Item 1. Business
Introduction: Measurement Specialties, Inc. is a New Jersey corporation organized in 1981. The Company is a diversified sensor technology company and a global leader in the design, development and manufacture of sensors and sensor-based systems for original equipment manufacturers (“OEM”) and end users, based on a broad portfolio of proprietary technology and typically marketed under the MEAS brand name. We believe we are among the leading manufacturers of sensor products in the markets we serve and we have a high degree of diversity when considering our geographic reach, broad range of products, number of end-use markets and breadth of customer base. The Company is a multi-national corporation with nineteen manufacturing facilities strategically located in the United States, China and Europe, enabling the Company to produce and market globally a wide range of sensors that use advanced technologies to measure precise ranges of physical characteristics. These sensors are used for engine and vehicle, medical, general industrial, consumer and home appliance, military and commercial aerospace, environmental water monitoring, and test and measurement applications.
Notes:
(1) Our fiscal year begins on April 1 and ends on March 31. All references to fiscal years refer to the fiscal year ending March 31 of the reference year, thus, references in this Annual Report on Form 10-K to the year 2013 or fiscal 2013 refer to the 12-month period from April 1, 2012 through March 31, 2013 and references to the year 2014 or fiscal 2014 refer to the 12-month period from April 1, 2013 through March 31, 2014.
(2) All U.S. dollar and other currency amounts in this report are in thousands, except share and per share amounts.
(3) Except as otherwise noted, the descriptions of our business, results and our operations contained in this report reflect only our continuing operations. As more fully described below and under “Changes in our Business,” we discontinued the remainder of our Consumer products business during fiscal 2006.
Acquisitions, Divestitures and Restructurings: Consistent with the Company’s strategy to be the supplier of choice to OEMs and select end-users for all their physical sensing needs, the Company has consummated twenty-three acquisitions since June 2004 through May 2014 with a total purchase price of approximately $450,000. We believe our acquisitions continue to enhance the Company’s long-term shareholder value by increasing growth in sales and profitability through the addition of new technologies, establishing new lines of business, and/or expanding our geographic footprint. The following acquisitions are included in the consolidated financial statements as of the effective date of acquisition (See Notes 2, 5 and 17 to the Consolidated Financial Statements of the Company included in this Annual Report on Form 10-K):
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.
Visyx Technologies, Inc. (“Visyx”)
November 20, 2007
U.S.A.
Intersema Microsystems SA (“Intersema”)
December 28, 2007
Switzerland
R.I.T. SARL (“Atexis”)
January 30, 2009
France and China
FGP Instrumentation, and related companies GS Sensors, and ALS (collectively, “FGP”)
January 30, 2009
France
Pressure Systems, Inc. (“PSI”)
September 8, 2010
U.S.A.
Eureka Environmental, Inc. (“Eureka”)
July 8, 2011
U.S.A.
Transducer Controls Corporation (“Celesco”)
September 30, 2011
U.S.A.
Gentech International Limited (“Gentech”)
October 31, 2011
Scotland
Cosense, Inc. (“Cosense”)
April 2, 2012
U.S.A.
Resistance Temperature Detector Company, Inc. and Cambridge Technologies, Inc. (collectively, “RTD”)
October 1, 2012
U.S.A.
Spectrum Sensors and Controls, Inc. (“Spectrum”)
April 17, 2013
U.S.A.
Sensotherm Temeratursensorik GmbH and Secon Kft
August 30, 2013
Germany and Hungary
Wema Group Holdings AS (“Wema”)
May 30, 2014
Norway
The above companies, except for Encoder, Polaron, Visyx, Eureka, Cosense, RTD, Spectrum, and Sensotherm, which were asset purchases, became direct or indirect wholly-owned subsidiaries of the Company upon consummation of their respective acquisitions. Since the acquisition of Wema was effective May 30, 2014, Wema is not included in the consolidated financial statements as of March 31, 2014.
As part of the Company’s ongoing efforts to review its business for opportunities to reduce operating expenses and leverage core competencies, the Company evaluates and implements various restructurings to, among other things, improve operational efficiencies. To that end, the Company has substantially completed the restructuring to consolidate the Company’s manufacturing operation in Scotland to other MEAS sites and the Company has started to implement the restructuring to consolidate its U.S. operations in Dayton, Ohio, St. Marys, Pennsylvania, Shrewsbury, Massachusetts and Ham Lake, Minnesota to a new greenfield facility in Andover, Minnesota, as well as certain other restructuring measures in Europe. For a further discussion concerning restructuring, please refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and also to Note 13 to the Consolidated Financial Statements.
Products, Markets and Applications: The majority of our sensors are components (sensing elements), devices, or transducers that convert fundamental physical measurands such as temperature, pressure, force, position, angle, acceleration, or humidity into electronic signals. These signals are subsequently used in many applications, including information display, processing, interpretation or control. MEAS sensor technologies can be combined to enable the sensing of more complex measurands, such as fluid viscosity and density, or the specific humidity at the air intake of a modern diesel engine.
The rapid proliferation of sensors continues in all markets and regions, driven in part by the increasing functionality and decreasing size and power of modern electronics. The level of “intelligence” continues to increase in products from virtually all end markets, including medical, transportation, energy, industrial, aerospace, and consumer applications. As OEMs strive to make products “smarter”, they have an expanding demand for sensors to connect the physical world to the digital world in order to improve functionality and competitiveness, decrease system costs, improve energy efficiency, enhance safety and security, and to meet more demanding regulatory requirements.
A summary of some of our sensor product offerings as of March 31, 2014, is presented in the following table.
Product
Family
Product
Technology
Applications
Pressure
Pressure Components, Sensors, and Transducers
Piezoresistive Micro-Electromechanical Systems (“MEMS”)
Disposable catheter blood pressure, wrist watch altimeter, process instrumentation, fluid level, intravenous drug administration monitoring, engine performance, barometric pressure, HVAC / building automation, wind tunnel testing, water level management and monitoring
Microfused TM Piezoresistive Silicon Strain Gauge
Automotive electronic stability control systems, paint spraying machines, fertilizer dispensers, hydraulics, refrigeration, automotive transmission
Bonded Foil Strain Gauge
Instrumentation-grade aerospace and weapon control systems, sub-sea pressure, ship cargo level, steel mills
Force
Load Cells
Microfused Piezoresistive Silicon Strain Gauge
Automotive occupancy weight sensing, bathroom scales, exercise equipment, appliance monitoring, intravenous drug administration monitoring
Bonded Foil Strain Gauge
High performance multiple sensing for aerospace, military and other high reliability markets
Position
Linear Variable Differential Transformers
Inductive Electromagnetic
Aerospace, machine control systems, knitting machines, industrial process control, hydraulic actuators, instrumentation
Rotary Position Transducers
Inductive Electromagnetic
Machine control systems, instrumentation
Magneto-Resistive (MR) sensors and Magnetic Encoders
Magneto-Resistive (“AMR”)
Automotive systems controls, pump counting and control, transmission position feedback
Long Stroke Linear Displacement
Cable Extension Potentiometer
Heavy equipment boom extension, pneumatic accumulator volume
Magnetostrictive
Inductive
Long stroke linear measurement
Hi-Rel Rotary
Potentiometer
Hi-reliability, angle/rotation measurement for military and aerospace applications
Piezo Film
Traffic Sensors
Piezoelectric Polymer
Traffic survey, speed and traffic light enforcement, toll, and truck weigh-in-motion
Custom Piezoelectric Film Sensors
Piezoelectric Polymer
Medical diagnostics, ultrasonic pen digitizers, musical instrument pickups, electronic stethoscope, security systems, anti-tamper sensors for data protection, electronic water meters
Vibration
Accelerometers
Micro-Electromechanical Systems instrumentation
Crash test sensors, anthropomorphic dummy sensors, road load dynamics, aerospace traffic alert and collision avoidance systems, instrumentation
Accelerometers
Piezoelectric Polymer
Cardiac activity sensors, audio speaker feedback, appliance load balancing
Humidity
Relative Humidity Sensors
Capacitive Polymer
Auto anti-fogging systems, diesel engine controls, air climate systems, reprography machines, respirators
Fluid Properties
Fluid Monitoring Sensors
Mechanical Resonator (Tuning Fork)
Heavy truck/off-road engine and transmission fluid monitoring for viscosity, density and dielectric constant, urea quality
Temperature
Thermistors & RTDs (Resistance Temperature Detector)
Negative Temperature Co-efficient (“NTC”) Thermistors, Infrared (“IR”), Nickel/Pt RTD, Thermocouple
Patient monitoring and diagnostics, gas chromatography, HVAC & R, and non-contacting thermometers, microwave and convection oven controls, gas detection
Photo Optics
Pulse Oximetry Sensors (SpO 2 ); X-Ray Detection
Photo optic infra-red light absorption
Reusable and disposable patient blood oxygen and pulse sensors, security system and CT scanner sensor arrays
Torque
Static & Dynamic Torque/Force Sensors
Bonded foil and discrete semiconductor strain gage
High speed dynamic torque sensors with non-contact technology for engine & gearbox testing in aerospace and motor sports, road load sensors for heavy truck and control of moderator rods in nuclear reactors.
Inertial Sensors
Angular Rate Measurement
MEMS gyro
Weapons separation testing
Technology
The Company has a broad 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, force, torque, and acceleration, and includes a number of specific material technologies including doped silicon, doped germanium, and thin metal foils. We believe that the use of piezoresistive technologies is expanding significantly, particularly in the form of micro-electromechanical systems (“MEMS”). The resistance of piezoresistive materials changes in applied mechanical variables such as stress, strain, or pressure. Changes in electrical conductivity can be readily detected using high precision, low cost, low noise electronics. Silicon MEMS devices are particularly advantageous in several large volume markets, and by leveraging commercial silicon manufacturing technology, MEMS can enable the cost-effective manufacture of small devices having high reliability and superior performance. Our proprietary Microfused™ technology employs a silicon strain gauge bonded to a stainless steel diaphragm using a high temperature glassing process devoid of organic material. The diaphragm is in contact with the sensed media in a hermetically sealed housing appropriate for harsh environments. MEAS also has extensive experience in the use of highly stable metal foil bonded strain gauge technology, useful in harsh and high temperature environments in aerospace, military, and sub-sea environments.
· Piezoelectric Technology: Piezoelectric materials, including polymers such as PVDF ceramic/polycrystalline materials such as PZT, and single crystal materials such as Lithium Niobate, produce an electrical output as a result of mechanical stress or strain, and conversely produce mechanical expansion or contraction when under an applied electrical signals. These materials are also pyroelectric, converting heat into electrical charge. MEAS is the leading global manufacturer of PVDF films which offer unique sensor design and performance opportunities because they are thin, flexible, tough, chemically inert, very sensitive, and relatively inexpensive. MEAS uses piezoelectric ceramic materials extensively in a number of applications including high performance accelerometry, medical ultrasound, and air ultrasound metrology. Single crystal materials are employed in highly specialized applications including the vibrating tuning fork structures used to extract fluid properties such as density and viscosity.
· Electrolytic Fluid Tilt Technology: Inclinometers are made using a small chamber partially filled with an electrolytic liquid. An alternating voltage is passed between two electrodes on the base of the sensor, and when tilted the electric field and associated current through this fluid change, producing a signal that can be precisely correlated to rotation angle. This technology is durable and highly repeatable.
· Fluid Capacitive Tilt Technology: Also known as fluid filled, variable capacitance technology, the output from these sensing elements is two variable capacitance signals per rotation 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 provided to the user in ratio metric, analog, or digital format.
· Inductive Coupling Technologies: This technology is used in the manufacture of several sensor lines, including Linear Variable Differential Transformers (LVDTs). An LVDT is an electromechanical sensor that produces an electrical signal proportional to the displacement of a movable core rod. They are widely used to measure displacement over the range of a few micro inches to several feet, or, for example, to indirectly measure pressure by detecting the movement of a diaphragm. LVDT’s are capable of extremely accurate and repeatable measurements in harsh and severe environments.
· Magneto-Resistive (MR) Technology: Magneto-resistive materials exhibit a change in resistivity as a function of an applied magnetic field. MEAS manufactures MR sensors by depositing ultra-thin layers of a material such as permoalloy (NiFe alloy) on top of silicon wafers. Subsequent processing creates complex resistive bridge structures which are very sensitive to small changes in magnetic fields. 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, and current sensors, and is also offered in a fully integrated surface mountable package which contains an embedded micro controller.
· Thin Film Diaphragm Technology: MEAS has substantial wafer processing experience and produces specialized structures having a very thin (several micro-meters) suspended diaphragm in the center of a silicon chip. This technology is particularly well suited for thermopile, mass air flow (MAF), and high temperature gas sensing. Thermopiles are made by creating dense serial arrays of thermocouple junctions on wafer mounted diaphragms. These arrays produce an output as a result of the Seebeck effect and are used to determine temperature without contact as a result of the infrared (IR) radiation of the target (Planck’s law). MAF sensors are made by locating thin film thermocouple or thermo-resistive temperature elements on both sides of a thin film heater, all mounted in the center of the low thermal mass diaphragm. As a gas flow over the assembly, convected heat raises the temperature of the downstream sensor in a predictable manner, allowing the calculation of mass flow. Thin metal heaters deposited on these diaphragms can reach temperatures of 400ºC very quickly with very low input power, and catalytic chemistry on top of the heater can be designed to undergo a change in resistance in response to certain gas species.
· Variable Capacitive Technology: Humidity sensors are built using a special polymer having a dielectric constant affected by water vapor. As the humidity in the environment changes, the capacitance of the polymer dielectric changes and an output is measured. This technology is uniquely designed for high volume OEM applications in consumer, automotive, home appliance, and environmental control markets.
· Photo Optical Technology: Photo-Optic sensors produce an output which is related to the variation light intensity or spectral content. MEAS uses LED transmitters and photo-diode light sensitive receivers to detect the variations in oxygen saturation, SpO2, in the blood, a widely used technique known as pulse oximetry. Photo-Optic sensors are also used to measure various water quality parameters including dissolved oxygen, turbidity, and photo-synthetically active radiation, and in transmission absorption spectroscopy sensors used to determine urea concentration and other fluid properties.
· Temperature Sensor Technology: MEAS uses a number of technologies to determine temperature, including negative temperature coefficient (“NTC”) thermistors, platinum and nickel thin film and wire based thermo-resistive materials, and thermocouples. Temperature sensors are designed for a huge array of applications and cover a temperature measurement range from less than -200ºC to over 1,700ºC.
· Application Specific Integrated Circuits (“ASICS”): Although ASICs are electronic devices, not sensors, expertise in this technology is essential in the design and manufacture of modern transducers. These specialized circuits are tailored to condition raw sensor outputs, to convert these analog signals into digital signals, to apply calculation algorithms to compensate the signals, and to deliver this information to upstream controllers using analog and digital communications protocols. MEAS has developed considerable experience in sensor specific ASICs which are increasingly employed in our sensor modules to lower cost, increase resolution and accuracy, increase interface flexibility, and decrease power consumption.
Business Segments: The Company has one reportable segment under the guidelines established by the Financial Accounting Standards Board (“FASB”) for disclosures about segments of an enterprise. Our recent acquisitions, which have been sensor-based companies, have not resulted in changes to our one reportable business segment.
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 Corporate-based assets (i.e., investment in unconsolidated subsidiary, intangible assets and goodwill), net of related depreciation are provided in Notes 15 and 16 to the Consolidated Financial Statements.
Customers: We sell a wide variety of sensor products throughout the world to a broad range of end-user markets and customers. 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, aerospace and consumer products. We have developed our strong market position due to, among other factors, our long-standing customer relationships, our competitive cost structure, and our geographic proximity to customers with our engineering, sourcing and manufacturing facilities located in North America, Europe and Asia. Our largest customer, Sensata, a large automotive sensor supplier, accounted for approximately 10%, 13% and 14% of our net sales during 2014, 2013 and 2012, respectively. At March 31, 2014 and 2013, the trade receivable with our largest customer was approximately $3,177 and $3,820, respectively. No other customer accounted for more than 10% of our net sales during the fiscal years ended March 31, 2014, 2013 and 2012.
Sales and Distribution: We sell our sensor products through a number of distribution channels, including experienced regional sales managers, distributors and (generally) exclusive 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, Asia and Western Europe. We believe the growing Asian market represents a significant opportunity for our business. Sales invoiced from foreign countries accounted for approximately 58%, 62% and 65% of net sales for the fiscal years ended March, 31, 2014, 2013 and 2012, respectively.
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.
Our manufacturing operations employ a wide variety of raw materials, including steel, copper, cast iron, electronic components, aluminum, and plastics. We purchase raw materials from a large number of independent sources around the world. No single raw material supplier is material, although some of the components we use require particular specifications where a limited number of suppliers exist that can supply such components, including wafer suppliers. Market forces, including changes in foreign currency exchange rates, can cause significant fluctuations in the costs of steel and petroleum-based products. In fiscal 2014, we experienced stable costs for most of our raw material categories and transportation costs, though some costs increased. We have attempted to mitigate the impact of cost increases through supply-chain initiatives or passing a portion of these increases on to customers in the form of price increases. There have been no raw material shortages that have had a material adverse effect on our business as a whole. We are unable to predict future shortages of raw materials or the impact of any such shortages. For a further discussion of risks related to the materials and components required for our operations, please refer to “Foreign Operations” and “Item 1A.
Item 1A. Risk Factors
Careful consideration should be given to the risks and uncertainties described below, together with the information included elsewhere in this Annual Report on Form 10-K and other documents we file with the SEC. The risks and uncertainties described below are those that we have identified as the most important risk factors applicable to the Company, but are not the only risks and uncertainties facing us. Our business is also subject to general risks and uncertainties that affect many other companies, such as overall U.S. and non-U.S. economic and industry conditions, geopolitical events, changes in laws or accounting rules, fluctuations in interest rates, terrorism, international conflicts, major health concerns, natural disasters, climate change or other disruptions of expected economic or business conditions. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our business, including our results of operations, liquidity and financial condition. 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.
Our operating results and financial conditions have been and may continue to be adversely affected by the global financial situation and worldwide economic conditions.
Historically our operating results have been impacted by the general state of the worldwide economic conditions. The global economy has been adversely impacted by the effects of the global financial crisis since 2008. These conditions make it difficult for our customers, our vendors and us to accurately forecast and plan future business activities, and have caused, and may continue to cause, our customers to reduce spending on our products. We cannot predict the strength of the economic recovery or the Company’s success in managing any other significant related risks that we may encounter. If the economy or markets in which we operate experience continued weakness or deteriorate further, our business, financial condition and results of operations could be materially and adversely affected.
Continued fundamental changes in certain industries in which we operate have had and could continue to have adverse effects on our business.
Our products are sold to multiple industries. These are global industries, and they are experiencing various degrees of contraction, growth and consolidation. Customers in these industries are located in every major geographic market. As a result, our customers are affected by changes in global and regional economic conditions, as well as by labor relations issues, regulatory requirements, trade agreements and other factors. This, in turn, affects overall demand and prices for our products sold to these industries. For example, the healthcare industry and related industries continue to undergo significant changes in an effort to reduce costs with reduced government funding of and reimbursement for healthcare products and services and research activities, as well as the impact of the U.S. Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act. In addition, many of our products are platform-specific-for example, sensors are designed for certain of our HVAC manufacturer customers according to specifications to fit a particular model. Our success may, to a certain degree, be connected with the success or failure of one or more of the manufacturers or industries to which we sell products, either in general or with respect to one or more of the platforms or systems for which our products are designed.
We may not be able to consummate future acquisitions or successfully integrate acquisitions into our business, indemnification provisions in our acquisitions agreements may not fully protect us and may result in unexpected liabilities, and we may have to restructure operations.
We have made twenty-three acquisitions from fiscal 2005 through May 2014. As a part of our business strategy, we may enter into additional business combinations and acquisitions, although acquisitions require lender approval under our credit agreement. 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 and availability under our credit facilities for 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, such as require restructurings with facility closures and consolidations. Conversely, we may not be able to consummate acquisitions at a similar rate as in the past, which could adversely impact our growth rate. Our ability to grow depends in part upon our ability to identify and successfully acquire and integrate companies and businesses at appropriate prices and realize anticipated cost savings. Risks associated with our restructurings include the risks of additional or unexpected restructuring costs, business disruption, losses of customers or key employees, not realizing expected benefits and savings from restructurings and other such related implications with restructurings
Changes in accounting or regulatory requirements or any deterioration in the credit markets could also adversely impact our ability to consummate acquisitions. Additionally, the Company has had and may have acquisition-related contingent payment obligations which are based on certain financial thresholds for which the Company has recorded an estimate of the fair value as part of purchase price. The estimated fair values for such earn-outs are based on a number of key assumptions and actual amounts could differ significantly and changes to such estimates are recorded to earnings.
As a result of our previous acquisitions, we have added different decentralized operating and accounting systems, resulting in a complex reporting environment. While we strive to quickly integrate all of our acquisitions to one enterprise resource planning (ERP) platform and management reporting/analysis information systems, 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.
We are entitled to certain indemnification rights under the agreements by which we have acquired companies. If circumstances arise under which we believe we are entitled to indemnification, the indemnifying party may not agree with our assertion as to our rights to indemnification under the circumstances and we may increase our accruals and corresponding costs.
We have recorded a significant amount of goodwill, identifiable intangible assets, and other long-lived assets which may become impaired in the future.
Goodwill, which represents the excess of cost over the fair value of the net assets of the businesses acquired, was recorded at fair value on the date of acquisition. Impairment of goodwill, identifiable intangible assets and other long-lived assets may result from, among other things, deterioration in our performance, significant negative industry or economic trends, significant decline in our stock price for a sustained period resulting in a significant change in market capitalization relative to net book value, adverse market conditions, adverse changes in laws or regulations, decrease in projected future cash flows, and a variety of other factors. The Company may have in the future an impairment of goodwill, identifiable intangible assets, and other long-lived assets, which could result in material impairment charges causing an adverse impact on our earnings and financial condition.
Our restructuring actions could have significant long-term adverse effects on our business.
We have implemented and continue to implement various restructuring activities across our businesses to adjust our cost structure, and we expect to engage in similar significant restructuring activities in the future. These restructuring activities and our regular ongoing cost reduction activities (including in connection with the integration of acquired businesses) can reduce our available talent, assets and other resources and could slow improvements in our products and services, adversely affect our ability to respond to customers and limit our ability to increase production quickly if demand for our products increases. These circumstances could adversely impact our business and financial statements.
