purchase price related to the Elekon
acquisition follows:
Assets:
|
|
|
|
Accounts receivable
|
|
$
|
501
|
|
Inventory
|
|
|
442
|
|
Property and equipment
|
|
|
169
|
|
Other assets
|
|
|
20
|
|
Acquired intangible assets
|
|
|
3,775
|
|
Goodwill
|
|
|
4,756
|
|
|
|
|
9,663
|
|
Liabilities:
|
|
|
|
|
Accounts payable
|
|
|
(1,516
|
)
|
Other liabilities
|
|
|
(102
|
)
|
Deferred income taxes
|
|
|
(248
|
)
|
|
|
|
(1,866
|
)
|
Total
purchase price
|
|
$
|
7,797
|
|
Entran:
On
July
16, 2004, the Company acquired 100% of the capital stock of Entran Devices,
Inc.
and Entran SA (collectively “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 paid a deferred payment
of
$2,186 in July 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, which was 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 Company’s final allocation of purchase price related to the
Entran acquisition follows:
Assets:
|
|
|
|
Cash
|
|
$
|
246
|
|
Accounts receivable
|
|
|
2,002
|
|
Inventory
|
|
|
1,648
|
|
Property and equipment
|
|
|
979
|
|
Other assets
|
|
|
264
|
|
Acquired intangible assets
|
|
|
800
|
|
Goodwill
|
|
|
7,204
|
|
|
|
|
13,143
|
|
Liabilities:
|
|
|
|
|
Accounts payable
|
|
|
(2,013
|
)
|
Other liabilities
|
|
|
(86
|
)
|
Deferred income taxes
|
|
|
(320
|
)
|
|
|
|
(2,419
|
)
|
Total
purchase price
|
|
$
|
10,724
|
|
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, which was based in Plainfield, IL, was a designer and
manufacturer of rotational sensors (encoders) utilizing magnetic encoding
technology. The Company’s final purchase allocation related to the Encoder
acquisition follow:
Assets:
|
|
|
|
Accounts receivable
|
|
$
|
96
|
|
Inventory
|
|
|
134
|
|
Property and equipment
|
|
|
245
|
|
Other assets
|
|
|
36
|
|
Acquired intangible assets
|
|
|
420
|
|
Goodwill
|
|
|
3,883
|
|
|
|
|
4,814
|
|
Liabilities:
|
|
|
|
|
Accounts payable
|
|
|
(204
|
)
|
Other liabilities
|
|
|
(9
|
)
|
|
|
|
(213
|
)
|
Total
purchase price
|
|
$
|
4,601
|
|
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 December 17, 2004 exchange rate was $26,318 ($23,244 at close,
$1,922 in deferred payment, and $1,152 in acquisition costs). The deferred
payment was paid on the second anniversary of the closing date (less any
applicable offsets) and bears interest at the rate of 3% per annum. 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 8). Set forth below is the final allocation of purchase price related
to
the Humirel acquisition:
Assets:
|
|
|
|
Cash
|
|
$
|
994
|
|
Accounts receivable
|
|
|
1,513
|
|
Inventory
|
|
|
1,755
|
|
Property and equipment
|
|
|
1,916
|
|
Other assets
|
|
|
744
|
|
Acquired intangible assets
|
|
|
4,690
|
|
Goodwill
|
|
|
19,195
|
|
|
|
|
30,807
|
|
Liabilities:
|
|
|
|
|
Accounts payable
|
|
|
(1,268
|
)
|
Long-term debt
|
|
|
(2,502
|
)
|
Deferred income taxes
|
|
|
(719
|
)
|
|
|
|
(4,489
|
)
|
Total
purchase price
|
|
$
|
26,318
|
|
MWS
Sensorik:
On
January 1, 2005, the Company acquired 100% of the capital stock of MWS Sensorik
GmbH (“MWS” or “Sensorik”), for 900 Euro, or $1,292 ($912 at close, $309 in
deferred payments, and $71 in acquisition costs). MWS, based in Pfaffenhofen,
Germany, integrates and distributes accelerometers and other sensors, sold
primarily to the automotive crash test market. MWS has historically used the
Company’s silicon micro-machined accelerometer as their die for Piezo-resistive
sensors. The Company’s final allocation of purchase price related to the MWS
acquisition follows:
Assets:
|
|
|
|
Accounts receivable
|
|
$
|
252
|
|
Inventory
|
|
|
189
|
|
Property and equipment
|
|
|
49
|
|
Other assets
|
|
|
6
|
|
Acquired intangible assets
|
|
|
844
|
|
Goodwill
|
|
|
452
|
|
|
|
|
1,792
|
|
Liabilities:
|
|
|
|
|
Accounts payable
|
|
|
(68
|
)
|
Other liabilities
|
|
|
(175
|
)
|
Deferred income taxes
|
|
|
(257
|
)
|
|
|
|
(500
|
)
|
Total
purchase price
|
|
$
|
1,292
|
|
Polaron:
On
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 $2,290 ($2,259 at close and $31 in acquisition
costs). 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. The Company had been
manufacturing Polaron pressure products in its wholly-owned subsidiary in China,
and these products continue to be manufactured by the Company’s factory in
China. The Company’s final allocation of purchase price related to the Polaron
acquisition follows:
Assets:
|
|
|
|
Inventory
|
|
$
|
48
|
|
Property and equipment
|
|
|
7
|
|
Acquired intangible assets
|
|
|
1,003
|
|
Goodwill
|
|
|
1,232
|
|
Total
purchase price
|
|
$
|
2,290
|
|
On
November 30, 2005, the Company acquired the capital stock of HL Planartechnik
GmbH (“HLP”), a sensor company located in Dortmund, Germany. The total purchase
price based On the November 30, 2005 exchange rate was $3,044 ($2,835 at
close
and $209 in acquisition costs). The sellers could have earned an additional
$3,517 if certain performance hurdles, specifically defined net sales, were
achieved in calendar 2006. Based on the results of operations, the minimum
performance targets were not achieved and no earn-out was paid. The initial
amounts of the transaction resulted in negative goodwill (the excess of fair
value of net assets over cost), and at March 31, 2006, the Company had recorded
$3,517 of the contingent consideration as a liability, which is the lesser
of
the maximum contingent consideration or negative goodwill as of the date
of the
acquisition based on preliminary purchase accounting. Effective April 1,
2006,
the negative goodwill provision was reversed and purchase price reallocated
to
proportionately reduce the assigned values of acquired property, equipment
and
acquired intangible assets. The reduction in property, equipment and acquired
intangible assets from the allocation of negative goodwill resulted in a
reduction in depreciation and amortization expense of approximately $420
and
$222, respectively, for the year ended March 31, 2007. Set forth below is
the
preliminary allocation prior to the allocation of negative goodwill and prior
to
finalization of purchase accounting and the final purchase price allocation
related to the HLP acquisition:
|
|
Preliminary
Allocation
|
|
Revised
Allocation
|
|
Assets:
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
1,116
|
|
$
|
1,065
|
|
Inventory
|
|
|
2,081
|
|
|
1,909
|
|
Property
and equipment
|
|
|
4,228
|
|
|
1,713
|
|
Acquired
intangible assets
|
|
|
1,684
|
|
|
603
|
|
Deferred
income taxes
|
|
|
2,708
|
|
|
3,010
|
|
Other
|
|
|
284
|
|
|
284
|
|
|
|
|
12,101
|
|
|
8,584
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(678
|
)
|
|
(678
|
)
|
Accrued
compensation
|
|
|
(392
|
)
|
|
(392
|
)
|
Debt
and other non-operational liabilities
|
|
|
(4,193
|
)
|
|
(4,193
|
)
|
Negative
goodwill provision
|
|
|
(3,517
|
)
|
|
—
|
|
Other
|
|
|
(277
|
)
|
|
(277
|
)
|
|
|
|
(9,057
|
)
|
|
(5,540
|
)
|
Total
Purchase Price
|
|
$
|
3,044
|
|
$
|
3,044
|
|
ATEX:
On
January 19, 2006, the Company completed the acquisition of Assistance Technique
Experimentale (“ATEX”), a sensor company based outside of Paris, France, by
acquiring all of the outstanding shares of ATEX stock. Founded in 2000, ATEX
specializes in providing vibration sensors to the Formula One racing market.
The
total purchase price based on the January 19, 2006 exchange rates was $4,959
($2,502 in cash, $74 in acquisition costs, deferred payment of $725, the
first
earn-out payment of $725 and the final earn-out payment accrual of the final
earn-out payments of $933). The selling shareholders have the potential to
receive up to an additional $1,888 in three earn-out payments tied to sales
growth objectives over the next three years, and if the contingencies are
resolved and meet established conditions, these amounts will be recorded
as an
additional element of the cost of the acquisition. The first earn-out payment
of
$725 was accrued and included in the total purchase price at March 31, 2006
since satisfying the first of the three sales growth objectives was considered
probable. At March 31, 2007, the final earn-out noted above was accrued for
the
other sales growth objectives. The Company’s final allocation of purchase price
related to the ATEX acquisition (subject to any remaining earn-out payments)
follows:
Assets:
|
|
|
|
Cash
|
|
$
|
692
|
|
Accounts receivable
|
|
|
401
|
|
Inventory
|
|
|
117
|
|
Property and equipment
|
|
|
131
|
|
Other assets
|
|
|
31
|
|
Acquired intangible assets
|
|
|
834
|
|
Goodwill
|
|
|
3,603
|
|
|
|
|
5,809
|
|
Liabilities:
|
|
|
|
|
Accounts payable
|
|
|
(416
|
)
|
Debt
|
|
|
(157
|
)
|
Deferred income taxes
|
|
|
(277
|
)
|
|
|
|
(850
|
)
|
Total
purchase price
|
|
$
|
4,959
|
|
YSI:
Effective
April 1, 2006, the Company completed the acquisition of all of the capital
stock
of YSIS Incorporated (“YSI Temperature”), a division of YSI Incorporated, for
$14,252 ($14,000 in cash at close and $252 in acquisition costs). YSI
Temperature manufactures a range of thermistors for automotive, medical,
industrial and consumer goods applications. The transaction was financed with
borrowings under the Company’s Amended Credit Facility provided by a syndicate
of lending institutions (See Note 8). The acquisition of YSI was consummated
on
April 3, 2006, and accordingly, the Company will finalize purchase accounting
within one year of this date. The Company’s final purchase price allocation
related to the YSI Temperature acquisition follows:
Assets:
|
|
|
|
Cash
|
|
$
|
440
|
|
Accounts
receivable
|
|
|
3,109
|
|
Inventory
|
|
|
1,672
|
|
Prepaid
assets and other
|
|
|
714
|
|
Property
and equipment
|
|
|
1,134
|
|
Acquired
intangible assets
|
|
|
2,142
|
|
Goodwill
|
|
|
7,588
|
|
Other
|
|
|
303
|
|
|
|
|
17,102
|
|
Liabilities:
|
|
|
|
|
Accounts
payable
|
|
|
(884
|
)
|
Accrued
compensation
|
|
|
(780
|
)
|
Deferred
income taxes
|
|
|
(65
|
)
|
Minority
interest
|
|
|
(1,121
|
)
|
|
|
|
(2,850
|
)
|
Total
Purchase Price
|
|
$
|
14,252
|
|
The
Company filed with the Internal Revenue Service a 338(h) (10) election for
the
YSI Temperature acquisition in December 2006, which for tax purposes, provides
treatment of the acquisition as an asset purchase with the underlying assets
stepped up to the fair value rather than as a stock purchase, and as result
of
this election, the deferred taxes initially recorded are no longer reflected
as
part of purchase accounting.
