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EX-32.1 - Measurement Specialties Incv164365_ex32-1.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

x   QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009

OR

¨   TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
COMMISSION FILE NUMBER: 1-11906

MEASUREMENT SPECIALTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

New Jersey
 
22-2378738
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
  
(I.R.S. EMPLOYER
IDENTIFICATION NO. )
 
1000 LUCAS WAY, HAMPTON, VA 23666
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
(757) 766-1500
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No  ¨ .
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨    No ¨.
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one):
 
Large accelerated filer ¨
Accelerated filer x  
Non-accelerated filer ¨ 
Smaller reporting company ¨ 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes  ¨    No  x .
 
Indicate the number of shares outstanding of each of the issuer’s classes of stock, as of the latest practicable date:  At October 30, 2009, the number of shares outstanding of the Registrant’s common stock was 14,505,767.

 
 

 
 
MEASUREMENT SPECIALTIES, INC.
FORM 10-Q
TABLE OF CONTENTS
SEPTEMBER 30, 2009

PART I.
FINANCIAL INFORMATION
 
3
       
ITEM 1.
FINANCIAL STATEMENTS
 
3
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
3
 
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
4
 
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (UNAUDITED)
 
6
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
7
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
8
       
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
20
       
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
32
       
ITEM 4.
CONTROLS AND PROCEDURES
 
33
       
PART II.
OTHER INFORMATION
 
33
       
ITEM 1.
LEGAL PROCEEDINGS
 
33
       
ITEM 1A.
RISK FACTORS
 
34
       
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
34
       
ITEM 6.
EXHIBITS
 
34
       
SIGNATURES
 
35

 
2

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MEASUREMENT SPECIALTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  
(UNAUDITED)
 
   
Three Months Ended
September 30,
   
Six Months Ended
September 30,
 
(Amounts in thousands, except per share amounts)
 
2009
   
2008
   
2009
   
2008
 
Net sales
  $ 49,087     $ 58,888     $ 93,828     $ 117,886  
Cost of goods sold
    31,145       33,851       59,635       67,608  
Gross profit
    17,942       25,037       34,193       50,278  
Selling, general, and administrative expenses
    16,512       18,510       33,845       38,098  
Operating income
    1,430       6,527       348       12,180  
Interest expense, net
    1,018       806       2,187       1,512  
Foreign currency exchange loss (gain)
    (437 )     396       (973 )     332  
Other expense (income)
    8       68       27       (353 )
Income (loss) from continuing operations, before income taxes
    841       5,257       (893 )     10,689  
Income tax expense from continuing operations
    675       1,446       307       2,945  
Income (loss) from continuing operations, net of income taxes
    166       3,811       (1,200 )     7,744  
Loss from discontinued operations, net of income taxes
    (125 )     -       (125 )     -  
Net income (loss)
    41       3,811       (1,325 )     7,744  
Less:  Net income attributable to noncontrolling interest
    98       93       210       170  
Net income (loss) attributable to Measurement Specialties, Inc. ("MEAS")
  $ (57 )   $ 3,718     $ (1,535 )   $ 7,574  
                                 
Amounts attributable to MEAS common shareholders:
                               
Income (loss) from continuing operations, net of income taxes
  $ 68     $ 3,718     $ (1,410 )   $ 7,574  
Discontinued operations, net of income taxes
    (125 )     -       (125 )     -  
Net income (loss)
  $ (57 )   $ 3,718     $ (1,535 )   $ 7,574  
                                 
Earnings per common share - Basic:
                               
Income (loss) from continuing operations, net of income taxes
  $ -     $ 0.26     $ (0.10 )   $ 0.52  
Loss from discontinued operations attributable to MEAS
    (0.01 )     -       (0.01 )     -  
Net income (loss) - Basic
  $ -     $ 0.26     $ (0.11 )   $ 0.52  
                                 
Earnings per common share - Diluted:
                               
Income (loss) from continuing operations, net of income taxes
  $ -     $ 0.26     $ (0.10 )   $ 0.52  
Loss from discontinued operations attributable to MEAS
    (0.01 )     -       (0.01 )     -  
Net income (loss) - Diluted
  $ -     $ 0.26     $ (0.11 )   $ 0.52  
                                 
Weighted average shares outstanding - Basic
    14,486       14,454       14,486       14,453  
Weighted average shares outstanding - Diluted
    14,486       14,530       14,486       14,532  
 
See accompanying notes to condensed consolidated financial statements.

 
3

 

MEASUREMENT SPECIALTIES, INC. AND SUBSIDIARIES
CONSENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

(Amounts in thousands)
 
September 30, 2009
   
March 31, 2009
 
             
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
  $ 27,792     $ 23,483  
Accounts receivable trade, net of allowance for doubtful accounts of $891 and $898, respectively
    27,772       28,830  
Inventories, net
    41,516       45,384  
Deferred income taxes, net
    967       2,067  
Prepaid expenses and other current assets
    3,656       3,968  
Other receivables
    995       458  
Due from joint venture partner
    2,490       1,824  
Promissory note receivable
    158       283  
Income taxes receivable
    1,151       -  
Total current assets
    106,497       106,297  
                 
Property, plant and equipment, net
    46,221       46,875  
Goodwill
    100,487       99,176  
Acquired intangible assets, net
    27,217       27,478  
Deferred income taxes, net
    1,170       2,985  
Other assets
    1,536       1,319  
Total assets
  $ 283,128     $ 284,130  
  
See accompanying notes to condensed consolidated financial statements.

 
4

 

MEASUREMENT SPECIALTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

(Amounts in thousands, except share amounts)
 
September 30, 2009
   
March 31, 2009
 
             
LIABILITIES  AND  SHAREHOLDERS'  EQUITY
           
             
Current liabilities:
           
Current portion of promissory notes payable
  $ 2,414     $ 2,176  
Current portion of long-term debt
    2,339       2,356  
Current portion of capital lease obligations
    529       797  
Accounts payable
    15,348       15,381  
Accrued expenses
    5,090       3,041  
Accrued compensation
    6,378       5,656  
Income taxes payable
    -       1,838  
Other current liabilities
    3,977       3,394  
Total current liabilities
    36,075       34,639  
                 
Revolver
    64,047       71,407  
Promissory notes payable, net of current portion
    4,828       4,352  
Long-term debt, net of current portion
    11,682       12,769  
Capital lease obligations, net of current portion
    165       250  
Other liabilities
    1,118       1,085  
Total liabilities
    117,915       124,502  
                 
Equity:
               
Measurement Specialties, Inc. ("MEAS") shareholders' equity:
               
Serial preferred stock; 221,756 shares authorized; none outstanding
    -       -  
Common stock, no par; 25,000,000 shares authorized; 14,485,937 and 14,483,622 shares issued and outstanding, respectively
    -       -  
Additional paid-in capital
    83,361       81,948  
Retained earnings
    65,683       67,218  
Accumulated other comprehensive income
    13,402       8,110  
Total MEAS shareholders' equity
    162,446       157,276  
Noncontrolling interest
    2,767       2,352  
Total equity
    165,213       159,628  
Total liabilities and shareholders' equity
  $ 283,128     $ 284,130  
 
See accompanying notes to condensed consolidated financial statements.