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 could 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.
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 operations represent a substantial portion of our net sales, total assets and net assets. Our foreign subsidiaries are in China, Europe and Hong Kong, as well as our joint venture in Japan, and as such, we are exposed to, among other things, foreign currency transaction and translation losses with the Chinese RMB, Hong Kong dollar, Euro, Japanese yen, British pound and Swiss franc. Our foreign subsidiaries’ operations reflect intercompany transfers of costs and expenses, including interest on intercompany receivables, at amounts established by us. We manufacture a large portion 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. International economic, political, legal and business factors could affect our results of operations, cash flows and financial condition.
Risks specific to our international operations include:
· political conflict and instability in the relationships among Hong Kong, Taiwan, China, Europe, the United States and in our target international markets;
· economic turbulence in Asian and European 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;
· risks relating to the transfer or repatriation of cash, which may be subject to certain restrictions on the transfer to another country because of currency control or other fiscal regulations;
· risks relating to the enforceability of contracts and other rights or collectability of accounts receivable in foreign countries;
· 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
· legislative initiatives, including tax legislation and other changes in the Company’s tax position, including tax policy changes in China, which could affect the profitability of our operations in China. For example, if the Company does not continue to receive special tax status in China, our income tax rates in China could increase from 15% to 25%.
Our indebtedness may limit our use of our cash flow and changes in the credit markets may adversely affect the availability to refinance and the cost of additional debt.
We have incurred debt to finance most of our acquisitions, and we may also incur additional debt. Our debt level and related debt service obligations and debt covenants could have negative consequences, including:
·
requiring us to dedicate significant cash flow from operations to the payment of principal and interest on our debt, which would reduce the funds we have available for other purposes;
·
reducing our flexibility in planning for or reacting to changes in our business and market conditions;
·
reducing our ability to make acquisitions;
·
exposing us to interest rate risk, since a large portion of our debt obligations are at variable rates; and
·
reducing our ability to refinance our debt, which could result in an event of default that could materially and adversely affect our operating results and financial condition.
We may incur more debt in the future. If we add new debt, the risks described above could increase. In addition, further deterioration in the credit markets may adversely impact the availability and cost of future debt and refinancing.
Commodity prices may adversely affect our results of operations and financial condition.
We are exposed to a variety of market risks, including the effects of changes in commodity prices. We are a buyer of steel, non-ferrous metals and petroleum-based products, as well as other commodities required for the manufacture of products. As a result, changes in commodity prices and our inability to pass such increases on to our customers may have an adverse effect on our results of operations and financial condition.
Our success depends on our ability to maintain and protect our intellectual property and avoid claims of infringement or misuse of third party intellectual property.
We own numerous patents, trademarks, copyrights, trade secrets and licenses to intellectual property owned by others, which in aggregate are important to our operations. The steps that we and our licensors have taken to maintain and protect our intellectual property may not prevent it from being challenged, invalidated or circumvented, particularly in countries where intellectual property rights are not highly developed or protected. Unauthorized use of our intellectual property rights could adversely impact our competitive position and results of operations. In addition, from time to time in the usual course of business, we receive notices from third parties regarding intellectual property infringement or misappropriation. In the event of a successful claim against us, we could lose our rights to needed technology or be required to pay substantial damages or license fees with respect to the infringed rights, any of which could adversely impact our revenues, profitability and cash flows. Even where we successfully defend against claims of infringement or misappropriation, we may incur significant costs which could adversely affect our profitability and cash flows.
We are subject to a variety of litigation in the course of our business that could adversely affect our results of operations and financial condition.
We are subject to or could be subject to a variety of litigation incidental to our business, including claims for damages arising out of the use of our products, claims relating to intellectual property matters and claims involving employment matters, commercial disputes, environmental matters and acquisition-related matters. Some of these lawsuits could include claims for punitive, consequential and compensatory damages. The defense of these lawsuits may divert our management’s attention, we may incur significant expenses in defending these lawsuits, and we may be required to pay damage awards or settlements or become subject to equitable remedies that could adversely affect our financial condition, operations and results of operations. Moreover, any insurance or indemnification rights that we may have may be insufficient or unavailable to protect us against potential loss exposures.
We may incur material losses and costs as a result of product liability and warranty, product defects and recall claims brought against us.
We have been and may continue to be exposed to product liability and warranty claims in the event that our products actually or allegedly fail to perform as expected or the use of our products results, or is alleged to result, in bodily injury and/or property damage. We do not generally have insurance coverage for exposures such as recall and warranty. Accordingly, we could experience material warranty, recall claims or product liability losses in the future and incur significant costs to defend these claims. Manufacturing or design defects, unanticipated use of our products, or inadequate disclosure of risks relating to the use of our products could lead to injury or other adverse events. If any of our products are, or are alleged to be, defective, we may be required to participate in a recall of the underlying end product, particularly if the defect or the alleged defect relates to product safety. Depending on the terms under which we supply products, an OEM may hold us responsible for some or all of the repair or replacement costs of these products under warranties, when the product supplied did not perform as represented. Personal injuries relating to the use of our products can also result in product liability claims being brought against us. Our costs associated with satisfying product liabilities could be material.
Our business is subject to regulation, and failure to comply with those regulations could adversely affect our results of operations, financial condition and reputation.
We are subject to extensive regulation by U.S. and non-U.S. governmental entities and other entities at the federal, state and local levels, including the following:
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Certain of our operations are subject to environmental laws and regulations in the jurisdictions in which they operate. We must also comply with various health and safety regulations in the U.S. and abroad in connection with our operations. We cannot give assurance that we have been or will be at all times in substantial compliance with environmental, health, employment and safety laws.
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We are required to comply with various import laws and export control and economic sanctions laws, which may affect our transactions with certain customers, business partners and other persons, including in certain cases dealings with or between our employees and subsidiaries. In certain circumstances, export control and economic sanctions regulations may prohibit the export of certain products, services and/or technologies, and in other circumstances, we may be required to obtain an export license before exporting the controlled item. Compliance with the various import laws that apply to our businesses can restrict our access to, and increase the cost of obtaining, certain products and at times can interrupt our supply of imported inventory.
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Exports of technology necessary to develop and manufacture certain of the Company’s products may be subject to U.S. export control laws and similar laws of other jurisdictions, and the Company may be subject to adverse regulatory consequences, including government oversight of facilities and export transactions, monetary penalties and other sanctions for violations of these laws. In certain instances, export control regulations may prohibit the Company from developing or manufacturing certain of its products for specific end applications outside the United States. The Company became aware in late May 2009 that certain of the Company’s 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. In early May 2014, the Company received notification from the U.S. Department of State’s Office of Defense Trade Controls Compliance, Enforcement Division that the agency had completed its review and closed the case without taking further action or imposing any civil penalty against the Company. Refer to Note 14 in the Consolidated Financial Statements included in this Annual Report on Form 10-K for details concerning disclosures related to the above ITAR matter.
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Certain of our products are medical devices and other products that are subject to regulation by the U.S. Food and Drug Administration (“FDA”), by counterpart agencies of other countries and by regulations governing the management, storage, handling and disposal of hazardous or radioactive materials. Violations of these regulations, efficacy or safety concerns or trends of adverse events with respect to our products can lead to warning letters, declining sales, recalls, seizures, injunctions, administrative detentions, refusals to permit importations, suspension or withdrawal of approvals and pre-market notification rescissions. Our products and operations are also often subject to the rules of industrial standards bodies such as the International Standards Organization (ISO), and failure to comply with these rules can also adversely impact our business.
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We also have agreements relating to the sale of products to government entities and are subject to various statutes and regulations that apply to companies doing business with the government. Our agreements relating to the sale of products to government entities may be subject to termination, reduction or modification in the event of changes in government requirements, reductions in federal spending and other factors. We are also subject to investigation and audit for compliance with the requirements governing government contracts, including requirements related to procurement integrity, export control, employment practices, the accuracy of records and the recording of costs. A failure to comply with these requirements might result in suspension of these contracts and suspension or debarment from government contracting or subcontracting.
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The Company and our suppliers are required to implement certain procedures and processes for tracking and reporting requirements mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act concerning certain minerals, commonly referred to as “conflict minerals” originating from the Democratic Republic of Congo and adjoining countries, used in our products. The implementation of these requirements could adversely impact the availability of certain minerals used in our products, such as gold, and result in additional costs.
In addition, failure to comply with any of these laws and regulations could result in civil and criminal, monetary and non-monetary penalties, disruptions to our business, limitations on our ability to import and export products and services, and damage to our reputation. Furthermore, there are a number of regulations that are evolving or under consideration which may have a significant impact on the Company, including the Patient Protection and Affordable Care Act and climate change for which the impact cannot be determined at this time.
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 continued consolidations, including the acquisition of several smaller competitors by larger competitors, the sensor industry remains highly fragmented. Some of our competitors and potential competitors may have a number of significant advantages over us, including:
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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 practices 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 at 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 adversely affect our net sales or profit margins.
Our customers are under pressure to reduce the cost and price 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.
Our failure to comply with the debt covenants in our credit agreement, including as a result of events beyond our control, could result in an event of default which could materially and adversely affect our operating results and our financial condition.
Our credit facility requires us to maintain specified financial ratios, including maximum leverage ratio and minimum fixed charge coverage ratio. Our credit facility contains other restrictive covenants, including restrictions on the payment of dividends, repurchase of common stock, acquisitions without lender approval and creation of liens. Sufficiently adverse financial performance could result in default under certain future ratio levels. If there were an event of default under our credit facility that was not cured or waived, the amounts outstanding could become due and payable immediately. Our assets and cash flow may not be sufficient to fully repay borrowings if accelerated upon an event of default and the Company may not be able to refinance our indebtedness. Any such actions could force us into bankruptcy or liquidation.
Our reputation and our ability to do business may be impaired by improper conduct by any of our employees, agents or business partners.
We cannot provide assurance that our internal controls will always protect us from reckless or criminal acts committed by our employees, agents or business partners that would violate U.S. and/or non-U.S. laws, including the laws governing payments to government officials, competition, money laundering and data privacy. Any such improper actions could subject us to civil or criminal investigations in the U.S. and in other jurisdictions, could lead to substantial civil or criminal, monetary and non-monetary penalties against us or our subsidiaries, and could damage our reputation.
Changes in our tax rates or exposure to additional income tax liabilities could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods.
We are subject to income taxes in the U.S. and in various foreign jurisdictions. Domestic and international tax liabilities are subject to the allocation of income among various tax jurisdictions. Our effective tax rate can be affected by changes in the mix of earnings in countries with differing statutory tax rates (including as a result of business acquisitions and dispositions), changes in the valuation of deferred tax assets and liabilities, accruals related to contingent tax liabilities, the results of audits and examinations of previously filed tax returns and changes in tax laws. Any of these factors may adversely affect our tax rate and decrease our profitability. The amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and local tax authorities and by foreign tax authorities. If these audits result in assessments different from our reserves, our future results may include unfavorable adjustments to our tax liabilities.
We have recorded a significant amount of deferred tax assets, which may become impaired in the future.
We have a significant amount of deferred tax assets, mainly resulting from previously incurred net operating loss carry-forwards (“NOLs”). Accounting guidance for valuation allowances for deferred tax assets is strictly based on the evaluation of positive and negative evidence which can be objectively verified as to whether it is more likely than not the NOLs will be utilized, and if positive evidence does not outweigh negative evidence, a valuation allowance is required. Based on such assessment, we may have to record valuation allowances for deferred tax assets. Impairment of deferred tax assets may result from, among other things, deterioration in our performance, significant negative industry or economic trends, adverse changes in laws or regulations, decrease in projected future cash flows, and a variety of other factors. In the future, we may have an impairment of deferred tax assets, which could result in material impairment charges causing an adverse impact on our earnings and financial condition.
If we cannot obtain sufficient quantities of materials, components and equipment for our manufacturing activities on a timely basis and at competitive pricing and quality, or if our manufacturing capacity does not meet demand, our business and financial results will suffer.
We purchase materials, components and equipment from third parties for use in our manufacturing operations. Some of our businesses purchase their requirements of certain of these items from sole or limited source suppliers. If we cannot obtain sufficient quantities of materials, components and equipment at competitive prices and quality and on a timely basis, especially within the current challenging economic environment, we may not be able to produce sufficient quantities of product to satisfy market demand, product shipments may be delayed or our material or manufacturing costs may increase. In addition, because we cannot always immediately adapt our cost structures to changing market conditions, our manufacturing capacity may at times exceed our production requirements and potentially result in restructurings with facility closures and consolidations, or fall short of our production requirements. Any or all of these problems could result in the loss of customers, provide an opportunity for competing products to gain market acceptance and otherwise adversely affect our business and financial results.
Our inability to hire, train and retain a sufficient number of skilled officers and other employees could impede our ability to compete successfully.
If we cannot hire, train and retain a sufficient number of qualified employees, we may not be able to achieve cost savings and other initiatives to profitably grow our business, effectively integrate acquired businesses, or realize anticipated results from those businesses.
Defects and unanticipated use or inadequate disclosures with respect to our products could adversely affect our business, reputation and financial statements.
Manufacturing or design defects, unanticipated use of, safety or quality issues with respect to, including products and components that we source from third parties can lead to personal injury, death, property damage or other liability. These events could lead to recalls, result in the removal of a product from the market and result in product liability or similar claims being brought against us. Recalls, removals and product liability and similar claims can result in significant costs, as well as negative publicity and damage to our reputation that could reduce demand for our products and services.
The manufacture of many of our products is a highly exacting and complex process, and if we directly or indirectly encounter problems manufacturing products, our reputation, business and financial statements could suffer.
The manufacture of many of our products is a highly exacting and complex process, due in part to strict regulatory requirements. Problems may arise during manufacturing for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, problems with raw materials, natural disasters and environmental factors, and if not discovered before the product is released to market could result in recalls and product liability exposure. Because of the time required to approve and license certain regulated manufacturing facilities, an alternative manufacturer may not be available on a timely basis to replace such production capacity. Any of these manufacturing problems could result in significant costs and liability, as well as negative publicity and damage to our reputation that could reduce demand for our products.
If we suffer loss to our facilities, information technology systems, third party distribution system, warehousing and logistical services, or disruptions in supply chain due to a catastrophe or other natural or man-made events, our operations could be seriously harmed.
Our facilities, information technology systems and distribution systems are subject to catastrophic loss due to fire, flood, terrorism or other natural or man-made disasters. If any of these facilities or systems were to experience a catastrophic loss, it could disrupt our operations, delay production, shipments and revenue and result in large expenses to repair or replace the facility. Furthermore, we continue to increase our use of digital technologies to conduct our business, and with this increased dependence, the risk to cyber security has also increased. While the Company has taken measures to reduce cyber security risks, the Company’s operations could be impacted by cyber security incidents.
We rely primarily on third parties for transportation of the products we manufacture. In particular, a significant portion of the goods we manufacture are transported to different countries, requiring sophisticated warehousing, logistics and other resources. If any of the countries from which we transport products were to suffer delays in exporting manufactured goods, or if any of our third party transportation providers were to fail to deliver the goods we manufacture in a timely manner, we may be unable to sell those products at full value, or at all. Similarly, if any of our raw materials or components used in our products could not be delivered to us in a timely manner, we may be unable to manufacture our products in response to customer demand.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
Our corporate headquarters is located in Hampton, Virginia in a leased facility. Worldwide, we have nineteen manufacturing facilities, and five additional locations for sales, manufacturing and marketing and research and development activities. Six factories located in the U.S., China, Ireland, and France with an aggregate of approximately 400,000 square feet are owned by us. The remaining sites with an aggregate of approximately 400,000 square feet are leased by us. Of these manufacturing, sales and marketing, research and development, and administrative and distribution locations, eight are located in the U.S.A., nine in Europe and three in Asia. We manufacture a large portion of our sensor products in Shenzhen, China. We consider our facilities suitable and adequate for the purpose for which they are used and we do not anticipate difficulty in renewing existing leases as they expire or in finding other facilities. The Company’s manufacturing facilities taken as a whole, currently operate moderately below full capacity. We believe our current manufacturing base offers additional capacity to support higher revenues. The Company is constructing a new facility in China, which will replace an existing leased facility. Please refer to Note 14 in the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information with regard to our lease commitments.
As part of the Company’s ongoing efforts to review its business for opportunities to reduce operating expenses and leverage core competencies, the Company evaluates and implements various restructurings to, among other things, improve operational efficiencies. To that end, the Company has implemented restructurings to consolidate the Company’s manufacturing operations in Scotland to other MEAS sites and to consolidate its U.S. operations in Dayton, Ohio, St. Marys, Pennsylvania, Shrewsbury, Massachusetts and Ham Lake, Minnesota to a new greenfield facility in Andover, Minnesota, as well as certain other restructuring measures in Europe. For a further discussion concerning restructurings, please refer to Note 13 in the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Our primary sensor manufacturing facilities are ISO 9001 certified. 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 certified.
Item 3.
Item 3. Legal Proceedings
From time to time, we are subject to 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.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable
Executive Officers of the Registrant: 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 18, 2014, 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, 2014.
Part II
Item 5.
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
(A) Market Information: Our common stock, no par value, is traded on The NASDAQ Global Market under the symbol MEAS. The following table presents high and low sales prices of our common stock as reported on the NASDAQ for the periods indicated:
(B) Approximate Number of Holders of Common Stock: At May 21, 2014, there were approximately 41 shareholders of record of our common stock and there were approximately 4,474 beneficial shareholders.
(C) Dividends: We have not declared cash dividends on our common equity. We intend to retain earnings to support our growth strategy and we do not anticipate paying cash dividends in the foreseeable future. The payment of dividends is restricted under our Senior Secured Credit Facility. Under our Senior Credit Agreement, the Company is limited to a cumulative amount of $15,000 for payments related to dividends.
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, however, restrict distribution and repatriation of dividends by our China subsidiary.
(D) Securities Authorized for Issuance under Equity Compensation Plans: See “Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report on Form 10-K for information about our equity compensation plans.
(E) Performance Graph: The following graph compares our cumulative total stockholder return since March 31, 2009 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, 2009.
(F) Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities: None.
The Company’s Board of Directors approved in November 2013 a repurchase program authorizing the buy-back of up to $10,000 of the Company’s common stock, for which share purchase price cannot exceed $57 per share with no expiration. The following table provides information relating to the Company's repurchase of common stock during the year ended March 31, 2014:
(G) Purchases of Equity Securities by the Issuer and Affiliated Purchasers: The Company’s Board of Directors has approved over the years a number of repurchase program authorizing the buy-back of the Company’s common stock. The Company has one share buy-back program outstanding for which approximately $248 worth of additional shares may yet be purchased under publically announced program. The repurchase of the Company’s common stock is restricted by our Senior Secured Credit Agreement. As permitted by Amendment 1 dated May 4, 2011 under our Senior Secured Credit Agreement, payments by the Company related to stock buy-backs may not exceed the amount of proceeds received by the Company from the exercise of stock options up to a cumulative amount of $60,000. Since April 1, 2010, the Company has made to date cumulative share buy-back payments totaling $30,753 and received cumulative proceeds from the exercise of stock options of approximately $38,417. In accordance with our bylaws as a New Jersey corporation, repurchased shares revert to authorized but unissued status.
Item 6.
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.
The above table includes acquisitions as of the purchase date (See Note 5 to the Consolidated Financial Statements of the Company in this Annual Report on Form 10-K for a discussion regarding acquisitions). Fiscal 2011 includes two tax items recorded during the quarter ended December 31, 2010: $2,890 income tax credit reducing income tax expense associated with the release of the valuation allowance on German deferred tax assets and $2,058 in additional income tax expense associated with the election to distribute certain undistributed earnings from the Company’s Irish subsidiary. Fiscal 2013 includes $4,384 in income related to fair value adjustments to acquisition earn-outs and $758 in restructuring costs. Fiscal 2014 includes $1,161 in income related to fair value adjustments to acquisition earn-outs and $544 in restructuring costs.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except per share data)
Overview
Measurement Specialties, Inc. is a global leader in the design, development and manufacture of sensors and sensor-based systems for OEM and end users, based on a broad portfolio of proprietary technology and typically characterized by the MEAS brand name. We are a global business and we believe we have a high degree of diversity when considering our geographic reach, broad range of products, number of end-use markets and breadth of customer base. The Company is a multi-national corporation with nineteen manufacturing facilities strategically located in the United States, China, France, Ireland, Germany, and Switzerland, enabling the Company to produce and market globally a wide range of sensors that use advanced technologies to measure precise ranges of physical characteristics. These sensors are used for engine and vehicle, medical, general industrial, consumer and home appliance, military/aerospace, environmental water monitoring, and test and measurement applications. The Company’s products include sensors for measuring a wide range of measurands including differential, gauge, and absolute pressure; static and dynamic force; torque; linear and rotary position; contact and non-contact temperature; linear and angular acceleration, vibration, and impact; optical absorption; humidity and gas concentration; gas or fluid flow rate; density, viscosity, dielectric constant, and other fluid properties; and fluid level. The Company’s advanced technologies include piezo-resistive silicon, piezo-electric polymer, ceramic, and single crystal materials, application specific integrated circuits (“ASICs”), state of the art micro-electromechanical systems (“MEMS”) and custom silicon microstructures, bonded foil strain gauges, variable reluctance and electromagnetic force balance systems, fluid filled capacitive sensors, linear and rotational variable differential transformers, anisotropic magneto-resistive devices, electromagnetic sensors, hygroscopic capacitive structures, ultrasonic measurement systems, precision load cells, optical and infrared measurement systems, negative thermal coefficient (“NTC”) ceramic sensors, platinum and nickel resistance temperature detectors (“RTD”) 3-6 DOF (degree of freedom) force/torque structures, complex mechanical resonators, magnetic reed switches, high frequency multipoint pressure and temperature scanning algorithms, and high precision submersible hydrostatic level detection. We compete in growing global market segments driven by demand for products that are smarter, safer, more energy-efficient, and environmentally-friendly. We deliver a strong value proposition to our customers through our willingness to customize sensor solutions, leveraging our innovative portfolio of core technologies and exploiting our low-cost manufacturing model based on our 19 year presence in China.