With
the
purchase of YSI Temperature, the Company acquired a 50 percent voting-ownership
interest in Nikisso-YSI, a joint venture in Japan. This joint venture is
consolidated as part of the purchase accounting and is included in the
consolidated financial statements of the Company, as a variable interest entity
(“VIE”) as defined by FIN 46(R), “Consolidation of Variable Interest Entities”
(revised December 2003), because YSI Temperature is determined to be the
primary beneficiary of the VIE as it incurs the majority of the economic risk
and reward. Assets and liabilities of the consolidated VIE at March 31, 2007
totaled $4,257 and $1,243, respectively. Net sales of the consolidated VIE
for
the twelve months ended March 31, 2007 totaled $4,771. Minority interest for
the
twelve months ended March 31, 2007 net of income taxes totaled $524. At March
31, 2007, the joint venture had amounts due from its joint venture partner
of
$1,456 which consists of funds held by Nikisso, the joint venture
partner, in a short-term interest bearing arrangement.
Effective
April 1, 2006, the Company completed the acquisition of all of the capital
stock
of BetaTHERM Group Ltd., a sensor company headquartered in Galway, Ireland
(“BetaTHERM”), for $37,248 ($33,741 in cash at closing, $1,787 in deferred
acquisition payments, $1,000 in Company shares and $720 in acquisition costs).
Established in 1983, BetaTHERM manufactures precision thermistors used for
temperature sensing in aerospace, biomedical, automotive, industrial and
consumer goods applications. BetaTHERM conducts business through operations
located in Ireland, Massachusetts and in China. The transaction was financed
with borrowings under the Company’s Amended Credit Facility provided by a
syndicate of lending institutions (See Note 8). The Company executed a
restructuring of BetaTHERM during the quarter ended March 31, 2007, whereby
the
ownership of BetaTHERM’s U.S. operation was transferred to Measurement
Specialties, Inc. from BetaTHERM Ireland. This reorganization was part of the
acquisition in that it was a requirement in our credit facility and provided
an
efficient organizational structure for operational and tax purposes. The
Company’s final purchase price allocation related to the BetaTHERM acquisition
follows:
Assets:
|
|
|
|
Cash
|
|
$
|
2,388
|
|
Accounts
receivable
|
|
|
3,180
|
|
Inventory
|
|
|
2,521
|
|
Property
and equipment
|
|
|
3,551
|
|
Acquired
intangible assets
|
|
|
8,609
|
|
Goodwill
|
|
|
25,803
|
|
Other
|
|
|
228
|
|
|
|
|
46,280
|
|
Liabilities:
|
|
|
|
|
Accounts
payable
|
|
|
(1,733
|
)
|
Accrued
expenses
|
|
|
(695
|
)
|
Taxes
payable
|
|
|
(805
|
)
|
Debt
|
|
|
(3,737
|
)
|
Deferred
income taxes
|
|
|
(2,062
|
)
|
|
|
|
(9,032
|
)
|
Total
Purchase Price
|
|
$
|
37,248
|
|
Acquired
Intangibles
In
connection with current and previous acquisitions, the Company acquired certain
identifiable intangible assets, including customer relationships, proprietary
technology, patents, trade-names, order backlogs and covenants-not-to-compete.
The gross amounts and accumulated amortization, along with the range of
amortizable lives is as follows:
|
|
March
31, 2007
|
|
March
31, 2006
|
|
|
|
Life
in years
|
|
Gross
Amount
|
|
|
|
Net
|
|
Gross
Amount
|
|
|
|
Net
|
|
Amortizable
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
|
5-15
|
|
$
|
15,474
|
|
$
|
(3,194
|
)
|
$
|
12,280
|
|
$
|
8,193
|
|
$
|
(922
|
)
|
$
|
7,271
|
|
Patents
|
|
|
5-19.5
|
|
|
2,514
|
|
|
(445
|
)
|
$
|
2,069
|
|
|
2,642
|
|
|
(422
|
)
|
|
2,220
|
|
Tradenames
|
|
|
1.5-3
|
|
|
1,031
|
|
|
(520
|
)
|
$
|
511
|
|
|
570
|
|
|
(135
|
)
|
|
435
|
|
Backlog
|
|
|
1
|
|
|
1,780
|
|
|
(1,780
|
)
|
$
|
-
|
|
|
654
|
|
|
(542
|
)
|
|
112
|
|
Covenants-not-to-compete
|
|
|
3
|
|
|
903
|
|
|
(824
|
)
|
$
|
79
|
|
|
903
|
|
|
(523
|
)
|
|
380
|
|
Proprietary
technology
|
|
|
5-15
|
|
|
2,447
|
|
|
(380
|
)
|
$
|
2,067
|
|
|
989
|
|
|
(157
|
)
|
|
832
|
|
|
|
|
|
|
$
|
24,149
|
|
$
|
(7,143
|
)
|
$
|
17,006
|
|
$
|
13,951
|
|
$
|
(2,701
|
)
|
$
|
11,250
|
|
Amortization
expense was $4,464, $1,767, and $744, for the years ended March 31, 2007, 2006
and 2005, respectively. During 2006, the Company reclassified $1,870 of customer
relationships from an indefinite life to an amortizing intangible asset with
a
10 year remaining life. In accordance with SFAS No. 142, this has been treated
as a change in an accounting estimate prospectively applied.
Estimated
annual amortization expense is expected to be as follows:
|
|
Amortization
|
|
Year
|
|
Expense
|
|
2008
|
|
$
|
2,962
|
|
2009
|
|
|
2,752
|
|
2010
|
|
|
2,537
|
|
2011
|
|
|
2,484
|
|
2012
|
|
|
2,049
|
|
Thereafter
|
|
|
4,222
|
|
|
|
$
|
17,006
|
|
Deferred
Acquisition Payments
In
connection with the BetaTHERM acquisitions, $1,973, net of imputed interest
of
$210, in deferred acquisition payments outstanding was classified as current
and
outstanding at March 31, 2007.
Pro
forma Financial Data (Unaudited)
The
following represents the Company’s pro forma consolidated results of continuing
operations for the year ended March 31, 2006, presented assuming all the above
acquisitions occurred as of April 1, 2005, 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, 2005. Since BetaTherm and YSI
Temperature were acquired effective April 1, 2006, there were no pro forma
adjustments to fiscal 2007.
|
|
March
31, 2006
|
|
Net
sales
|
|
$
|
164,737
|
|
Income
from continuing operations
|
|
$
|
4,291
|
|
Income
from continuing operations per common share:
|
|
|
|
|
Basic
|
|
$
|
0.31
|
|
Diluted
|
|
$
|
0.30
|
|
6.
DISCONTINUED OPERATIONS AND GAIN ON SALE OF ASSETS:
CONSUMER
PRODUCTS SEGMENT: Effective December 1, 2005, the Company completed the sale
of
the Consumer Products segment to Fervent Group Limited (FGL), whereby the
Company sold its Consumer Products segment, including its Cayman Island
subsidiary, Measurement Limited (‘ML Cayman’). FGL is a company controlled by
the owners of River Display Limited (RDL), the Company’s long time partner and
primary supplier of consumer products in Shenzhen, China. Under the terms of
the
agreement, the Company sold to FGL the Company’s Consumer Division for $8,500 in
cash and a two-year $4,000 non-interest bearing promissory note receivable
from
FGL. The Company recorded the promissory note receivable net of imputed interest
of 5% at $3,800. In addition, the Company could have earned an additional $5,000
if certain performance criteria (sales and margin targets) were met within
the
first year. The Company recorded $2,156 of the earn-out in 2007, because a
portion of the earn-out targets were met. This amount is net of imputed
interest, payable over eight quarters, reported in the 2007 consolidated
statement of operations as the gain on disposition of discontinued operations,
and the related receivable is included in the consolidated balance sheet as
both
current and non-current portions of promissory note receivable. At March 31,
2007 and 2006, the promissory notes receivable related to the sale and earn-out
of the Consumer business totaled $3,316 and $3,297, respectively.
In
accordance with SFAS 144, Accounting
for Impairment or Disposal of Long-lived Assets,
the
related financial information for the Consumer segment are reported as
discontinued operations. The Consumer segment designed and manufactured
sensor-based consumer products, such as bathroom and kitchen scales, tire
pressure gauges and distance estimators, primarily as an original equipment
manufacturer (OEM), to retailers and distributors mainly in the United States
and Europe.