 
5

 

MEASUREMENT SPECIALTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)

                     
Accumulated
                   
   
Shares of
   
Additional
         
Other
                   
   
Common
   
Paid-in
   
Retained
   
Comprehensive
   
Noncontrolling
         
Comprehensive
 
(Dollars in thousands)
 
Stock
   
Capital
   
Earnings
   
Income
   
Interest
   
Total
   
Income
 
Balance,  March 31, 2008
    14,440,848     $ 78,720     $ 61,939     $ 15,130     $ 1,953     $ 157,742        
Comprehensive income:
                                                     
Net income
            -       7,574       -       170       7,744     $ 7,744  
Currency translation adjustment
            -       -       (4,286 )     (4 )     (4,290 )     (4,290 )
Comprehensive income
                                                  $ 3,454  
Non-cash equity based compensation
            1,524       -       -       -       1,524          
Amounts from exercise of stock options
    30,270       176       -       -       -       176          
Balance,  September 30, 2008
    14,471,118     $ 80,420     $ 69,513     $ 10,844     $ 2,119     $ 162,896          
                                                         
Balance,  March 31, 2009
    14,483,622     $ 81,948     $ 67,218     $ 8,110     $ 2,352     $ 159,628          
Comprehensive income:
                                                       
Net income (loss)
            -       (1,535 )     -       210       (1,325 )   $ (1,325 )
Currency translation adjustment
            -       -       5,292       205       5,497       5,497  
Comprehensive income
                                                  $ 4,172  
Non-cash equity based compensation
            1,411       -       -       -       1,411          
Amounts from exercise of stock options
    2,315       2       -       -       -       2          
Balance,  September 30, 2009
    14,485,937     $ 83,361     $ 65,683     $ 13,402     $ 2,767     $ 165,213          

See accompanying notes to condensed consolidated financial statements.

 
6

 

MEASUREMENT SPECIALTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

   
Six Months Ended September 30,
 
(Amounts in thousands)
 
2009
   
2008
 
Cash flows from operating activities:
           
Net income (loss)
  $ (1,325 )   $ 7,744  
Less:  Loss from discontinued operations
    (125 )     -  
Income (loss) from continuing operations
    (1,200 )     7,744  
                 
Adjustments to reconcile net income (loss) to net cash
               
provided by operating activities from continuing operations:
               
Depreciation and amortization
    7,205       6,577  
Loss on sale of assets
    71       107  
Non-cash equity based compensation
    1,411       1,524  
Deferred income taxes
    879       (430 )
Net change in operating assets and liabilities:
               
Accounts receivable, trade
    2,014       3,989  
Inventories
    5,234       (4,684 )
Prepaid expenses, other current assets and other receivables
    (27 )     (500 )
Other assets
    (561 )     834  
Accounts payable
    (1,144 )     (1,018 )
Accrued expenses, accrued compensation, other current and other liabilities
    3,117       (266 )
Income taxes payable and income taxes receivable
    (1,046 )     1,697  
Net cash provided by operating activities from continuing operations
    15,953       15,574  
Cash flows from investing activities from continuing operations:
               
Purchases of property and equipment
    (2,305 )     (7,966 )
Proceeds from sale of assets
    50       4  
Acquisition of business, net of cash acquired
    (100 )     -  
Net cash used in investing activities from continuing operations
    (2,355 )     (7,962 )
Cash flows from financing activities from continuing operations:
               
Repayments of long-term debt
    (1,213 )     (1,671 )
Borrowings of short-term debt, revolver and notes payable
    -       9  
Repayments of short-term debt, revolver, capital leases and notes payable
    (7,807 )     (4,416 )
Payment of deferred financing costs
    (832 )     -  
Proceeds from exercise of options and employee stock purchase plan
    2       176  
Net cash used in financing activities from continuing operations
    (9,850 )     (5,902 )
                 
Net cash provided by investing activities of discontinued operations
    -       540  
Net cash provided by discontinued operations
    -       540  
                 
Net change in cash and cash equivalents
    3,748       2,250  
Effect of exchange rate changes on cash
    561       (1,101 )
Cash, beginning of year
    23,483       21,565  
Cash, end of period
  $ 27,792     $ 22,714  
                 
Supplemental Cash Flow Information:
               
Cash paid or received during the period for:
               
Interest paid
  $ 1,683     $ 1,279  
Income taxes paid
    2,528       1,213  
Income taxes refunded
    2,177       -  

See accompanying notes to condensed consolidated financial statements.

 
7

 

MEASUREMENT SPECIALTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)

(Amounts in thousands, except share and per share amounts)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:

Interim Financial Statements:  The information presented as of September 30, 2009 and for the three and six month periods ended September 30, 2009 and 2008 are unaudited, and reflect all adjustments (consisting only of normal recurring adjustments) which Measurement Specialties, Inc. (the “Company” or “MEAS”) considers necessary for the fair presentation of the Company’s financial position as of September 30, 2009, the results of its operations for the three and six month periods ended September 30, 2009 and 2008, and cash flows for the six month periods ended September 30, 2009 and 2008. The Company’s March 31, 2009 balance sheet information was derived from the audited consolidated financial statements for the year ended March 31, 2009, which are included as part of the Company’s Annual Report on Form 10-K.

The condensed consolidated financial statements included herein have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended March 31, 2009, which are included as part of the Company’s Annual Report on Form 10-K.

The Company has evaluated subsequent events for potential recognition and/or disclosure through November 4, 2009, the date the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q were issued.

Description of Business:  The Company is a leader in the design, development and manufacture of sensors and sensor-based systems for original equipment manufacturers and end users, based on a broad portfolio of proprietary technology. The Company is a multi-national corporation with twelve primary manufacturing facilities strategically located in the United States, China, France, Ireland, Germany and Switzerland, enabling the Company to produce and market world-wide a broad range of sensors that use advanced technologies to measure precise ranges of physical characteristics. These sensors are used for automotive, medical, consumer, military/aerospace, and industrial applications. The Company’s sensor products include pressure sensors and transducers, linear/rotary position sensors, piezoelectric polymer film sensors, custom microstructures, load cells, accelerometers, optical sensors, humidity and temperature sensors. The Company's advanced technologies include piezo-resistive silicon sensors, application-specific integrated circuits, micro-electromechanical systems (“MEMS”), piezoelectric polymers, foil strain gauges, force balance systems, fluid capacitive devices, linear and rotational variable differential transformers, electromagnetic displacement sensors, hygroscopic capacitive sensors, ultrasonic sensors, optical sensors, negative thermal coefficient (“NTC”) ceramic sensors and mechanical resonators.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

As part of the transition to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“AS Codification”), plain English references to the corresponding accounting policies are provided, rather than specific numeric AS Codification references.  The AS Codification identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. The AS Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  There was no impact on our financial position, results of operations or cash flows upon the adoption of the AS Codification.
 
Principles of Consolidation:  The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and its joint venture in Japan. All significant intercompany balances and transactions have been eliminated in consolidation.

