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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 

(Mark one)

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE ACT OF 1934

 

For the fiscal year ended March 31, 2013

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE ACT OF 1934

 

For the transition period from         to      

 

Commission File No: 0-11740

 


 

MESA LABORATORIES, INC.

(Exact name of registrant as specified in its charter)

 

Colorado

 

84-0872291

(State or other jurisdiction of

 

(I.R.S. Employer

Incorporation or organization)

 

Identification number)

 

12100 West Sixth Avenue

 

 

Lakewood, Colorado

 

80228

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (303) 987-8000

 

Securities registered under Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, no par value

 

NASDAQ

 

Securities registered under Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES o  NO x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES o  NO x

 

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of the chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES x  NO o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a
smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o  NO x

 

The aggregate market value as of September 28, 2012 (the last business day of the registrant’s most recently completed second fiscal quarter), of the voting and non-voting common equity of Mesa Laboratories Inc. held by non-affiliates (assuming, for this purpose, that all directors, officers and owners of 5% or more of the registrant’s common stock are deemed affiliates) computed by reference to the price at which the common equity was last sold ($48.38 per share) was $108,981,000.

 

The number of outstanding shares of the common stock as of May 31, 2013 was 3,395,847.

 

 

 



Table of Contents

 

Table of Contents

 

Forward Looking Statements

 

Part I

 

 

Item 1.

Business

1

Item 1A.

Risk Factors

5

Item 1B.

Unresolved Staff Comments

9

Item 2.

Properties

9

Item 3.

Legal Proceedings

9

Item 4.

Mine Safety Disclosures

9

Part II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

10

Item 6.

Selected Financial Data

12

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

21

Item 8.

Financial Statements and Supplementary Data

22

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

44

Item 9A.

Controls and Procedures

44

Item 9B.

Other Information

44

Part III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

45

Item 11.

Executive Compensation

49

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

57

Item 13.

Certain Relationships and Related Transactions, and Director Independence

57

Item 14.

Principal Accountant Fees and Services

58

Part IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

59

 

Signatures

 

 



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FORWARD-LOOKING STATEMENTS

 

This report contains information that may constitute “forward-looking statements.”  Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will” and similar expressions identify forward-looking statements, which generally are not historical in nature.  However, the absence of these words or similar expressions does not mean that a statement is not forward-looking.  All statements that address operating performance, events or developments that we expect or anticipate will occur in the future — including statements relating to revenue growth and statements expressing general views about future operating results — are forward-looking statements.  Management believes that these forward-looking statements are reasonable as and when made.  However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made.  We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.  In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections.  These risks and uncertainties include, but are not limited to, those described in Part I, “Item 1A.  Risk Factors” and elsewhere in this report and those described from time to time in our future reports to be filed with the Securities and Exchange Commission.

 

PART I

 

ITEM 1.  BUSINESS

 

Introduction

 

Mesa Laboratories, Inc. (we, us, our, the “Company” or “Mesa”) was incorporated under the laws of the State of Colorado on March 26, 1982.  We pursue a strategy of focusing primarily on quality control products, which are sold into niche markets that are driven by regulatory requirements.  We prefer markets that have limited competition where we can establish a commanding presence and achieve high gross margins.  We are organized into two divisions across four physical locations.  Our Instruments Division designs, manufactures and markets quality control instruments and disposable products utilized in connection with the healthcare, pharmaceutical, food and beverage, medical device, industrial hygiene, semiconductor and petrochemical industries. Our Biological Indicators Division manufactures and markets biological indicators and distributes chemical indicators used to assess the effectiveness of sterilization processes, including steam, gas, hydrogen peroxide and radiation, in the hospital, dental, medical device and pharmaceutical industries.

 

Our Lakewood, Colorado and Butler, New Jersey facilities manufacture our Instruments Division products, which include the DataTrace®, Medical, Bios, Torqo®, and Nusonics® brands.  Our Omaha, Nebraska and Bozeman, Montana locations manufacture our Biological Indicators Division products — the Mesa and Apex™ brands.

 

Our philosophy is to manufacture a quality product and provide a high level of on-going service for those products.  Our revenues come from two main sources — product sales, and parts and services.  Our strategic goals involve continuing to grow revenues and profits through three key strategies — a) improving our distribution channels, b) introducing new products to the market, and c) seeking out companies or product lines to acquire.

 

In May 2012, we completed a business combination (the “Bios Acquisition”) by acquiring specific assets and assuming certain liabilities of Bios International Corporation (“Bios”), a New Jersey corporation.

 

In April 2010, we acquired SGM Biotech, Inc. and the facility that houses the operations, located in Bozeman, Montana.  In December 2010, we acquired the biological indicator business of Apex Laboratories, Inc.

 

Our principal executive offices and corporate headquarters are located at 12100 West Sixth Ave., Lakewood, Colorado 80228, and our telephone number is 303-987-8000.  Our website is www.mesalabs.com.  The information contained or connected to our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this report.

 

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Instruments Division

 

Our Instruments Division designs, manufactures and markets quality control instruments and disposable products utilized in the healthcare, pharmaceutical, food and beverage, medical device, industrial hygiene, semiconductor and petrochemical industries.  Generally, our instrument products are used for testing, quality control, safety validation and regulatory compliance.  Our Instruments Division products include:  1) DataTrace data loggers, which are used in critical manufacturing and quality control processes in the food, pharmaceutical and medical device industries; 2) Medical meters and calibration solutions, which are used for quality control in dialysis clinics and dialysis machine manufacturing operations; 3) Gas flow calibration equipment, which is used for quality control, occupational health and safety, and environmental air monitoring in metrology labs, industrial hygiene and environmental air sampling; 4) Torqo torque testing systems, which are used to measure bottle cap tightness in the beverage and pharmaceutical industries; and 5) Nusonics concentration analyzers, pipeline interface detectors and flow meter products used in the chemical, food, pharmaceutical and plastics industries.

