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Measurement Specialties, Inc. (NASDAQ:MEAS)

F1Q09 Earnings Call

August 7, 2008 10:00 am ET

Executives

Frank Guidone - President and Chief Executive Officer

Mark Thomson - Chief Financial Officer

Analysts

John Franzreb – Sidoti and Company

Larry Solow – Needham and Company

Ted Kundtz – Needham and Company

Gene Fox – Cardinal Capital Management

Operator

Welcome to the Measurement Specialties first quarter fiscal year 2009 earnings results. (Operator Instructions) It is now my pleasure to introduce you to your host, Frank Guidone, CEO for Measurement Specialties.

Frank Guidone

Let me start this morning by reading our Safe Harbor Provisions. Management wishes to caution investors that certain statements made on today's call are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995; Section 27A of the Securities Act of 1933, as amended; and Section 21E of the Securities and Exchange Act of 1934, as amended.

Forward-looking statements may be identified by such words or phrases as "believe," "expect," "intend," "estimate," "anticipate," "project," "will," "may," and similar expressions. All statements that address operating performance, events, or developments that we expect or anticipate will occur in the future are forwardlooking statements. Forward-looking statements used herein are not guarantees of future performance and involve a number of risks and uncertainties. Please refer to the "Risk Factors" outlined in the company's SEC reports for more detail.

The company, from time to time, considers acquiring or disposing of business or product lines; the forward-looking statements do not include the impact of acquisitions or disposition of assets, which could affect results in the near term. Actual results may differ materially, and the company assumes no obligation to update the information provided in today's call. Unless otherwise noted, all discussions and references in today's call reflect continuing operations only.

With that, let's get started. I am going to make a few highlevel comments and observations this morning and then turn the call over to Mark.

From a sales perspective, total sales for the first quarter of fiscal 2009 were $59 million which is up 11% over the same period last year. Excluding the sales from Intersema which was $4.1 million in the first quarter, sales increased $1.7 million or 3.2%, which would be defined as our organic growth. Given our strongerthanexpected fiscal 2008 fourth quarter, last quarter, we were anticipating a relatively weak first quarter, so this is consistent with our expectations.

Our top 50 customers, which represent close to 50% of our total sales, declined slightly quartertoquarter. Virtually all of this decline can be attributed to two lost customers suggesting that there are a lot of puts and takes with respect to the individual customers, but the overall top 50 are basically flat periodtoperiod.

We would generally expect to see some net growth in our top 50 customer base, so we believe the flat performance of this group of customers is in part a reflection of our somewhat seasonal business and in part a reflection of the generally weak U.S. economy.

As of July 31, our total backlog was $73.9 million, an increase of $3.8 million or 5.4% over March 31. Growing backlog is, of course, a positive indicator supporting our forecasted increase in sales in the second quarter.

Continued weakness of the dollar remains a challenge. The Chinese renminbi appreciated 10.4% from the first quarter 2008 to the first quarter 2009, while the Euro appreciated 15.9% over the same period. As compared to the last quarter, as compared to the fourth quarter, the renminbi appreciated 3% and the Euro 4.4%. This creates not only margin pressure, particularly with respect to the renminbi, but also higher SG&A when stated in U.S. dollars.

For example, a European site with 1 million Euro of SG&A expense last year, they still have 1 million Euro with SG&A expense this year. However, stated in U.S. dollars, you would have seen an increase of $160,000. SG&A expense did increase over last year as well as over last quarter, largely as a result of the weak dollar and higher translation of Euro and renminbi denominated SG&A expense.

As compared to Q1 of 2008, SG&A increased $2.5 million. Of that increase, approximately $1.6 million was associated with the Intersema and Visyx acquisitions and roughly $800,000 was associated with the FX translation expense as we just explained. Excluding those two items, the actual increase in SG&A was really negligible.

We're seeing an increase in cost pressure as a result of higher fuel utility costs and commodity pricing; however, despite these pressures, favorable mix and continued emphasis on material cost reductions allowed us to improve gross margin nearly 200 basis points over Q4. We think this is a very positive trend.