In accordance with accounting principles for consolidation of entities whose equity holders do not possess the characteristics of a controlling financial interest or whose equity investment at risk is not considered sufficient to finance its activities without additional subordinated financial support for which the Company is the primary beneficiary, commonly referred to as variable interest entities or “VIEs”, the Company consolidates its joint venture in Japan, its one VIE for which the Company is the primary beneficiary. With the purchase of YSI Temperature in April 2006, the Company acquired a 50 percent ownership interest in Nikisso-THERM (“NT”), a joint venture in Japan. This joint venture is included in the condensed consolidated financial statements of the Company for the periods ended September 30, 2009 and 2008, and at September 30, 2009 and March 31, 2009.  Noncontrolling interests recorded in the condensed consolidated financial statements represent the ownership interest in NT not owned by the Company.  The presentation of certain prior year information for minority interest in the condensed consolidated statements of operations, condensed consolidated balance sheets, condensed consolidated statements of shareholders’ equity and condensed consolidated statements of cash flows have been reclassified to noncontrolling interests.

 
8

 

In accordance with the disclosure requirements of accounting policies for VIEs of public reporting companies, the nature of the Company’s involvement with NT is not as a sponsor of a qualifying special purpose entity (QSPE) for the transfer of financial assets.  NT is a self-sustaining manufacturer and distributor of temperature based sensor systems in Asian markets.  The assets of NT are for the operations of the joint venture and the VIE relationship does not expose the Company to risks not considered normal business risks.  The carrying amount and classification of the VIE’s assets and liabilities included in the condensed consolidated statement of financial position are as follows at September 30, 2009 and March 31, 2009:

   
September 30,
   
March 31,
 
   
2009
   
2009
 
Assets:
           
Cash
  $ 1,193     $ 1,206  
Accounts receivable
    1,434       1,176  
Inventory
    683       660  
Other assets
    461       456  
Due from joint venture partner
    2,490       1,824  
Property and equipment
    182       203  
      6,443       5,525  
                 
Liabilities:
               
Accounts payable
    250       194  
Accrued expenses
    177       195  
Income tax payable
    348       276  
Other liabilities
    134       156  
    $ 909     $ 821  

Reclassifications: The presentation of certain prior year information in the condensed consolidated statement of cash flows for adjustments to reconcile net income to net cash provided by operating activities previously presented for the provision for doubtful accounts, provision for inventory reserve and provision for warranty have been reclassified to trade accounts receivable, inventories and accrued expenses, respectively, to conform with current year presentation.  The presentation of certain prior year information in the condensed consolidated balance sheets previously presented in non-current deferred income tax assets has been reclassified to income taxes receivable to conform with current year presentation.

Use of Estimates:  The preparation of the condensed consolidated financial statements, in accordance with U.S. GAAP, requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the useful lives of fixed assets, carrying amount and analysis of recoverability of property, plant and equipment, acquired intangibles, goodwill, deferred tax assets, valuation allowances for receivables, inventories, income tax uncertainties and other contingencies, and stock based compensation. Actual results could differ from those estimates.

Recently Adopted Accounting Standards:  In December 2007, the FASB issued new accounting principles for acquisition accounting and noncontrolling interests, which require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders.  These principles are effective April 1, 2009. The Company will apply the new acquisition accounting principles to business combinations occurring after March 31, 2009. The accounting for contingent consideration under the new acquisition accounting principles requires the measurement of contingencies at the fair value on the acquisition date. Contingent consideration can be either a liability or equity based. Subsequent changes to the fair value of the contingent consideration (liability) are recognized in earnings, not to goodwill, and equity classified contingent consideration amounts are not re-measured.  The adoption of the new accounting principles for acquisition accounting and noncontrolling interests did not have a material impact on the Company’s results of operations and financial position.

In February 2008, the FASB issued new accounting standards for leases, which removed fair value measurement requirements for certain leasing transactions.  In February 2008, the FASB also delayed the effective date for fair value measurements for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 2008.  The adoption of the fair value measurements requirements for non-financial assets and liabilities did not have any impact on the Company’s results of operations and financial position.

In April 2008, the FASB issued new guidelines for determining the useful life of intangible assets, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of the new guidelines for determining the useful life of intangible assets is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset. The new guidelines for determining the useful life of intangible assets shall be applied prospectively to all intangible assets acquired after March 31, 2009.  The adoption of these guidelines did not have any impact on the Company’s results of operations and financial condition.

 
9

 
 
Recently Issued Accounting Pronouncements:  New disclosure requirements for employer postretirement benefit plan assets were issued on December 30, 2008 and are effective for fiscal years ending after December 15, 2009.  The new disclosure requirements for employer postretirement benefit plans clarify an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan.  The new requirements also prescribe expanded disclosures regarding investment allocation decisions, categories of plan assets, inputs, and valuation techniques used to measure fair value, the effect of Level 3 inputs on changes in plan assets and significant concentrations of risk.   The Company will adopt the new postretirement plan disclosure requirements at March 31, 2010 and does not expect the adoption of the new disclosure requirements to have a material impact on the Company’s results of operations and financial condition.
 
In June 2009, the FASB issued new accounting principles which eliminate the concept of qualifying special purpose entity (“QSPE”).  These principles improve financial reporting by enterprises involved with VIEs and address constituent concerns about the application of certain key provisions, including those in which the accounting and disclosures an enterprise’s involvement in a variable interest entity.   These new accounting principles related to VIEs are effective as of the beginning of the annual reporting period that begins after November 15, 2009, for interim periods within that annual reporting period, and for interim and annual reporting periods thereafter.  Earlier application is prohibited.  The Company is evaluating the potential impact of the adoption of the new accounting principles related to VIEs with the elimination of the QSPE concept on the Company’s results of operations and financial condition.

3.  NON-CASH EQUITY BASED COMPENSATION AND PER SHARE INFORMATION

Non-cash equity-based compensation expense for the three months ended September 30, 2009 and 2008 was $811 and $726, respectively, and for the six months ended September 30, 2009 and 2008 was $1,411 and $1,524, respectively. The estimated fair value of stock options granted during the three and six months ended September 30, 2009 approximated $2,465 and $2,474, respectively, net of expected forfeitures and is being recognized over their respective vesting periods. During the three and six months ended September 30, 2009, the Company recognized $368 and $369, respectively, of expense related to these options.

The Company has four equity-based compensation plans for which options are currently outstanding.  These plans are administered by the compensation committee of the Board of Directors, which approves grants to individuals eligible to receive awards and determines the number of shares and/or options subject to each award, the terms, conditions, performance measures, and other provisions of the award. The Chief Executive Officer can also grant individual awards up to certain limits as approved by the compensation committee. Awards are generally granted based on the individual’s performance. Terms for stock-option awards include pricing based on the closing price of the Company’s common stock on the award date, and generally vest over three to five year requisite service periods using a graded vesting schedule or subject to performance targets established by the compensation committee. Shares issued under stock option plans are newly issued common stock. Readers should refer to Note 14 of the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2009 for additional information related to the four share-based compensation plans under which options are currently outstanding.

During the three and six months ended September 30, 2009, the Company granted a total of 706,217 and 711,218 stock options from the 2008 Equity Incentive Plan (the “2008 Plan”). The 2008 Plan permits the granting of incentive stock options, non-qualified stock options, and restricted stock units.  Subject to certain adjustments, the maximum number of shares of common stock that may be issued under the 2008 Plan in connection with awards is 1,400,000 shares.  With the adoption of the 2008 Plan, no further options may be granted under the Company’s other option plans.