During
2006, the Company recorded a gain on the sale of the Consumer business of
$9,039, net of income taxes of $118, severance and professional fees of $1,162,
and stock compensation expense of $913 for severance directly related to the
execution of the sale. Also included in the gain on sale is the recognition
of
$826 of non-cash deferred gain from the sale of the Thinner® branded business to
Conair Corporation that was consummated in January 2004. The Company has no
further obligations to Conair Corporation subsequent to the sale of the Consumer
business. Since ML Cayman, which was directly owned by the Company’s British
Virgin Island subsidiary, Kenabell Holding BVI, did not conduct business in
Hong
Kong, the sale of the Consumer segment was effectively not taxed. The net assets
of approximately $1,894 sold to FGL consist of those items related to the
business of the Consumer segment, including such items as raw material and
finished goods inventory, tooling, and patents, but excluding certain trade
accounts receivable, property and equipment, and accounts payable.
The
Company does not have any continued involvement in the management of the
Consumer business, nor does the Company have a direct financial ownership
investment in the Consumer business. For a limited period of time, the Company
will continue to sell certain sensor components to RDL used in the manufacturing
of the consumer products, but as part of the sale, the Company has agreed to
allow RDL a royalty-free license in order to manufacture these components
themselves.
A
summary
of the results of operations of the discontinued Consumer operating unit
follows:
|
|
|
April
1, 2005
to
December
1,
2005
|
|
|
For
the year ended March 31,
|
|
|
|
|
Fiscal
2006
|
|
|
2005
|
|
Net
sales
|
|
$
|
40,356
|
|
$
|
48,673
|
|
Cost
of goods sold
|
|
|
30,595
|
|
|
36,309
|
|
Gross
profit
|
|
|
9,761
|
|
|
12,364
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
2,441
|
|
|
4,405
|
|
Research
and development
|
|
|
887
|
|
|
1,338
|
|
Total
operating expense
|
|
|
3,328
|
|
|
5,743
|
|
Operating
income
|
|
|
6,433
|
|
|
6,621
|
|
Gain
on sale of assets
|
|
|
-
|
|
|
-
|
|
Other
expense (income)
|
|
|
(262
|
)
|
|
13
|
|
Income
from discontinued operations before income taxes
|
|
|
6,695
|
|
|
6,608
|
|
Income
taxes from discontinued operations
|
|
|
1,527
|
|
|
1,562
|
|
Income
from discontinued operations before, gain
|
|
|
5,168
|
|
|
5,046
|
|
Gain
on disposition of discontinued operations (net of income
tax)
|
|
|
9,039
|
|
|
-
|
|
Income
from discontinued operations
|
|
$
|
14,207
|
|
$
|
5,046
|
|
Income
from discontinued operations for the year ended March 31, 2007 was $121,
representing interest income earned on the promissory notes receivable and
partially offset by certain residual amounts as the business was unwound. No
interest expense was allocated to discontinued operations, since none of the
proceeds from the sale were used to pay down debt.
CONSUMER
PRODUCTS THINNER® BRAND: On January 30, 2004, Conair Corporation (Conair)
purchased certain assets of the Company’s Thinner® branded bathroom and kitchen
scale business. Under the terms of the Agreement of Purchase and Sale of Assets,
dated January 30, 2004, Conair Corporation acquired certain assets associated
with the sale of Thinner® brand bathroom and kitchen scales, including worldwide
rights to the Thinner® brand name and exclusive rights to the Thinner® designs
in North America. Assets sold to Conair included, among other things, all
inventories of finished scales, open customer purchase orders, and patents.
The
Company previously sold its Thinner® branded scales directly to retailers,
predominately in the U.S. and Canada.
The
Company has accounted for the sale of this business under the guidance of EITF
00-21. As part of the asset purchase agreement with Conair, the Company has
agreed to supply Conair existing models of bathroom and kitchen scales at prices
that approximate cost to manufacture the product. Accordingly, a significant
portion of the $12,418 proceeds from the sale of the business was in fact an
up-front payment for future lost margins. Of the $12,418 proceeds, $11,418
was
received in February 2004, and additional $1,000 was released from escrow in
April 2004. The estimated total gain (‘total gain’), prior to any deferral, was
approximately $8,565. In order to arrive at the amount of the total gain on
sale
that should be deferred and amortized into future periods, the Company analyzed
the estimated lost margins on an OEM basis for the Thinner® branded bathroom and
kitchen scale models sold to Conair. The basis of the calculation was to
determine the estimated remaining product lives for those Thinner® branded
bathroom and kitchen scale models sold to Conair. Based upon this analysis,
barring any new product introduction or material change to the competitive
landscape, it is estimated that the Company would have been able to continue
to
sell these Thinner® branded bathroom and kitchen scale models into the
marketplace for approximately an additional 4.25 years. Applying these factors,
it was determined that $7,142 of the total gain should be deferred and amortized
over the remaining life cycle of the Thinner® branded bathroom and kitchen scale
models sold to Conair. Accordingly, the Company recorded a gain on the sale
of
the assets of $1,424 (reflected as ‘Gain on Sale of Assets’), and included
$2,940, $2,978 and $398 in ‘net sales’ for the amortization of the deferred gain
in the fiscal years ended March 31, 2006, 2005 and 2004, respectively. The
balance of deferred gain of $826 remaining upon the sale of the Consumer
business to FGL above was included in the gain on disposition of discontinued
operations for the year ended March 31, 2006.
7.
FINANCIAL INSTRUMENTS:
Fair
Value of Financial Instruments
The
following table presents the carrying amounts and estimated fair values of
the
Company’s financial instruments at March 31, 2007 and 2006. The fair value of a
financial instrument is the amount at which the instrument could be exchanged
in
a current transaction between willing parties.
|
|
2007
|
|
2006
|
|
|
|
Carrying
amount
|
|
Fair
value
|
|
Carrying
amount
|
|
Fair
value
|
|
|
|
|
|
|
|
|
|
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
7,709
|
|
$
|
7,709
|
|
$
|
9,166
|
|
$
|
9,166
|
|
Accounts
receivable
|
|
|
34,774
|
|
|
34,774
|
|
|
19,381
|
|
|
19,381
|
|
Promissory
notes receivable
|
|
|
3,316
|
|
|
3,316
|
|
|
3,297
|
|
|
3,297
|
|
Other
receivables
|
|
|
1,876
|
|
|
1,876
|
|
|
3,409
|
|
|
3,409
|
|
Prepaids
and other assets (current and long-term)
|
|
|
4,745
|
|
|
4,745
|
|
|
3,363
|
|
|
3,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory
notes payable
|
|
|
100
|
|
|
100
|
|
|
1,100
|
|
|
1,040
|
|
Accounts
payable
|
|
|
17,742
|
|
|
17,742
|
|
|
11,337
|
|
|
11,337
|
|
Deferred
acquisition payments
|
|
|
1,973
|
|
|
1,973
|
|
|
3,972
|
|
|
3,916
|
|
Foreign
currency contracts
|
|
|
102
|
|
|
102
|
|
|
59
|
|
|
59
|
|
Capital
lease obligation
|
|
|
2,165
|
|
|
2,165
|
|
|
2,786
|
|
|
2,786
|
|
Accrued
compensation
|
|
|
6,616
|
|
|
6,616
|
|
|
3,116
|
|
|
3,116
|
|
Accrued
expenses
|
|
|
2,447
|
|
|
2,447
|
|
|
2,190
|
|
|
2,190
|
|
Other
liabilities (current and long-term)
|
|
|
4,695
|
|
|
4,695
|
|
|
3,730
|
|
|
3,730
|
|
Contingent
consideration provision
|
|
|
-
|
|
|
-
|
|
|
3,517
|
|
|
3,517
|
|
Accrued
litigation settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolver
|
|
|
42,010
|
|
|
42,010
|
|
|
-
|
|
|
-
|
|
Long-term
debt
|
|
|
20,314
|
|
|
20.314
|
|
|
19,347
|
|
|
14,626
|
|
The
carrying amounts shown in the table are included in the consolidated balance
sheets under the indicated captions, except for foreign currency contracts,
which are included in accrued expenses or other assets.
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments:
For
cash
and cash equivalents, accounts receivable, notes receivable and other
receivables, prepaid and other assets (current and long-term), promissory notes
payable, accounts payable, accrued expenses other liabilities (non-derivatives,
current and long-term), and foreign currency contracts, the carrying amounts
approximate fair value because of the short maturity of these instruments or
amounts have already been recorded at approximate fair value.
For
promissory notes payable, deferred acquisition payments and capital lease
obligation, the fair value is determined as the present value of expected future
cash flows discounted at the current interest rate, which approximates rates
currently offered by lending institutions for loans of similar terms to
companies with comparable credit risk.
For
long-term debt and revolver, the fair value of the Company’s long-term debt is
estimated by discounting future cash flows of each instrument at rates currently
offered to the Company for similar debt instruments of comparable maturities
by
the Company’s lenders. The fair value of long-term debt and revolver
approximates carrying value with the recent renegotiation of debt in April
2006
and the variable interest nature of the debt.
Foreign
Exchange Risk Management
The
Company has a number of currency contracts to manage exposure to fluctuations
of
the U.S. dollar relative to the Euro. These currency contracts have a total
notional amount of $5,088 and $7,300 at March 31, 2007 and 2006,
respectively. The exercise dates are through March 2008 at an average exchange
rate of $1.275 (Euro to U.S. dollar conversion rate). Since these derivatives
are not designated as cash-flow hedges under SFAS 133, changes in their fair
value are recorded in earnings, not in accumulated other comprehensive income.
As of March 31, 2007 and 2006, the fair value of these contracts was an asset
and a liability of $102 and $59, respectively.
The
aggregate foreign currency transaction exchange gain (loss) recorded in other
income of the statement of operations was ($767), ($300) and $115 for the years
ended March 31, 2007, 2006 and 2005, respectively.
8.