Adjusted EBITDA at $10.1 million was solid for the quarter, particularly given the soft sales. Based on the forecasted increase in sales in Q2 and beyond, we reiterate our guidance of $45 million to $50 million in adjusted EBITDA for the full fiscal year. Free cash flow, at $6 million, was quite good as a result of the strong sales in Q4 and associated collections this quarter, partially offset by an increase in capital spending and inventory build in preparation for our China facility move. We think this gets us off on the right foot and positions us well to exceed our 2008 free cash flow of $20.4 million.

As previously disclosed, Sensata, who is our largest customer, has been concerned about the solesource situation with MEAS for quite some time. We've been cooperatively working on an insource program where Sensata has established internal capacity to reduce a portion of the volume currently supplied by MEAS. The insourcing by Sensata is transitioning a little slower than expected and, accordingly, Sensata sales were up in the first fiscal quarter of 2009 as compared to last year. We still expect the full fiscal year sales with Sensata to be flat or slightly down.

The new China building project is nearing completion. We're having some delays finishing the drive work due to record rains hitting south China, but have most of the major mechanical and electrical approvals at this time. Based on current estimates, we believe we will be operational in the new facility by calendar yearend.

Although growth with existing business has slowed somewhat, evidenced by our top 50 customers being flat quarter-to-quarter and customers are generally cautious to assign resources to new opportunities until the economic environment improves, we maintain a full pipeline of new opportunities and reiterate or FY09 guidance of $255 million in net sales and $1.30 EPS. This represents a 12% increase over fiscal 2008. However, adjusting in sales  a 12% increase in sales over fiscal 2008  adjusting for the full year effect of Intersema, organic growth is expected to be around 6%.

As previously stated, we expect Sensata sales to be flat to down year-on-year, while nonSensata business is expected to post high single or low doubledigit growth.

We're making good progress on our fluid property sensor technology acquired from Visyx last year. We received prototype funding and two verbal commitments from major diesel engine manufacturers. The product has undergone field test trials, and we expect to begin volume production in 2009 calendar.

Applications include monitoring oil quality for heavy truck, to optimize pan changes, as well as fuel system monitoring in support of NOS emission reduction. With respect to Intersema, performance improved modestly over the fourth quarter. We're now in full production with the new electronics, as discussed in our last call; and we expect that, along with seasonally stronger sales, to drive meaningful improvement in performance in the second quarter and for the remainder of the fiscal year. With that, I will turn the call over to Mark.

Mark Thomson

Net sales for the quarter increased $5.8 million to $59.0 million, an 11% increase over the same period last year. Excluding sales from the Intersema acquisition completed in fiscal 2008 of $4.1 million, organic sales increased $1.7 million or 3%. Relative to the prior quarter, sales were down $3.8 million or 6%. However, as noted by Frank earlier, this sales pattern was expected, given the company's strongest quarter is generally Q4 and Q1 tends to be flat to down on the relative basis.

As noted during our last investor call, there are several factors that will influence fiscal 2009 sales, including (a) the insourcing program with Sensata and their associated decline versus historical growth in sales; {b) the general cautiousness with customers regarding existing and new programs due to the current economic environment; and (c) the loss of a low margin SP02 program to a competitor.

Although we're seeing some softening in the demand in market verticals including auto, heavy truck, semiconductor and construction, we remain very positive about our ability to perform in the current economic condition. Our backlog is strong, and our new product opportunities will continue to bolster growth.

Gross margin for the quarter was 42.8% and slightly down compared to the corresponding period last year. Relative to the prior quarter, our gross margin increased 190 basis points despite the continued weakening dollar, heavy RMB, and continued growth in Sensata sales which carry lower margin than other product line averages.

The major drivers of gross margin continued to be product sales mix; foreign exchange, driven by the appreciation of the RMB relative to the U.S. dollar; and the impact of various costs results from higher prices for oil and other commodities.

As noted by Frank, the dollar continues to weaken against the RMB. The RMB appreciated approximately 3% during Q1, which translates into approximately $660,000 of annual margin erosion. We continue to evaluate both natural and formal hedges to improve the foreign exchange exposure against the RMB. Historically, pricing of formal hedges have precluded the company from entering into derivative arrangements. However, recent pricing of four deliverable contracts on shore in China have come down; and we're strongly considering entering into formal hedges to reduce our RMB exposure.