The Company uses the Black-Scholes-Merton option pricing model to estimate the fair value of equity-based awards with the following assumptions for the indicated period.

   
Three months ended September 30,
   
Six months ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Dividend yield
    -       -       -       -  
Expected volatility
    62.9 %     40.3 %     62.9 %     39.8 %
Risk free interest rate
    2.1 %     3.0 %     2.1 %     2.6 %
Expected term after vesting (in years)
    2.0       2.0       2.0       2.0  
Weighted-average grant-date fair value
  $ 3.49     $ 5.70     $ 3.48     $ 5.69  

The assumptions above are based on multiple factors, including historical exercise patterns of employees with respect to exercise and post-vesting employment termination behaviors, expected future exercise patterns for these employees and the historical volatility of our stock price and the stock prices of companies in our peer group (Standard Industrial Classification or “SIC” Code 3823). The expected term of options granted is derived using company-specific, historical exercise information and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

During the six months ended September 30, 2009, 2,315 stock options were exercised yielding $2 in cash proceeds and no tax benefit recognized as additional paid-in capital.  At September 30, 2009, there was $3,458 of unrecognized compensation cost adjusted for estimated forfeitures related to share-based payments, which is expected to be recognized over a weighted-average period of approximately 1.2 years.

 
10

 

Per Share Information:  Basic and diluted per share calculations are based on net income (loss) attributable to MEAS.  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. Since the Company was in a loss position for the three and six months ended September 30, 2009, all shares that may be issued upon exercise or conversion of stock options were excluded from the calculation of diluted shares since the impact would have an anti-dilutive effect.  Outstanding awards relating to approximately 1,866,430 and 1,861,949 weighted shares were excluded from the calculation for the three and six months ended September 30, 2008, respectively, as the impact of including such awards in the calculation of diluted earnings per share would have had an anti-dilutive effect.
 
The computation of the basic and diluted net income (loss) per common share is as follows:

   
Net income
(Loss)
(Numerator)
   
Weighted
Average Shares
in thousands
(Denominator)
   
Per-Share
    Amount    
 
Three months ended September 30, 2009
                 
Basic per share information
  $ (57 )     14,486     $ -  
Effect of dilutive securities
    -       -       -  
Diluted per-share information
  $ (57 )     14,486     $ -  
                         
Three months ended September 30, 2008
                       
Basic per share information
  $ 3,718       14,454     $ 0.26  
Effect of dilutive securities
    -       76       -  
Diluted per-share information
  $ 3,718       14,530     $ 0.26  
                         
Six months ended September 30, 2009
                       
Basic per share information
  $ (1,535 )     14,486     $ (0.11 )
Effect of dilutive securities
    -       -       -  
Diluted per-share information
  $ (1,535 )     14,486     $ (0.11 )
                         
Six months ended September 30, 2008
                       
Basic per share information
  $ 7,574       14,453     $ 0.52  
Effect of dilutive securities
    -       79       -  
Diluted per-share information
  $ 7,574       14,532     $ 0.52  

4. INVENTORIES

Inventories and inventory reserves for slow-moving, obsolete and lower of cost or market exposures at September 30, 2009 and March 31, 2009 are summarized as follows:

   
September 30, 2009
   
March 31, 2009
 
Raw Materials
  $ 24,031     $ 22,270  
Work-in-Process
    5,717       4,622  
Finished Goods
    15,500       21,981  
      45,248       48,873  
Inventory Reserves
    (3,732 )     (3,489 )
    $ 41,516     $ 45,384  
 
5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Equipment under capital leases is stated at the present value of minimum lease payments.  Property, plant and equipment are summarized as follows:

   
September 30, 2009
   
March 31, 2009
 
Production equipment & tooling
  $ 49,267     $ 45,894  
Building and leasehold improvements
    24,323       24,301  
                 
Furniture and equipment
    14,273       13,663  
Construction-in-progress
    815       1,122  
Total
    88,678       84,980  
Less: accumulated depreciation and amortization
    (42,457 )     (38,105 )
    $ 46,221     $ 46,875  

 
11

 

Total depreciation was $2,047 and $1,880 for the three months ended September 30, 2009 and 2008, respectively.  Total depreciation was $4,055 and $3,854 for the six months ended September 30, 2009 and 2008, respectively.  Property and equipment included $694 and $1,047 in capital leases at September 30, 2009 and March 31, 2009, respectively.
 
6. ACQUISITIONS AND ACQUIRED INTANGIBLES

Acquisitions:  As part of its growth strategy, the Company has consummated fourteen acquisitions since June 2004 with total purchase price exceeding $167,000, of which two acquisitions were made during each fiscal year ending March 31, 2009 and 2008.  All of these acquisitions have been accounted for as purchases and have resulted in the recognition of goodwill in the Company’s condensed consolidated financial statements. This goodwill arises because the purchase prices for these businesses reflect a number of factors, including the future earnings and cash flow potential of these businesses, and other factors at which similar businesses have been purchased by other acquirers, the competitive nature of the process by which the Company acquired the business, and the complementary strategic fit and resulting synergies these businesses bring to existing operations.
 
Goodwill balances presented in the condensed consolidated balance sheets of foreign acquisitions are translated at the exchange rate in effect at each balance sheet date; however, opening balance sheets used to calculate goodwill and acquired intangible assets are based on purchase date exchange rates, except for earn-out payments, which are recorded at the exchange rates in effect on the date the earn-out is accrued.  The following table shows the roll-forward of goodwill reflected in the financial statements resulting from the Company’s acquisition activities for the six months ended September 30, 2009:

Balance March 31, 2009
  $ 99,176  
Attributable to 2009 acquisitions
    (5 )
Effect of foreign currency translation
    1,316  
Balance September 30, 2009
  $ 100,487  

The following briefly describes the Company’s acquisitions from the beginning of fiscal 2008 forward.

Visyx:  Effective November 20, 2007, the Company acquired certain assets of Visyx Technologies, Inc. (Visyx”) based in Sunnyvale, California for $1,624 ($1,400 at close, $100 held-back to cover certain expenses, and $124 in acquisition costs). The Seller has the potential to receive up to an additional $2,000 in the form of a contingent payment based on successful commercialization of specified sensors prior to December 31, 2011, and an additional $9,000 earn-out based on a percentage of sales in calendar years 2009, 2010 and 2011. If these earn-out contingencies are resolved and meet established conditions, these amounts will be recorded as an additional element of the cost of the acquisition.  The resolution of these contingencies is not determinable at this time, and accordingly, the Company’s purchase price allocation for Visyx is subject to earn-out payments.  Visyx has a range of sensors that measure fluid properties, including density, viscosity and dielectric constant, for use in heavy truck/off road engines and transmissions, compressors/turbines, refrigeration and air conditioning.  The Company’s final purchase price allocation, except for earn-out contingencies, related to the Visyx acquisition is as follows:
 
Assets:
     