LONG-TERM DEBT:
Long-term
Debt and Revolving Credit Facility:
To
support the financing of the acquisitions of YSI Temperature and BetaTherm
(See
Note 5), effective April 1, 2006, the Company entered into an Amended and
Restated Credit Agreement (“Amended Credit Facility”) with GECC which, among
other things, increased the Company’s existing credit facility from $35,000 to
$75,000 and lowered the applicable LIBOR or Index Margin from 4.50% and 2.75%,
respectively, to LIBOR and Index Margins of 2.75% and 1%, respectively. The
term
portion of the Amended Credit Facility totaled $20,000. Interest accrues on
the
principal amount of the borrowings at a rate based on either LIBOR plus a LIBOR
margin, or at the election of the borrower, at an Index Rate (prime based rate)
plus an Index Margin. Beginning on September 30, 2006, the applicable margins
may be adjusted quarterly on a prospective basis based on a change in specified
financial ratios. The term loan is payable in $500 quarterly installments plus
interest beginning June 1, 2006 through March 1, 2011, with a final payment
of
$10,500 payable on April 3, 2011. Borrowings under the line are subject to
certain financial covenants and restrictions on indebtedness, dividend payments,
financial guarantees, annual capital expenditures, and other related items.
The
availability of the revolving credit facility is not based on any borrowing
base
requirements, but borrowings may be limited by certain financial covenants.
The
Company has provided a security interest in substantially all of the Company’s
U.S. based assets as collateral for the Amended Credit Facility. At March 31,
2007, the Company was in compliance with applicable financial
covenants.
As
of
March 31, 2007, the Company utilized the LIBOR based rate for approximately
$54,000, and the balance utilized the Index based rate. The interest rate
applicable to borrowings under the revolving credit facility was approximately
8.1% at March 31, 2007. As of March 31, 2007, the outstanding borrowings on
the
revolver, which is classified as long-term debt, were $42,010, and the Company
had the right to borrow an additional $12,990 under the revolving credit
facility. Commitment fees on the unused balance were equal to .375% per annum
of
the average amount of unused balances.
Previous
Long-term debt and Revolving Credit Facility
On
December 17, 2004, the Company entered into a $35,000 five-year credit agreement
with 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. On April 1, 2006, the $35,000 credit agreement
was replaced by the Amended Credit Facility of $75,000. Interest accrued 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 was at the election of the
borrower. From the closing date to the second anniversary date of the closing,
the applicable LIBOR and Index Margins were 4.50% and 2.75%, respectively,
and
from the second anniversary, the applicable LIBOR and Index Margins were 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 was payable in twenty
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, ordinary working capital and general corporate needs.
As
of
March 31, 2006, the Company utilized the prime based Index Rate, and the
interest rate applicable to borrowings under the revolving credit facility
was
10.50%. As of March 31, 2006, the outstanding borrowings on the term loan and
revolver, which is included in short-term debt, were $17,500 and $3,500,
respectively. The weighted average amount of borrowings and weighted average
interest rate for the above facilities during the twelve months ended March
31,
2006 were $20,213 and 9.45%, respectively. Commitment fees on the unused balance
were equal to .5% per annum of the average amount of unused balances and
commitment fees paid during the year ended March 31, 2006 was $69.
Promissory
Notes
In
connection with the acquisition of Elekon Industries USA, Inc., the Company
issued unsecured Promissory Notes (the “Notes”) totaling $3,000, of which $100
and $1,100 was outstanding at March 31, 2007 and 2006, respectively. At March
31, 2007 and 2006, $100 and $1,000, respectively, were considered current.
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, Humirel, HLP, and ATEX, the Company
assumed outstanding short-term borrowings. At March 31, 2006, $277 of this
assumed short-term borrowing remained outstanding and was included in short-term
debt in the accompanying consolidated balance sheets. Below is a summary of
Other Short-Term Debt outstanding at March 31, 2006, which were paid during
2007:
|
|
2006
|
|
Short-term
debt:
|
|
|
|
Revolver
|
|
$
|
3,500
|
|
European
short-term borrowings
|
|
|
277
|
|
|
|
$
|
3,777
|
|
Long-Term
Debt and Promissory Notes
Below
is
a summary of the long-term debt and promissory notes outstanding at March 31,
2007 and 2006:
The
principal payments of long-term debt, revolver and promissory notes are as
follows:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Prime
or LIBOR plus 2.75% or 1% five-year term loan
with
a final installment due on March 31, 2011
|
|
$
|
18,000
|
|
$
|
17,500
|
|
Governmental
loans from French agencies at no interest
and
payable based on R&D expenditures.
|
|
|
744
|
|
|
535
|
|
Term
credit facility with six banks at an interest rate of
4%
payable through 2010.
|
|
|
1,009
|
|
|
750
|
|
Bonds
issued at an interest rate of 3% payable through
2009.
|
|
|
467
|
|
|
423
|
|
Term
credit facility with two banks at interest rates of
3.9%-4.0%
payable through 2009.
|
|
|
94
|
|
|
139
|
|
|
|
|
20,314
|
|
|
19,347
|
|
Less
current portion of long-term debt
|
|
|
2,753
|
|
|
2,553
|
|
|
|
$
|
17,561
|
|
$
|
16,794
|
|
|
|
|
|
|
|
|
|
6%
promissory notes payable in six quarterly
installments
through July 1, 2007
|
|
$
|
100
|
|
$
|
1,100
|
|
Less
current portion of promissory notes payable
|
|
|
100
|
|
|
1,000
|
|
|
|
$ |
- |
|
$
|
100
|
|
The
principal payments of long-term debt, revolver and promissory notes are as
follows:
Year
|
|
|
Term
|
|
|
Other
|
|
|
Subtotal
|
|
|
|
|
|
Revolver
|
|
|
Total
|
|
2008
|
|
$
|
2,000
|
|
$
|
753
|
|
$
|
2,753
|
|
$
|
100
|
|
|
-
|
|
$
|
2,853
|
|
2009
|
|
|
2,000
|
|
|
1,105
|
|
$
|
3,105
|
|
|
-
|
|
|
-
|
|
|
3,105
|
|
2010
|
|
|
2,000
|
|
|
242
|
|
$
|
2,242
|
|
|
-
|
|
|
-
|
|
|
2,242
|
|
2011
|
|
|
1,500
|
|
|
173
|
|
$
|
1,673
|
|
|
-
|
|
|
-
|
|
|
1,673
|
|
2012
|
|
|
10,500
|
|
|
25
|
|
$
|
10,525
|
|
|
-
|
|
|
42,010
|
|
|
52,535
|
|
Thereafter
|
|
|
-
|
|
|
16
|
|
$
|
16
|
|
|
-
|
|
|
-
|
|
|
16
|
|
Total
|
|
$
|
18,000
|
|
$
|
2,314
|
|
$
|
20,314
|
|
$
|
100
|
|
$
|
42,010
|
|
$
|
62,424
|
|
9.
SHAREHOLDERS’ EQUITY:
Capital
Stock:
The
Company is authorized to issue 21,200,000 shares of capital stock, of which
221,756 shares have been designated as serial preferred stock and 20,978,244
shares have been designated as common stock. Each share of common stock has
one
vote. The Board of Directors has the authority without further action by
shareholders to issue up to 978,244 shares of blank check preferred stock,
none
of which are issued or outstanding.
Accumulated
Other Comprehensive Income:
Accumulated
other comprehensive income consists of foreign currency translation adjustments.
The largest portion of the cumulative translation adjustment relates to the
Company’s European and Asian operations and reflects the changes in the Euro and
RMB exchange rates relative to the US dollar.
10.
BENEFIT PLANS:
Defined
Contribution Plans:
The
Company has a defined contribution plan qualified under Section 401(k) of the
Internal Revenue Code. Substantially all of its U.S. employees are eligible
to
participate after completing three months of service. Participants may elect
to
contribute a portion of their compensation to the plan. Under the plan, the
Company has the discretion to match a portion of participants’ contributions.
The Company recorded an expense of $579 under the plan for the fiscal year
ended
March 31, 2007. For the fiscal year ended March 31, 2006 and 2005, the Company
recorded an expense of $244 and $241, respectively.
Defined
Benefit Plans:
The
Company’s European operations maintain certain supplemental defined benefit
plans for substantially all of its employees. The gross amount of the future
benefit to be paid for pension and retirement will be fully covered through
a
specific contract subscribed through an insurance company. Annual payments
for
this obligation total approximately $48.
Employee
Stock Purchase Plan:
In
September 2006, the Company established The Measurement Specialties, Inc. 2006
Employee Stock Purchase Plan (“ESPP”) under Section 423 of the Internal Revenue
Code to provide employees of the Company and certain of its subsidiaries with
an
opportunity to purchase shares of the Company’s common stock through accumulated
payroll deductions. The purchase price for shares of the Company’s common stock
under the ESPP is 95% of the lower of the closing value of the Company’s common
stock on the first or last trading day of an offering period. In accordance
with
Statement of Position (“SOP”) 93-6, Employers’
Accounting for Employee Stock Ownership Plans,
shares
held by the ESPP are considered outstanding upon the commitment date for
issuance for purposes of calculating diluted net income per commons share.
The
ESPP is accounted for and within the safe-harbor provisions of SFAS No. 123R.
On
April 4, 2007, the Company issued 2,734 shares as part of the initial offering
period ending March 31, 2007, and accordingly, these shares were considered
outstanding as of March 31, 2007 in the calculation of diluted net income per
share.
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 made 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 was for an indefinite period
of
time and both parties had the right to terminate the agreement on sixty day’s
advance notice. During fiscal year 2006 and 2005, the Company paid an aggregate
of $400 for compensation each year and $129 and $96 for the reimbursement of
travel costs, respectively, to Four Corners under this agreement.
On
April
5, 2006, the Company entered into an Employment Agreement with Mr. Guidone,
the
current Chief Executive Officer of the Company, effective as of March 30, 2006
(the “Employment Agreement”). The Employment Agreement is for an initial term of
two years with automatic renewal for successive one-year terms unless either
party gives timely notice of non renewal.