We expect fiscal 2009 gross margins to fluctuate between 42% and 44%, mainly driven by improved sales mix, which is strongly influenced by the lower Sensata sales as a percentage of total sales; and gross margins generally by Intersema will favorably influence the business as they're expected to exceed historical company averages in the second half of fiscal 2009.

Overall, total operating expenses increased $3 million, or 18%, to $19.6 million; and adjusted SG&A increased $2.5 million, or 16.4%, to $17.4 million for the quarter, as compared to the same period last year. These increases are largely due to costs associated with acquisitions and foreign exchange translation. Relative to the prior quarter, adjusted SG&A increased $0.8 million or 4.8% and, as Frank noted, this is mainly driven by foreign exchange.

As a percentage of sales, adjusted SG&A increased to 29.5% of sales. Although adjusted SG&A as a percentage of sales is higher than our past quarters' historical averages, this is driven largely by lower sales in Q1; and we expect future SG&A leverage to be more in line with prior quarters' historical averages.

The company's cash balance at June 30, 2008, was approximately $26.8 million, which reflects an increase of $5.2 million since the beginning of the year. The increase in cash balance is largely attributable to the increase in cash balances in China, roughly $4.5 million, due to funding requirements in support of the China facility.

Although we didn't reduce our revolver balance during the quarter, our cash position remains strong. Our revolver balance is approximately $58.2 million at June 30, 2008, and open availability under the revolver is approximately $63 million.

Our incremental borrowing rate is approximately 4.8%. Cash generated from operations during the quarter was $9.3 million and relatively flat as compared to the same period last year.

While the cash provided by operations didn't fluctuate significantly relative to the prior year, there were fluctuations in the number of categories which offset one another.

Positive operating cash flows during the quarter resulted from improvement in collections of accounts receivable, which in part were offset by higher inventory balances based on a planned buildup in support of the China facility move.

The company continues to focus on working capital management and believes it will generate strong cash flows in fiscal 2009. Free cash flow, defined as cash flow from operations less capital expenditures, decreased by $1.0 million to $6 million during the quarter as compared to the same period last year. The driver of this decrease was an increase in capital spending. The company invested $3.3 million or 5.6% of sales in the first quarter, largely attributable to the China facility and machinery and equipment in support of sales growth.

We expected to spend between $5 million and $6 million in fiscal 2009 on the China building. Excluding the China facility project, we expect capital expenditures to run between 4% to 5% of sales.

Total income tax expense during the first quarter increased $0.3 million to $1.5 million as compared to the same period last year.  The increase in income tax expense is primarily attributable to the overall increase in the estimated consolidated effective tax rate. Excluding discrete tax adjustments, including, among other things, changes in tax laws, return to accrual adjustment, and tax liability corrections, the overall annual effective tax rate in fiscal 2008, prior year, was approximately 24% as compared to our estimate for fiscal 2009 of 28%. The company's overall effective tax rate increase has been impacted by a higher portion of taxable income earned in tax jurisdictions with higher tax rates as compared to fiscal 2008, as well as the impact of the China tax law changes.

The China tax authorities continue to publish tax circulars which provide further guidance on tax law changes and qualification criteria for high technology or hightech status; however, nothing is definitive at this point. The company continues to pursue continued qualification as a hightech enterprise with the Chinese authorities. If the company obtains hightech status, the effective income tax rate will be 15%.

Lastly, as noted in previous calls, it's important to note that the company has a sizable net operating loss carried forward balances. These NOLs are both in Germany and the U.S. At the end of our fiscal 2008, Germany and the U.S. had NOLs of approximately $13 million and $16 million, respectively. These NOLs have a favorable impact on actual taxes paid and remain a large benefit to the company.

With that, I will turn it back over to you, Frank.

Frank Guidone

We will now open the call up for some questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from John Franzreb with Sidoti and Company.

John Franzreb - Sidoti and Company

First question is, given the tepid organic sales profile, but your willingness to maintain the total revenue outlook, I imagine there's some decent size programs out there that you expect to roll in the coming quarters. Can you give us a little color on what, if not what the programs are exactly, groups that will benefit the most, and what we should look forward to?