Accounts receivable
 
$
12
 
Inventory
   
10
 
Acquired intangible assets
   
1,528
 
Goodwill
   
74
 
Total Purchase Price
 
$
1,624
 

Intersema:  Effective December 28, 2007, the Company completed the acquisition of all of the capital stock of Intersema Microsystems S.A. (“Intersema”), a sensor company headquartered in Bevaix, Switzerland, for $40,160 ($31,249 in cash at closing, $8,708 in unsecured Promissory Notes (“Intersema Notes”), and $203 in acquisition costs). The Intersema Notes bear interest of 4.5% per annum and are payable in four equal annual installments beginning December 28, 2008. The selling shareholders have the potential to receive up to an additional $18,946 based on December 31, 2008 exchange rates or 20,000 Swiss francs tied to calendar 2009 earnings growth objectives, 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 resolution of these contingencies is not determinable at this time, and accordingly, the Company’s purchase price allocation for Intersema is subject to earn-out payments.  Intersema is a designer and manufacturer of pressure sensors and modules with low pressure, harsh media and ultra-small package configurations for use in barometric and sub-sea depth measurement markets. The transaction was financed with borrowings under the Company’s Amended Credit Facility (See Note 8).   The Company’s final purchase price allocation, except for earn-out contingencies, related to the Intersema acquisition is as follows:

 
12

 

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

Atexis:  On January 30, 2009, the Company consummated the acquisition of all of the capital stock of RIT SARL (“Atexis”), a sensor company headquartered in Fontenay, France, for €4,096.  The total purchase price in U.S. dollars based on the January 30, 2009 exchange rate was approximately $5,359 ($5,152 in cash at close and $207 in acquisition costs). The selling shareholders have the potential to receive up to an additional €2,000 tied to calendar 2009 and 2010 sales growth objectives, and if the contingencies are resolved and established conditions are met, these amounts will be recorded as an additional element of the cost of the acquisition.  The resolution of these contingencies is not determinable at this time, and accordingly, the Company’s purchase price allocation for Atexis is subject to earn-out payments.  Atexis designs and manufactures temperature sensors and probes utilizing NTC, Platinum (Pt) and thermo-couples technologies through wholly-owned subsidiaries in France and China.  The transaction was partially financed with borrowings under the Company’s Amended Credit Facility (See Note 8).   The Company’s final purchase price allocation, except for earn-out contingencies, related to the Atexis acquisition is as follows:

Assets:
     
Cash
  $ 110  
Accounts receivable
    2,268  
Inventory
    2,613  
Other assets
    270  
Property and equipment
    1,532  
Acquired intangible assets
    1,610  
Goodwill
    1,524  
      9,927  
         
Liabilities:
       
Accounts payable
    1,384  
Accrued expenses and other liabilities
    2,292  
Deferred income taxes
    892  
      4,568  
Total Purchase Price
  $ 5,359  

FGP:  On January 30, 2009, the Company consummated the acquisition of all of the capital stock of FGP Instrumentation, GS Sensors and ALS (collectively “FGP”), sensor companies located in Les Clayes-sous-Bois and Druex, France for €6,112.  The total purchase price in U.S. dollars based on the January 30, 2009 exchange rate was approximately $7,998 ($4,711 in cash at close, discharge of certain liabilities totaling $3,059 and $228 in acquisition costs). The selling shareholders have the potential to receive up to an additional €1,400 tied to 2009 sales growth objectives, 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 resolution of these contingencies is not determinable at this time, and accordingly, the Company’s purchase price allocation for FGP is subject to earn-out payments.  FGP is a designer and manufacturer of custom force, pressure and vibration sensors for aerospace and test and measurement markets.  The transaction was partially financed with borrowings under the Company’s Amended Credit Facility (See Note 8).   The Company’s final purchase price allocation, except for earn-out contingencies, related to the FGP acquisition is as follows:

 
13

 

Assets:
     
Cash
  $ 980  
Accounts receivable
    1,678  
Inventory
    1,807  
Other assets
    85  
Property and equipment
    789  
Deferred income taxes
    351  
Acquired intangible assets
    1,900  
Goodwill
    3,723  
      11,313  
         
Liabilities:
       
Accounts payable
    1,100  
Accrued expenses and other liabilities
    1,472  
Deferred income taxes
    743  
      3,315  
Total Purchase Price
  $ 7,998  

Acquired Intangibles:  In connection with all acquisitions, the Company acquired certain identifiable intangible assets, including customer relationships, proprietary technology, patents, trade-names, order backlogs and covenants-not-to-compete. The gross amounts and accumulated amortization, along with the weighted-average amortizable lives, are as follows:

         
September 30, 2009
   
March 31, 2009
 
   
Weighted-
Average Life
in years
   
Gross Amount
   
Accumulated
Amortization
   
Net
   
Gross Amount
   
Accumulated
Amortization
   
Net
 
Amortizable intangible assets:
                                         
Customer relationships
   
9
    $ 29,623     $ (10,959 )   $ 18,664     $ 27,627     $ (8,794 )   $ 18,833  
Patents
   
16
      4,306       (1,100 )     3,206       3,984       (895 )     3,089  
Tradenames
   
3
      2,162       (1,844 )     318       2,000       (1,478 )     522  
Backlog
   
1
      2,912       (2,889 )     23       2,732       (2,556 )     176  
Covenants-not-to-compete
   
3
      1,020       (959 )     61       1,008       (932 )     76  
Proprietary technology
   
13
      6,225       (1,280 )     4,945       5,763       (981 )     4,782  
            $ 46,248     $ (19,031 )   $ 27,217     $ 43,114     $ (15,636 )   $ 27,478  

Amortization expense for acquired intangible assets for the three months ended September 30, 2009 and 2008 was $1,440 and $1,359, respectively.  Amortization expense for the six months ended September 30, 2009 and 2008 was $3,150 and $2,723, respectively.  Estimated annual amortization expense is as follows:

   
Amortization
 
Year
 
Expense
 
2010
  $ 4,545  
2011
    4,043  
2012
    3,502  
2013
    2,689  
2014
    2,244  
Thereafter
    10,194  
    $ 27,217  

Pro forma Financial Data:  The following represents the Company’s pro forma consolidated net income attributable to MEAS for the three and six months ended September 30, 2008, based on final purchase accounting information assuming the Atexis and FGP acquisitions occurred as of April 1, 2008, 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, 2008.

   
For the three months ended
September 30, 2008
   
For the six months ended
September 30, 2008
 
Net sales
  $ 64,435     $ 129,376  
                 
Net income attributable to MEAS
  $ 3,808     $ 7,537  
                 
Net income attributable to MEAS per common share:
         
Basic
  $ 0.26     $ 0.52  
Diluted
  $ 0.26     $ 0.52  

 
14

 

7. FINANCIAL INSTRUMENTS:
 
Fair Value of Financial Instruments

Effective April 1, 2009, the Company adopted a new accounting standard related to fair values, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset and liability.  As a basis for considering such assumptions, the principles establish a fair value hierarchy that prioritizes the inputs used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurements).  The three levels of the fair value hierarchy are as follows:
 
Level 1 - Quoted prices in active markets for identical assets or liabilities;
 
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and
 
Level 3 - Unobservable inputs in which there is little or no market data which require the reporting entity to develop its own assumptions.
 