Executive Summary
Our vision is to be the supplier of choice to OEMs and select end-users for all their physical sensing needs. To that end, MEAS continues to expand our market position as a leading global sensor supplier. Over the past ten years, the Company’s Compounded Annual Growth Rate (“CAGR”) of our sales of 16% has exceeded overall market increases. (CAGR is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being considered or ($412,665 /$92,268)^(1/10)=16%). The Company’s historic and expected strong growth in sales reflects the positive returns from our significant investments in research and development for new programs and the approximately $450,000 invested since June 2004 through May 2014 in our 23 acquisitions, expanding our product offerings and geographic reach.
The Company remains focused on creating long-term shareholder value through continued development of innovative technologies and strengthening our market position by expanding customer relationships. We believe we continue to have one of the strongest product development pipelines in the history of the Company, which we expect to lay the foundation for future sales growth. Research and development will continue to play a key role in our efforts to maintain product innovations for new sales and to improve profitability. Our broad range of products and geographic diversity provide the Company with a variety of opportunities to leverage technology, products, manufacturing base and our financial performance. We continue to take measures we believe will result in sales performance in excess of the overall market and generation of positive adjusted earnings before interest, tax, foreign currency exchange gains or losses, depreciation and amortization (“Adjusted EBITDA”). A core tenant of our long-term strategy to increase profitability is to grow the size and scale of the Company in order to improve our leverage of SG&A expenses. Accordingly, we believe we can achieve 21% Adjusted EBITDA Margin (Adjusted EBITDA as a percent of Net Sales) in fiscal 2015 (excluding 2015 acquisition) and improve this metric as we grow sales at a higher rate than costs in fiscal 2016 and beyond. Adjusted EBITDA Margin is a non-GAAP financial measure and we direct the reader to the Quarterly Net Sales and Quarterly Adjusted EBITDA table on page 30 for an explanation of the calculation of Adjusted EBITDA Margin. We have implemented aggressive actions to position the Company for future growth in sales and profitability. As part of these continued measures to improve profitability, the Company has targeted a number of workforce reductions and facility consolidations. The Company has substantially completed in fiscal 2014 the consolidation of all of the Company’s manufacturing operations in Scotland to other MEAS sites. Also in 2014, the Company fully transitioned from the Juarez, Mexico shared facility with API to our manufacturing sites in China. Additionally, the Company has begun to implement the consolidation of the U.S. operations in Dayton, Ohio, St. Marys, Pennsylvania, Shrewsbury, Massachusetts and Ham Lake, Minnesota to a new greenfield facility in Andover, Minnesota, as well as certain restructuring measures in Switzerland. The Company expects restructuring charges to range from $2,500 to $3,000 associated with the restructuring of the U.S. operations through calendar 2015. The Company expects to realize annual cost efficiencies beginning in fiscal 2016 as a result of the various restructurings in the U.S. and Europe of approximately $5,000 by fiscal 2016, of which approximately $1,400 relate to the restructuring in Scotland. For a further discussion concerning the restructuring, please refer to Note 13 to the Consolidated Financial Statements.
Acquisitions are a key component of the Company’s growth strategy. We believe there are many acquisition opportunities available within our targeted markets. Consistent with this strategy, the Company made three acquisitions since April 1, 2013. On May 30, 2014, the Company made its largest acquisition to date with the purchase of the capital stock of Wema Group Holdings AS, the global leader in SCR tank level sensors, as well as urea quality sensors, a key market for MEAS, along with diesel fuel level sensors. On August 30, 2013, the Company acquired the capital stock of Sensotherm and Secon, a leader in the design and manufacture of platinum (Pt) thin film temperature sensors.
On April 17, 2013, the Company acquired the capital stock of three Spectrum entities, a leader in the design and manufacture of custom temperature probes, high reliability encoders and inertial sensors.
Trends
There are a number of trends that we expect to materially affect our future operating results, including changing global economic conditions with the resulting impact on our sales, profitability, and capital spending, changes in foreign currency exchange rates relative to the U.S. dollar, shifts in our taxable income between tax jurisdictions and the resulting impact on our overall effective tax rate, changes in our debt levels and applicable interest rates, and prices of raw materials and other costs, such as labor. Additionally, sales and results of operations could be impacted by additional acquisitions and restructuring projects.
Overall, the Company expects continued solid sales growth next fiscal year, despite continued reductions in sales with our largest customer, Sensata, as a result of the long-term in-sourcing arrangement previously disclosed in last year’s Annual Report on Form 10-K. The Company expects to generate sales ranging from $438,000 to $442,000 for fiscal 2015, excluding sales associated with the 2015 acquisition.
We remain positive with regard to sales contribution coming from product developments and expect solid contributions over the next several years driven by key development programs, including urea level/quality sensors, digital temperature sensors and new barometric pressure sensors. One key development program in particular relates to increased diesel emission standards. All diesel truck (and eventually passenger car) OEMs are migrating to selective catalytic reduction systems (SCR), which inject urea into the exhaust stream to reduce NOx emissions. We expect OEMs to implement urea quality sensors over the next three years in the U.S. In Europe, to achieve new standards set in Euro 6c in 2016, we believe EU OEMs will integrate urea quality monitoring (as well as push for continuous level in tank) as ways to improve system efficiency and close the monitoring/dosing loop. China is several years behind U.S. and EU emission standards, so requirements for urea quality in China should phase in after 2016.
Additionally, we expect the sensor market will continue to be a growth industry and perform well relative to the overall economy as a result of the increase in sensor content in various products across most end markets in the U.S., Europe and Asia. Sensor content continues to increase at a faster rate than overall product unit growth, as OEMs add “intelligence” in products across most market verticals to promote improved energy efficiency and cleaner technologies, to meet regulatory compliance requirements and to improve user safety and convenience.
The following graph details the Company’s quarterly net sales and Adjusted EBITDA over the previous two years.
Adjusted EBITDA is a non-GAAP financial measure that is not in accordance with, or an alternative to, measures prepared in accordance with GAAP. The Company believes certain financial measures which meet the definition of non-GAAP financial measures provide important supplemental information. The Company considers Adjusted EBITDA an important financial measure because it provides a financial measure of the quality of the Company’s earnings. Other companies may calculate Adjusted EBITDA differently than we do, which might limit its usefulness as a comparative measure. Adjusted EBITDA is used by management in addition to and in conjunction with the results presented in accordance with GAAP. Additionally, we believe quarterly Adjusted EBITDA provides the current run-rate for trending purposes rather than a trailing twelve month historical amount. The following table details quarterly net sales and also provides a non-GAAP reconciliation of quarterly Adjusted EBITDA to the applicable GAAP financial measures.
* - Adjusted EBITDA = Income from Continuing Operations before Interest, Foreign Currency Exchange Loss (Gain), Depreciation and Amortization, Income Taxes, Share-based Compensation and Other. Other represents legal fees incurred related to certain International Traffic in Arms Regulations matters, professional fees related to acquisitions, impairment of asset held for sale, restructuring and fair value adjustments to earn-out contingencies. Adjusted EBITDA Margin = Adjusted EBITDA divided by Net Sales. Adjusted EBITDA Margin is a non-GAAP financial measure that is not in accordance with, or an alternative to, measures prepared in accordance with GAAP. With regard to forward looking measures of Adjusted EBITDA and Adjusted EBITDA Margin, a reconciliation to the applicable GAAP financial measures is not provided because it is not available without unreasonable efforts. For the quarter ended March 31, 2014, professional fees were $76, restructuring costs of $344, credit to operating cost of $440 related to the release of a liability for a dilapidation accrual, and $277 in overlapping costs with the transition out of Mexico and Scotland to other MEAS sites. Overlapping costs represent duplicative costs incurred during production transition and production start-up including direct labor, manufacturing overhead and other production-related expenses. Overlapping costs reflected in the fourth quarter are attributable to production transferred from Scotland and Mexico to China operations. These costs generally do not overlap more than two quarters and will not be duplicated long-term.
The primary factors that impact our costs of sales include production and sales volumes, product sales mix, foreign currency exchange rates, changes in the price of raw materials, China wage rate increases and the impact of various cost control measures. Although we expect continued pressures on our gross margins given our expectation that costs, including raw material and labor costs, will increase, we expect an overall improvement in gross margins by 200 to 250 basis points over the next two years as a result of a number of factors, including product mix, largely due to lower Sensata sales and sales growth of other more profitable product lines, increased leverage of our fixed manufacturing overhead and the benefits from restructurings. We expect our overall gross margins, excluding costs associated with the restructurings, to range from approximately 41% to 43%, during fiscal 2015, though gross margins for certain quarters could be outside this expected range. As with all manufacturers, our gross margins are sensitive to the overall volume of business (i.e., economies of scale) in that certain costs are fixed. In comparing the year ended March 31, 2014 to the prior year, the RMB appreciated 2.4%, and for fiscal years 2013 and 2012, the RMB appreciated approximately 0.7%, and 3.6%, respectively, relative to the U.S. dollar. However, since mid-February 2014, the RMB has depreciated by approximately 1%. There are indications the trend of the RMB depreciating may continue in the near term, though there is no way to predict whether the RMB will appreciate or depreciate, or by how much. We estimate in 2015 for every 10% increase in the value of the RMB relative to the U.S. dollar, our gross profit would decline by approximately $4,034 or less than 1% of gross margin (gross profit divided by projected net sales). Conversely, for every 10% depreciation in the value of the RMB relative to the U.S. dollar, our gross profit would increase by approximately $4,034.
Total selling, general and administrative expenses (“Total SG&A”) as a percentage of net sales were higher in fiscal 2014 as compared to the prior year, mainly reflecting increases in acquisition related expenses and amortization of acquired intangible assets, as well as restructuring costs. Long-term, the Company plans to continue to control costs and leverage our SG&A expenses by growing sales at a higher rate than SG&A expenses. As a percent of sales, Total SG&A was approximately 29.5% during the year ended March 31, 2014. For fiscal 2013 and 2012, Total SG&A expenses were approximately 29.3% and 28.7% of net sales, respectively. In 2015, we expect an increase in our SG&A expenses as a percentage of net sales mainly due to continued investment in R&D for new programs, increased amortization expense from recent acquisitions, restructuring costs and higher wage and benefit costs, including non-cash equity based compensation and incentive based compensation, as part of the Company’s overall growth.
Included in Total SG&A is amortization expense related to intangible assets acquired in acquisitions. Amortization of acquired intangible assets and deferred financing costs have increased over the past three years mainly due to the acquisitions we have made. Amortization is disproportionately loaded more in the initial years of the acquisition, and therefore amortization expense is higher in the quarters immediately following a transaction, and declines in later years based on how various intangible assets are valued and the differing useful lives for which the respective intangible assets are amortized. For example, backlog is amortized over a period less than 1 year and patents are amortized over a weighted average life of 15 years. All things being equal, amortization of acquired intangible assets for fiscal 2015 is expected to decrease by approximately $500, based on fair value estimates, as well as assuming no significant changes in foreign currency exchange rates and excluding any acquisitions in fiscal 2015.
In addition to margin exposure, the Company also has foreign currency exchange exposures related to balance sheet accounts. When foreign currency exchange rates fluctuate, there is a resulting revaluation of assets and liabilities denominated and accounted for in foreign currencies other than the subsidiary’s functional currency, resulting in foreign currency exchange (“fx”) losses or gains. These fx transaction gains and losses are reflected in our “Foreign Currency Exchange Gain or Loss.” The Company does not hedge these U.S. dollar balance sheet exposures with forward contracts or other derivatives because the U.S. dollar is the Company’s reporting and primary functional currency, though the Company does hedge the margin exposure associated with the RMB. The Company uses and may continue to use foreign currency contracts to hedge margin fx exposures. The Company does not hedge all margin fx exposures, but has accepted some exposure to exchange rate movements. The Company does not apply hedge accounting when derivative financial instruments are used to manage these fx exposures. Since the Company does not apply hedge accounting, the changes in the fair value of those derivative financial instruments are reported in earnings in the fx gains or losses caption. We expect the value of the U.S. dollar will continue to fluctuate relative to the RMB, Euro, Swiss franc and British pound. Therefore, both positive and negative movements in currency exchange rates relative to the U.S. dollar will continue to affect the reported amounts of sales, profits, and assets and liabilities in the Company’s consolidated financial statements.
We believe the Company has a relatively low overall effective cash tax rate with the utilization of our NOLs, as well as an overall low effective tax rate due to the low tax rates afforded to the Company in several tax jurisdictions in which we operate, including China, Ireland and Switzerland. Our overall effective tax rate will continue to fluctuate as a result of the shift in earnings among the various taxing jurisdictions in which we operate and their varying tax rates. This is particularly challenging due to the different timing and rates of economic activity around the world. We expect our 2015 overall estimated effective tax rate without discrete tax adjustments to range from approximately 22% to approximately 25%, an increase as compared to the prior year. The increase in the estimated overall effective tax rate mainly reflects a higher proportion of taxable earnings to tax jurisdictions with higher tax rates. 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 are subject to change.
The Company’s subsidiary in China, MEAS China, received approval from the Chinese authorities for High New Technology Enterprise (“HNTE”) status through December 31, 2014. HNTE status decreased the tax rate for MEAS China from 25% to 15%. To qualify for this reduced rate the Company must continue to meet various criteria in regard to its operations related to sales, research and development activity, and intellectual property rights. If the Company does not continue to receive HNTE status, the Company’s income tax rate in China would increase to 25%.
The Company plans to continue investing in various capital projects in fiscal 2015 to generate higher sales in new and expanded programs, and expects these expenditures to range between 3.5% and 4.5% of sales. This range of expected capital expenditures excludes investments in new greenfield manufacturing facilities in China, U.S., and other such facility investments, such as the purchase of a facility to replace a leased facility or to expand an existing facility. There is no specific timeline or commitment to acquire a facility, but the Company does from time to time contemplate making such facility investments. The Company’s investment in the new greenfield manufacturing facility in Chengdu, China is expected to be completed in fiscal 2015. The Chengdu facility is expected to cost approximately $6,000, excluding VAT, of which $4,962 has been incurred to date. The Company’s investment in the new greenfield manufacturing facility in Andover, Minnesota is expected to be completed in fiscal 2015. The Andover facility is expected to range in total cost from approximately $4,000 to $5,000, of which approximately $100 has been incurred to date. During the transition to the new facilities, the Company expects to temporarily increase certain inventory levels.
Changes in Our Business
Acquisitions, Divestures and Restructurings: As described in the Executive Summary above and in more detail in Note 5 to the Consolidated Financial Statements of the Company included in this Annual Report on Form 10-K, the Company continues to acquire business that either strategically fit into our existing portfolio or to expand our portfolio.
The Company has substantially completed the restructuring to consolidate the Company’s manufacturing operation in Scotland to other MEAS sites and the Company has started to implement the restructuring to consolidate its U.S. operations in Dayton, Ohio, St. Marys, Pennsylvania, Shrewsbury, Massachusetts and Ham Lake, Minnesota to a new greenfield facility in Andover, Minnesota, as well as certain other restructuring measures in Europe. These restructuring activities are expected to, among other things, improve operational efficiencies. For a further discussion concerning these restructurings, please refer to Note 13 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Recent Accounting Pronouncements
Recently Adopted Accounting Standards: In February 2013, the FASB issued new accounting standards for reporting of amounts reclassified out of accumulated other comprehensive income. Under this standard, entities are required to disclose additional information with respect to changes in accumulated other comprehensive income (“AOCI”) balances by component and significant items reclassified out of AOCI. Expanded disclosures for presentation of changes in AOCI involve disaggregating the total change of each component of other comprehensive income (for example, unrealized gains or losses on available for sale marketable securities) as well as presenting separately for each such component the portion of the change in AOCI related to (1) amounts reclassified into income and (2) current-period other comprehensive income. Additionally, for amounts reclassified into income, disclosure in one location is required, based upon each specific AOCI component, of the amounts impacting individual income statement line items. Disclosure of the income statement line item impacts are required only for components of AOCI reclassified into income in their entirety. Therefore, disclosures of the income statement line items affected by AOCI components such as net periodic benefit costs are not included. The disclosures required with respect to income statement line item impacts are made in either the notes to the consolidated financial statements or parenthetically on the face of the financial statements. The Company applied these new accounting standards effective beginning April 1, 2013. Since this standard only impacts presentation and disclosure requirements, its adoption did not have a material impact on the Company’s consolidated results of operations or financial condition.
Recently issued accounting pronouncements: In May 2014, the FASB and the IASB issued a new joint revenue recognition standard that supersedes nearly all US GAAP guidance on revenue recognition. The core principle of the standard is that revenue recognition should depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard is effective for the Company for the fiscal year beginning April 1, 2017 and the effects of the standard on the Company's financial statements are not known at this time.
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. Management has reviewed the development, selection and disclosure of our critical accounting estimates and assumptions with the Company’s Audit Committee of the Board of Directors. 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: The Company derives revenues primarily from the sale of sensors and sensor-based systems. In order for revenue and related cost of sales from product sales to be recognized there must persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable, and collectability of the related receivable is reasonably assured. The Company’s standard terms are FOB shipping point, but a portion of our customers have FOB destination terms. Based on the above criteria, revenue is recognized depending on the specific terms of the arrangement: Either at the point of shipment for those sales under FOB shipping point terms or when it is received by the customer for sales under FOB destination terms. For those transactions that are shipped at or near the end of the reporting period for which the sales terms are FOB destination, the Company confirms receipt of the shipment, and if delivery has not occurred, then the revenue is not recognized. Product sales are recorded net of trade discounts at the point of sale (including volume and early payment incentives) because these allowances reflect a reduction in the price for the products, sales returns, value-added tax and similar taxes. Shipping and handling costs are included in cost of revenue, and shipping and handling costs billed to customers are included in sales. Sales to customers generally include a right of return. The Company provides for allowances for returns based upon historical and estimated return rates. Sales returns have not historically been significant to our revenues and have been within the estimates made by management. The amount of actual returns could differ from estimates. Changes in estimated returns would be accounted for in the period of change. Many of our products are designed and engineered to meet customer specifications, and customer arrangements do not involve post-installation or post-sale testing and acceptance. There is no significant variation in sales terms geographically, or among product lines and industries.
Inventory Valuation: 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 under the first-in, first-out method. 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.
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 be necessary for 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. In the case of products which have been written down below cost at any given reporting period, such reduced amount is to be considered the new cost basis for subsequent accounting purposes. Cash flows from the purchase and sale of inventory are included in cash flows from operating activities.
Goodwill Impairment: Goodwill represents the excess of the aggregate purchase price over the fair value of the net identifiable assets acquired in a purchase business combination.
Management assesses goodwill for impairment at the reporting unit level on an annual basis at fiscal year-end or more frequently under certain circumstances. Our sensor business is the Company’s one reporting segment and sole reporting unit. 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. 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 the implied fair value approach or 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 and goodwill is not impaired.
In evaluating goodwill for impairment, the fair value of the Company’s reporting unit was determined using the implied fair value approach for fiscal years ended March 31, 2014, 2013 and 2012. The implied fair value approach consists of comparing the Company’s market capitalization to the Company’s book value, and if the market capitalization exceeds book value, there is no impairment of goodwill. Based on our analyses and the applicable guidelines, there was no impairment of the Company’s goodwill at March 31, 2014, 2013, and 2012.
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 using various valuation approaches, including the relief from royalty method, cost approach and income approach, depending on the circumstances. 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. There can be acquisition related contingent payment obligations, which are based on certain financial thresholds, for which the Company records at estimated fair value. The estimated fair values for such earn-outs are based on a number of key assumptions and actual amounts could differ significantly. Changes to the estimated fair value of earn-out after the measurement period are recorded to earnings. 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 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.
Long Lived Assets: The Company accounts for the impairment of long-lived assets and amortizable intangible assets in accordance with standards for 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.
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 historical or projected future operating results;
· Significant negative industry or economic trends;
· Decision to restructuring a site;
· Significant decline in stock price for a sustained period; and
· Significant 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 projected undiscounted cash flow 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.
There were no indicators of potential impairment in 2014 and 2013 requiring impairment charges, except for that relating to the asset held for sale, as detailed in Note 13 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Foreign Currency Translation and Transactions: The functional currency of the Company’s foreign operating companies is the applicable local currency. In consolidation, 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 other comprehensive income (loss) includes 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 foreign currency exchange in the Company’s consolidated statements of operations. However, foreign currency exchange gains and losses on intercompany notes of a long-term investment nature which management does not intend to repay in the foreseeable future are recorded as a component of other comprehensive income (loss).
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. The Company evaluates all positive and negative evidence in evaluating whether a valuation allowance is required. The Company annually evaluates positive and negative evidence in determining whether a valuation allowance on deferred tax assets is required. Consideration of current and expected future taxable income of the Company indicated that an overall valuation allowance is not needed.
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. The Company prepares various transfer pricing studies and other such procedures to assist in determining and supporting transfer pricing. 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.
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.
Share-Based Payments: The Company has six active share-based compensation plans, which are more fully described in Note 12 to the Consolidated Financial Statements of the Company in this Annual Report on Form 10-K.
Determining the appropriate fair value model and calculating the fair value of share-based payment awards require the input of subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our equity-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the equity-based compensation expense could be significantly different from what we have recorded in the current period.
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. The Company is required to report excess tax benefits from the award of equity instruments as financing cash flows. For purposes of measuring the tax benefit related to stock options, the Company applied the tax-law-ordering approach, whereby the tax benefits were 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. 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.
Fiscal Year Ended March 31, 2014 Compared To Fiscal Year Ended March 31, 2013
Analysis of Consolidated Statement of Operations: The following is a discussion and analysis of the Company’s consolidated statement of operations in comparing fiscal 2014 to fiscal 2013. For further details regarding certain trends and expectations, please refer to the Executive Summary and Trend sections earlier in “Item 7. Management Discussion and Analysis” of our Form 10-K.
The following table sets forth certain items from operations in our consolidated statements of operations for the years ended March 31, 2014 and 2013, respectively:
As part of our discussion and analysis, the following table summarizes certain items in our consolidated statements of income as a percentage of net sales:
Net sales: For the year ended March 31, 2014, net sales totaled a record $412,665, and represented an increase of $65,697 or 18.9% over the corresponding period last year. Organic sales, defined as net sales excluding sales attributed to the RTD, Spectrum and Sensotherm acquisitions of $42,334 for the year ended March 31, 2014 and $7,840 in sales for RTD for the year ended March 31, 2013, increased $31,203 or 9.2%. Sales increased in most sensor product lines, except Sensata, with the largest increases in sales in the pressure/force, humidity, temperature and optical product lines. The overall increase in organic sales is mainly due to new sales from broader product adoptions and new programs.