Frank Guidone

The two groups for us that we expect to experience the most growth this year largely due to new programs are within our PFG group, pressure business, and that's across the board in terms of programs. As you know, the pressure market is a very large market. And we participate in general industry, in heavy truck, in medical and all major market verticals there.

Because we're such a small share of a very large market, you really can't draw any conclusions relative to our growth versus the overall market growth. But the pressure business we’re expecting to grow through last year. There's lots of programs in the pipeline that we expect to drive the sales increases in the back half of the year.

Secondly, in our HDG group, in the humidity business, that business continues to enjoy success in the windshield fogging prevention applications which are being adopted on new platforms, as well as with the adoption of our TRICAN product which is used for engine optimization for heavy truck applications. These are programs that have been awarded a year or two ago, in some cases, and are rolling in.

John Franzreb – Sidoti and Company

How much incrementally would those programs collectively add?

Frank Guidone

From a growth perspective, those two groups are going to represent maybe 50% to 75% of our total growth for the year. The growth in those businesses is largely as a result of new programs as well as some net growth of the top 50 as I talked about earlier. The top 50 is flat for the first quarter. What we do is effectively sum that growth there. Simply because some customers in that top 50 pool represent programs that were new to us this year as compared to last and then on a full-year basis, we will just see growth.

John Franzreb - Sidoti and Company

You mentioned the loss of two customers. One was mentioned was a large medical customer in the optical business. Could you talk a little bit about the conditions and what happened there?

Frank Guidone

This was with one of our customers. We still maintain them as a temperature customer for medical temperature probes. We were also supplying them SCO2 sensors and, based on some prior relationship, they've gone to a competitor for their SCO2 sensors. As Mark said, it's a relatively low-margin program. While it impacted $2 million to $3 million of top-line sales, the net margin and EBITDA implications were much smaller relative to the lower margin.

John Franzreb - Sidoti and Company

Does that explain the improvements in the gross margins sequentially?

Frank Guidone

That is, in part, the improvement in mix, that's correct.

John Franzreb - Sidoti and Company

What would be the balance of that?

Frank Guidone

The improvement in gross margin? The general mix is better and we've been forecasting that this year. We've been forecasting the mix to improve is why we were forecasting an overall improvement in gross margin. We were reasonably successful last year in our overall material strategic sourcing program, which has allowed us to consolidate vendors and negotiate better pricing. So, despite the overall commodity price increases, we were net favorable from a PPV purchase price variance last year. Rolling those new standards in helps our margin as well.

John Franzreb – Sidoti and Company

One last question. Could you share with us your sales by geography if you have it and how the growth looks on a geographic basis?

Frank Guidone

I can give you generally as of fiscal 2008 yearend, we were about 45% in U.S. and 55% nonU.S. Of that 55% nonU.S., it was split roughly equal between Europe and Asia, with Asia being heavily influenced by our sales to Sensata, which are all largely to Asia. That's all sold to their Malaysia facility.

Growth in Asia, excluding Sensata, tends to be higher than our average since you're starting from a relatively low base. Growth in China, in particular, is a country that we have been focusing on driving more sales and higher organic growth. So, as a geography, that's probably going to grow twice as fast as the overall company average.

John Franzreb – Sidoti and Company

Are you seeing any weakness in U.S. or Europe that's noticeable?

Frank Guidone

Since U.S. and Europe are the lion's share, again excluding Sensata, U.S. and Europe are the lion's share of our sales and we're seeing overall cautiousness. I wouldn't categorize that cautiousness as being a U.Scentriconly situation. The current economic overhang, if you will, is something that everybody globally is concerned about.

Operator

Our next question comes from Larry Solow with CJS Securities.

Larry Solow – CJS Securities

Can you elaborate a little more, I you know you don't give quarterly guidance, but with Sensata being clearly up yearoveryear and probably a little bit better than your expectations, would you say internally that these numbers were a little bit less than expected, appreciating the seasonality in some of the dropoffs from Q4?

Frank Guidone

It's in line. I would say plus or minus a million dollars is easy for us to fall in or out of a quarter, depending on where your quarter breaks. That's like a week's worth of shipments. That can make the difference in terms of the line you're trying to cut here. I would say that it's a little weaker, yes, but not much.

Larry Solow – CJS Securities

Was Sensata up meaningfully? You said it was up yearoveryear?