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), accounts payable, and accrued expenses other liabilities (non-derivatives, current and long-term), the carrying amounts approximate fair value because of the short maturity of these instruments.  Foreign currency contracts are recorded at approximately fair value.  Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  The Company's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value of assets and liabilities and their placement within the fair value hierarchy levels. The fair value of the Company’s cash and cash equivalents was determined using Level 1 measurements in the fair value hierarchy.  The fair value of the Company’s foreign currency contracts was based on Level 2 measurements in the fair value hierarchy.  The fair value of the foreign currency contracts is based on forward exchange rates relative to current exchange rates which were obtained from independent financial institutions reflecting market quotes.
 
For promissory notes payable, deferred acquisition payments and capital lease obligation, the fair value is determined as the present value of expected future cash flows discounted at the current interest rate, which approximates rates currently offered by lending institutions for loans of similar terms to companies with comparable credit risk.  These are considered Level 2 inputs.
 
For long-term debt and the revolver, the fair value of the Company’s long-term debt is estimated by discounting future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities by the Company’s lenders.  These are considered Level 2 inputs.  The fair value of long-term debt and the revolver approximates carrying value due to the variable interest nature of the debt.
 
Derivative Instruments and Risk Management

The Company is exposed to market risks from changes in interest rates, commodities, credit and foreign currency exchange rates, which could impact its results of operations and financial condition. The Company attempts to address its exposure to these risks through its normal operating and financing activities. In addition, the Company’s relatively broad-based business activities help to reduce the impact that volatility in any particular area or related areas may have on its operating results as a whole.

Interest Rate Risk:  Under our term and revolving credit facilities, we are exposed to a certain level of interest rate risk. Interest on the principal amount of our borrowings under our revolving credit facility and term loan accrue at a rate based on either a LIBOR rate plus a LIBOR margin or at an Indexed (prime based) Rate plus an Index Margin. The LIBOR or Index Rate is at our election. Our results will be adversely affected by any increase in interest rates. We do not currently hedge this interest rate exposure.

Foreign Currency Exchange Rate Risk:  Foreign currency exchange rate risk arises from the Company’s investments in subsidiaries owned and operated in foreign countries, as well as from transactions with customers in countries outside the U.S. and transactions denominated in currencies other than the applicable functional currency.

The effect of a change in currency exchange rates on the Company’s net investment in international subsidiaries is reflected in the “accumulated other comprehensive income” component of shareholders’ equity.  The Company does not hedge the Company’s net investment in subsidiaries owned and operated in countries outside the U.S.

 
15

 

Although the Company has a U.S. dollar functional currency for reporting purposes, it has manufacturing sites throughout the world and a large portion of its sales are generated in foreign currencies. A substantial portion of our revenues are priced in U.S. dollars, and most of our costs and expenses are priced in U.S. dollars, with the remaining priced in Chinese renminbi, Euros, Swiss francs and Japanese yen. Sales by subsidiaries operating outside of the United States are translated into U.S. dollars using exchange rates effective during the respective period. As a result, the Company is exposed to movements in the exchange rates of various currencies against the U.S. dollar. Accordingly, the competitiveness of our products relative to products produced locally (in foreign markets) may be affected by the performance of the U.S. dollar compared with that of our foreign customers’ currencies. Refer to Note 11, Segment Information, for details concerning annual net sales invoiced from our facilities within the U.S. and outside of the U.S., as well as long-lived assets.  Therefore, both positive and negative movements in currency exchange rates against the U.S. dollar will continue to affect the reported amount of sales, profit, and assets and liabilities in the Company’s condensed consolidated financial statements.
 
The value of the renminbi (“RMB”) relative to the U.S. dollar was stable during the first six months of fiscal 2010, but appreciated 2.5% and 9.0% in fiscal years 2009 and 2008, respectively. The Chinese government no longer pegs the RMB to the U.S. dollar, but established a currency policy letting the renminbi trade in a narrow band against a basket of currencies. The Company has more expenses in RMB than sales (i.e., short RMB position), and as such, if the U.S. dollar weakens relative to the RMB, our operating profits will decrease. We continue to consider various alternatives to hedge this exposure, and we are attempting to manage this exposure through, among other things, forward purchase contracts, pricing and monitoring balance sheet exposures for payables and receivables.

Fluctuations in the value of the Hong Kong dollar have not been significant since October 17, 1983, when the Hong Kong government tied the value of the Hong Kong dollar to that of the U.S. dollar. However, there can be no assurance that the value of the Hong Kong dollar will continue to be tied to that of the U.S. dollar.

The Company’s French and German subsidiaries have more sales in Euro than expenses in Euro and the Company’s Swiss subsidiary has more expenses in Swiss franc than sales in Swiss franc, and as such, if the U.S. dollar weakens relative to the Euro and Swiss franc, our operating profits increase in France and Germany, but decrease Switzerland.
 
The Company has a number of foreign currency exchange contracts in Europe in an attempt to hedge the Company’s exposure to the Euro and Japanese Yen. The Euro/U.S. dollar and Japanese Yen/Euro currency contracts have notional amounts totaling $3,336 and $2,408, respectively, with exercise dates through June 2010 at an average exchange rate of $1.38 (Euro to U.S. dollar conversion rate) and $119 Yen (Euro to Japanese Yen). Since these derivatives are not designated as hedges for accounting purposes, changes in their fair value are recorded in results of operations, not in other comprehensive income.
 
To manage our exposure to potential foreign currency transaction and translation risks, we may purchase additional foreign currency exchange forward contracts, currency options, or other derivative instruments, provided such instruments may be obtained at suitable prices.

Fair values of derivative instruments not designated as hedging instruments:

   
September 30,
   
March 31,
   
   
2009
   
2009
 
Balance sheet location
Financial position:
             
Foreign currency exchange contracts - Euro/US dollar
  $ (18 )   $ 105  
Other assets
Foreign currency exchange contracts - RMB
  $ -     $ (143 )
Other liabilities
Foreign currency exchange contracts - Japanese yen
  $ 184     $ 115  
Other assets

The effect of derivative instruments not designated as hedging instruments on the statements of operations and cash flows for the three and six months ended September 30, 2009 and 2008:

 
16

 

   
Three months ended
September 30,
   
Six months ended
September 30,
   
   
2009
   
2008
   
2009
   
2008
 
Location of gain or loss
Results of operations:
                         
Foreign currency exchange contracts - Euro
  $ (98 )   $ 85     $ (99 )   $ (22 )
Foreign currency exchange (gain) loss
Foreign currency exchange contracts - RMB
    7       75       18       75  
Foreign currency exchange (gain) loss
Foreign currency exchange contracts - Japanese yen
    4       -       (69 )     -  
Foreign currency exchange (gain) loss
Total
  $ (87 )   $ 160     $ (150 )   $ 53    

   
Six months ended
September 30,
   
   
2009
   
2008
 
Location of gain or loss 
Cash flows from operating activities:  Source (Use) -
             
Foreign currency exchange contracts - Euro
  $ 50     $ 36  
Prepaid expenses, other current assets and other receivables
Foreign currency exchange contracts - RMB
    (125 )     -  
Accrued expenses, accrued compensation, other current and other liabilities
Total
  $ (75 )   $ 36    