We expect the sensor market to continue to perform well relative to the overall economy as a result of the increase in sensor content in various products across most end markets in the U.S., Europe and Asia. Sensor business is a growth industry that outpaces overall average global gross domestic product. Sensor content continues to increase at a faster rate than overall product unit growth, as OEMs add “intelligence” in products across most market verticals to promote improved energy efficiency and cleaner technologies, to meet regulatory compliance requirements and to improve user safety and convenience.
Also contributing to the increase in sales was a translation increase in sales resulting from changes in foreign currency exchange rates. If the average U.S. dollar / Euro exchange rate had not changed during year ended March 31, 2014 as compared to the year ended March 31, 2013, the Company’s net sales would have been lower by approximately $3,465. Since a portion of the Company’s sales are denominated in Euros and translated into U.S. dollars, there can be a translation decrease or a translation increase in the Company’s net sales depending on changes in exchange rates. The U.S. dollar depreciated relative to the Euro in comparing average exchange rates for the twelve months ended March 31, 2014 to the twelve months ended March 31, 2013. For example, €1,000 is translated to $1,340 based on the twelve month average exchange rate ending March 31, 2014, but the same €1,000 is translated to $1,287 using the twelve month average exchange rate ending March 31, 2013.
Gross margin: Gross margin (gross profit as a percent of net sales) increased to approximately 41.7% from approximately 41.0%. The increase in gross margin is mainly due to higher sales and improved product sales mix, partially offset by the appreciation of the RMB from 2013 to 2014. In comparing the year ended March 31, 2014 to the corresponding period last year, the RMB appreciated approximately 2.4% relative to the U.S. dollar. This translates to an annualized decrease in profits of approximately $968 based on an estimate decrease in our operating income of approximately $4,034 for every 10% appreciation of the RMB against the U.S. dollar. Since mid-February 2014, the RMB has depreciated by approximately 1%. There are indications the trend of the RMB depreciating may continue in the near term, though there is no way to predict whether the RMB will appreciate or depreciate, or by how much.
On a continuing basis, our gross margin may vary due to product mix, sales volume, availability and cost of raw materials, foreign currency exchange rates, and other factors.
Selling, general and administrative: Overall, total selling, general and administrative (“SG&A”) expenses increased $20,357 or 20.0% to $121,894. Organic SG&A costs, defined as total SG&A excluding SG&A costs associated with the RTD, Spectrum and Sensotherm acquisitions of $9,884 for the year ended March 31, 2014 and $1,974 in SG&A costs associated with RTD for the year ended March 31, 2013, increased $12,447 or 12.5%. The increase in organic SG&A mainly reflects the increases in research and development costs, compensation costs, restructuring charges associated with facility consolidations and professional fees tied to acquisitions. The increase in research and development costs is mostly due to the Company’s continued investment in new programs. The increase in compensation costs, including non-cash equity based compensation, mainly reflects higher headcount, compensation and bonus levels as part of the Company’s overall growth and increased profitability. The Company incurred approximately $965 and $401 in professional fees during year ended March 31, 2014 and 2013, respectively, associated with acquisition related activities.
Total SG&A expenses as a percent of net sales for the year ended March 31, 2014 was approximately 29.5%, as compared to 29.3% for the corresponding period last year.
Non-cash equity based compensation: Non-cash equity based compensation increased $2,641 to $7,374. The increase in non-cash equity based compensation is mainly because of the higher estimated fair value of the recent stock awards, which primarily reflects the increase in the Company’s stock price. Additionally, approximately $248 of the non-cash equity based compensation relates to awards for retention as part of the Company’s restructuring of the U.S. operations. During the year ended March 31, 2014 and 2013, the Company awarded 396,995 and 424,186, respectively, stock options and restricted stock units with an estimated fair value of $17,708 and $7,920, respectively. Total compensation cost, net of expected forfeitures, related to share based payments not yet recognized totaled $10,738 at March 31, 2014, which is expected to be recognized over a weighted average period of approximately 1.1 years.
Amortization of acquired intangible assets and deferred financing costs: Amortization of acquired intangible assets and deferred financing costs increased $1,272 to $9,632, as compared to $8,360 the same period last year. The increase in amortization expense is mainly because of the acquisitions of RTD, Spectrum and Sensotherm.
Restructuring costs: As part of the Company’s ongoing efforts to review our business for opportunities to reduce operating expenses and leverage core competencies, the Company continually evaluates various workforce reductions and facility consolidations. The Company has substantially completed the consolidation of all of the Company’s manufacturing operations in Scotland to other MEAS sites in fiscal 2014. Also in 2014, the Company fully transitioned its Juarez, Mexico facility, a shared facility with API, to our manufacturing sites in China. Additionally, the Company started to implement the consolidation of the U.S. operations in Dayton, Ohio, St. Marys, Pennsylvania, Shrewsbury, Massachusetts and Ham Lake, Minnesota to a new greenfield facility in Andover, Minnesota (“U.S. Restructuring”), which was announced to employees in February 2014. These and other such restructurings include initiatives designed to centralize certain operating activities and improve capital utilization, and are expected to, among other things, improve operational efficiencies and performance. The U.S. Restructuring costs will include equipment transfers, retention and relocation, severance, termination of benefits and other related activities, in addition to possible contract termination costs, which will be reported in the statement of operations costs. A portion of the retention costs are share-based awards and are reported with non-cash equity based compensation and not included in the reported restructuring costs. U.S. Restructuring costs are expected to be roughly $2,500 to $3,000 and annual savings resulting from U.S. consolidation are expected to be roughly $2,000 to $2,500. We will begin moving production later in calendar year 2014 and expect to complete all transfers and facility closures by the end of calendar year 2015.
During the year ended March 31, 2014, the Company incurred approximately $895 for restructuring costs related to the facility closure in Scotland. During the year ended March 31, 2014, the Company incurred $248 of equity-based retention costs for the U.S. Restructuring. At March 31, 2014, the liability recorded for the U.S. Restructuring was $84. For further details concerning restructurings, please refer to Note 13 to the Consolidated Financial Statements. The prior year restructuring related to the consolidation of the Company’s Cosense acquisition from New York to Virginia.
Interest expense, net: Interest expense increased $520 to $3,213 from $2,693. The increase in interest expense is primarily due to the increase in average outstanding debt. Total average outstanding debt increased to approximately $134,395 for the year ended March 31, 2014 as compared to $105,486 for the same period last year, mainly reflecting additional borrowing to fund acquisitions. The Company’s weighted average interest rate was approximately 2.4% for the year ended March 31, 2014, as compared to 2.6% during the same period last year.
Foreign currency exchange gains and losses: Foreign currency exchange gains and losses represent the impact of changes in foreign currency exchange rates with, among other things, the revaluation of balance sheet accounts and foreign currency contracts. When foreign currency exchange rates fluctuate, there is a resulting revaluation of assets and liabilities denominated and accounted for in foreign currencies other than the business’ functional currency. For example, our Irish subsidiary, which uses the Euro as its functional currency, holds cash denominated in foreign currencies, including the U.S. dollar. As the Euro appreciates against the U.S. dollar, the cash balances held in other denominations are devalued when stated in terms of Euro, resulting in a foreign currency exchange loss.
The increase in the foreign currency exchange loss is mainly due to the foreign currency exchange losses recorded with the unfavorable fluctuations of the European currencies relative to the U.S. dollar with the Company’s European operations and the fluctuation of the RMB relative to the U.S. dollar with the Company’s operations in China. The Company does not hedge the U.S. dollar net asset exposures of the Company’s European and Asian operations with forward contracts or other derivatives, because the U.S. dollar is the Company’s reporting and primary functional currency. The Company does hedge a portion of the Company’s short-position in RMB (more expenses denominated in RMB than sales denominated in RMB) with forward exchange contracts. Since these derivatives are not designated as hedges for accounting purposes, the Company does not apply hedge accounting with these foreign currency exchange contracts and changes in their fair value are recorded in the results of operations. During fiscal 2013, the changes in the fair value of these derivatives were gains because the RMB had appreciated, but during fiscal 2014, the changes in the fair value of these contracts were losses since the RMB has recently depreciated, as detailed in Note 6 to the Consolidated Financial Statements. The Company continues to be impacted by volatility in foreign currency exchange rates, including the impact of the fluctuation of the U.S. dollar relative to the Euro, Swiss franc and British pound, as well as the appreciation of the RMB relative to the U.S. dollar.
Impairment of asset held for sale: During the year ended March 31, 2013, the Company determined there were triggering events requiring an impairment analysis for asset held for sale for which the Company recorded impairment charges of $489. There were no such triggering events during the year ended March 31, 2014. The Company sold the asset held for sale on September 23, 2013 for $1,000, consisting of $181 in cash, net of $69 in costs to sell, and a $750 promissory note. The carrying value of this asset group was $940 and approximated fair value less cost to sell.
Acquisition earn-out contingency adjustment: Acquisition earn-out contingency adjustment represents the impact of change in the estimated fair value of acquisition earn-outs. The fair value of acquisition earn-out contingencies is based on expectations and other such estimates related to the specific earn-out target, all of which are subject to modification with changing circumstances until the contingency is resolved. The fair value of acquisition earn-out contingencies prior to resolution is determined using a modeling technique with significant unobservable inputs calculated using a probability-weighted approach. Key assumptions include discount rates for present value factor, which are based on industry specific weighted average cost of capital, adjusted for, among other things, time and risk, as well as forecasted annual earnings before interest, taxes, depreciation and amortization and forecasted annual revenues over the life of the earn-outs. Adjustments to the fair value of earn-outs are recorded to earnings with that portion of the adjustment relating to the time value of money as interest expense and the non-interest portion of the change in earn-outs as a separate non-operating item in the statement of operations. During the year ended March 31, 2013, as a result of the assessment of actual and projected earnings and sales scenarios, the Company determined that Eureka’s earnings and Gentech’s sales were expected to be below originally estimated earn-out levels. The Company recorded fair value adjustments of $2,191 and £1,387 or approximately $2,193 decreasing the acquisition earn-out liabilities for Eureka and Gentech, respectively, during the year ended March 31, 2013. During the year ended March 31, 2014, the Company determined that RTD’s projected sales were below originally estimated earn-out levels and recorded a fair value adjustment of $1,161 to reflect no acquisition earn-out liability for RTD.
Other income: Other income consists of various non-operating items, including sales of tooling and other miscellaneous income and expense items. The increase in other income mainly reflects local Chinese government incentives provided to the Company’s subsidiary in China during the current year. These subsidies were not provided to the Company last year and such subsidies may not recur in future periods, as these incentives depend on a number of factors, including the annual approval and funding of such programs by the local Shenzhen government.
Income Taxes: Income tax expense and deferred tax assets and liabilities reflect management’s assessment of future taxes expected to be paid on items reflected in the Company’s financial statements. The Company records the tax effect of discrete items and items that are reported net of their tax effects in the period in which they occur.
The Company’s effective tax rate (“ETR”) can be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, accruals related to contingent tax liabilities, the results of audits and examinations of previously filed tax returns, the implementation of tax planning strategies and changes in tax laws. As detailed in Note 10 to the Consolidated financial statements of the Company in this Annual Report on Form 10-K, the Company’s effective tax rate for 2014 differs from the United States federal statutory rate of 35% is primarily a result of lower effective tax rates on certain earnings from operations outside of the United States. No provisions for United States income taxes have been made with respect to earnings that are planned to be reinvested indefinitely outside the United States.
The amount of income taxes the Company pays is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. Management performs a comprehensive review of its global tax positions on a quarterly basis and accrues estimated amounts for contingent tax liabilities. Based on these reviews, the results of discussions and resolutions of matters with certain tax authorities and the closure of tax years subject to tax audit, reserves are adjusted as necessary.
Income tax expense for the year ended March 31, 2014 increased $1,928 to $10,274 from $8,346 last year. The increase in income tax expense is primarily due to the generation of higher profits before taxes during the current period, partially offset by discrete income tax adjustments.
The Company’s overall effective tax rate (income tax expense divided by income before income taxes) for the year ended March 31, 2014 was approximately 21%, as compared to approximately 20% the same period last year.
The Company recorded the following discrete income tax adjustments during the twelve months ended March 31, 2014, resulting in a net income tax credit adjustment of approximately $911, as compared to a $1,396 discrete income tax credit adjustments during the prior year.
During the three months ended March 31, 2014, the Company recorded discrete income tax credits of approximately $358, of which $200 pertained to the revaluation of deferred tax liabilities for a reduction in the applicable tax rate with certain intangible assets and $158 tax benefit from equity base compensation deduction. During the three months ended December 31, 2013, the Company recorded a discrete income tax credit of approximately $191, of which $170 related to the refinement of estimates between the 2013 year tax provision and tax returns. During the three months ended September 30, 2013, the Company recorded discrete income tax credit adjustments of approximately $149 related to a tax law change reducing the tax rate in the United Kingdom. During the three months ended June 30, 2013, the Company recorded discrete income tax credit adjustments of approximately $213, which included a $156 release of a liability related to an uncertain tax position in Switzerland, $32 for equity compensation benefit and $25 U.S. state tax credit.
Fiscal Year Ended March 31, 2013 Compared To Fiscal Year Ended March 31, 2012
The following table sets forth certain items from operations in our consolidated statements of operations for the years ended March 31, 2013 and 2012, respectively:
As part of our discussion and analysis, the following table summarizes certain items in our consolidated statements of income as a percentage of net sales.
Net sales: For the year ended March 31, 2013, net sales totaled $346,968, and represented an increase of $33,764 or 10.8% over last year. Organic sales, defined as net sales excluding sales attributed to the Eureka, Celesco, Gentech, Cosense and RTD acquisitions of $45,025 for the year ended March 31, 2013 and excluding sales of $16,397 attributed to Eureka, Celesco and Gentech for the year ended March 31, 2012, increased $5,136 or 1.7%. Sales increases were in all sensor product lines, except optical, position, vibration and temperature, with the largest increases in sales to humidity, pressure, piezo and Sensata. The overall increase in organic sales is mainly due to new sales from broader product adoptions and new programs, partially offset by weak macro-economic environmental conditions and the translation decrease in sales from changes in foreign currency exchange rates. The increase in sales to Sensata was not as high as the prior year, and sales to Sensata are expected to decline in future periods due to a customer insourcing program whereby a majority of our Sensata business will be manufactured by Sensata under a royalty arrangement. Also impacting sales is the continued uncertainty and cautiousness with customers across most markets, particularly with the financial instability in Europe.
We expect the sensor market to continue to perform well relative to the overall economy as a result of the increase in sensor content in various products across most end markets in the U.S., Europe and Asia. Sensor content continues to increase at a faster rate than overall product unit growth, as OEMs add “intelligence” in products across most market verticals to promote improved energy efficiency and cleaner technologies, to meet regulatory compliance requirements and to improve user safety and convenience.
Partially offsetting the increase in sales is the translation decrease in sales resulting from changes in foreign currency exchange rates. If the average U.S. dollar / Euro exchange rate had not changed during the twelve months ended March 31, 2012 as compared to the twelve months ended March 31, 2012, the Company’s organic net sales would have been higher by approximately $5,265. Since a portion of the Company’s sales are denominated in Euros and translated into U.S. dollars, there can be a translation decrease or a translation increase in the Company’s net sales depending on changes in exchange rates. The U.S. dollar appreciated relative to the Euro in comparing average exchange rates for the twelve months ended March 31, 2013 to the twelve months ended March 31, 2012. For example, €1,000 is translated to $1,287 based on the twelve month weighted average exchange rate ended March 31, 2013, but the same €1,000 is translated to $1,383 using the twelve month average exchange rate ended March 31, 2012.
Gross margin: Gross margin (gross profit as a percent of net sales) increased to approximately 41.0% from approximately 40.2%. The increase in gross margin is mainly due to, among other factors, improved product sales mix and lower scrap, partially offset by increases in direct labor costs and the appreciation of the RMB. The Company sold a larger proportion of products with higher gross margins as compared to the prior year, mainly reflecting the increase in sales from acquisitions and the decline in the proportionate level of sales to Sensata. In comparing fiscal 2013 to 2012, the RMB appreciated approximately 0.7% relative to the U.S. dollar. This translates to an annualized decrease in profits of approximately $266 based on an estimate decrease in our operating income of approximately 3,805 for every 10% appreciation of the RMB against the U.S. dollar.
On a continuing basis, our gross margin may vary due to product mix, sales volume, availability and cost of raw materials, foreign currency exchange rates, and other factors.
Selling, general and administrative: Overall, total selling, general and administrative (“SG&A”) expenses increased $11,574 or 12.9% to $101,537. Organic SG&A costs, defined as total SG&A excluding SG&A costs associated with the Eureka, Celesco, Gentech, Cosense and RTD acquisitions and acquired intellectual property from Sentelligence of $13,589 for the year ended March 31, 2013, and approximately $5,681 in SG&A costs associated with Eureka, Celesco, Gentech and Sentelligence for the year ended March 31, 2012, increased $3,666 or 4.3%. The increase in organic SG&A mainly reflects increases in research and development (“R&D”) costs, lower customer funding and higher compensation costs, including wages and non-cash equity based compensation, as well as restructuring-related costs. The increase in R&D costs is mostly due to the Company’s continued investment in new programs. The decrease in customer funding of tooling and other R&D is due to a variety of factors, including economic factors with the largest decreases in Europe and Asia, as well the completion of a number of non-recurring development programs during the prior year. The increase in compensation is due to, among other things, higher headcount and higher compensation levels, including non-cash equity based compensation, as part of the Company’s overall growth.
Total SG&A expenses as a percent of net sales was approximately 29.3%, as compared to 28.6% last year.
Non-cash equity based compensation: Non-cash equity based compensation increased $469 to $4,733. The increase in non-cash equity based compensation is due to the increase in the quantity of options and awards granted during the current year as compared to the prior year. Total compensation cost related to share based payments not yet recognized totaled $4,889 at March 31, 2013, which is expected to be recognized over a weighted average period of approximately 1 year.
Amortization of acquired intangible assets and deferred financing costs: Amortization of acquired intangible assets and deferred financing costs increased $365 to $8,360 as compared to $7,995 the same period last year. The increase in amortization expense is mainly because of the acquisitions of Cosense and RTD (“2013 Acquisitions”).
Restructuring costs: As part of the Company’s ongoing efforts to review our business for opportunities to reduce operating expenses and leverage core competencies, the Company completed the restructuring of operations of Cosense in 2013 and the Company started implementing plans to consolidate all of the Company’s manufacturing operations in Scotland to other MEAS sites. The Company completed in 2013 the consolidation of the manufacturing operations of Cosense from New York to Virginia, which included $362 in severance related costs. The Scottish restructuring includes initiatives designed to centralize certain operating activities, and is expected to, among other things, improve operational efficiencies and performance. This restructuring is expected to be implemented over the next 12 to 24 months. Costs associated with this restructuring will include payments for severance charges, costs for termination of benefits and other related activities, in addition to possible contract termination, all of which will be reported in the statement of operations costs. The announcement to employees for the closure of the facility in Scotland was made in March 2013. At March 31, 2013, the Company recorded a liability for an estimate of $396 for severance costs related to the facility closure in Scotland, and the Company expects to incur additional costs with the Scottish restructuring of approximately $1,200. For further details concerning the Scottish restructuring, please refer to Note 13 to the Consolidated Financial Statements.
Interest expense, net: Interest expense increased $119 to $2,693 from $2,574. The increase in interest expense is primarily due to the increase in borrowings, which was partially offset by the decrease in average interest rates. Total average outstanding debt increased to approximately $105,486 for the year ended March 31, 2013 as compared to $86,811 for the year ended March 31, 2012, mainly reflecting additional borrowing to fund the 2013 Acquisitions. The 2013 Acquisitions had a lower purchase price than the acquisitions in 2012. Interest rates declined to approximately 2.6% for the year ended March 31, 2013 from about 3.1% last year. The decrease in interest rates mainly reflects improved pricing with the amendment to the Senior Secured Credit Facility effective November 8, 2011. Additionally, interest costs of approximately $37 and $41 were capitalized in 2013 and 2012, respectively, with the construction of the new facilities in France and China.
Foreign currency exchange gains and losses: Foreign currency exchange gains and losses represent the impact of changes in foreign currency exchange rates with, among other things, the revaluation of balance sheet accounts and foreign currency contracts. When foreign currency exchange rates fluctuate, there is a resulting revaluation of assets and liabilities denominated and accounted for in foreign currencies other than the business’ functional currency. For example, our Irish subsidiary, which uses the Euro as its functional currency, holds cash denominated in foreign currencies, including the U.S. dollar. As the Euro appreciates against the U.S. dollar, the cash balances held in other denominations are devalued when stated in terms of Euro, resulting in a foreign currency exchange loss.
The increase in the foreign currency exchange gain is mainly due to the foreign currency exchange gains recorded with the favorable fluctuations of the European currencies relative to the U.S. dollar with the Company’s European operations, partially offset by the lower foreign exchange losses with the fluctuation of the RMB relative to the U.S. dollar. The Company continues to be impacted by volatility in foreign currency exchange rates, including the impact of the fluctuation of the U.S. dollar relative to the Euro, Swiss franc and British pound, as well as the appreciation of the RMB relative to the U.S. dollar.
Impairment of asset held for sale: During the three months ended September 30, 2012, the Company recorded an impairment charge of $489 to write-down the carrying value of the former PSI facility. The carrying value of the asset held for sale is $940 as of March 31, 2013, and approximates fair value less cost to sell.
Acquisition earn-out contingency gain: The fair value of acquisition earn-out contingencies is based on expectations and other such estimates related to the specific earn-out target, all of which are subject to modification with changing circumstances until the contingency is resolved. The fair value of acquisition earn-out contingencies is determined using a modeling technique with significant unobservable inputs calculated using a probability-weighted income approach. Key assumptions include discount rates for present value factor, which are based on industry specific weighted average cost of capital, adjusted for, among other things, time and risk, as well as forecasted annual earnings before interest, taxes, depreciation and amortization and forecasted annual revenues over the life of the earn-outs. Adjustments to the fair value of earn-outs are recorded to earnings with that portion of the adjustment relating to the time value of money as interest expense and the non-interest portion of the change in earn-outs as a separate non-operating item in the statement of operations. As a result of the assessment of actual and projected earnings and sales scenarios, the Company determined that Eureka’s earnings and Gentech’s sales were expected not to reach estimated earn-out levels. Accordingly, the Company recorded fair value adjustments totaling $2,191 and £1,387, or approximately $2,193, respectively, eliminating the acquisition earn-out liabilities for Eureka and Gentech, and recognized the adjustments in the Consolidated Statements of Operations.