Frank Guidone

Up, but less so than prior years.

Larry Solow – CJS Securities

Not like you are going to get this tremendous dropoff from that. Because they had a big first quarter, that's not going to hurt your overall growth.

Frank Guidone

No. They were maybe a half a million better than our second quarter. Not anything, it’s not $5 million; it's not going to change the equation.

Larry Solow – CJS Securities

Then on Intersema, is that now fully integrated, is the ASIC fully up and running and everything?

Frank Guidone

It is. And we're through the inventory of the old products, so we should have that behind us at this point. So far, we've seen the margins improve. They have a seasonally strong quarter in the second quarter, so our second fiscal quarter is a little more consumer oriented, kind of their buildup in support of the Christmas season with their customers. We're expecting Q2 to be the telltale. If we operate where we expect to operate in Q2, then I will breathe a little bit easier.

Larry Solow – CJS Securities

I know you had actually talked about using the ASIC maybe corporate-wide in manufacturing processes at other parts of your company. Is that still a possibility and that would, I guess, be a positive?

Frank Guidone

Their products are primarily a digital output product. We take an analog signal from the sensor and convert it to a digital out through that ASIC and that works for most of their products. Most of our products are analog out, which means the ASIC needs to do an AG to A conversion. There's a second version that they were developing to support analog out production which is not yet released, and that's the one that will be helpful for us to roll out across our other pressure applications.

Larry Solow – CJS Securities

Lastly, on the China facility and the move, I know you had mentioned this could maybe create some shortterm disruptions in the next one or two quarters. Is that still a potential?

Frank Guidone

It's a facility move so that's always that potential. We are working closely with customers to try to get customers to take inventory early in order to help reduce the variability associated with us trying to forecast what they're going to want in terms of their inventory build. We are kind of very carefully scripting out the different groups in terms of how we're moving in stages.

It's driving some increase in capital spending, because equipment that we might have otherwise stretched, if it's close, we're opting to add duplicative capacity to try to reduce risk. So we're trying to manage this as closely as possible, but I'd be kidding if said that it was a zero-risk proposition, there's always risk associated with a facility move.

Larry Solow – CJS Securities

I appreciate the answers, and we look forward to seeing you next week at our conference.

Operator

Our next question comes from Ted Kundtz of Needham and Company.

Ted Kundtz – Needham and Company

Couple questions for you. One, could you just go back to the gross margin. You sort of talked about a 42% to 44%, which I think is a little narrower than the Q mentioned. I think the Q mentioned 41% to 44%. So it's 42% to 44% now, I think you talked about the FX being a big impact there as well as mix. Is there any chance you can get any price increases passed through to reflect either the cost increases going on, the commodity cost increases, or fuel cost increases, or the FX impacts and things like that?

Frank Guidone

We've been pushing it, price increases. We certainly initiated that at the back part of Q4 and more heavily in Q1. Depending on how far out we have contracts and POs with customers determines how that rolls in. We may notify a customer of a price increase but they've got POs placed for the next six months, so we're not going to see it until Q3, let's say. That varies customer to customer. And in some cases, you may have contractual arrangements locking in prices and where we have more flexibility in other situations. It's a mixed bag.

We've been working through that with customers and pushing price increases and/or freight premiums where appropriate. I would say, yes, we've generally been able to move the needle to some degree there. I don't think we've seen much of that in Q1, we may see some impact in Q2 to that. But, again, I don't want to bake that in because we're using that as an offset to commodity price increases that we know we will continue to do through the rest of the year as well.

Ted Kundtz – Needham and Company

Everyone else is seeing them, too, so folks are talking about getting these things through. And they seem to be generally sticking for most companies.

Frank Guidone

I would say that's been our experience as well.

Ted Kundtz – Needham and Company

Could you cover tax rate guidance again? I know there's a lot of moving parts here. But just, if you had a netnet, we were looking at 28.5% kind of run rate here going forward. Is that a little too high? You came in a little lower than that this quarter.