8. LONG-TERM DEBT:
 
LONG-TERM DEBT

To support the financing of acquisitions, effective April 1, 2006, the Company entered into an Amended and Restated Credit Agreement (“Amended and Restated Credit Facility”) with General Electric Capital Corporation (“GE”) as agent which, among other things, increased the Company’s existing credit facility from $35,000 to $75,000, consisting of a $55,000 revolving credit facility and a $20,000 term loan, and lowered the applicable London Inter-bank Offered Rate (“LIBOR”) or Index Margin from 4.50% and 2.75%, respectively, to LIBOR and Index Margins of 2.75% and 1.0%, respectively. To support the financing of the acquisition of Intersema (See Note 6), the Company entered into an Amended Credit Agreement (“Amended Credit Facility”) with four banks, with GE as agent, effective December 10, 2007 which, among other things, increased the Company’s existing revolving credit facility from $55,000 to $121,000 and lowered the applicable LIBOR or Index Margin from 2.75% and 1.0%, respectively, to LIBOR and Index Margins of 2.00% and 0.25%, respectively. 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. The applicable margins may be adjusted quarterly based on a change in specified financial ratios. Borrowings under the credit facility are subject to certain financial covenants and restrictions on indebtedness, dividend payments, repurchase of Company common stock, financial guarantees, annual capital expenditures, and other related items. The borrowing availability of the revolving credit facility is not based on any borrowing base requirements, but borrowings are limited by certain financial covenants.  The term loan portion of our credit facility was not changed with the Amended Credit Facility. The term loan is payable in $500 quarterly installments plus interest through March 1, 2011, with a final term payment of $10,500 and the revolver payable on April 3, 2011. 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.

On April 27, 2009, the Company entered into an amendment (the “Amendment”) to the Amended Credit Facility whereby the Company proactively negotiated a reduction of its debt covenant requirements, as a result of the decline in our sales and profitability resulting from the impact of the global recession.  The Amendment provides the Company with additional flexibility under its minimum EBITDA covenant, total leverage ratio covenant, fixed charge ratio covenant and maximum capital expenditure covenant included in its senior credit facility. Under the terms of the Amendment, the principal amount available under the Company’s revolver has been reduced from $121,000 to $90,000. The Amendment increased the interest rate by between 1.50% and 2.25%, increased the Index Margin and LIBOR Margin (which vary based on the Company’s debt to EBITDA leverage ratio), and also increased the commitment fee on the unused balance to 0.5% per annum.  As part of the Amendment, the Company paid $832 in amendment fees, which were capitalized as deferred financing costs.  Pursuant to the Amendment, the Company is prohibited from consummating any business acquisitions without lender approval during the covenant relief period, which ends March 31, 2010.  The Company is presently in compliance with applicable financial covenants at September 30, 2009.

The Company’s debt covenant requirements for September 30, 2009 and the next two quarters are as follows:

 
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Amended Financial Covenant Requirements
 
   
September 30,
2009
   
December 31,
2009
   
March 31, 2010
 
Minimum Proforma Earnings Before Income Taxes, Stock Options,  Depreciation, and Amortization ("PEBITSDA")
  $ 16,600     $ 19,100     $ 24,750  
                         
Minimum Adjusted Fixed Charge Coverage Ratio for the last twelve months
    1.00       1.15       1.20  
                         
Maximum Adjusted Capital Expenditures for the last twelve months
  $ 6,541     $ 7,978     $ 8,758  
                         
Maximum Adjusted Total Leverage Ratio
    5.00       4.25       3.25  

PEBITSDA is the Company’s earnings before income taxes, stock options, depreciation and amortization for last twelve months, in addition to the last twelve months of PEBITSDA for acquisitions.  Adjusted fixed charge coverage ratio is PEBITSDA less adjusted capital expenditures divided by fixed charges.  Fixed charges are the last twelve months of interest, taxes paid, and the last twelve months of payments of long-term debt, notes payable and capital leases.  Adjusted capital expenditures represent purchases of plant, property and equipment during the last twelve months.  Total leverage ratio is total debt less cash maintained in U.S. bank accounts which are subject to blocked account agreements with lenders divided by the last twelve months of PEBITSDA.  All of the aforementioned financial covenants are subject to various adjustments, many of which are detailed in the amended credit agreement and subsequent amendments to the credit agreement previously filed with the Securities Exchange Commission, as well as other adjustments approved by the lender.  These adjustments include such items as excluding capital expenditures associated with the new China facility from capital expenditures, and adjustments to PEBITSDA for certain items such as litigation settlement costs, severance costs and other items considered non-recurring in nature.

As of September 30, 2009, the Company utilized the LIBOR based rate for the term loan and for $64,000 of the revolving credit facility under the Amended Credit Facility. The weighted average interest rate applicable to borrowings under the revolving credit facility was approximately 4.5% at September 30, 2009. As of September 30, 2009, the outstanding borrowings on the revolving credit facility, which is classified as long-term debt, were $64,047, and the Company had an additional $25,953 available under the revolving credit facility. The Company’s borrowing capacity is limited by financial covenant ratios, including earnings ratios, and as such, our borrowing capacity is subject to change.  At September 30, 2009, the Company could borrow an additional $25,953. 

Promissory Notes:  In connection with the acquisition of Intersema, the Company issued 10,000 Swiss franc unsecured promissory notes (“Intersema Notes”).  At September 30, 2009, the Intersema Notes totaled $7,242, of which $2,414 was classified as current. The Intersema Notes are payable in four equal annual installments, the first of which was made in January 2009, and bear an interest rate of 4.5% per year.
 
Long-Term Debt and Promissory Notes:  Below is a summary of the long-term debt and promissory notes outstanding at September 30, 2009 and March 31, 2009:

   
September 30,
   
March 31,
 
   
2009
   
2009
 
Prime or LIBOR plus 4.50% or 3.00% five-year term loan with a final installment due on
April 3, 2011
  $ 13,000     $ 14,000  
                 
Governmental loans from French agencies at no interest and payable based on R&D expenditures
    518       517  
                 
Term credit facility with six banks at an interest rate of 4% payable through 2010
    503       608  
                 
      14,021       15,125  
Less current portion of long-term debt
    2,339       2,356  
    $ 11,682     $ 12,769  
                 
4.5% promissory note payable in four equal annual installments through December 28, 2011
  $ 7,242     $ 6,528  
Less current portion of promissory notes payable
    2,414       2,176  
    $ 4,828     $ 4,352  
 
The annual principal payments of long-term debt, promissory notes and revolver as of September 30, 2009 are as follows:

 
18

 

Year ended
September 30,
 
Term
   
Other
   
Subtotal
   
Notes
   
Revolver
   
Total
 
2010
  $ 2,000     $ 339     $ 2,339     $ 2,414     $ -     $ 4,753  
2011
    11,000       654       11,654       2,414       64,047       78,115  
2012
    -       18       18       2,414       -       2,432  
2013
    -       10       10       -       -       10  
Total
  $ 13,000     $ 1,021     $ 14,021     $ 7,242     $ 64,047     $ 85,310  

9.  INCOME TAXES:

Income tax expense for interim reporting is based on an estimated overall effective tax rate (“ETR”) for the entire fiscal year, in addition to any discrete tax adjustments. The overall estimated effective tax rate is based on expectations and other estimates and involves complex domestic and foreign tax issues, which the Company monitors closely, but which are subject to change.