Under
the
terms of the Employment Agreement, Mr. Guidone will continue to serve as the
Chief Executive Officer of the Company at an annual base salary of $450.
Pursuant to the terms of the Employment Agreement dated March 30, 2006, Mr.
Guidone received an option to purchase 300,000 shares of the Company’s common
stock at an exercise price per share equal to the fair market value of a share
of the Company’s common stock on March 30, 2006 (the “Options”). The Options
were granted pursuant to the Company’s 2006 Stock Option Plan. In addition, Mr.
Guidone received a prepaid bonus in the amount of $50 in connection with the
execution of the Employment Agreement. This prepaid bonus shall be credited
against the aggregate of any bonus amounts payable to the CEO in fiscal 2007.
Mr. Guidone shall also be eligible to receive an annual bonus pursuant to the
Company’s Bonus Plan, payable in accordance with the terms thereof, based upon
annual performance criteria and goals established by the Compensation Committee
of the Board of Directors of the Company.
12.
INCOME TAXES:
Income
from continuing operations before minority interest and income taxes consists
of
the following:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(2,515
|
)
|
$
|
4,828
|
|
$
|
6,860
|
|
Foreign
|
|
|
18,123
|
|
|
8,723
|
|
|
5,608
|
|
Income
before income taxes and minority interest
|
|
|
15,608
|
|
|
13,551
|
|
|
12,468
|
|
Minority
interest
|
|
|
524
|
|
|
-
|
|
|
-
|
|
Income
before income taxes
|
|
$
|
15,084
|
|
$
|
13,551
|
|
$
|
12,468
|
|
The
income tax provision (benefit) from continuing operations consists of the
following:
|
|
2007
|
|
2006
|
|
2005
|
|
Current
|
|
|
|
|
|
|
|
Federal
|
|
$
|
64
|
|
$
|
153
|
|
$ |
35 |
|
Foreign
|
|
|
3,492
|
|
|
930
|
|
|
429 |
|
State
|
|
|
144
|
|
|
45
|
|
|
279 |
|
Total
|
|
$
|
3,700
|
|
$
|
1,128
|
|
$ |
743 |
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
233
|
|
|
1,058
|
|
|
2,115
|
|
Foreign
|
|
|
(776
|
)
|
|
(157
|
)
|
|
(469 |
) |
State
|
|
|
(30
|
)
|
|
1,195
|
|
|
299 |
|
Total
|
|
|
(573
|
)
|
|
2,096
|
|
|
1,945
|
|
|
|
$
|
3,127
|
|
$
|
3,224
|
|
$
|
2,688
|
|
Differences
between the federal statutory income tax rate and the effective tax rates using
income from continuing operations before income taxes and after minority
interest of $15,084 are as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
Statutory
tax rate
|
|
|
34.0
|
%
|
|
34.0
|
%
|
|
34.0
|
%
|
Return
to provision adjustment
|
|
|
0.6
|
%
|
|
-
|
|
|
-
|
|
Effect
of foreign taxes
|
|
|
-20.4
|
%
|
|
-16.4
|
%
|
|
-14.1
|
%
|
State
taxes and other
|
|
|
0.8
|
%
|
|
6.0
|
%
|
|
1.7
|
%
|
Valuation
allowance
|
|
|
0.5
|
%
|
|
0.4
|
%
|
|
-
|
|
Permanent
items
|
|
|
5.9
|
%
|
|
0.3
|
%
|
|
0.2
|
%
|
Rate
changes
|
|
|
-0.5
|
%
|
|
- |
|
|
- |
|
Other
|
|
|
-0.2
|
%
|
|
-0.5
|
%
|
|
-0.2
|
%
|
|
|
|
20.7
|
%
|
|
23.8
|
%
|
|
21.6
|
%
|
The
difference between the Federal statutory rate and the effective tax rate relates
primarily to reduce income tax applied to pre-tax income generated by the
Company’s foreign subsidiaries. The Company considers undistributed earnings of
its foreign subsidiaries to be indefinitely reinvested outside of the United
States, and accordingly, no U.S. deferred taxes have been recorded with respect
to such earnings. Should the earnings be remitted as dividends, the Company
may
be subject to additional U.S. taxes net of allowable foreign tax credits. It
is
not practicable to estimate the amount of any additional taxes which may be
payable on the undistributed earnings. The larger permanent items in 2007
include incentive stock options, Sub-Part F income and non-deductible foreign
currency translation items, as well as meals and entertainment.
The
Company has received on an annual basis over the past 8 years certain tax
reductions from the tax authorities in China, as the Company qualifies as a
high-technology and export business enterprise. This special tax status provides
the Company, among other things, reductions in statutory national and local
tax
rates in China from approximately 15% to approximately 10%. These reduced tax
rates have resulted in tax reductions of approximately $642, or $0.04 per share,
$420, or $0.03 per share, and $288, or $0.02 per share for fiscal years ended
March 31, 2007, 2006, and 2005, respectively. This special tax status is renewed
annually provided that the Company meets certain threshold targets. China
enacted higher tax rates which will be effective January 2008, and the Company’s
tax rate in China is expected to increase from 10% to 15% beginning April 1,
2008. If the Company does not obtain the annual special tax status in China,
tax
rates could be between 15% to 25%.
The
Hong
Kong statutory corporate tax rate, at which the Company's Hong Kong
Subsidiaries' earnings are taxed, is 17.5%. The statutory tax rates for the
Company's subsidiaries in France and Germany are approximately 33% and 38%,
respectively. The statutory tax rates in Ireland are 10% for trade operating
income and 25% for passive income such as interest.
The
significant components of the net deferred tax assets from continuing operations
consist of the following:
|
|
2007
|
|
2006
|
|
Current
deferred tax assets:
|
|
|
|
|
|
Net
operating loss
|
|
|
2,034
|
|
|
443
|
|
Accounts
receivable allowance
|
|
|
162
|
|
|
87
|
|
Inventory
|
|
|
792
|
|
|
803
|
|
Accrued
expenses
|
|
|
1,937
|
|
|
321
|
|
Other
|
|
|
386
|
|
|
59
|
|
Total
current deferred tax assets
|
|
$
|
5,311
|
|
$
|
1,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
deferred tax liabilities:
|
|
|
|
|
|
|
|
Basis
difference in fixed assets
|
|
|
(166
|
)
|
|
-
|
|
Basis
difference in acquired intangible assets
|
|
|
(427
|
)
|
|
(203
|
)
|
Total
|
|
$
|
(593
|
)
|
$
|
(203
|
)
|
|
|
|
|
|
|
|
|
Net
current deferred tax assets
|
|
$
|
4,718
|
|
$
|
1,510
|
|
|
|
|
|
|
|
|
|
Long-term
deferred tax assets:
|
|
|
|
|
|
|
|
AMT
and other credit carry-forwards
|
|
|
878
|
|
|
594
|
|
Warranty
and other accrued expenses
|
|
|
34
|
|
|
6
|
|
Net
operating loss carryforwards
|
|
|
10,541
|
|
|
12,828
|
|
Stock
Options
|
|
|
441
|
|
|
194
|
|
Other
|
|
|
810
|
|
|
156
|
|
Total
long term asset
|
|
$
|
12,704
|
|
$
|
13,778
|
|
Valuation
allowance
|
|
|
(141
|
)
|
|
(58
|
)
|
Net
long-term deferred tax assets
|
|
$
|
12,563
|
|
$
|
13,720
|
|
|
|
|
|
|
|
|
|
Long-term
deferred tax liability
|
|
|
|
|
|
|
|
Basis
difference in fixed assets
|
|
|
-
|
|
|
(152
|
)
|
Basis
difference in acquired intangible assets
|
|
|
(3,726
|
)
|
|
(2,401
|
)
|
Other
|
|
|
(477
|
)
|
|
(382
|
)
|
Total
long term liability
|
|
$
|
(4,203
|
)
|
$
|
(2,935
|
)
|
Net
long term deferred tax asset (liability)
|
|
$
|
8,360
|
|
$
|
10,785
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$
|
13,078
|
|
$
|
12,295
|
|
The
following are the net deferred tax assets and deferred tax liabilities by
jurisdiction:
Current
deferred tax assets:
|
|
|
|
|
|
Domestic
|
|
|
4,837
|
|
|
1,507
|
|
Europe
|
|
|
295
|
|
|
74
|
|
China
and Hong Kong
|
|
|
179
|
|
|
132
|
|
Total
|
|
$
|
5,311
|
|
$
|
1,713
|
|
|
|
|
|
|
|
|
|
Non-current
deferred tax assets:
|
|
|
|
|
|
|
|
Domestic
|
|
|
6,804
|
|
|
8,889
|
|
Europe
|
|
|
5,425
|
|
|
4,668
|
|
China
and Hong Kong
|
|
|
334
|
|
|
163
|
|
Total
|
|
$
|
12,563
|
|
$
|
13,720
|
|
Total
deferred tax assets
|
|
$
|
17,874
|
|
$
|
15,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
deferred tax liabilities:
|
|
|
|
|
|
|
|
Domestic
|
|
|
(580
|
)
|
|
(203
|
)
|
Europe
|
|
|
(13
|
)
|
|
-
|
|
China
and Hong Kong
|
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
(593
|
)
|
$
|
(203
|
)
|
|
|
|
|
|
|
|
|
Non-current
deferred tax liabilities:
|
|
|
|
|
|
|
|
Domestic
|
|
|
(1,763
|
)
|
|
(1,074
|
)
|
Europe
|
|
|
(2,428
|
)
|
|
(1,861
|
)
|
China
and Hong Kong
|
|
|
(12
|
)
|
|
-
|
|
Total
|
|
$
|
(4,203
|
)
|
$
|
(2,935
|
)
|
Total
deferred tax liabilities
|
|
$
|
(4,796
|
)
|
$
|
(3,138
|
)
|
Net
deferred tax assets
|
|
$
|
13,078
|
|
$
|
12,295
|
|
The
Company does not have an overall valuation allowance for deferred tax assets.