Mark Thomson

We've had some opportunities since our yearend call to refine some of our calculations. Of course as I noted, it will, in fact, vary based on what actual profits are generated in each of the respective jurisdictions. We do our best to keep up on any and all tax law changes that have influences, and certainly we're very much a fairly complicated business overall being that we are in many different jurisdictions. We implement and spend quite a bit of time on tax strategy and planning. But, overall right now based on our latest estimates, we think we're going to be roughly 28%.

Ted Kundtz – Needham and Company

Going back to the automotive side, remind us again currently what the percent of the business is automotive related? I know you have Sensata being most of that, but there's probably some other stuff as well. What's the total automotive exposure?

Frank Guidone

About 25%.

Ted Kundtz – Needham and Company

Still running at that level? I thought it may have been drifting down a bit. And Sensata represents the bulk of that, I assume, what 20 percent? Is that a fair number?

Frank Guidone

They're a little lower than that. Last year they were about 18 percent of sales. That will come down this year because it's flat.

Ted Kundtz – Needham and Company

And you expect that to continue, that relationship, that agreement to go forward at the same run rate for the next several years is that correct?

Frank Guidone

Yes.

Ted Kundtz – Needham and Company

And back to the general gross margin question one more time, are the biggest variables there the FX side of it?

Frank Guidone

That is a big variable for sure, mix is a huge variable for us. We're forecasting mix.

Ted Kundtz – Needham and Company

I am thinking the unexpected side of it.

Frank Guidone

I would say mix, because even within product lines, we're forecasting at the product line level, but even within a product line, we can have mix implications that move us a couple of points within a product line. That's only a smaller percentage of the total, of course, but depending on how you have those items move in terms of actual sales versus forecast, that can have a impact on us.

Commodity pricing certainly, we're working our kind of unforecasted offset to commodity price increases is (a) any pricing increases that we can get pushed through and (b) our efforts in our global sourcing group, our strategic sourcing, from an overall purchase price variance perspective. Those are the two items that we're pushing in order to offset the commodity pricing. Again, timing of those things is when we get notices and increases from our vendors and when we can drive savings and improvements, that can have an impact on gross margin as well.

Operator

We have a followup question from the John Franzreb from Sidoti and Company.

John Franzreb – Sidoti and Company

I was just wondering if I could remind us when the Sensata transfer will be fully completed?

Frank Guidone

It's going to happen throughout this year. They're running qualification parts now. And they're going to slowly ramp up and take volume throughout the rest of this fiscal year and toward into next year as well. There's not a cliff date, it will be more of a ramp that we'll take over several quarters. What is going to happen is they're going to qualify a part number, they're going to have to get their customer to approve that transfer, and then kind of move through another part number. Each part is going to have to have its own qualification; and, therefore, there's a phasing of that that's going to make it a ramp rather than a cliff transition.

John Franzreb – Sidoti and Company

I am just trying to get a handle when we're going to start anniversering better numbers because we've had the final transfer. Sounds like now you're saying the second quarter of next fiscal year? Maybe a better apples-to-apples basis?

Frank Guidone

If the question is they've got a fixed amount of capacity, when do we think they will transition enough to consume that capacity and get to the point where we'll see net growth? I think from a product transfer perspective, it's a true statement that will take three to four quarters.

But the other dynamic that we're expecting to see is, as I'm sure you're aware through some of your other companies, is occupant weight sensing has been a moving target in terms of the technology here. And what's happening is there's been a greater proliferation of smart air bags, which is reducing the need for the passenger occupancy qualification or classification system, which is in part what we apply to Sensata. We're expecting that business to slowly decline as smart air bags are more widely deployed. That's okay for us because we make a, there's a lot more steel in our occupant weight parts, but we don't have a lot of taxfree margin on the extra steel, so it's a higher priced item for us, but it's a much lower margin product for us.

So, what will happen is we're expecting, from now looking out two or three years, we're expecting that our volume of occupant weight, OWS, parts is going to decline with Sensata, which is going to have a larger impact on the top line, but our higher margin pressure parts are going to increase which won't completely offset the sales, but will improve the gross margin.

John Franzreb – Sidoti and Company

One last question. As you start to build up cash, can you talk a little bit about the debt reduction in light of that?