The estimated overall ETR without discrete items for fiscal 2010 is a negative 7%, as compared to the 28% estimated overall ETR during the first half of fiscal 2009.  The decrease in the estimated overall effective tax rate mainly reflects the impact of the overall decrease in profits due to the current economic situation, the shift of taxable earnings to tax jurisdictions with lower tax rates and favorable tax deductions in China.  The overall shift in profits and losses was a higher proportion of profits to those jurisdictions with lower tax rates and a higher proportion of losses to jurisdictions with higher tax rates.

In July 2009, the Company received notification of approval from the local Chinese tax authority for certain research and development (“R&D”) deductions.  The income tax benefit of approximately $266 associated with this R&D deduction is reflected as a favorable discrete tax adjustment during the quarter ended September 30, 2009.

During the second quarter of fiscal 2010, the Company received approval from the Swiss tax authority for a five year tax holiday effective in fiscal 2010.  The Company’s tax rate in Switzerland was reduced to approximately 13% from 22%.  In accordance with accounting principles for income taxes, the Company revalued the Company’s Swiss net deferred tax liabilities at the lower tax rate, resulting in a discrete non-cash income tax credit of $650 recorded during the quarter ended September 30, 2009.

The Company has previously considered undistributed earnings of its foreign subsidiaries to be indefinitely reinvested outside of the U.S. and, accordingly, no U.S. deferred taxes had been recorded with respect to such earnings. However, as part of the Company’s ongoing evaluation of various tax planning and repatriation strategies, the Company has elected to distribute $7,500 of earnings for its Irish subsidiary, Betatherm, and recorded a deferred tax liability and corresponding discrete income tax expense for $1,100 during the quarter ended September 30, 2009.

10. COMMITMENTS AND CONTINGENCIES:
 
Litigation:  There currently are no material pending legal proceedings. From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business. The Company currently is not aware of any such legal proceedings or claims that the Company believes will have, individually or in the aggregate, a material adverse effect on the Company’s business, financial condition, or operating results.
 
Contingency:  Exports of technology necessary to develop and manufacture certain of our products are subject to U.S. export control laws, and we may be subject to adverse regulatory consequences, including government oversight of facilities and export transactions, monetary penalties and other sanctions for violations of these laws.  All exports of technology necessary to develop and manufacture our products are subject to U.S. export control laws. In certain instances, these regulations may prohibit us from developing or manufacturing certain of our products for specific end applications outside the United States. In late May 2009, the Company became aware that certain of its piezo products when designed or modified for use with or incorporation into a defense article are subject the International Traffic in Arms Regulations ("ITAR") administered by the United States Department of State.  Certain technical data relating to the design of the products may have been exported to China without authorization from the U.S. Department of State. As required by the ITAR, we are currently investigating the matter thoroughly. In addition, we have taken steps to mitigate the impact of potential violations, and we are in the process of strengthening our export-related controls and procedures. The U.S. Department of State encourages voluntary disclosures and generally affords parties mitigating credit under such circumstances. We nevertheless could be subject to continued investigation and potential regulatory consequences related to these possible violations ranging from a no-action letter, government oversight of facilities and export transactions, monetary penalties, and in extreme cases, debarment from government contracting, denial of export privileges and criminal penalties.
 
Acquisition Earn-Outs and Contingent Payments:  In connection with the Visyx acquisition, the Company has a contingent payment obligation of approximately $2,000 based on the commercialization of certain sensors, and a sales performance based earn-out totaling $9,000. In connection with the Intersema acquisition, the Company has earnings performance based earn-out obligations totaling 20,000 Swiss francs.  In connection with the Atexis acquisition, the selling shareholders have the potential to receive up to an additional €2,000 tied to 2009 and 2010 sales growth thresholds.  In connection with the FGP acquisition, the selling shareholders have the potential to receive up to an additional €1,400 tied to 2009 sales growth thresholds.  No amounts related to the above acquisition earn-outs were accrued at September 30, 2009 since the contingencies were not determinable or achieved.

 
19

 
 
11. SEGMENT INFORMATION:
 
The Company continues to have one reporting segment, a sensor business, under applicable accounting guidelines for segment reporting. For a description of the products and services of the sensor business, see Note 1.

Geographic information for revenues based on country from which invoiced, and long-lived assets based on country of location, which includes property, plant and equipment, but excludes intangible assets and goodwill, net of related depreciation and amortization follows:

   
For the three months ended September 30,
   
For the six months ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Net Sales:
                       
United States
  $ 17,607     $ 26,005     $ 36,511     $ 51,005  
France
    8,537       7,509       16,745       15,315  
Germany
    3,484       4,642       6,115       9,484  
Ireland
    4,694       3,466       7,340       6,989  
Switzerland
    2,736       4,196       5,214       8,344  
China
    12,029       13,070       21,903       26,749  
Total:
  $ 49,087     $ 58,888     $ 93,828     $ 117,886  

Long Lived Assets:
 
September 30, 2009
   
March 31, 2009
 
United States
  $ 7,217     $ 7,754  
France
    8,408       7,860  
Germany
    2,420       2,253  
Ireland
    3,701       3,434  
Switzerland
    1,868       1,918  
China
    22,607       23,656  
Total:
  $ 46,221     $ 46,875  

At September 30, 2009, approximately $5,374 of the Company’s cash is maintained in China, which is subject to certain restrictions on the transfer to another country because of currency control regulations.

12. DISCONTINUED OPERATIONS:

Effective December 1, 2005, the Company completed the sale to Fervent Group Limited (“FGL”) of its Consumer Products segment, including its Cayman Island subsidiary, Measurement Limited. FGL is a company controlled by the owners of River Display Limited, the Company’s long time partner and primary supplier of consumer products in Shenzhen, China. Under the terms of the agreement, 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 fiscal year 2007, because a portion of the earn-out targets were met. The related receivable is included in the condensed consolidated balance sheet as current portion of promissory note receivable and any cash collections are included as net cash provided by investing activities of discontinued operations in the condensed consolidated statement of cash flows. At September 30, 2009 and March 31, 2009, the gross promissory notes receivable related to the earn-out of the Consumer business totaled $283, representing the last payment which was due on December 31, 2008.  FGL has withheld the final payment to the Company because of a potential warranty claim.  The Company has formally issued FGL a demand letter for full payment.  The Company is currently in discussions with FGL about the payment of the remaining balance of the promissory note.  The Company considers FGL’s claim without merit and FGL in breach of the terms of the agreement.  However, the Company reserved $125 of the promissory note at September 30, 2009, resulting in a net receivable of $158.  The amount of the reserve is the Company’s best estimate based on available information.  Actual uncollectible amounts could exceed the Company’s estimate and changes to its estimate will be accounted for in the period of the change.  The reserve was recorded as an expense for discontinued operations during the quarter ended September 30, 2009.

ITEM 2. MANAGEME