Income Taxes: Income tax expense and deferred tax assets and liabilities reflect management’s assessment of future taxes expected to be paid on items reflected in the Company’s financial statements. The Company records the tax effect of discrete items and items that are reported net of their tax effects in the period in which they occur.
The Company’s effective tax rate (“ETR”) can be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, accruals related to contingent tax liabilities, the results of audits and examinations of previously filed tax returns, the implementation of tax planning strategies and changes in tax laws. As detailed in Note 10 to the Consolidated financial statements of the Company in this Annual Report on Form 10-K, the Company’s effective tax rate for 2013 differs from the United States federal statutory rate of 35% is primarily a result of lower effective tax rates on certain earnings from operations outside of the United States. No provisions for United States income taxes have been made with respect to earnings that are planned to be reinvested indefinitely outside the United States.
The amount of income taxes the Company pays is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. Management performs a comprehensive review of its global tax positions on a quarterly basis and accrues estimated amounts for contingent tax liabilities. Based on these reviews, the results of discussions and resolutions of matters with certain tax authorities and the closure of tax years subject to tax audit, reserves are adjusted as necessary.
Income tax expense for the year ended March 31, 2013 increased $2,193 to $8,346 from $6,153 in fiscal 2012. The increase in income tax expense is primarily due to the increase in taxable income and the overall increase in the Company’s ETR, as well as the impact of discrete income adjustments.
The Company’s overall ETR (income tax expense divided by income before income taxes) for the year ended March 31, 2013 was approximately 20%, as compared to approximately 18% in fiscal 2012. The increase in the overall ETR without discrete adjustments mainly reflects a higher proportion of taxable income in tax jurisdictions with higher tax rates, including the U.S.
The Company recorded the following discrete income tax adjustments during the twelve months ended March 31, 2013, resulting in a net income tax credit adjustment of approximately $1,396, as compared to a $612 discrete income tax credit adjustment during the prior year.
During the three months ended March 31, 2013, the Company recorded a discrete income tax credit of approximately $1,133, of which $551 related to a reduction in the tax estimate previously recognized during the three months ended September 30, 2012 for the Swiss income tax holiday. There was an additional $232 income tax credit associated with tax law changes and $350 for stock option exercises.
During the three months ended December 31, 2012, the Company recorded a discrete income tax credit of approximately $575, of which $267 related to the refinement of the estimates between the 2012 year tax provision and tax returns, for, among other things, estimated U.S. income taxes on foreign based income. There were also $247 in R&D tax credits and $61 of other discrete tax credits.
During the three months ended September 30, 2012, the Company recorded discrete income tax expense adjustments of approximately $312 for the recognition of an uncertain tax position of $707 for certain claw-back provisions for a tax holiday provided to the Company’s subsidiary in Switzerland, which was partially offset by the non-cash tax impact associated with the release of an earn-out contingencies. The Company believed it was more likely than not that the tax benefits would not be fully realized through the claw-back provision. Accordingly, the Company revalued the Swiss deferred tax liabilities and established a reserve for the claw-back provisions included in the tax holiday which expires in fiscal 2014. The Company subsequently met with local Swiss officials and released most of the amounts previously reserved during the quarter ended March 31, 2013.
During the quarter ended June 30, 2011, the Company recorded a discrete non-cash income tax credit adjustment of $612 for the re-measurement of the net deferred tax liabilities in Switzerland resulting from a decrease in Swiss tax rates. The regional tax rate, or also referred to as the “cantonal” tax rate, for the Company’s subsidiary in Switzerland decreased from 20% to 10% over the next five years.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances totaled $49,964 at March 31, 2014, an increase of $13,936 as compared to March 31, 2013, reflecting, among other factors, changes in cash flows generated from operating activities, borrowings from the Company’s revolver and proceeds from exercise of stock options, which were partially offset by cash used in the share buy-back and investing activities for acquisitions, capital expenditures and debt payments. Additionally, higher cash balances are also due in part to cash retained in Europe to fund the Wema acquisition.
The following compares the primary categories of the consolidated statement of cash flows for the year ended March 31, 2014 and 2013:
A key source of the Company’s liquidity is its ability to generate positive operating cash flows. Cash flows provided by operating activities increased $11,224 to $58,930. The increase in operating cash flows is mainly due to the $8,766 increase in net income plus depreciation, amortization and non-cash equity based compensation and the $506 increase in cash flows from operating working capital (net changes in trade accounts receivable, inventory and accounts payable). In comparing cash flows generated from operating working capital for the year ended March 31, 2014 to the corresponding period last year, the largest drivers of the increase in cash flows from operating working capital were the favorable trends with trade receivables and trade payables, partially offset by the unfavorable fluctuations in inventory. The current period net change in accounts receivable was an increase or use of cash flows of $3,796, as compared to an increase or a use of cash flows of $5,023 last year. The favorable change in the fluctuation in trade receivables during the current year as compared to last year mainly reflects the overall improvement in number of days sales outstanding (DSO) due to continued emphasis on improving collections. DSO was approximately 56 days as compared to 57 days last year. DSO is a non-GAAP financial measure and is calculated as follows: ((trade receivables/respective quarter net sales annualized)*360) or (($65,451 / ($104,865 X 4))*360). Operating cash flows from accounts payable fluctuated favorably by $7,305, reflecting, among other factors, overall efforts to manage payments to vendors. The net increases in inventory or use of cash flow was $5,236, as compared to a decrease or source of cash of $2,790 last year. The higher inventory balances reflect, among other factors, the decrease in the number of inventory turns to 3.6 from 3.8 with the build-up of inventory levels to support the overall growth in sales for new programs and broader product adoptions. The number of inventory turns is a non-GAAP financial measure and is calculated as follows: (respective quarterly cost of goods sold annualized / inventory) or (($61,198 X 4) / $68,280). Cash outflows for income taxes decreased by $3,573 mainly due to the timing of estimated U.S. tax payments.
Net cash used in investing activities for the year ended March 31, 2014 was $75,217 as compared to $41,056 last year. The increase in cash used in investing activities mainly reflects the higher purchase price and cash outlays for the acquisitions of Spectrum and Sensotherm during the year ended March 31, 2014, as compared to the acquisitions of Cosense and RTD during the year ended March 31, 2013. Capital expenditures primarily consist of the purchase of equipment for the manufacturing of new products and programs, as well as capital additions related to the new manufacturing facility in China.
Net cash provided by financing activities for the year ended March 31, 2014 totaled $28,505, as compared to $2,745 in net cash used in financing activities the same period last year. The Company’s credit facilities are mainly utilized to fund acquisitions. The Company purchased in 2014 and 2013 approximately $9,753 and $7,000, respectively, of the Company’s common stock under share buy-back plans. Additionally, the Company received proceeds from the exercise of stock options and the related excess tax benefit from the exercise of stock options. Proceeds from the exercise of stock options totaled $10,417 and $7,790 for the year ended March 31, 2014 and 2013, respectively. The increase in proceeds from the exercise of stock options mainly reflects the higher amount of options exercised largely due to the increase in the Company’s stock price.
The effect of exchange rate changes on cash is the translation decrease or increase in cash due to the fluctuation of foreign currency exchange rates. The increase in cash for the current year impact of exchange rate changes is primarily due to the fluctuation of the U.S. dollar relative to the Euro and the higher cash balances in Europe.
Long-term debt and revolver: The Senior Secured Credit Facility, as amended, consists of a $185,000 revolving credit facility (the "Revolving Credit Facility") with a $75,000 accordion feature enabling expansion of the Revolving Credit Facility to $260,000 and matures on November 8, 2016. Refer to Note 7 of the Consolidated Financial Statement included in this Annual Report on Form 10-K for details concerning the Company’s long-term debt, revolver and other credit facilities. The Company was in compliance with its debt covenants at March 31, 2014.
LIQUIDITY: Management assesses the Company’s liquidity in terms of available cash, our ability to generate cash and our ability to borrow to fund operating, investing and financing activities. The Company continues to generate cash from operating activities, and the Company remains in a positive financial position with availability under credit facilities. The Company will continue to have cash requirements to support working capital needs, capital expenditures and to pay interest and service debt. One of the Company’s known cash requirements is for capital expenditure commitments related to the construction of the new facilities in Chengdu, China and Andover, Minnesota. The Chengdu facility is expected to be built through fiscal 2016 at a cost of approximately $6,000, excluding land and VAT, of which approximately $4,962 has been incurred to date. The Andover facility is expected to be built through fiscal 2016 at a cost of approximately $4,000 to $5,000, of which approximately $100 has been incurred to date. As part of the transition to the new facilities, the Company expects to temporarily increase certain inventory levels. Additionally, as part of the Company’s ongoing efforts to review our business for opportunities to reduce operating expenses and leverage core competencies, the Company has substantially completed the consolidation all of the Company’s manufacturing operations in Scotland to other MEAS sites and the Company has started to implement the restructuring to consolidate its U.S. operations in Dayton, Ohio, St. Marys, Pennsylvania, Shrewsbury, Massachusetts and Ham Lake, Minnesota to a new greenfield facility in Andover, Minnesota. Refer to Note 13 to the Consolidated Financial Statements of the Company included in this Annual Report on Form 10-K for further details concerning restructurings. The Company has an active share buy-back plan of which approximately $248 of shares may still be purchased periodically under the publically announced plan. We believe the Company’s financial position, generation of cash and the existing credit facility, in addition to the potential to refinance or obtain additional financing will be sufficient to meet funding of day-to-day and material short and long-term commitments for the foreseeable future.
At March 31, 2014, we had approximately $49,964 of available cash and approximately $80,000 of borrowing capacity. This cash balance includes cash of $10,366 in China, which is subject to certain restrictions on the transfer to another country because of currency control regulations. Additionally, the Company had approximately $32,494 of cash (of which approximately $14,226 was in France, $984 in Germany, $7,045 in Ireland, $6,647 in Switzerland and $3,592 in Scotland) in Europe at March 31, 2014. The Company had $1,744 of cash in Hong Kong. The Company’s cash balances are generated and held in numerous locations throughout the world, including substantial amounts held outside the United States. Cash balances of approximately $44,604 are held outside the United States and could be repatriated to the United States, but, under current law, would be subject to United States federal income taxes, less applicable foreign tax credits. Repatriation of some foreign balances is restricted or prohibited by local laws. Where local restrictions prevent an efficient intra-company transfer of funds, the Company’s intent is that cash balances would remain in the foreign country and it would meet United States liquidity needs through ongoing cash flows, external borrowings, or both. Additionally, the Company makes an election regarding the amount of earnings intended for indefinite reinvestment. No provision for U.S. income taxes has been made with respect to earnings that are planned to be reinvested indefinitely outside the U.S. and the amount of U.S. income taxes is not readily determinable given the various tax planning alternatives the Company could employ if these earnings were repatriated. The Company utilizes a variety of tax planning and financing strategies in an effort to ensure that its worldwide cash is available in the locations in which it is needed. Wherever possible, cash management is centralized and intra-company financing is used to provide working capital to the Company’s operations.
ACCUMULATED OTHER COMPREHENSIVE INCOME: Accumulated other comprehensive income primarily consists of foreign currency translation adjustments, which relate to the Company’s European and Asian operations and the effects of changes in the exchange rates of the U.S. dollar relative to the Euro, Chinese RMB, Hong Kong dollar, Japanese Yen, Swiss franc and British pound. Foreign currency translation adjustments are generally not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. Accumulated other comprehensive income also includes unrecognized pension costs.
DIVIDENDS: We have not declared cash dividends on our common equity. Additionally, the payment of dividends is restricted under our Senior Secured Credit Facility. 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 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, however, restrict distribution and repatriation of dividends by our China subsidiary.
The Company’s Board of Directors has approved over the years a number of repurchase programs authorizing the buy-back of the Company’s common stock. The Company had a $10,000 share buy-back program in 2014 for which the Company purchased $9,752 in the Company’s stock and the Company may purchase approximately $248 more in the Company’s stock. The repurchase of the Company’s common stock is restricted by our Senior Secured Credit Agreement. As permitted by Amendment 1 dated May 4, 2011 under our Senior Secured Credit Agreement, payments by the Company related to stock buy-backs may not exceed the amount of proceeds received by the Company from the exercise of stock options up to a cumulative amount of $60,000. Since April 1, 2010, the Company has made to date cumulative share buy-back payments totaling $30,753 and received cumulative proceeds from the exercise of stock options of approximately $38,613. In accordance with our bylaws as a New Jersey corporation, repurchased shares revert to authorized but unissued status.
SEASONALITY: As a whole, there is no material seasonality in our sales. However, general economic conditions have an impact on our business and financial results, and certain end-use markets experience certain seasonality. For example, European sales are often lower in summer months and OEM sales are often stronger immediately preceding and following the introduction of new products.
INFLATION: We compete on the basis of product design, features, and value. Accordingly, our prices 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. We have recently experienced increases in material and labor costs, including the direct impact of changes in foreign currency exchange rates, and as a result, we have had pressure on our margins.
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. The Company does have an unconsolidated joint venture in Japan, N-T, which is not considered to be a special purpose entity or variable interest entity for the purposes of facilitating off-balance sheet arrangements or such limited purposes. Accordingly, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had such relationships.
The Company has acquired and divested of certain assets, including the acquisition of businesses. In connection with these acquisitions, the Company often provides and receives representations, warranties and/or indemnities to cover various risks and unknown liabilities, such as claims for damages arising out of the use of products or relating to intellectual property matters, commercial disputes, environmental matters or tax matters. The Company cannot estimate the potential liability from such representations, warranties and indemnities because they relate to unknown conditions. However, the Company does not believe that the liabilities relating to these representations, warranties and indemnities will have a material adverse effect on the Company’s financial position, results of operations or liquidity.
AGGREGATE CONTRACTUAL OBLIGATIONS: As of March 31, 2014, the Company’s contractual obligations, including payments due by period, are as follows:
* Other long-term obligations on the Company’s balance sheet under GAAP include obligations under warranty polices, foreign currency contracts, contractual obligations related to the construction of new facilities, pension and tax liabilities. The timing of cash flows associated with these obligations is based upon management’s estimate over the terms of these arrangements and are largely based on historical experience.
The above contractual obligation table excludes certain contractual obligations, such as possible severance payments to certain executives, since these contractual commitments are not accrued as liabilities at March 31, 2014 or are otherwise indeterminable. These contractual obligations are accrued as liabilities when the respective contingencies are determinable.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in, among other things, interest rates, foreign currency exchange rates, commodity, credit risk, and health insurance claims, 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 broad-based business activities help to reduce the impact that volatility in any particular area or related areas may have on its operating earnings 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 loan accrue at a rate based on either a LIBOR or EURIBOR based rate plus a margin or at an Indexed (prime based) Rate plus a margin. The LIBOR, EURIBOR or Index Rate is at our election. Our results will be adversely affected by any increase in interest rates. For example, based on the $105,000 of total debt outstanding under the revolver credit facility at March 31, 2014, an annual interest rate increase of 10 percent would increase interest expense and decrease our pre-tax profitability by $10,500. Interest on the principal amounts of our borrowings under our term loans accrue at fixed rates. If interest rates decline, the Company would not be able to benefit from the lower rates on our long-term debt. We do not currently hedge our interest rate exposure.
Commodity Risk: The Company uses a wide range of commodities in our products, including steel, non-ferrous metals and petroleum based products, as well as other commodities required for the manufacture of our sensor products. Changes in the pricing of commodities directly affect our results of operations and financial condition. We attempt to pass increases in commodity costs to our customers, and we do not currently hedge such commodity price exposures.
Credit Risk: Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and temporary investments, foreign currency forward contracts and trade accounts receivable. The Company is exposed to credit losses in the event of nonperformance by counter parties to its financial instruments. The Company places cash and temporary investments with various high-quality financial institutions throughout the world. Although the Company does not obtain collateral or other security to secure these obligations, it does periodically monitor the third-party depository institutions that hold our cash and cash equivalents. Our emphasis is primarily on safety and liquidity of principal and secondarily on maximizing yield on those funds. In addition, concentrations of credit risk arising from trade accounts receivable are limited due to the diversity of the Company’s customers. The Company performs ongoing credit evaluations of its customers’ financial conditions and the Company does not obtain collateral, insurance or other security. Notwithstanding these efforts, the current distress in the global economy may increase the difficulty in collecting accounts receivable.
Foreign Currency Exchange Rate Risk: Foreign currency exchange rate risk arises from the Company’s investments in subsidiaries owned and operated in foreign countries, as well as from transactions in currencies other than the business’ 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 stockholders’ equity. A 10% appreciation in major currencies relative to the U.S. dollar at March 31, 2014 would result in a reduction of stockholders’ equity of approximately $21,039. The effect of a change in currency exchange rates from transactions in currencies other than the business’ functional currency is reflected in “foreign currency exchange gain or loss.” The Company’s primary transactional foreign currency exposures relate to the U.S. dollar relative to the RMB, Euro, Swiss franc and British pound. A 10 percent appreciation of the RMB, British pound, Euro and Swiss franc relative to the U.S. dollar for the Company’s net U.S. dollar exposure in those currencies at March 31, 2014, would result in foreign currency losses of approximately $23, $2,675, $139 and $409 with the RMB, Euro, British pound and Swiss Franc, respectively.
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 RMB, Euros, Swiss francs and British pound. 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 United States 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 Notes 15 and 16 to the Consolidated Financial Statements for more information concerning annual net sales invoiced from our facilities within the U.S. and outside of the U.S. and as a percentage of total net sales for the last three years, as well as net assets and the related functional currencies. Therefore, both positive and negative movements in currency exchange rates against the U.S. dollar will continue to affect the reported amount of sales, profit, and assets and liabilities in the Company’s consolidated financial statements.
During 2014, the RMB appreciated approximately 1.8% relative to the U.S. dollar. The RMB appreciated approximately 0.7% and 3.6% during 2013 and 2012, respectively. However, since mid-February 2014, the RMB has depreciated by approximately 1%. There are indications the trend of the RMB depreciating may continue in the near term, though there is no way to predict whether the RMB will appreciate or depreciate, or by how much. The Chinese government no longer pegs the RMB to the US dollar, but established a currency policy letting the RMB trade in a narrow band against a basket of currencies. The Company has more expenses denominated in RMB than sales denominated in RMB (i.e., short RMB position), and as such, when the U.S. dollar weakens relative to the RMB, our operating profits decrease. Based on our net exposure of RMB to U.S. dollars for the fiscal year ended March 31, 2014 and forecast information for fiscal 2015, we estimate an annualized negative operating income impact of approximately $4,034 for every 10 percent appreciation in RMB 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 we are attempting to manage this exposure through, among other things, forward purchase contracts, pricing and monitoring balance sheet exposures for payables and receivables.
Fluctuations in the value of the Hong Kong dollar have not been significant since October 17, 1983, when the Hong Kong government tied the value of the Hong Kong dollar to that of the U.S. dollar. However, there can be no assurance that the value of the Hong Kong dollar will continue to be tied to that of the U.S. dollar.
The Company’s French, Irish and German subsidiaries have more expense denominated in Euros than sales denominated in Euros and the Company’s Swiss subsidiary has more expenses denominated in Swiss francs than sales denominated in Swiss francs. As such, if the U.S. dollar weakens relative to the Euro and Swiss franc, our operating profits decrease in France, Ireland, Germany and Switzerland. Based on the net exposures of Euros and Swiss francs to the U.S. dollars for the fiscal year ended March 31, 2014, we estimate an annualized negative operating income impact of approximately $308 and $434 for every 10 percent appreciation in the Euro and Swiss franc, respectively, relative to the U.S. dollar (assuming no price increases passed to customers, and associated cost increases or currency hedging).
The Company has entered into a number of foreign currency exchange contracts in China in an attempt to hedge the Company’s exposure to the RMB. The RMB/U.S. dollar currency contracts have gross notional amounts totaling $24,200 with exercise dates through June 30, 2015 at an average exchange rate of 0.1618 (RMB to U.S. dollar conversion rate). With these RMB/U.S. dollar contracts, for every 10 percent depreciation of the RMB or a 10 percent appreciation of the RMB, the Company would be exposed to an additional fx gains and losses, respectively, of approximately $2,420. Since these derivatives are not designated as hedges for accounting purposes, changes in their fair value are recorded in the 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.
Item 8.
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.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
(a) Effectiveness of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer with the participation of management evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2014. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-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, 2014, 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.
In reliance on guidance set forth in Question 3 of a “Frequently Asked Questions” interpretative release issued by the Staff of the SEC’s Office of the Chief Accountant and the Division of Corporation Finance in September 2004, as revised on September 24, 2007, regarding Securities Exchange Act Release No. 34-47986, Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, management’s assessment of and conclusion on the effectiveness of internal controls over financial reporting excluded the evaluation of internal controls for the Company’s recent acquisitions of Spectrum Sensors and Controls, Inc. (“Spectrum”), and Sensotherm Temperaturesensorik GmbH and Secon Kft. (collectively “Sensotherm”). The reason for these exclusions is that it was not possible for management to conduct an assessment of internal control over financial reporting in the period between the date the acquisition was completed and the date of management’s assessment. Accordingly, management excluded Spectrum and Sensotherm from its assessment of changes to internal control over financial reporting during the year ended March 31, 2014. At March 31, 2014, Spectrum represented approximately 10% of total assets, and approximately 6% of net sales for the year then ended. At March 31, 2014, Sensotherm represented approximately 2% of total assets, and less than 1% of net sales for the year then ended. Spectrum and Sensotherm will be included in management’s assessment of the effectiveness of internal control over financial reporting starting no later than the annual assessment for the fiscal year beginning April 1, 2014.
Exclusive of recent acquisitions, our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2014. 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 (1992 framework). Based on this assessment, management concluded that our internal control over financial reporting was effective as of March 31, 2014.
Ernst & Young LLP, an independent registered public accounting firm, has audited the Company’s internal controls over financial reporting as of March 31, 2014, as stated in their report which appears below.
(c) Attestation Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
On Internal Control Over Financial Reporting
The Board of Directors and Shareholders of Measurement Specialties, Inc.:
We have audited Measurement Specialties, Inc.’s and subsidiaries’ (“Measurement Specialties”) internal control over financial reporting as of March 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Measurement Specialties’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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.