Frank Guidone

It's our strategy, and always has been and will continue to be, to use excess cash flow to reduce debt and then scale back up debt as we have acquisition opportunities in front of us. I don't expect it to be any different. We're positioning cash, we're a little cash heavy in China right now, simply because we know we have the final payments coming up to finalize the facility and are maintaining our cash there, more cash than we would normally otherwise. In general, no different strategy. Except cash flow reduces our revolver balance so that we can reduce overall interest expense in the short term and scale that back up as we find acquisition opportunities.

John Franzred – Sidoti and Company

How much is that one last cash payment and when is that due in China?

Frank Guidone

There is no one last cash payment, but we're expecting to spend about $6 million this year in total in the China facility, $5 million or $6 million is what we had remaining for this expense. Is that right, Mark?

Mark Thomson

That's correct, and we incurred roughly $1.2 million in the first quarter.

Frank Guidone

So if you call it $5 million, we may have another $4 million of remaining expense associated with the China facility.

Operator

Our next question is from Gene Fox from Cardinal Capital Management.

Gene Fox – Cardinal Capital Management

Just want to make sure I had a couple of things right. Your interest expense looked a little bit low in the quarter. Was I right? And what should we use for that for the balance of the year?

Mark Thomson

As I stated, our incremental perspective borrowing rate is roughly 4.8%, because we enter into a generally threemonth rolling blocks which are tied to LIBOR? Based on our financial covenants, depending on our leverage ratio, our borrowing will be LIBOR, plus 2% or higher, depending upon the actual leverage. What you have reviewed is probably little south of 4.8%, and that is accurate.

Gene Fox – Cardinal Capital Management

D&A for the year, it looked a little high in Q1 relative to expectations. Can you give us some guidance there?

Frank Guidone

Our full year expectation on D&A is close to $15 million for consolidated depreciation and amortization, I think $14 million or $15 million. Our amortization is around $5 million, I think per the guidance, which would be around $9 million or $10 million in depreciation.

Gene Fox – Cardinal Capital Management

Last question. Practically, Frank, how much do you think you could save in terms of this delta on FX through implementing the strategy that you mentioned earlier?

Frank Guidone

Hedging? Hedging pricing is typically, we've got it baked in and said, look, the renminbi is going to move somewhere between 5% to 7% a year is what we've been assuming. And the oneyear forward pricing has generally been around there or higher. The current forward pricing, the most recent numbers I saw were around 3%. So our view is if we can lock in our exposure at 3% and we think it's going to move closer to 5% or 6%, it looks more favorable for us to do that now.

That just gives you an idea it's a daily moving target in terms of how these are priced. But just to give you an idea of what we're seeing as the opportunity here, it could be 3 points if we think doing nothing is a 6% change in currency and we can lock in and hedge at half that rate. Now, we wouldn't likely lock in 100% of our exposure, but some percentage of that.

Gene Fox – Cardinal Capital Management

Have you started doing anything yet, Frank, and should we hear about that next quarter?

Frank Guidone

We should hear about it next quarter. We've been evaluating different things and trying to decide the best strategy there, both in terms of who to go with and the amount to hedge. At this point, it looks very attractive.

Gene Fox – Cardinal Capital Management

In terms of your cash balance, obviously, you're generating good cash, what should we assume for debt paydown for this year or your use of cash?

Frank Guidone

I had been estimating, bear with me a second to make sure I don't give you a bad number, somewhere between $15 million and $20 million this year.

Gene Fox – Cardinal Capital Management

Of debt paydown?

Frank Guidone

Yes. That's revolver paydown. You have $500,000 per quarter on the principal.

Gene Fox – Cardinal Capital Management

So another $2 million in addition to that.

Operator

There are no further questions.

Frank Guidone

In closing, despite the soft sales, we felt the quarter was in line with our expectations. The gross margin improvement was very positive and the growing backlog supports our forecasted increase in sales for the second quarter. Adjusted EBITDA and free cash flow were strong, and we remain confident in our guidance of $45 million to $50 million in adjusted EBITDA for the full fiscal year.

As a reminder, Mark Thomson will be presenting at the upcoming CJS summer conference on Tuesday, August 12. Please contact CJS directly if you're interested in arranging a oneonone meeting. Thank you for your participation this morning and, operator, that will conclude our call.

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Source: Measurement Specialties, Inc. F1Q09 (Qtr End 06/30/08) Earnings Call Transcript

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