The analysis of positive evidence which could be objectively verified supports
the conclusion that an overall valuation allowance is not applicable and
outweighs any negative evidence. Current and expected results of the Company
supports that the overall valuation allowance is not needed and it is more
likely than not that the results of future operations will generate sufficient
taxable income to realize the deferred tax assets.
The
valuation allowance of $141 and $58 at March 31, 2007 and 2006, respectively,
primarily relates to two of the Company's subsidiaries in Germany and one in
Barbados, which were shut-down, and consequently, the related deferred tax
assets are not expected to be realized.
The
Company has U.S. federal and state net operating loss carry-forwards of
approximately $20,704 and $25,219, respectively, which expire beginning in
fiscal year 2022. The Company has net operating loss carry-forwards in
Germany and France of approximately $11,723 and $659, respectively, which are
not subject to expiration. The Company has net operating loss carry-forwards
in
Ireland and Hong Kong totaling 4 and $171, respectively, which are not subject
to expiration. The Company has a federal AMT tax credit carry-forward of
approximately $175, which does not expire.
13.
EARNINGS PER SHARE INFORMATION:
Basic
per
share information is computed based on the weighted-average common shares
outstanding during each period. Diluted per share information additionally
considers the shares that may be issued upon exercise or conversion of stock
options, less the shares that may be repurchased with the funds received from
their exercise. The following is a reconciliation of the numerators and
denominators of basic and diluted EPS computations for the years ended March
31,
2007, 2006 and 2005, respectively:
|
|
Net
income
(Numerator)
|
|
Weighted
|
|
Per-Share
|
|
March
31, 2007:
|
|
|
|
|
|
|
|
Basic
per share information
|
|
$
|
14,234
|
|
|
14,156
|
|
$
|
1.01
|
|
Effect
of dilutive securities
|
|
|
-
|
|
|
267
|
|
|
(0.02
|
)
|
Diluted
per-share information
|
|
$
|
14,234
|
|
|
14,423
|
|
$
|
0.99
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Basic
per share information
|
|
$
|
24,534
|
|
|
13,704
|
|
$
|
1.79
|
|
Effect
of dilutive securities
|
|
|
-
|
|
|
652
|
|
|
(0.08
|
)
|
Diluted
per-share information
|
|
$
|
24,534
|
|
|
14,356
|
|
$
|
1.71
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2005:
|
|
|
|
|
|
|
|
|
|
|
Basic
per share information
|
|
$
|
14,826
|
|
|
13,392
|
|
$
|
1.11
|
|
Effect
of dilutive securities
|
|
|
-
|
|
|
703
|
|
|
(0.06
|
)
|
Diluted
per-share information
|
|
$
|
14,826
|
|
|
14,095
|
|
$
|
1.05
|
|
For
the
years ended March 31, 2007, 2006 and 2005, respectively, an aggregate of
1,147,918, 400,575, and 327,550 options, respectively, were excluded from the
earnings per share calculation because their effect would be
anti-dilutive.
14.
STOCK OPTION PLANS:
The
Company’s stock option plans are administered by the compensation committee of
the Board of Directors, which approves grants to individuals eligible to
receive
awards and determines the number of shares and/or options subject to each
award,
the terms, conditions, performance measures, and other provisions of the
award.
The C.E.O. can also grant individual awards up to certain limits as
approved by the compensation committee. Terms for stock-option awards
include pricing based on the closing price on the award date, and generally
vest
up to five years and such awards are generally granted based on the individual’s
performance. Shares issued under stock option plans are newly issued common
stock.
Options
to purchase up to 1,000,000 shares of common stock may be granted under the
Company’s 2006 Stock Option Plan (the ‘2006 Plan’) until its expiration on
February 29, 2016. Shares issuable under 2006 Plan grants which expire or
otherwise terminate without being exercised become available for later issuance.
A total of 644,000 options to purchase shares were outstanding at March 31,
2007
under the 2006 plan.
On
July
28, 2003, the Board of Directors adopted the Measurement Specialties, Inc.
2003
Stock Option Plan (the “2003 Plan”), which was approved by shareholders at the
2003 Annual Meeting on September 23, 2003. Options to purchase up to 1,000,000
common shares were eligible to be granted under the 2003 Plan, and as of March
31, 2007, 2006, and 2005 respectively, 853,600, 908,880 and 564,450, stock
options were issued and outstanding under the 2003 Plan.
Options
to purchase up to 1,500,000 shares of common stock may be granted under the
Company’s 1998 Stock Option Plan, (the ‘1998 Plan’) until its expiration on
October 19, 2008. Shares issuable under 1998 Plan grants which expire or
otherwise terminate without being exercised become available for later issuance.
A total of 412,062, 562,984, and 941,499 options to purchase shares were
outstanding at March 31, 2007, 2006 and 2005, respectively under the 1998
Plan.
Options
to purchase up to 1,828,000 common shares were eligible to be granted under
the
Company’s 1995 Stock Option Plan and its predecessor plan (together the ‘1995
Plan’), until its expiration on September 8, 2005. Shares issuable under 1995
Plan grants which expire or otherwise terminate without being exercised become
available for later issuance. All shares eligible for grant were issued prior
to
April 1, 1999.
Options
under all Plans generally vest over requisite service periods of up to five
years, and expire no later than ten years from the date of grant. Options may,
but need not, qualify as ‘incentive stock options’ under section 422 of the
Internal Revenue Code. Tax benefits are recognized upon nonqualified exercises
and disqualifying dispositions of shares acquired by qualified exercises. There
were no changes in the exercise prices of outstanding options, through
cancellation and re-issuance or otherwise, for 2007, 2006, or 2005. The number
of shares remaining for future issuance under equity compensation plans totaled
407,165, 131,103, and 768,975 as of March 31, 2007, 2006, and 2005,
respectively.
A
summary
of stock options outstanding as of March 31, 2007 and changes during the twelve
months then ended is presented below:
|
|
|
Number
of outstanding
shares
exercisable
|
|
|
Weighted-Average
Exercise
Price
|
|
|
|
|
Outstanding
|
|
|
Exerciseable
|
|
|
Outstanding
|
|
|
Exerciseable
|
|
March
31, 2006
|
|
|
1,471,864
|
|
|
500,570
|
|
|
17.45
|
|
|
9.87
|
|
Granted
at market
|
|
|
485,000
|
|
|
|
|
|
23.19
|
|
|
|
|
Granted
above market
|
|
|
300,000
|
|
|
|
|
|
25.52
|
|
|
|
|
Forfeited
|
|
|
(80,202
|
)
|
|
|
|
|
21.80
|
|
|
|
|
Exercised
|
|
|
(267,000
|
)
|
|
|
|
|
6.75
|
|
|
|
|
March
31, 2007
|
|
|
1,909,662
|
|
|
641,180
|
|
|
21.46
|
|
|
16.87
|
|
The
aggregate intrinsic value of options outstanding at March 31, 2007, was $4,755
and had a weighted-average remaining contractual life of 5.9 years. Of these
options outstanding, 641,180 were exercisable and 583,474 were expected to
vest, and had an aggregate intrinsic value of $4,322 with a
weighted-average remaining contractual life of 3.7 years. The following table
provides information related to options exercised during the years ended March
31, 2007, 2006, and 2005:
|
|
2007
|
|
2006
|
|
2005
|
|
Total
intrinsic value
|
|
$
|
4,316
|
|
$
|
6,706
|
|
$
|
5,750
|
|
Cash
received upon exercise of options
|
|
|
1,865
|
|
|
2,887
|
|
|
1,200
|
|
Related
tax benefit realized
|
|
|
1,276
|
|
|
784
|
|
|
1,100
|
|
The
fair
value of each option grant is estimated on the date of grant using the
Black-Scholes-Merton option-pricing model (graded vesting schedule with traunche
by traunche measurement and recognition of compensation cost) with the following
weighted-average assumptions:
|
|
2007
|
|
2006
|
|
2005
|
|
Dividend
yield
|
|
|
-
|
|
|
- |
|
|
- |
|
Expected
Volality
|
|
|
38.90
|
%
|
|
35.34
|
%
|
|
33.26
|
%
|
Risk-Free
Interest Rate
|
|
|
4.85
|
%
|
|
4.40
|
%
|
|
1.85
|
%
|
Expected
term (in years)
|
|
|
2.0
|
|
|
2.0 |
|
|
4.0 |
|
Weighted-average
grant-date fair value
|
|
$
|
7.54
|
|
$ |
8.59 |
|
$ |
8.10 |
|
The
assumptions above are based on multiple factors, including historical exercise
patterns of employees with respect to exercise and post-vesting employment
termination behaviors, expected future exercise patterns for these employees
and
the historical volatility of our stock price and the stock prices of companies
in our peer group (Standard Industrial Classification or “SIC” Code 3823). The
expected term of options granted is derived using company-specific, historical
exercise information and represents the period of time that options granted
are
expected to be outstanding. The risk-free interest rate for periods within
the
contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.
In
order
to provide an appropriate expected volatility, one which marketplace
participants would likely use in determining an exchange price for an option,
the Company revised, during the quarter ended September 30, 2006, the method
of
calculating expected volatility by disregarding a period of the Company’s
historical volatility data not considered representative of expected future
volatility and replacing the disregarded period of time with peer group data.
The Company considers the period of time disregarded to be within the “rare”
situations stated in Security Exchange Commission Staff Accounting Bulletin
No.
107 (“SAB 107”). The Company experienced, during the period of time leading up
to and after the restructuring in May 2002, a rare series of events, including
a
going concern situation, financial statement restatement, a class action
shareholder lawsuit, an SEC investigation, a $4.4 million asset write-down,
significant net losses, and a halt in the trading of the Company’s common stock,
none of which are expected to recur in the future.
Based
on
calculations using the Black-Scholes-Merton option pricing model, the
weighted-average fair value per share of options granted during the years ended
March 31, 2007, 2006, and 2005 was $7.54, $8.59, and $8.10,
respectively.