As indicated in the accompanying Management’s Annual Report on Internal Controls over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls for Spectrum Sensors and Controls, Inc. (“Spectrum”), and Sensotherm Temperaturesensorik GmbH and Secon Kft. (collectively “Sensotherm”), which are included in the 2014 consolidated financial statements of Measurement Specialties. Spectrum and Sensotherm constituted 10% and 2% of total assets, respectively, as of March 31, 2014, and 6% and 1% of revenue, respectively, and 5% and 0.4% of net income, respectively, for the year then ended. Our audit of internal controls over financial reporting of Measurement Specialties also did not include an evaluation of the internal control over financial reporting of Spectrum and Sensotherm.
In our opinion, Measurement Specialties maintained, in all material respects, effective internal control over financial reporting as of March 31, 2014, based on the COSO criteria.
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 as of March 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 2014, and our report dated June 3, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Richmond, Virginia
June 3, 2014
(d) Changes in Internal Control over Financial Reporting
There were no 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, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
Part III
Item 10.
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 18, 2014, 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, 2014.
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. The Company will promptly post on its website any amendment to the Code of Conduct or a waiver of a provision there under, rather than filing with the SEC any such amendment or waiver as part of a Current Report on Form 8-K.
Item 11.
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 18, 2014, 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, 2014.
Item 12.
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, 2014:
Equity Compensation Plan Information
For the Year Ended March 31, 2014:
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 18, 2014, including the information set forth under the caption “Beneficial Ownership of Measurement Specialties Common Stock.”
Item 13.
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 18, 2014, 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, 2014.
Item 14.
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 18, 2014, including the information set forth under the caption “Fees Paid to Our Independent Registered Public Accounting Firm”, 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, 2014.
Part IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(a)The following documents are filed as part of this report:
1.Consolidated financial statements and schedules are filed at the end of this report, beginning on page F-l.
2.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.
3.See Exhibit Index following this Annual Report on Form 10-K.
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 3, 2014
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 3, 2014
Frank Guidone
Director (Principal Executive Officer)
/s/ Mark Thomson
Chief Financial Officer (Principal Financial Officer and Principal Accounting
June 3, 2014
Mark Thomson
Officer)
/s/ Morton L. Topfer
Chairman of the Board
June 3, 2014
Morton L. Topfer
/s/ Satish Rishi
Director
June 3, 2014
Satish Rishi
/s/ R. Barry Uber
Director
June 3, 2014
R. Barry Uber
/s/ Kenneth E. Thompson
Director
June 3, 2014
Kenneth E. Thompson
Exhibit Index
Exhibit Index
Number
Description
3.1
Second Restated Certificate of Incorporation of Measurement Specialties, Inc. (1)
3.2
Bylaws of Measurement Specialties, Inc. (2)
4.1
Specimen Certificate for shares of common stock of Measurement Specialties, Inc. (3)
10.1
Measurement Specialties, Inc. 2006 Stock Option Plan (4)
10.2
Measurement Specialties, Inc. 2006 Employee Stock Purchase Plan (4)
10.3
Measurement Specialties, Inc. 2008 Equity Incentive Plan (5)
10.4
Measurement Specialties, Inc. 1998 Stock Option Plan (6)
10.5
Measurement Specialties, Inc. 2003 Stock Option Plan (7)
10.6
Measurement Specialties, Inc. 2010 Equity Incentive Plan (8)
10.7
Measurement Specialties, Inc. 2013 Equity Incentive Plan (17)
10.8
Measurement Specialties, Inc. Nonqualified Deferred Compensation Plan (18)
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. (9)
10.18
Amended and Restated Executive Employment Agreement dated November 6, 2007 by and between Measurement Specialties, Inc. and Frank Guidone. (10)
10.19
Employment Agreement dated March 13, 2007 by and between Measurement Specialties, Inc. and Mark Thomson. (11)
10.20
Employment Agreement dated December 7, 2005 by and between Measurement Specialties, Inc. and Steve Smith. (14)
10.21
Employment Agreement dated February 15, 2008 by and between Measurement Specialties, Inc. and. Glen MacGibbon (14)
10.22
Amendments to Employment Agreements dated June 6, 2011 by and between Measurement Specialties, Inc. and Frank Guidone, Mark Thomson, Glen MacGibbon and Steve Smith. (15)
10.23
Agreement for the purchase of entire share capital of Intersema Microsystems SA dated December 28, 2007 by and among Measurement Specialties, Inc., Mr. Manfred Knutel and Mr. Hans Peter Salvisberg. (10)
10.25
Credit facility Agreement by and among Measurement Specialties (China) Ltd. and China Merchants Bank Co. Ltd. dated December 23, 2011. (12)
Previously filed with the Securities and Exchange Commission as an Exhibit to the Quarterly Report on Form 10-Q filed on November 7, 2007 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 Proxy Statement for the Annual Meeting of Shareholders filed on July 28, 2006 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, 2008 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 Proxy Statement and Additional Proxy Materials on Schedule 14A for the Annual Meeting of Shareholders filed on July 29, 2010 and September 7, 2010, respectively, 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 December 6, 2005 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 February 6, 2008 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 June 12, 2007 and incorporated herein by reference.
Previously filed with the Securities and Exchange Commission as an Exhibit to the Current Reports on Form 8-K filed on December 12, 2011 and November 26, 2014 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 June 1, 2010 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 6, 2008 and incorporated herein by reference.
Previously filed with the Securities and Exchange Commission as an Exhibit to the Current Reports on Form 8-K filed on June 9, 2011 and December 18, 2013, and incorporated herein by reference.
Previously filed with the Securities and Exchange Commission as an Exhibits to Quarterly Report on Form 10-Q filed on August 3, 2011, and Exhibits to the Current Report on Form 8-K filed on November 8, 2011, October 16, 2012 and February 1, 2014 and incorporated herein by reference.
Previously filed with the Securities and Exchange Commission as an Exhibits to the Proxy Statement for the Annual Meeting of Shareholders filed on July 29, 2013 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 February 12, 2014 and incorporated herein by reference.
Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2014 and 2013, (ii) Consolidated Statements of Earnings for the twelve months ended March 31, 2014, 2013 and 2012, (iii) Consolidated Statements of Comprehensive Income for the twelve months ended March 31, 2014, 2013 and 2012, (iv) Consolidated Statements of Stockholders’ Equity for the twelve months ended March 31, 2014, 2013 and 2012, (v) Consolidated Statements of Cash Flows for the twelve months ended March 31, 2014, 2013 and 2012 and (vi) Notes to Consolidated Financial Statements.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Measurement Specialties, Inc.:
We have audited the accompanying consolidated balance sheets of Measurement Specialties, Inc. and subsidiaries (“Measurement Specialties”) as of March 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Measurement Specialties at March 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2014, 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 financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Measurement Specialties’ internal control over financial reporting as of March 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated June 3, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Richmond, Virginia
June 3, 2014
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEASUREMENT SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
MEASUREMENT SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
See accompanying notes to consolidated financial statements.
MEASUREMENT SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
MEASUREMENT SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
MEASUREMENT SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR YEARS ENDED MARCH 31, 2014, 2013 AND 2012
See accompanying notes to consolidated financial statements.
MEASUREMENT SPECIALTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
Measurement Specialties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2014 and 2013
(Currency amounts in thousands, except share and per share amounts)
1. DESCRIPTION OF BUSINESS
Description of business: Measurement Specialties, Inc. is a global leader in the design, development and manufacture of sensors and sensor-based systems for original equipment manufacturers (“OEM”) and end users, based on a broad portfolio of proprietary technology and typically characterized by the MEAS brand name. We are a global business and we believe we have a high degree of diversity when considering our geographic reach, broad range of products, number of end-use markets and breadth of customer base. The Company is a multi-national corporation with nineteen manufacturing facilities strategically located in the United States, China and Europe, enabling the Company to produce and market globally a wide range of sensors that use advanced technologies to measure precise ranges of physical characteristics. These sensors are used for engine and vehicle, medical, general industrial, consumer and home appliance, military/aerospace, environmental water monitoring, and test and measurement applications. The Company’s products include sensors for measuring a wide range of measurands including differential, gauge, and absolute pressure; static and dynamic force; torque; linear and rotary position; contact and non-contact temperature; linear and angular acceleration, vibration, and impact; optical absorption; humidity and gas concentration; gas or fluid flow rate; density, viscosity, dielectric constant, and other fluid properties; and fluid level.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries (the “Subsidiaries”). All significant intercompany balances and transactions have been eliminated in consolidation.
Variable interest entity: The Company accounts for its 50 percent ownership interest in Nikkiso-THERM (“NT”), a joint venture in Japan and the Company’s one variable interest entity (“VIE”), under the equity method of accounting. The Company is not the primary beneficiary of NT since it does not have both the power to direct activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb the losses or the right to receive the benefits of the VIE. The power to direct the activities of NT is shared with each of NT’s partners. Under the equity method of accounting, the Company does not consolidate the VIE but recognizes its proportionate share of the profits and losses of the unconsolidated VIE. 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 used in the joint venture’s operations and the VIE relationship does not expose the Company to risks not considered normal business risks.
Use of estimates: The preparation of the consolidated financial statements, in accordance 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 useful lives of fixed assets, carrying amount and analysis of recoverability of property, plant and equipment, assets held for sale, acquired intangibles, goodwill, deferred tax assets, valuation allowances for receivables, inventories, income tax uncertainties and other contingencies, including acquisition earn-outs, partial self-insurance liability for health care, restructuring provisions and stock based compensation. Actual results could differ from those estimates.
Cash and Cash Equivalents: The Company considers highly liquid investments with original maturities of up to three months, when purchased, to be cash equivalents. There were no cash equivalents at March 31, 2014 and 2013. At March 31, 2014 and 2013, approximately $10,366 and $8,145, respectively, 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.
Accounts Receivable: 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, medical 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. The Company maintains an allowance for doubtful accounts for estimated losses inherent in accounts receivable. 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.
Inventories: Inventories are valued at the lower of cost or market (‘LCM’) using the first-in first-out method. In evaluating LCM, management also considers, if applicable, other factors, 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. In the case of products which have been written down below cost at any given reporting period, such reduced amount is to be considered the new cost basis for subsequent accounting purposes. Cash flows from the purchase and sale of inventory are included in cash flows from operating activities.
Other Receivables: Other receivables consist of various non-trade receivables such as value added tax (VAT) receivables.
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.
Restructuring Liabilities: Restructuring liabilities consist of various liabilities, such as accrued severance and related charges in addition to facility closure, contract termination and other related activities.
Other Assets: Other assets consist of various non-current assets such as deferred financing costs, various deposits for leases and utilities and research and development tax credits.
Other Liabilities: Other liabilities include pension liabilities, deferred rent and deferred revenue.
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 lives 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.
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. The Company has a valuation allowance for certain deferred tax assets. The Company assesses all available positive and negative evidence to determine if a valuation allowance is required. Accounting guidance for such valuation allowances is strictly based on the evaluation of positive and negative evidence which can be objectively verified as to whether it is more likely than not the deferred tax assets will be utilized, and if positive evidence does not outweigh negative evidence, a valuation allowance is required. Positive evidence would include such items as tax planning strategies and current and future taxable income.
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 gain or loss in the Company’s consolidated statements of operations.
Goodwill: Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination.
In accordance with applicable accounting standards for evaluating goodwill for impairment, 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 fair value. The fair value is allocated in a manner similar to a purchase price allocation, in accordance with accounting for business combinations. The residual fair value after this allocation is the fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using the implied fair value approach or 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 for fiscal years ended March 31, 2014, 2013 and 2012. The implied fair value approach consists of comparing the Company’s market capitalization to the Company’s book value, and if the market capitalization exceeds book value, there is no impairment of goodwill. Based on our analyses and the applicable guidelines, there was no impairment of the Company’s goodwill at March 31, 2014, 2013 and 2012.
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 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.
Long-Lived Assets: The Company accounts for the impairment of long-lived assets and amortizable intangible assets in accordance with applicable standards for 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.
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;
·Decisions to restructuring a site;
·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 projected undiscounted cash flow 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.
In step one, management must make assumptions regarding estimated future cash flows to determine whether there is an indication of impairment, and in the event step two is required, the fair value of these assets is determined. 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 are included in our consolidated statements of operations, and resulted in reduced carrying amounts of the related assets on our consolidated balance sheets.
The Company determined there were no triggering events requiring an impairment analysis for Asset Held for Sale in fiscal 2014. The Company determined there were triggering events requiring an impairment analysis for Asset Held for Sale, for which the Company recorded impairment charges of $489 and $400 during fiscal 2013 and fiscal 2012, respectively.
Revenue Recognition: The Company recognizes revenue when products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Shipping and other transportation costs charged to buyers are recorded in both sales and cost of sales. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenues in the consolidated statements of income.
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.
Shipping and Handling Costs: Shipping and handling costs are recorded in cost of sales in the Company’s consolidated statement of operations. Shipping and handling costs billed to customers are included in sales.
Research and Development and Advertising Costs: The Company conducts research and development activities for the purpose of developing new products, enhancing the functionality, effectiveness, ease of use and reliability of the Company’s existing products and expanding applications of the Company’s products. Research and development and advertising costs are expensed as incurred and are included in operating expenses in the Company’s consolidated statement of operation. Research and development costs amounted to $29,819, $24,378 and $20,198, for the years ended March 31, 2014, 2013 and 2012, respectively. Customer funded research and development was $3,233, $2,774 and $4,564 for the fiscal years ended March 31, 2014, 2013, and 2012, respectively. Advertising costs are expensed when the advertising or promotion is published. Advertising expenses for the years ended March 31, 2014, 2013, and 2012 were approximately $281, $369 and $218, respectively.
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 costs 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.
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.
Acquisitions can include earn-out contingencies, for which estimated fair values are recorded to goodwill as part of preliminary purchase accounting during the permitted measurement period. Estimates of the fair value for earn-outs are based on a number of assumptions and actual amounts could differ significantly. Changes to the recorded earn-out estimates after the measurement period are recorded to earnings.
Beginning January 1, 2013, the Company became partially self-insured for certain levels of health care coverage in the U.S. The Company purchases insurance to limit the maximum annual exposure for claims to an amount not to exceed approximately $4,998. The liability for the self-insurance programs is accrued primarily based upon estimated settlements for anticipated claims. Any resulting adjustments to previously recorded reserves are reflected in current period earnings. At March 31, 2014, the liability for the self-insured program was $505.
Comprehensive Income: Comprehensive income consists of net income for the period, the impact of unrealized foreign currency translation adjustments, net of applicable income taxes and unrecognized pension plan costs, net of income taxes.
Stock-Based Payment: The Company’s results for the years ended March 31, 2014, 2013, and 2012 include $7,374, $4,733 and $4,264, respectively, of operating expenses for share-based compensation.
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. The Company has elected to report the excess tax benefit from the exercise of equity instruments as a financing cash inflow. Since the Company has been 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 $10,417, $7,790 and $8,973 for the years ended March 31, 2014, 2013 and 2012, respectively. Excess income tax benefit realized for the years ended March 31, 2014, 2013 and 2012 from stock option exercises was $2,635, $1,329, and $1,090, respectively.
Leases: The Company follows the applicable accounting principles for leases for its operating and capital leases. Lease costs, including escalations, are provided for using the straight-line basis over the lease period. The Company leases certain equipment and automobiles, which are considered capital lease arrangements. Applicable accounting standards require 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.
Derivative Instruments: The Company accounts for derivatives and hedging activities in accordance with applicable accounting guidelines, which establish accounting and reporting standards for derivative instruments and hedging activities and require that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure 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 RMB. 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 for hedge accounting, changes in the fair value of these instruments are recognized in foreign currency gains and losses, rather than in other comprehensive income.
Pensions: The Company’s European operations maintain certain defined benefit plans for substantially all of their employees. The Company follows the standards for employers’ accounting for defined benefit pension and other postretirement plans. Accounting for pensions and other postretirement benefit plans requires management to make several estimates and assumptions (See Note 9). These include the expected rate of return from investment of the plans' assets and the expected retirement age of employees as well as their projected earnings and mortality. In addition, the amounts recorded are affected by changes in the interest rate environment because the associated liabilities are discounted to their present value. Management makes these estimates based on the company's historical experience and other information that it deems pertinent under the circumstances (for example, expectations of future stock market performance).
The Company recognizes in the statement of financial position the funded status of the defined benefit pension plan as the difference between the fair value of the plan assets and the benefit obligation. The Company recognizes the changes in the funded status in the year in which the changes occur through accumulated other comprehensive income. Actuarial gains and losses are generally amortized, subject to the corridor, over the average remaining service life of the Company’s active employees. Certain pension disclosures are not made since the plans in aggregate is considered immaterial to the consolidated financial statements.
Recently adopted accounting pronouncements: In February 2013, the FASB issued new accounting standards for reporting of amounts reclassified out of accumulated other comprehensive income. Under this standard, entities are required to disclose additional information with respect to changes in accumulated other comprehensive income (“AOCI”) balances by component and significant items reclassified out of AOCI. Expanded disclosures for presentation of changes in AOCI involve disaggregating the total change of each component of other comprehensive income (for example, unrealized gains or losses on available for sale marketable securities) as well as presenting separately for each such component the portion of the change in AOCI related to (1) amounts reclassified into income and (2) current-period other comprehensive income. Additionally, for amounts reclassified into income, disclosure in one location is required, based upon each specific AOCI component, of the amounts impacting individual income statement line items. Disclosure of the income statement line item impacts are required only for components of AOCI reclassified into income in their entirety. Therefore, disclosure of the income statement line items affected by AOCI components such as net periodic benefit costs are not be included. The disclosures required with respect to income statement line item impacts can be made in either the notes to the consolidated financial statements or parenthetically on the face of the financial statements. The Company applied these new accounting standards effective April 1, 2013. Since this standard only impacts presentation and disclosure requirements, its adoption did not have a material impact on the Company’s consolidated results of operations or financial condition.
Recently issued accounting pronouncements: In May 2014, the FASB and the IASB issued a new joint revenue recognition standard that supersedes nearly all US GAAP guidance on revenue recognition. The core principle of the standard is that revenue recognition should depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard is effective for the Company for the fiscal year beginning April 1, 2017 and the effects of the standard on the Company's financial statements are not known at this time.
3. INVENTORIES
Inventories are valued at the lower of cost or market (‘LCM’) using the first-in first-out method. Inventories and inventory reserves for slow-moving, obsolete and lower of cost or market exposures at and March 31, 2014 and 2013 are summarized as follows:
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:
Included in construction-in-progress at March 31, 2014 and 2013 was approximately $4,962 and $371, respectively, related to the construction of the new facility in Chengdu, China. Total depreciation was $10,801, $9,510 and $8,740 for the years ended March 31, 2014, 2013 and 2012, respectively. Property and equipment included $514 and $28 in capital leases at March 31, 2014 and 2013, respectively.
5. ACQUISITIONS AND ACQUIRED INTANGIBLE ASSETS
Acquisitions: The Company continually evaluates potential acquisitions that either strategically fit with the Company’s existing portfolio or expand the Company’s portfolio into new and attractive business areas. The Company has completed a number of acquisitions that have been accounted for as purchases and have resulted in the recognition of goodwill in the Company’s financial statements. This goodwill arises because the purchase prices for these businesses reflect a number of factors, including the future earnings and cash flow potential of these businesses, and other factors at which similar businesses have been purchased by other acquirers, the competitive nature of the process by which the Company acquired the business, and the complementary strategic fit and resulting synergies these businesses bring to existing operations.
Goodwill balances presented in the consolidated balance sheets of foreign acquisitions are translated at the exchange rate in effect at each balance sheet date; however, opening balance sheets used to calculate goodwill and acquired intangible assets are based on purchase date exchange rates. The following table shows the roll forward of goodwill reflected in the financial statements for the year ended March 31, 2014:
The following briefly describes the Company’s acquisitions since April 1, 2011.
Eureka: On July 8, 2011, the Company acquired certain assets of Eureka Environmental, Inc. (“Eureka”), a sensor company based in Austin, Texas, for $2,250. The sellers had the potential to receive additional amounts in the form of a contingent payment based on certain earnings thresholds through calendar 2013, for which the Company had recorded as part of purchase price the fair value estimate of $2,100. The Company determined that Eureka’s earnings were expected to be below initially estimated earn-out levels, as a result of changes in certain assumptions based on current economic and market conditions in the water monitoring industry. Accordingly, the Company recorded fair value adjustments to decrease the acquisition earn-out liability to reflect no earn-out liability at March 31, 2013, since the Company determined that the expectation for Eureka’s earnings would not reach estimated earn-out levels. The fair value of adjustments related to Eureka recognized as income in the Consolidated Statements of Operations totaled $2,191 for the year ended March 31, 2013. The determination that there were no amounts due for the Eureka earn-out was finalized in February 2014. Eureka manufactures a range of multi-probe pressure sensors mainly used for monitoring water quality. The transaction was funded from available cash on hand.
Celesco: On September 30, 2011, the Company completed the acquisition of all of the capital stock of Transducer Controls Corporation, a sensor company doing business as Celesco (“Celesco”) based in Chatsworth, California, for $37,375, including an estimated $2,375 in acquired cash. The purchase price was subsequently increased by $220 based on final calculations of established working capital levels. The transaction was funded from borrowings under the Company’s Senior Secured Credit Facility. Celesco is a leading supplier to OEMs of a range of position sensors, including short and long stroke string pot, linear potentiometer and rotary sensors. In fiscal year 2013, the Company recorded certain adjustments to goodwill mainly related to income taxes to finalize purchase price allocation for the Celesco acquisition.
Gentech: On October 31, 2011, the Company completed the acquisition of all of the capital stock of Timesquest Limited, a holding company and the sole shareholder of Gentech International Limited (“Gentech”), for £6,500 or approximately $10,500, net of cash acquired, based on foreign currency exchange rates at the date of the acquisition. Gentech is a level sensor and non-contact level switch company based in Ayrshire, Scotland. The seller could have earned up to an additional £1,500 or approximately $2,400 if certain sales performance goals were achieved for the two year period ending December 31, 2013, for which the Company had recorded as part of purchase price a fair value estimate of £1,387 or approximately $2,200 based on exchange rates at the date of acquisition. The Company determined that Gentech’s sales were expected to be below initially estimated earn-out levels, as a result of changes in certain assumptions based on current economic and market conditions. Accordingly, the Company recorded fair value adjustments to reflect no earn-out liability at March 31, 2013, since the Company determined that the expectation for Gentech’s sales would not reach estimated earn-out levels. The fair value of adjustments related to Gentech was recognized as income in the Consolidated Statements of Operations totaled £1,387 or approximately $2,193 for the year ended March 31, 2013. The determination that there were no amounts due for the Gentech earn-out was finalized in February 2014. The acquisition of Gentech allowed the Company to compete in the urea tank market with combined level and quality sensors. The transaction was funded from borrowings under the Company’s Senior Secured Credit Facility.