At
March
31, 2007, there was $7,033 of unrecognized compensation cost related to
share-based payments, which is expected to be recognized over a weighted-average
period of 2.7 years. The unrecognized compensation cost above is not adjusted
for estimated forfeitures. Including estimated forfeitures, at March 31, 2007,
there was $5,179 of unrecognized compensation cost related to share-based
payments.
15.
COMMITMENTS AND CONTINGENCIES:
Leases:
The
Company leases certain property and equipment under non-cancelable operating
leases expiring on various dates through March 2015. The Company provided an
unconditional guarantee up to a maximum amount of $1,000 under a property
sub-lease if the sub-lessor defaults. Expenses for leases that include escalated
lease payments are recorded on a straight-line basis over that base lease
period, in accordance with SFAS No. 13. Rent expense, including real estate
taxes, insurance and maintenance expenses associated with net operating leases
approximates $4,607 for 2007, $2,594 for 2006, and $1,742 for 2005. At March
31,
2007, total minimum rent payments under leases with initial or remaining
non-cancelable lease terms of more than one year were:
|
|
Years
ending March 31,
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
|
Minimum
operating lease rent payments
|
|
$
|
3,945
|
|
$
|
3,354
|
|
$
|
2,447
|
|
$
|
1,791
|
|
$
|
1,094
|
|
|
3,195
|
|
Minimum
payments have not been reduced by minimum sublease rentals of $150 per year
due
in the future under non-cancelable subleases.
The
Company is obligated under capital lease arrangements for certain equipment.
At
March 31, 2007 and 2006, the gross amount of equipment and related accumulated
amortization recorded under capital leases were $2,165 and $2,786,
respectively.
Below
is
a schedule of future payments under capital leases:
|
|
Year
1
|
|
|
Year
2
|
|
|
Year
3
|
|
|
Year
4
|
|
|
Year
5
|
|
|
Thereafter
|
|
|
Total
|
|
Capital
lease obligations
|
|
$
|
811
|
|
|
694
|
|
|
634
|
|
|
26
|
|
|
-
|
|
|
-
|
|
$
|
2,165
|
|
Amortization
of assets held under capital leases is included with depreciation
expense.
Litigation:
Pending
Legal Matters
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. On January
4, 2006, the Tribunal ruled in the Company’s favor, invalidating the claims of
the SEB patent that SEB had asserted. Although the time for appeal has not
yet
expired, the Company is unaware of any appeal of this decision by
SEB.
From
time
to time, the Company is subject to other legal proceedings and claims in the
ordinary course of business. The Company currently is not aware of any such
legal proceedings or claims that the Company believes will have, individually
or
in the aggregate, a material adverse effect on the Company’s business, financial
condition, or operating results.
Settled
legal matters:
Measurement
Specialties, Inc. Securities Litigation.
On
March 20, 2002, a class action lawsuit was filed on behalf of purchasers of
the
Company’s common stock in the United States District Court for the District of
New Jersey against the Company and certain of its present and former officers
and directors. The complaint was subsequently amended to include the
underwriters of the Company’s August 2001 public offering as well as the
Company’s former auditors. The lawsuit alleged violations of the federal
securities laws. The lawsuit sought an unspecified award of money damages.
After
March 20, 2002, nine additional similar class actions were filed in the same
court. The ten lawsuits were consolidated into one case under caption In re:
Measurement Specialties, Inc. Securities Litigation, 02 Civ. No. 1071 (D.N.J.).
Plantiffs filed a Consolidated Amended Compliant on September 12, 2002. The
underwriters made a claim for indemnification under the underwriting
agreement.
On
April
1, 2004, the Company reached an agreement in principle to settle this class
action lawsuit. On July 20, 2004, the court approved the settlement agreement.
Pursuant to the agreement, the case has been settled as to all defendants in
exchange for payments of $7,500 from the Company and $590 from Arthur Anderson,
the Company’s former auditors. Both the Company’s primary and excess D&O
insurance carriers initially denied coverage for this matter. After discussion,
the Company’s primary D&O insurance carrier agreed to contribute $5,000 and
the Company’s excess insurance carrier agreed to contribute $1,400 to the
settlement of this case. As part of the arrangement with the Company’s primary
carrier, the Company agreed to renew its D&O coverage for the period from
April 7, 2003 through April 7, 2004. The $3,200 renewal premium represented
a
combination of the market premium for an aggregate of $6,000 in coverage for
this period plus a portion of the Company’s contribution toward the
settlement.
SEC
Investigation.
In
February 2002, the Company contacted the staff of the SEC after discovering
that
its former chief financial officer had made the misrepresentation to senior
management, its board of directors and its auditors that a waiver of a covenant
default under our credit agreement had been obtained when, in fact, the
Company’s lenders had refused to grant such a waiver. Since February 2002, the
Company and a special committee formed by our board of directors have been
cooperating with the staff of the SEC. In June, 2002, the staff of the Division
of Enforcement of the SEC informed the Company that it was conducting a formal
investigation relating to matters reported in our Quarterly Report on Form
10-Q
for the quarter ended December 31, 2001. On June 28, 2004, the Company reached
a
definitive settlement agreement with the SEC which resolved the SEC’s
investigation of the Company. On June 30, 2004, the court approved the
settlement agreement. Pursuant to the definitive settlement agreement, the
Company paid one dollar in disgorgement and $1,000 in civil
penalties.
Settlement
of the above matters resulted in litigation expense of $1,500 in the year ended
March 31, 2004.
The
Honorable Dan Samuel v. Measurement Specialties, Inc., Case No. 3:06 cv
1005.
On June
29, 2006, the Company was sued by a former director of the Company in the United
States District Court for the District of Connecticut. In this matter, the
plaintiff, The Honorable Dan Samuel, a former director of the Company, allowed
his stock options to terminate before he attempted to exercise them. Mr. Samuel
claimed that the Company misled him with respect to when his options
terminated/expired and asserts claims against the Company for negligent
misrepresentation, fraud, breach of contract, and conversion and sought damages
in an amount not less than $450 plus interest and costs. On August 30, 2006,
the
Company filed a motion to dismiss. At a conference before the Court, the Court
suggested that Mr. Samuel file an amended complaint and that the Company,
instead of moving to dismiss, answer the amended complaint, take some discovery
and then renew its motion to dismiss as a motion for summary judgment at the
conclusion of discovery. Consistent with the Court's direction, on October
12,
2006, Mr. Samuel filed an amended complaint which contained counts asserting
negligent misrepresentation, fraud, breach of contract, conversion and
promissory estoppel. The Company answered the amended complaint and have
asserted numerous affirmative defenses. On April 16, 2007, the Company reached
an agreement in principle to settle this lawsuit. Pursuant to the agreement,
the
case was settled on a no fault basis in exchange for a payment by the Company
in
the amount of $225 to Mr. Samuel. On May 7, 2007, a Stipulation of Dismissal
of
with Prejudice and without cost as to all causes of Action by Dan Samuel was
filed with the United States District Court for the District of Connecticut.
The
settlement of this matter resulted in an expense of $225 in fiscal
2007.
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 of the Company’s officers and directors in the
United States District Court of the District of New Jersey. Mr. DeWelt resigned
on March 26, 2002 in disagreement with management’s decision not to restate
certain of the Company’s 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 answered the complaint and engaged in
the
discovery process, which has now concluded. On December 1, 2006, the Company
filed a motion for summary judgment seeking dismissal of all claims. The
Court
denied the motion, but pursuant to the election of remedies provision of
the New
Jersey Conscientious Employee Protection Act, two of the common law claims
were
waived by Mr. DeWelt and dismissed by the Court. The trial of this case was
scheduled for June 2007. On June 1, 2007, Mr. DeWelt voluntarily dismissed
his
claim for breach of contract, intending to proceed to trial on only his claim
under the New Jersey Conscientious Employee Protection Act. However, the
parties orally agreed to a confidential settlement in the amount of $1,050
and
the Court cancelled the trial. The parties have now executed a settlement
agreement to writing and will file a stipulation dismissing the lawsuit with
prejudice once the agreement is signed and the settlement payment is issued.
Accordingly, the Company accrued a liability for the DeWelt matter in the
amount
of $1,050 at March 31, 2007.
Acquisition
Earn-Outs:
As
disclosed in Note 5, in connection with the ATEX acquisition, the Company had
potential performance based earn-out obligations totaling $1,888, of which
approximately $933 remains accrued at March 31, 2007 for the final two earn-out
payments, because satisfaction of the sales growth objective is considered
probable.
16.
SEGMENT INFORMATION:
The
Company has one reportable segment, the Sensor business. The Company sold the
Consumer segment on December 1, 2005. For a description of the products and
services of the Sensor business, see Note 1.
The
Company continues to have one reporting segment, a sensor business, under the
guidelines established with SFAS 131, Disclosures
about Segments of an Enterprise and Related Information,
because, among other things, the criteria for aggregation.
Geographic
information, excluding discontinued operations, for revenues based on country
of
destination, and long-lived assets based on country of location, which includes
property, plant and equipment, but excludes intangible assets and goodwill,
net
of related depreciation and amortization follows:
Net
Sales:
|
|
2007
|
|
2006
|
|
2005
|
|
United
States
|
|
$
|
136,485
|
|
$
|
90,387
|
|
$
|
67,140
|
|
Europe
and other
|
|
|
48,165
|
|
|
22,030
|
|
|
16,322
|
|
China
|
|
|
15,600
|
|
|
9,000
|
|
|
8,806
|
|
Total:
|
|
$
|
200,250
|
|
$
|
121,417
|
|
$
|
92,268
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
lived assets:
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
5,969
|
|
$
|
4,230
|
|
$
|
2,653
|
|
Europe
and other
|
|
|
10,609
|
|
|
8,428
|
|
|
3,182
|
|
Asia
|
|
|
10,981
|
|
|
9,428
|
|
|
6,854
|
|
Total:
|
|
$
|
27,559
|
|
$
|
22,086
|
|
$
|
12,689
|
|
17.