Cosense: On April 2, 2012, the Company acquired the assets of Cosense, Inc. (“Cosense”), a Long Island, New York based manufacturer of ultrasonic sensors and switches used in semiconductor, medical, aerospace and industrial applications for $11,500. The Company paid $10,013 at close in cash from a combination of available cash on hand and from borrowings under the Company’s Senior Secured Credit Facility, and the Company paid an additional $1,500 on April 2, 2013, which had been withheld at closing to secure certain indemnification rights. The acquisition of Cosense provided the Company with an ultrasonic sensor used for single-point, multi-point and continuous liquid level measurement, along with entrained bubble detection, which is considered an innovative solution complementary to the Company’s existing product offering, particularly within the high purity semiconductor, medical infusion pump and commercial aerospace markets.
RTD: On October 1, 2012, the Company acquired the assets of Resistance Temperature Detector Company, Inc. and its parent company, Cambridge Technologies, Inc. (collectively “RTD”), a designer and manufacturer of temperature sensors and probes based in Ham Lake, Minnesota. The Company paid $17,225 in cash at close from a combination of available cash on hand and from borrowings under the Company’s Senior Secured Credit Facility. The purchase price was subsequently increased by $58 based on final calculations of established working capital levels. The seller had the potential to receive up to $1,500 in additional consideration if certain sales targets are achieved during calendar 2013, for which the Company initially recorded as part of purchase price a fair value estimate of $1,122. The Company determined that RTD’s sales were expected to be below initially estimated earn-out levels, as a result of changes in certain assumptions based on current economic and market conditions. The determination that there were no amounts due for the RTD earn-out was finalized in February 2014. The RTD acquisition provided both operational and strategic synergies in that RTD adds to the Company’s temperature portfolio with a presence in the motor/generator market, and services all of the major OEMs in that space, as well as custom temperature sensors for factory automation, medical and general industrial markets.
Spectrum: On April 17, 2013, the Company acquired the capital stock of Spectrum Sensors and Controls, Inc. (“Spectrum”), a leader in the design and manufacture of custom temperature probes, high reliability encoders and inertial sensors, from API Technologies Corp. for approximately $51,408 in cash from a combination of available cash on hand and from borrowings under the Company’s Senior Secured Credit Facility. The purchase price was subsequently decreased by $224 based on final calculations of established working capital levels. From the acquisition date to March 31, 2014, approximately $24,287 in net sales, approximately $1,712 in net income and approximately $308 in transaction related costs were recorded as a component of selling, general and administrative expenses related to Spectrum in the Company’s consolidated financial statements. The accounting for the acquisition is subject to certain adjustments for, among other things, income taxes, and will be finalized within the permitted measurement period. The Company’s preliminary accounting for the Spectrum acquisition is as follows:
Sensotherm: On August 30, 2013, the Company acquired the capital stock of Sensotherm Temperatursensorik GmbH, a German limited liability company and Secon Kft., a Hungarian limited liability company (together, “Sensotherm"), a leader in the design and manufacture of platinum (Pt) thin film temperature sensors for approximately €4,900 or approximately $6,600 in cash from available cash on hand. From the acquisition date to March 31, 2014, approximately $2,321 in net sales, approximately $148 in net income and approximately $237 in transaction related costs were recorded as a component of selling, general and administrative expenses related to Sensotherm in the Company’s consolidated financial statements. Due to the recent timing of the Sensotherm acquisition, the accounting for the acquisition is subject to certain adjustments for, among other things, income taxes, and will be finalized within the permitted measurement period. The Company’s preliminary accounting for the Sensotherm acquisition is as follows:
Acquired intangible assets: In connection with all acquisitions, the Company acquired certain identifiable intangible assets, including customer relationships, proprietary technology, patents, trade-names, order backlogs and covenants-not-to-compete.
The gross amounts and accumulated amortization, along with the range of amortizable lives, are as follows:
Amortization expense for acquired intangible assets for the years ended March 31, 2014, 2013 and 2012 was $9,290, $8,070 and $7,656. Annual amortization expense for the years ending March 31 is estimated as follows:
Pro forma Financial Data (Unaudited): The following represents the Company’s pro forma consolidated net sales and net income for the years ended March 31, 2014 and 2013, based on purchase accounting information assuming the Cosense, RTD, Spectrum and Sensotherm acquisitions occurred as of April 1, 2012, giving effect to purchase accounting adjustments. The pro forma data is for informational purposes only and may not necessarily reflect results of operations had the acquired companies been operated as part of the Company since April 1, 2012.
6. FAIR VALUE MEASUREMENTS:
Accounting standards define fair value based on an exit price model, establish a framework for measuring fair value where the Company’s assets and liabilities are required to be carried at fair value and provide for certain disclosures related to the valuation methods used within a valuation hierarchy as established within the accounting standards. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, or other observable characteristics for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from or corroborated by observable market data through correlation. Level 3 inputs are unobservable inputs based on the Company’s assumptions. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety. 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.
Assets and liabilities measured at fair value on a recurring basis: A summary of financial assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2014 and 2013 are as follows:
The table below provides a reconciliation of the fair value of the acquisition earn-out contingencies measured on a recurring basis for which the Company has designated as Level 3:
The foreign currency exchange contracts do not qualify for hedge accounting, and as a result, changes in the fair value of the currency forwards are reflected in the accompanying consolidated statements of operations. The fair value of the Company’s foreign currency contracts was based on Level 2 measurements in the fair value hierarchy. The fair value of the foreign currency contracts is based on forward exchange rates relative to current exchange rates which were obtained from independent financial institutions reflecting market quotes. The fair value of the acquisition earn-out contingencies is determined using a modeling technique based on significant unobservable inputs calculated using a probability-weighted income approach. Key assumptions include discount rates for present value factor of 16% for Eureka, 3% for Gentech and for 10% for RTD, which are based on industry specific weighted average cost of capital, adjusted for, among other things, time and risk, as well as forecasted annual earnings before interest, taxes, depreciation and amortization of $1,039 for Eureka, forecasted annual revenues of £10,800 for Gentech and forecasted revenues in excess of $16,000 for RTD over the respective lives of the earn-outs. The estimated fair value of acquisition earn-out contingencies could differ significantly from actual amounts. Adjustments to the fair value of earn-outs are recorded to earnings with that portion of the adjustment relating to the time value of money as interest expense and the non-interest portion of the change in earn-outs as a separate non-operating item in the statement of operations. There were no earn-out contingencies at March 31, 2014. The Company determined that RTD’s sales were expected to be below initially estimated earn-out levels, as a result of changes in certain assumptions based on current economic and market conditions. Accordingly, the Company recorded fair value adjustments to reflect no earn-out liability at March 31, 2014. As a result of the assessment of actual and projected earnings and sales scenarios, the Company determined that Eureka’s earnings and Gentech’s sales were not expected to reach estimated earn-out levels. Accordingly, during fiscal 2013 the Company recorded fair value adjustments in the Consolidated Statements of Operations totaling $2,191 and £1,387 or approximately $2,193, eliminating the acquisition earn-out liabilities for Eureka and Gentech at March 31, 2013.
There were no transfers between Level 1, Level 2 and Level 3 of the fair value hierarchy during the year ended March 31, 2014.
Assets and liabilities measured at fair value on a nonrecurring basis: Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition. That is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment. No circumstances were identified, including evidence of impairment, during the year ended March 31, 2014. However, the Company determined there were triggering events requiring an impairment analysis for asset held for sale for which the Company recorded impairment charges of $489 during fiscal 2013 and a $400 impairment charge during fiscal 2012. The inputs utilized in the analysis are classified as Level 2 inputs within the fair value hierarchy as defined in the related accounting standards for fair value measurements and disclosures.
Fair Value of Financial Instruments: In addition to the fair value disclosure requirements related to financial instruments carried at fair value, accounting standards require interim disclosures regarding the fair value of all of the Company’s financial instruments. The methods and significant assumptions used to estimate the fair value of financial instruments and any changes in methods or significant assumptions from prior periods are also required to be disclosed.
The fair values and carrying amounts of other financial instruments as March 31, 2014 and 2013 are as follows:
For promissory note receivable, promissory notes payable, capital lease obligations, and long-term debt, 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 and comparable maturities to companies with comparable credit risk. These are considered Level 2 inputs. The fair value of the revolver approximates carrying value due to the variable interest nature of the debt. There were no changes in the methods or significant assumptions to estimate fair value of the Company’s financial instruments from prior periods.
Derivative instruments and risk management: The Company is exposed to market risks from changes in interest rates, commodities, credit and foreign currency exchange rates, which could impact its results of operations and financial condition. The Company attempts to address its exposure to these risks through its normal operating and financing activities. In addition, the Company’s relatively broad-based business activities help to reduce the impact that volatility in any particular area or related areas may have on its operating results as a whole.
Interest Rate Risk: Under our term and revolving credit facilities, we are exposed to a certain level of interest rate risk. Interest on the principal amount of our borrowings under our revolving credit facility is variable and accrues at a rate based on either a London Inter-Bank Offered Rate (“LIBOR”) or Euro Inter-bank Offered Rate (“ EURIBOR”) rate plus a margin or at an Indexed (prime based) Rate plus a margin. The LIBOR, EURIBOR or Index Rate is at our election. With our revolving credit facility, our results will be adversely affected by an increase in interest rates. Interest on the principal amounts of our borrowings under our term loans accrue at fixed rates. If interest rates decline, the Company would not be able to benefit from the lower rates on our long-term debt. We do not currently hedge these interest rate exposures.
Commodity Risk: The Company uses a wide range of commodities in its products, including steel, non-ferrous metals and petroleum based products, as well as other commodities required for the manufacture of its sensor products. Changes in the pricing of commodities directly affect its results of operations and financial condition. The Company attempts to address increases in commodity costs through cost control measures or pass these added costs to its customers, and the Company does not currently hedge such commodity exposures.
Credit Risk: Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and temporary investments, foreign currency forward contracts when in an asset position and trade accounts receivable. The Company is exposed to credit losses in the event of nonperformance by counter parties to its financial instruments. The Company places cash and temporary investments with various high-quality financial institutions throughout the world. Although the Company does not obtain collateral or other security to secure these obligations, it does periodically monitor the third-party depository institutions that hold our cash and cash equivalents. Our emphasis is primarily on safety and liquidity of principal and secondarily on maximizing yield on those funds. In addition, concentrations of credit risk arising from trade accounts receivable are limited due to the diversity of the Company’s customers. The Company performs ongoing credit evaluations of its customers’ financial conditions and the Company does not generally obtain collateral, credit insurance or other security. Notwithstanding these efforts, the current distress in the global economy may increase the difficulty in collecting accounts receivable.
Foreign Currency Exchange Rate Risk: Foreign currency exchange rate risk arises from the Company’s investments in subsidiaries owned and operated in foreign countries, as well as from transactions with customers in countries outside the U.S. and transactions denominated in currencies other than the applicable functional currency.
Although the Company has a U.S. dollar functional currency for reporting purposes, it has manufacturing and operating sites throughout the world and a large portion of its sales are generated in foreign currencies. A substantial portion of the Company’s revenue is priced in U.S. dollars, and most of its costs and expenses are priced in U.S. dollars, with the remaining priced in Chinese RMB, Euros, Swiss francs and British pounds. 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 its 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 15, Segment Information, for details concerning net sales invoiced from our facilities within the U.S. and outside of the U.S., as well as long-lived assets. Therefore, both positive and negative movements in currency exchange rates against the U.S. dollar will continue to affect the reported amount of sales, profit, and assets and liabilities in the Company’s consolidated financial statements.
During 2014, the RMB appreciated approximately 1.8% relative to the U.S. dollar. However, since mid-February 2014, the RMB has depreciated by approximately 1%. There are indications the trend of the RMB depreciating may continue in the near term, though there is no way to predict whether the RMB will appreciate or depreciate, or by how much. The RMB appreciated approximately 0.7% and 3.6% during 2013 and 2012, respectively. The Chinese government no longer pegs the RMB to the U.S. dollar, but established a currency policy letting the RMB trade in a narrow band against a basket of currencies. The Company has more expenses in RMB than sales (i.e., short RMB position), and as such, if the U.S. dollar weakens relative to the RMB, our operating profits will decrease. We continue to consider various alternatives to hedge this exposure, and we are attempting to manage this exposure through, among other things, forward purchase contracts, pricing and monitoring balance sheet exposures for payables and receivables.
The Company uses foreign currency forward exchange contracts in Asia for the purposes of hedging the Company’s short-position exposure to the RMB. At March 31, 2014, the Company has a number of RMB/U.S. dollar currency contracts with notional amounts totaling $24,200 and exercise dates through June 30, 2015 at average exchange rates of 0.1618 (RMB to U.S. dollar conversion rate). With the RMB/U.S. dollar contracts, for every 10 percent depreciation of the RMB, the Company would be exposed to approximately $2,420 in additional foreign currency exchange losses. Since these derivatives are not designated as hedges for accounting purposes, changes in their fair value are recorded in results of operations, not in other comprehensive income. To manage our exposure to potential foreign currency transaction and translation risks, we may purchase additional foreign currency exchange forward contracts, currency options, or other derivative instruments, provided such instruments may be obtained at suitable prices.
Fair values of derivative instruments not designated as hedging instruments are as follows:
The effect of derivative instruments not designated as hedging instruments on the statements of operations for the years ended March 31, 2014, 2013 and 2012 and statements of cash flows for the years ended March 31, 2014, 2013 and 2012 are as follows:
7. LONG-TERM DEBT:
Long-term debt and revolver: The Company entered into a Credit Agreement (the "Senior Secured Credit Facility") dated June 1, 2010, among JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (in such capacity, the "Senior Secured Facility Agents"), Bank America, N.A., as syndication agent, HSBC Bank USA, N.A., as document agent, and certain other parties thereto (the "Credit Agreement") to refinance the Amended and Restated Credit Agreement effective as of April 1, 2006 among the Company, General Electric Capital Corporation (“GE”), as agent and a lender, and certain other parties thereto and to provide for the working capital needs of the Company including to effect permitted acquisitions.
The Senior Secured Credit Facility, as amended, consists of a $185,000 revolving credit facility (the "Revolving Credit Facility") with a $75,000 accordion feature enabling expansion of the Revolving Credit Facility to $260,000 and matures on November 8, 2016. The Revolving Credit Facility has a variable interest rate based on the LIBOR, EURIBOR or the ABR Rate (prime based rate) with applicable margins ranging from 1.25% to 2.00% for LIBOR and EURIBOR based loans or 0.25% to 1.00% for ABR Rate loans. The applicable margins may be adjusted quarterly based on a change in the leverage ratio of the Company. The Senior Secured Credit Facility also includes the ability to borrow in currencies other than U.S. dollars, such as the Euro and Swiss Franc, up to $66,000, none of which was utilized at March 31, 2014. Commitment fees on the unused balance of the Revolving Credit Facility range from 0.25% to 0.375% per annum of the average amount of unused balances. The Revolving Credit Facility will expire on November 8, 2016 and all balances outstanding under the Revolving Credit Facility will be due on such date. The Company has provided a security interest in substantially all of the Company's U.S. based assets as collateral for the Senior Secured Credit Facility and private placement of credit facilities entered into by the Company from time to time not to exceed $50,000, including the Prudential Shelf Facility (as defined below). The Senior Secured Credit Facility includes an inter-creditor arrangement with Prudential and is on a pari passu (equal force) basis with the Prudential Shelf Facility.
The Senior Secured Credit Facility includes specific financial covenants for maximum leverage ratio and minimum fixed charge coverage ratio, as well as customary representations, warranties, covenants and events of default for a transaction of this type. Consolidated EBITDA for debt covenant purposes is the Company's consolidated net income determined in accordance with GAAP minus the sum of income tax credits, interest income, gain from extraordinary items for such period, any non-cash gains, and gains due to fluctuations in currency exchange rates, plus the sum of any provision for income taxes, interest expense, loss from extraordinary items, any aggregate net loss during such period arising from the disposition of capital assets, the amount of non-cash charges for such period, amortized debt discount for such period, losses due to fluctuations in currency exchange rates and the amount of any deduction to consolidated net income as the result of any grant to any members of the management of the Company of any equity interests. The Company's leverage ratio consists of total debt less unrestricted cash maintained in U.S. bank accounts which are subject to control agreements in favor of JPMorgan Chase Bank, N.A., as Collateral Agent, to Consolidated EBITDA. Adjusted fixed charge coverage ratio is Consolidated EBITDA less capital expenditures for the last twelve months, excluding capital expenditures in connection with the facility being in China in an aggregate amount of $6,000 through March 31, 2016, divided by fixed charges. Fixed charges are the last twelve months of scheduled principal payments, taxes paid in cash and consolidated interest expense. All of the aforementioned financial covenants are subject to various adjustments, many of which are detailed in the Credit Agreement.
As of March 31, 2014, the Company utilized the LIBOR based rate for $105,000 of the Revolving Credit Facility. The weighted average interest rate applicable to borrowings under the Revolving Credit Facility was approximately 1.7% at March 31, 2014. As of March 31, 2014, the outstanding borrowings on the Revolving Credit Facility, which is classified as non-current, were $105,000. 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 March 31, 2014, the Company could have borrowed an additional $80,000 under the Revolving Credit Facility.
On June 1, 2010, the Company entered into a Master Shelf Agreement (the "Prudential Shelf Facility") with Prudential Investment Management, Inc. ("Prudential") whereby Prudential agreed to purchase up to $50,000 of senior secured notes (the "Senior Secured Notes") issued by the Company. Prudential purchased two Senior Secured Notes each for $10,000 and the remaining $30,000 of such Senior Secured Notes may be purchased at the discretion of Prudential or one or more of its affiliates upon the request of the Company. The Prudential Shelf Facility has a fixed interest rate of 5.70% and 6.15% for each of the two $10,000 Senior Secured Notes issued by the Company and the Senior Secured Notes issued thereunder are due on June 1, 2015 and 2017, respectively. The Prudential Shelf Facility includes specific financial covenants for maximum total leverage ratio and minimum fixed charge coverage ratio consistent with the Senior Secured Credit Facility, as well as customary representations, warranties, covenants and events of default. The Prudential Shelf Facility includes an inter-creditor arrangement with the Senior Secured Facility Agents and is on a pari passu (equal force) basis with the Senior Secured Facility.
The Company was in compliance with its debt covenants at March 31, 2014.
Deferred financing costs: Amortization of deferred financing costs totaled $342, $290 and $339 for the year ended March 31, 2014, 2013 and 2012, respectively. Annual amortization expense of deferred financing costs associated with the refinancing is estimated to be approximately $341.
Chinese credit facility: On November 3, 2009, the Company’s subsidiary in China (“MEAS China”) entered into a two year credit facility agreement (the “China Credit Facility”) with China Merchants Bank Co., Ltd (“CMB”). MEAS China renewed the China Credit Facility and extended the expiration to November 28, 2015. The China Credit Facility permits MEAS China to borrow up to RMB 68,000 (approximately $11,000). Specific covenants include customary limitations, compliance with laws and regulations, use of proceeds for operational purposes, and timely payment of interest and principal. MEAS China has pledged its Shenzhen facility to CMB as collateral. The interest rate will be based on the London Inter-bank Offered Rate (“LIBOR”) plus a LIBOR spread, depending on the term of the loan when drawn. The purpose of the China Credit Facility is primarily to provide additional flexibility in funding operations of MEAS China. At March 31, 2014, MEAS China had not borrowed any amounts under the China Credit Facility.
European credit facility: On July 21, 2010, the Company’s subsidiary in France (“MEAS Europe”) entered into a five year credit facility agreement (the “European Credit Facility”) with La Societe Bordelaise de Credit Industriel et Commercial (“CIC”). The European Credit Facility permits MEAS Europe to borrow up to €2,000 (approximately $2,700). Specific covenants include certain financial covenants for maximum leverage ratio and net debt to equity ratio, as well as customary limitations, compliance with laws and regulations, use of proceeds, and timely payment of interest and principal. MEAS Europe has pledged its Les Clayes-sous-Bois, France facility to CIC as collateral. The interest rate is based on the EURIBOR interest rate plus a spread of 1.8%. The EURIBOR interest rate will vary depending on the term of the loan when drawn. The purpose of the European Credit Facility is primarily to provide additional flexibility in funding operations of MEAS Europe. At March 31, 2014, MEAS Europe had not borrowed any amounts under the European Credit Facility.
Long-term debt and promissory notes: Below is a summary of the long-term debt and promissory notes outstanding at March 31, 2014 and 2013:
The annual principal payments of long-term debt, promissory notes and revolver as of March 31, 2014 are as follows:
8. SHAREHOLDERS’ EQUITY:
Capital Stock:
The Company is authorized to issue 26,200,000 shares of capital stock, of which 221,756 shares have been designated as serial preferred stock and 25,000,000 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.
The Company’s Board of Directors has approved over the years a number of repurchase program authorizing the buy-back of the Company’s common stock. In August 2011 and 2012, the Company’s Board of Directors approved two repurchase programs authorizing the buy-back of up to $6,500, and $7,000, respectively, of MEAS common stock. The Company completed the approved repurchase programs and acquired 229,911 shares in fiscal 2012 and 215,161 shares in fiscal 2013. In November 2013, the Company’s Board of Directors approved a share buy-back plan without an expiration date to purchase up to $10,000 in MEAS common stock at a price not to exceed $57 per share. The Company acquired 174,504 shares in fiscal 2014 and approximately $248 of shares may yet be purchased under this publically announced program. The repurchase of the Company’s common stock is restricted by our Senior Secured Credit Agreement. As permitted by Amendment 1 dated May 4, 2011 under our Senior Secured Credit Agreement, payments by the Company related to stock buy-backs may not exceed the amount of proceeds received by the Company from the exercise of stock options up to a cumulative amount of $60,000. Since April 1, 2010, the Company has made to date cumulative share buy-back payments totaling $30,753 and received cumulative proceeds from the exercise of stock options of approximately $38,613 . In accordance with our bylaws as a New Jersey corporation, repurchased shares revert to authorized but unissued status.