CONCENTRATIONS:
Financial
instruments, which potentially subject the Company to significant concentrations
of credit risk, are principally cash, long-term debt, trade accounts receivable
and note receivable.
The
Company generally maintains its cash equivalents at major financial institutions
in the United States, Europe, Hong Kong, and China. Cash held in foreign
institutions amounted to $6,807 and $8,773 at March 31, 2007 and 2006,
respectively. The Company periodically evaluates the relative credit standing
of
financial institutions considered in its cash investment strategy.
Measurement
Specialties Sensor (China) Ltd. is subject to certain Chinese government
regulations, including currency exchange controls, which limit cash dividends
and loans to Measurement Specialties Sensor (Asia) Limited and Measurement
Specialties, Inc. At March 31, 2007 and 2006, Measurement Specialties
Sensors (China) Ltd.’s net assets approximated $23,810 and $18,503,
respectively.
Accounts
receivable are concentrated in the United States and Europe and the note
receivable is concentrated in Hong Kong. At March 31, 2007 and 2006, accounts
receivable in the United States totaled $20,344 and $11,109, respectively,
and
accounts receivable in Europe totaled $9,818 and $4,853, respectively. To limit
credit risk, the Company evaluates the financial condition and trade payment
experience of customers to whom credit is extended. The Company generally does
not require customers to furnish collateral, though certain foreign customers
furnish letters of credit.
The
Company manufactures the substantial majority of its non-temperature and
non-optical sensor products in the Company’s factory located at leased premises
in Shenzhen, China. Sensors are also manufactured at the Company’s United States
leased facilities located in Virginia, and California and at two of the
Company’s facilities in France and Germany. The Company manufactures a
significant portion of the temperature sensors at leased facilities in Ohio
and
in Ireland. Substantially all of the Company’s optical products are assembled in
India, by a single supplier, Opto Circuits. A larger portion of the Company’s
temperature sensors are manufactured by Betacera Inc., a Taiwanese-based
contract manufacturer in China. Additionally, most of the Company’s products
contain key components, which are obtained from a limited number of sources.
These concentrations in external and foreign sources of supply present risks
of
interruption for reasons beyond the Company’s control, including, political,
economic and legal uncertainties resulting from the Company’s operations outside
the U.S.
Our
largest Sensor business customer, a large U.S. OEM automotive supplier,
accounted for approximately 15.0% of our net sales during fiscal 2007,
approximately 18.1% of our net sales during fiscal 2006, and approximately
15.3%
of our sales during fiscal 2005. No other customers accounted for more than
10%
during the fiscal years ended March 31, 2007, 2006 and 2005.
18.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Presented
below is a schedule of selected quarterly operating results.
|
|
First
Quarter Ended June 30
|
|
Second
Quarter Ended Sept. 30
|
|
Third
Quarter Ended Dec. 31
|
|
Fourth
Quarter Ended March 31
|
|
Year
Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
45,991
|
|
$
|
50,111
|
|
$
|
49,766
|
|
$
|
54,382
|
|
Gross
profit
|
|
|
20,575
|
|
|
21,296
|
|
|
21,653
|
|
|
23,923
|
|
Net
income from continuing operations
|
|
|
2,429
|
|
|
3,379
|
|
|
3,334
|
|
|
2,815
|
|
Income
(loss) from discontinued operations net of taxes before
gain
|
|
|
23
|
|
|
(49
|
)
|
|
(4
|
)
|
|
151
|
|
Gain
on disposition of discontinued operations (net of income
tax)
|
|
|
-
|
|
|
-
|
|
|
2,156
|
|
|
-
|
|
Net
Income
|
|
|
2,452
|
|
|
3,330
|
|
|
5,486
|
|
|
2,966
|
|
Income
- continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
basic
|
|
|
0.17
|
|
|
0.24
|
|
|
0.24
|
|
|
0.20
|
|
EPS
diluted
|
|
|
0.17
|
|
|
0.24
|
|
|
0.23
|
|
|
0.19
|
|
Income
(loss) - discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
basic
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.01
|
|
EPS
diluted
|
|
|
-
|
|
|
(0.01
|
)
|
|
-
|
|
|
0.02
|
|
Income
gain on disposition of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
basic
|
|
|
-
|
|
|
-
|
|
|
0.15
|
|
|
-
|
|
EPS
diluted
|
|
|
-
|
|
|
-
|
|
|
0.15
|
|
|
-
|
|
Year
Ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
25,278
|
|
$
|
29,571
|
|
$
|
31,006
|
|
$
|
35,562
|
|
Gross
profit
|
|
|
12,562
|
|
|
13,742
|
|
|
14,556
|
|
|
15,766
|
|
Net
income (loss) from continuing operations
|
|
|
1,273
|
|
|
2,428
|
|
|
3,734
|
|
|
2,892
|
|
Income
from discontinued operations net of taxes before gain
|
|
|
1,663
|
|
|
1,917
|
|
|
1,565
|
|
|
23
|
|
Gain
on disposition of discontinued operations (net of income
tax)
|
|
|
-
|
|
|
-
|
|
|
9,040
|
|
|
(51
|
)
|
Net
Income
|
|
|
2,936
|
|
$
|
4,345
|
|
$
|
14,338
|
|
$
|
2,915
|
|
Income
- continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
basic
|
|
|
0.09
|
|
|
0.18
|
|
|
0.27
|
|
|
0.21
|
|
EPS
diluted
|
|
|
0.09
|
|
|
0.17
|
|
|
0.26
|
|
|
0.20
|
|
Income
- discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
basic
|
|
|
0.12
|
|
|
0.14
|
|
|
0.11
|
|
|
-
|
|
EPS
diluted
|
|
|
0.12
|
|
|
0.13
|
|
|
0.11
|
|
|
-
|
|
Income
gain on disposition of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
basic
|
|
|
-
|
|
|
-
|
|
|
0.67
|
|
|
-
|
|
EPS
diluted
|
|
|
-
|
|
|
-
|
|
|
0.64
|
|
|
-
|
|
Earnings
per share are computed independently for each of the quarters presented, on
the
basis described in Note 14. The sum of the quarters may not be equal to the
full
year earnings per share amounts. There was an adjustment of approximately $695
during the third quarter of fiscal 2006 that increased income tax expense.
This
adjustment was the revaluation of the related U.S. net deferred tax assets
based
on a lower estimated effective U.S. tax rate. Also impacting quarterly
results during fiscal 2006, the Company made several acquisitions, the timing
of
which had a larger impact during the third and fourth quarters. These year
end
adjustments primarily related to: (i) adjustments with the allocation of income
to jurisdictions with lower tax rates based on the review of various transfer
pricing factors, (ii) the recordation of additional deferred tax assets and
(iii) the amortization of certain deferred tax liabilities associated with
recent acquisitions. During the quarter ended March 31, 2007, the Company
recorded $1,275 in litigation settlement charges and approximately $620 in
tax
adjustments related to the year end tax provision. The Company assessed the
impact of these adjustments relative to the first three quarters and prior
year,
and determined there was no material impact of the periods
reported.
SCHEDULE
II
VALUATION
AND QUALIFYING ACCOUNTS
Years
Ended March 31, 2007, 2006, and 2005
Col.
A
|
|
Col.
B
|
|
Col.
C
|
|
Col.
D
|
|
|
|
Col.
E
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
Description
|
|
Balance
at Beginning of Period
|
|
Charged
to Costs and Expenses
|
|
Charged
to Other Accounts Describe
|
|
Deductions-Describe
|
|
|
|
Balance
at End of Period
|
|
Year
ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted
from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
447
|
|
$
|
258
|
|
$
|
30
(e
|
)
|
$
|
(219
|
)
|
|
(a)
|
|
$
|
516
|
|
Sales
return and allowance
|
|
|
60
|
|
|
102
|
|
|
-
|
|
|
(162
|
)
|
|
(b)
|
|
|
-
|
|
Inventory
allowance
|
|
|
3,296
|
|
|
1,508
|
|
|
9
(e
|
)
|
|
(1,655
|
)
|
|
(c)
|
|
|
3,158
|
|
Valuation
allowance for deferred taxes
|
|
|
58
|
|
|
83
|
|
|
|
|
|
-
|
|
|
|
|
|
141
|
|
Warranty
Reserve
|
|
|
146
|
|
|
432
|
|
|
59
(e
|
)
|
|
(236
|
)
|
|
(d)
|
|
|
401
|
|
Year
ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted
from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
244
|
|
$
|
250
|
|
$
|
(45)
(e
|
)
|
$
|
(2
|
)
|
|
(a)
|
|
$
|
447
|
|
Sales
return and allowance
|
|
|
-
|
|
|
60
|
|
|
-
|
|
|
-
|
|
|
(b)
|
|
|
60
|
|
Inventory
allowance
|
|
|
2,670
|
|
|
1,561
|
|
|
(1)
(e
|
)
|
|
(934
|
)
|
|
(c)
|
|
|
3,296
|
|
Valuation
allowance for deferred taxes
|
|
|
-
|
|
|
-
|
|
|
58
(e
|
)
|
|
-
|
|
|
(e)
|
|
|
58
|
|
Warranty
Reserve
|
|
|
70
|
|
|
32
|
|
|
92
(e
|
)
|
|
(48
|
)
|
|
(d)
|
|
|
146
|
|
Year
ended March 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted
from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
183
|
|
$
|
(70
|
)
|
$
|
-
|
|
$
|
131
|
|
|
(a)
|
|
$
|
244
|
|
Sales
return and allowance
|
|
|
(1
|
)
|
|
5
|
|
|
-
|
|
|
(4
|
)
|
|
(b)
|
|
|
-
|
|
Inventory
allowance
|
|
|
3,137
|
|
|
(79
|
)
|
|
-
|
|
|
(388
|
)
|
|
(c)
|
|
|
2,670
|
|
Valuation
allowance for deferred taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
Warranty
Reserve
|
|
|
89
|
|
|
(73
|
)
|
|
-
|
|
|
54
|
|
|
(d)
|
|
|
70
|
|