Accumulated Other Comprehensive Income:
Accumulated other comprehensive income primarily consists of foreign currency translation adjustments, as well as unrecognized pension costs. The largest portion of the cumulative translation adjustment relates to the Company’s European and Asian operations and reflects the changes in the Euro, RMB, Hong Kong dollar, Swiss franc and British pound exchange rates relative to the US dollar.
9. 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. 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 $1,518, $744 and $568 under the plans for the fiscal years ended March 31, 2014, 2013 and 2012, respectively.
Defined Benefit Plans:
Two of the Company’s European operations maintain certain defined benefit plans for substantially all of their 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. At March 31, 2014 and 2013, the fair value of the plan assets was $5,857 and $4,943, respectively, and the benefit obligation was $8,908 and $7,791, respectively. Overall, remaining amounts and related disclosures for the pension plan are immaterial to the consolidated financial statements.
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 the applicable standards for 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 common share. The Company issued 3,056, 3,048 and 3,861 shares as part of the offering period ending March 31, 2014, 2013 and 2012, respectively, and these shares were considered outstanding in the respective calculations of diluted net income per common share.
10. INCOME TAXES:
Income from continuing operations before income taxes for the years ended March 31, 2014, 2013 and 2012 consists of the following:
Income tax expense from continuing operations consists of the following:
Differences between the federal statutory income tax rate and the effective tax rates using income from continuing operations, before income taxes are as follows:
Differences between the federal statutory rate and the effective tax rate relate mainly to lower rates applied to pre-tax income generated by the Company’s foreign subsidiaries. The change in the effect of foreign income taxes over the past three years reflects, among other factors, the shift of more taxable income within the jurisdictions with higher income tax rates. The larger permanent items in 2014, 2013 and 2012 include incentive equity based compensation, tax credits and incentives, and U.S. taxes on foreign earnings.
The Company recorded the following discrete income tax adjustments during the twelve months ended March 31, 2014, resulting in a net income tax credit adjustment of approximately $911. During the three months ended March 31, 2014, the Company recorded a discrete income tax credit of approximately $358, of which $200 pertain to the revaluation of deferred tax liabilities for a reduction in the applicable tax rate with certain intangible assets and $158 tax benefit from equity base compensation deduction. During the three months ended December 31, 2013, the Company recorded a discrete income tax credit of approximately $191, of which $170 related to the refinement of estimates between the 2013 year tax provision and tax returns. During the three months ended September 30, 2013, the Company recorded discrete income tax credit adjustments of approximately $149 related to a tax law change reducing the tax rate in the United Kingdom. During the three months ended June 30, 2013, the Company recorded discrete income tax credit adjustments of approximately $213, which included a $156 release of a liability related to an uncertain tax position in Switzerland, $32 for equity compensation benefit and $25 U.S. state tax credit.
The Company recorded the following discrete income tax adjustments during the twelve months ended March 31, 2013, resulting in a net income tax credit adjustment of approximately $1,396. During the three months ended March 31, 2013, the Company recorded a discrete income tax credit of approximately $1,133, of which $551 related to a reduction in the tax estimate previously recognized during the three months ended September 30, 2012 for the Swiss income tax holiday. There was an additional $232 income tax credit associated with tax law changes and $350 for stock options exercises. During the three months ended December 31, 2012, the Company recorded a discrete income tax credit of approximately $575, of which $267 related to the refinement of the estimates between the 2012 year tax provision and tax returns for, among other things, estimated U.S. income taxes on foreign based income. There were also $247 in R&D tax credits and $61 of other discrete tax credits. During the three months ended September 30, 2012, the Company recorded discrete income tax expense adjustments of approximately $312 related to certain claw-back provisions for a tax holiday provided to MEAS Switzerland, the Company’s subsidiary in Switzerland. The Company believed it was more likely than not that the tax benefits would not be fully realized through the claw-back provision. Accordingly, the Company revalued the Swiss deferred tax liabilities and established a reserve for the claw-back provisions included in the tax holiday which expires in fiscal 2014. The Company subsequently met with local Swiss officials and released most of the amounts previously reserved during the quarter ended March 31, 2013.
The Company received approval from the Chinese authorities for renewal of High Tech New Enterprise status (“HTNE”) status through December 31, 2014. The HTNE status for the Company provides a reduced rate of 15%. To qualify for this reduced rate, the Company has to meet various criteria in regard to its operation related to its sales, research and development activity, and intellectual property rights. If the Company does not retain HTNE status after calendar 2014, the Company’s income tax rate in China would increase from 15% to 25%. These reduced tax rates resulted in tax reductions of approximately $1,622, $1,481, and $1,513, or approximately $0.10, $0.09 and $0.10 per diluted share for the fiscal years ended March 31, 2014, 2013 and 2012, respectively.
The Company generally considers undistributed earnings of most of its foreign subsidiaries to be indefinitely reinvested outside of the U.S. and, accordingly, no U.S. deferred taxes are recorded with respect to such earnings. The Company had approximately $174,129 and $144,886 in undistributed earnings related to our foreign subsidiaries that we have earned which were considered to be indefinitely reinvested at March 31, 2014 and 2013, respectively. Should the earnings be remitted as dividends, the Company would 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 Hong Kong statutory corporate tax rate applicable to the Company's Hong Kong Subsidiary’s earnings is 16.5%. The statutory tax rates for the Company's subsidiaries in France and Germany are approximately 33.3% and 32.8%, respectively. The statutory tax rates in Ireland are 12.5% for trade operating income and 25% for passive income such as interest. The statutory tax rate in Scotland is approximately 23%.
The significant components of the deferred tax assets and deferred tax liabilities at March 31, 2014 and 2013 consist of the following:
The following are the deferred tax assets and deferred tax liabilities by region at March 31, 2014 and 2013:
The Company had certain state net operating loss carry-forwards at March, 31, 2014. The Company had net operating loss carry-forwards in Germany of approximately $10,754 and $10,493 at March 31, 2014 and 2013, respectively, which are not subject to expiration. The Company has net operating loss carry-forwards in France of $8,021 and $8,903 at March 31, 2014 and 2013, respectively. During the years ended March 31, 2014 and 2013, the Company realized approximately $706 and $375, respectively, in benefits from the net operating loss carry-forwards. The Company has French R&D tax credits of $2,041 and $3,847 at March 31, 2014 and 2013, respectively, not subject to expiration. The French tax credits are recorded as non-current other assets and a reduction to R&D operating expenses.
The following is a reconciliation of the total amounts of unrecognized tax benefits for the year ended March 31, 2014:
The unrecognized tax benefits of $235 at March 31, 2014, if recognized, would impact the effective tax rate.
The Company recognizes interest and penalties related to unrecognized tax benefits. The interest related to unrecognized tax benefits is recorded in “Interest expense” and penalties related to tax matters is recorded in “Operating expenses.”
The Company is subject to taxation in the U.S., various states and foreign jurisdictions. The additional tax years of 2007 through 2012 are subject to examination by China tax authorities. In the U.S., additional tax years of 2010 through 2013 are subject to examination by the U.S. tax authorities. In France, Germany, Switzerland and Ireland, up to four additional years are subject to examination by the respective tax authorities.
Based on the expiration of the statute of limitations for specific jurisdictions, there is no unrecognized tax benefit for positions previously taken that are expected to change significantly in the next twelve months.
11. 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 earnings per share computations for the years ended March 31, 2014, 2013 and 2012, respectively:
For the years ended March 31, 2014, 2013 and 2012, an aggregate of 4,949, 280,539 and 142,401 options, respectively, were excluded from the earnings per share calculation because their effect would be anti-dilutive.
12. EQUITY-BASED COMPENSATION PLANS:
The Company has six share-based compensation plans for which equity awards 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.
At the Company’s Annual Shareholders’ Meeting on September 19, 2013, the Company’s shareholders approved the 2013 Equity Incentive Plan (the “2013 Plan”). With the adoption of the 2013 Plan, no additional options may be granted under the Company’s 2010 Equity Incentive Plan (the “2010 Plan”). Subject to certain adjustments, the maximum number of shares of common stock that may be issued under the 2013 Plan in connection with awards is 750,000 shares. A total of 19,845 time and performance based options to purchase shares and awards of RSUs were outstanding at March 31, 2014 under the 2013 Plan.
The 2010 Plan permitted the granting of incentive stock options, non-qualified stock options and restricted stock units. Subject to certain adjustments, the maximum number of shares of common stock that may be issued under the 2010 Plan in connection with awards is 1,600,000 shares. With the adoption of the 2010 Plan, no further options may be granted under the Company’s other option plans. A total of 1,035,592, 827,161 and 467,773 options to purchase shares and awards of RSUs were outstanding at March 31, 2014, 2013 and 2012 respectively, under the 2010 Plan.
The 2008 Equity Incentive Plan (“2008 Plan”) permitted 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 could have been issued under the 2008 Plan in connection with awards was 1,400,000 shares. A total of 520,529, 692,459, and 874,830 options to purchase shares and awards of RSUs were outstanding at March 31, 2014, 2013 and 2012, respectively, under the 2008 Plan.
Options to purchase up to 1,000,000 shares of common stock could have been eligible to be granted under the Company’s 2006 Stock Option Plan (“2006 Plan”). A total of 429,088, 613,815 and 739,925 options to purchase shares were outstanding at March 31, 2014, 2013 and 2012, respectively, under the 2006 plan.
On July 28, 2003, the Board of Directors adopted the Measurement Specialties, Inc. 2003 Stock Option Plan (“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 could have been eligible to be granted under the 2003 Plan, and 62,978, 105,308, and 223,960 stock options were outstanding at March 31, 2014, 2013, and 2012, respectively, under the 2003 Plan.
Options to purchase up to 1,500,000 shares of common stock could have been granted under the Company’s 1998 Stock Option Plan (“1998 Plan”), until its expiration on October 19, 2008. A total of 11,000, 21,372 and 28,372 options to purchase shares were outstanding at March 31, 2014, 2013 and 2012, respectively, under the 1998 Plan.
Stock-option awards are priced based on the closing price of the Company’s common stock on the award date, 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, 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. RSU awards included time-based restricted stock units (“Time-based Awards”) and performance-based restricted stock units (“Performance-based Awards”). 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 2014, 2013, or 2012. The number of shares remaining for future issuance under equity compensation plans totaled 730,155, 798,061, and 1,205,531, as of March 31, 2014, 2013, and 2012, respectively.
The following table summarizes the components of the Company’s stock-based compensation expense:
The following table summarizes information on unvested RSUs at March 31, 2014 and activity during the year then ended:
A summary of stock options outstanding as of March 31, 2014 and changes during the year then ended is presented below:
The aggregate intrinsic value of options outstanding at March 31, 2014, was $77,245 with a weighted-average remaining contractual life of 4.22 years and a weighted average exercise price of $21.26. Of these options outstanding, 1,394,777 were exercisable and 1,634,392 were expected to vest with aggregate intrinsic values of $67,946 and $76,405, respectively. The weighted-average contractual life of options exercisable and options expected to vest was 3.5 and 0.1 years, respectively. The weighted average exercise price of options exercisable and options expected to vest was $19.14 and $21.10, respectively. The following table provides information related to options exercised during the years ended March 31, 2014, 2013, and 2012:
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 tranche by tranche measurement and recognition of compensation cost) with the following weighted-average assumptions:
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. 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.
At March 31, 2014, there was $15,047 of unrecognized compensation cost not adjusted for forfeitures related to share-based payments, which is expected to be recognized over a weighted-average period of approximately 1.1 years.
Adjusted for estimated forfeitures, at March 31, 2014, there was $10,738 of unrecognized compensation cost related to share-based payments.
13. RESTRUCTURINGS AND ASSET HELD FOR SALE:
Restructurings: As part of the Company’s ongoing efforts to review its business for opportunities to reduce operating expenses and leverage core competencies, the Company evaluates and implements various restructurings to, among other things, improve operational efficiencies. To that end, the Company has substantially completed the restructuring to consolidate the Company’s manufacturing operation in Scotland to other MEAS sites and the Company has started to implement the restructuring to consolidate its U.S. operations in Dayton, Ohio, St. Marys, Pennsylvania, Shrewsbury, Massachusetts and Ham Lake, Minnesota to a new greenfield facility in Andover, Minnesota, as well as certain restructuring measures in Europe. Costs associated with these restructurings have and will include payments for severance charges, costs for termination of benefits and other related activities, in addition to possible contract terminations. The announcement to employees for the closure of the facility in Scotland was made in March 2013 and the announcements concerning the U.S. operations were made in February 2014. At March 31, 2014, the liability for estimated severance costs related to U.S. restructurings was approximately $84, and the Company expects restructurings cost to range from $2,500 to $3,000 through calendar 2015.
The following details the accrued restructuring reserves and activity at March 31, 2014:
Restructuring provisions are determined based on estimates prepared at the time the restructuring actions are approved by management, and are periodically updated for changes and also include amounts recognized as incurred.
Asset Held for Sale and Impairment of Asset Held for Sale: The Company completed the consolidation of the former Pressure Systems, Inc. (“PSI”) facility into the existing MEAS Hampton facility during the quarter ended June 30, 2012. The former PSI facility was no longer utilized for manufacturing and was held for sale. Accordingly, the former PSI facility was classified as an asset held for sale in the consolidated balance sheet, since it met the held for sale criteria under the applicable accounting guidelines.
The Company determined there were triggering events requiring an impairment analysis for asset held for sale for which the Company recorded impairment charges of $489 and $400 during the second quarter of fiscal 2013 and fourth quarter of fiscal 2012, respectively. The inputs utilized in the analysis are classified as Level 2 inputs within the fair value hierarchy as defined in the related accounting standards for fair value measurements and disclosures.
On September 25, 2013, the Company sold the asset held for sale for $1,000, consisting of $181 in cash, net of $69 in costs to sell, and a seven-year 5% interest bearing promissory note receivable for $750. The promissory note is secured by the former PSI facility and final payment is due on September 1, 2020. The carrying value of the former PSI facility was $940, which approximated fair value less cost to sell.
14. COMMITMENTS AND CONTINGENCIES:
Leases:
The Company leases certain property and equipment under non-cancelable operating leases expiring on various dates through March 2056. Expenses for leases that include escalated lease payments are recorded on a straight-line basis over that base lease period. Rent expense, including real estate taxes, insurance and maintenance expenses associated with net operating leases approximates $4,838 for 2014, $4,014 for 2013, and $4,421 for 2012. At March 31, 2014, total minimum rent payments under leases with initial or remaining non-cancelable lease terms of more than one year were:
The Company is obligated under capital lease arrangements for certain equipment. At March 31, 2014 and 2013, the amount of equipment recorded in property and equipment under capital leases were $514 and $28, respectively.
Below is a schedule of future payments under capital leases:
Amortization of assets held under capital leases is included with depreciation expense.
Litigation:
Pending Legal Matters
There are currently no material pending legal proceedings. From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business. The Company currently is not aware of any such legal proceedings or claims that the Company believes will have, individually or in the aggregate, a material adverse effect on the Company’s business, financial condition, or operating results.
Contingency: Exports of technology necessary to develop and manufacture certain of the Company’s products are subject to U.S. export control laws and similar laws of other jurisdictions, and the Company may be subject to adverse regulatory consequences, including government oversight of facilities and export transactions, monetary penalties and other sanctions for violations of these laws. In certain instances, these export control regulations may prohibit the Company from developing or manufacturing certain of its products for specific end applications outside the United States. In late May 2009, the Company became aware that certain of its piezo products when designed or modified for use with or incorporation into a defense article are subject the International Traffic in Arms Regulations ("ITAR") administered by the United States Department of State. Certain technical data relating to the design of the products may have been exported to China without authorization from the U.S. Department of State. As required by the ITAR, the Company conducted a thorough investigation into the matter. The Company has taken steps to strengthen our export compliance controls and procedures and in December 2009 filed a final voluntary disclosure with the U.S. Department of State relating to that matter, as well as to exports and re-exports of other ITAR-controlled technical data and/or products to Canada, India, Ireland, France, Germany, Italy, Israel, Japan, the Netherlands, South Korea, Spain and the United Kingdom, which disclosure have since been supplemented.
In early May 2014, the Company received notification from the U.S. Department of State’s Office of Defense Trade Controls Compliance, Enforcement Division that the agency had completed its review and closed the case without taking further action or imposing any civil penalty against the Company.
15. SEGMENT INFORMATION:
The Company continues to have one reporting segment, a sensor business, under applicable accounting guidelines for segment reporting. For a description of the products and services of the Sensor business, see Note 1. Management continually assesses the Company’s operating structure, and this structure could be modified further based on future circumstances and business conditions.
Geographic information for revenues based on country from which invoiced and long-lived assets based on country of location, which includes property, plant and equipment, but excludes intangible assets and goodwill, net of related depreciation and amortization follows:
16. CONCENTRATIONS:
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 RMB, Euros and Swiss francs. Sales by subsidiaries operating outside of the United States are translated into U.S. dollars using exchange rates effective during the respective period. As a result, the Company is exposed to movements in the exchange rates of various currencies against the United States 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. The Company has generally accepted the exposure to exchange rate movements without using derivative financial instruments to manage this risk. Therefore, both positive and negative movements in currency exchange rates against the U.S. dollar will continue to affect the reported amount of sales, profit, and assets and liabilities in the Company’s consolidated financial statements.
The following table details annual net sales invoiced from our facilities within the U.S. and outside of the U.S. and as a percentage of total net sales for the last three years, as well as net assets and the related functional currencies:
The Company is exposed to credit losses in the event of nonperformance by counter parties to its financial instruments. The Company places cash with various major financial institutions in the United States, Europe, Hong Kong, and China. Cash held in foreign institutions amounted to $44,604 and $26,649 at March 31, 2014 and 2013, respectively. The Company periodically evaluates the relative credit standing of financial institutions considered in its cash investment strategy. Our emphasis is primarily on safety and liquidity of principal and secondarily on maximizing yield on those funds. Measurement Specialties (China) Ltd. and Measurement Specialties (Chengdu) Ltd are subject to certain Chinese government regulations, including currency exchange controls, which limit cash dividends and loans to MEAS (Asia) Limited and Measurement Specialties, Inc. Cash balances outside of the U.S. could be repatriated to the U.S., but, under current law, would be subject to U.S. federal income taxes, less applicable foreign tax credits. The Company generally considers undistributed earnings of most of its foreign subsidiaries to be indefinitely reinvested outside the U.S., and no U.S. deferred taxes are recorded with respect to such earnings. It is not practicable to estimate the amount of any additional taxes which may be payable on the undistributed earnings. Repatriation of some foreign cash balances is restricted or prohibited by local laws.
Accounts receivable are primarily concentrated in the United States and Europe. At March 31, 2014 and 2013, accounts receivable in the United States totaled $28,217 and $22,676, respectively, and accounts receivable in Europe totaled $29,167 and $24,491, respectively. To limit credit risk, the Company evaluates the financial condition and trade payment experience of customers to whom credit is extended. The Company does not require customers to furnish collateral, though certain foreign customers furnish letters of credit. In addition, concentrations of credit risk arising from trade accounts receivable are limited due to the diversity of the Company’s customers. Notwithstanding these efforts, the continued distress in the global economy may increase the difficulty in collecting accounts receivable.
The Company manufactures the substantial majority of its non-temperature sensor products in the Company’s factories located at owned premises in Shenzhen, China. The Company also has a leased facility in Chengdu, China. Sensors are also manufactured at the Company’s United States leased facilities located in Virginia and California and at four of the Company’s facilities in France, Germany and Switzerland. The Company manufactures a significant portion of its temperature sensors at leased facilities in Ohio, China and in Ireland. 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 customer, Sensata, is a large U.S. OEM automotive supplier, and accounted for approximately 10% of our net sales during fiscal 2014, 13% of our net sales during fiscal 2013, and 14% of our net sales during fiscal 2012. No other customers accounted for more than 10% of sales during the fiscal years ended March 31, 2014, 2013, and 2012. At March 31, 2014 and 2013, the trade receivable with our largest customer was approximately $3,177 and $3,820, respectively.
17. SUBSEQUENT EVENT:
On May 30, 2014, the Company acquired the capital stock of Wema Group Holdings AS (“Wema”), a company based in Norway and a leader in the design and manufacture of urea quality sensors for approximately $114,000 in cash from a combination of available cash on hand and from borrowings under the Company’s Senior Secured Credit Facility. As part of the Wema acquisition, the Company amended the Senior Secured Credit facility to, among other things, exercise the accordion feature, reset the accordion feature and adjust certain financial ratios. The Company is not able to provide additional disclosures concerning the acquisition of Wema due to the limited amount of time between the close of the acquisition and the filing of our Consolidated Financial Statements of the Company included in the Annual Report on Form 10-K.
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Presented below is a schedule of selected quarterly operating results.
Earnings per share are computed independently for each of the quarters presented, on the basis described in Note 11. The sum of the quarters may not be equal to the full year earnings per share amounts. During the quarters ended September 30, 2012 and March 31, 2014, the Company repurchased 215,161 and 174,504, respectively, shares of MEAS common stock. During the quarter ended September 30, 2012, the Company recorded charges of $489 with the write-down of Assets held for sale. During the three months ended September 30, 2012, the Company recorded discrete income tax expense adjustments of approximately $853 as a reserve related to certain claw-back provisions for a tax holiday provided to MEAS Switzerland, the Company’s subsidiary in Switzerland, and during the quarter ended March 31, 2013, the Company recorded an income tax credit to release most of this reserve previously recorded. During the quarter ended December 31, 2012, the Company recorded discrete income tax credits of approximately $575 related to the refinement of the estimates between the preparation of the prior year tax provision and the filing of the prior year tax returns for, among other things, R&D tax credits and foreign tax credits related to the previous year. The Company recognized fair value of adjustments related to earn-outs for Eureka and Gentech as gains of approximately $3,722 and $662 for the quarters ended September 30, 2012 and March 31, 2013, respectively. The Company recognized fair value of adjustments related to earn-out for RTD as gains of approximately $1,053 and $108 for the quarters ended September 30, 2013 and December 31, 2013, respectively.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended March 31, 2014, 2013, and
Notes:
(a) Bad debts written off, net of recoveries.
(b) Inventory sold or destroyed, production credit and foreign exchange.
(c) Costs of product repaired or replaced and foreign exchange.
(d) Recorded as part of purchase accounting.
(e) Amounts written off against reserve.
S-1