 

Data Loggers

 

Our data logger products are self-contained, wireless, high precision instruments that are used in critical manufacturing, quality control and validation applications.  They are used to measure temperature, humidity and pressure inside a process or a product during manufacturing.  In addition, data loggers can be used to validate the proper operation of laboratory or manufacturing equipment, either during its installation or for annual re-certifications.  The products consist of individual data loggers, a personal computer (“PC”) interface, software and various accessories.  A customer typically purchases a large number of data loggers along with a single PC interface and the software package.  In practice, using the PC interface, the user programs the loggers to collect environmental data at a pre-determined interval, places the data loggers in the product or process, and then collects stored process data from the data logger either through the PC interface or wirelessly via a radio link.  The user can then prepare tabular and graphical reports using the software.  Unique aspects of our data loggers are their ability to operate at elevated temperatures and in explosive environments — important differentiating factors in the marketplace and, consequently, they are used by companies to control their most critical processes, such as sterilization.  Industries utilizing the data loggers include food processing, pharmaceutical manufacturing, medical device companies, and contract sterilizers.

 

Medical Meters and Calibration Solutions

 

Our medical meters are used to test various parameters of the dialysis fluid (dialysate), and the proper calibration and operation of the dialysis machine.  Each measures some combination of temperature, pressure, pH and conductivity to ensure that the dialysate has the proper composition to promote the transfer of waste products from the blood to the dialysate.  The meters provide a digital readout that the patient, physician or technician uses to verify that the dialysis machine is working within prescribed limits and delivering properly prepared dialysate.  We manufacture two styles of medical meters; those designed for use by dialysis machine manufacturers and biomedical technicians, and those used primarily by dialysis nurses.  The meters for technicians are characterized by exceptional accuracy, stability and flexibility, and are used by the industry as the primary standard for the calibration of dialysis machines.  The meters designed for use by dialysis nurses are known primarily for their ease of use and incorporate a patented, built-in syringe sampling system.  These meters are used as the final quality control check on the dialysate just prior to starting a treatment.  In addition to the dialysate meters, we market a line of standard solutions for use in dialysis clinics for calibration and testing.  These standard solutions are regularly consumed by the dialysis clinics thus, along with calibration services, are less impacted by general economic conditions than instrument sales.  Customers that utilize these products include dialysis facilities, medical device manufacturers and biomedical service companies.

 

Gas Flow Calibration Equipment

 

Gas flow is defined as the volume of gas per unit of time through a system.  Our DryCal® technology, which measures gas, is considered to be a “primary standard” of gas flow, as it involves a direct measurement of volume and time.  Many other gas flow meters measure flow via indirect means of either a pressure drop across a flow restriction or through the transfer of heat from the gas flow.  Some of our devices may also incorporate measurement of pressure and temperature, which allows them to convert volumetric flow to mass flow.  Our gas flow calibration equipment provides the precise standards required by laboratories and industry in the design, development, manufacture, installation and calibration of various gas and mass flow meters, and air sampling devices.  Our flow meters are used in many industries where professionals require the superior accuracy, reliability and ease of operation that our flow meters provide, including 1) industrial hygienists, 2) calibration and

 

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research laboratories, 3) manufacturers who design, develop and manufacture gas and mass flow meters, and 4) industry engineering and manufacturing companies that utilize gas and mass flow meters.

 

Torque Testing Systems

 

Our automated torque testing system is a durable and reliable motorized cap torque analyzer used throughout the packaging industry.  With its on-board microprocessor, the torque system is easy to use, easy to set up and mostly maintenance free.  The primary advantages of our torque instruments are their high accuracy and long term consistency of measurement.  Unlike manual torque testing instruments, our motorized torque system eliminates the effects on the measurement results of different operators and different cap removal speeds.  With a motorized torque testing system, the force applied to a cap is precisely the same in each testing cycle, regardless of who may be operating the machine, or how strong they may be.  Our torque system provides the information that helps the packaging operation track events, and potential problems, during the manufacturing process so that corrections can be performed in a timely fashion.  Industries utilizing these instruments include food processors, beverage companies, pharmaceutical, and consumer product manufacturers.

 

Concentration Analyzers and Flow Meters

 

Our primary Nusonics brand ultrasonic fluid measurement products include flow meters and concentration monitors.  While the total market for flow meters is very large, our flow meters best serve applications where cleanliness and resistance to corrosives are required, such as water treatment, chemical processing and heating, ventilation and air conditioning (“HVAC”) applications.  The concentration monitor component of the product line consists of pipeline interface detectors for petrochemical applications and concentration analyzers for a wider variety of industry application, such as chemical, food, pharmaceutical and plastics processes.  The ultrasonic products have been subject to strong competition in the marketplace in recent years, primarily from larger, well established process control companies.  Consequently, sales of these products have decreased and currently represent a minor portion of our total revenue.  Today, most sales are made to existing customers who are replacing or adding to their current infrastructure, and it is not expected that we will make significant investments in these products in the future.

 

Biological Indicators Division

 

Our Biological Indicators Division manufactures and markets biological indicators and distributes chemical indicators used to assess the effectiveness of sterilization processes, including steam, gas (such as Ethylene Oxide or Chlorine Dioxide), hydrogen peroxide and radiation, in the hospital, dental, medical device and pharmaceutical industries.  Our biological indicators are registered medical devices manufactured under International Standards Organization (“ISO”) 13485 controlled processes.  They are developed and used according to the Association for the Advancement of Medical Instrumentation (“AAMI”) guidelines, which are adopted as the worldwide standard under ISO.

 

Biological indicators consist of resistant spores of certain microorganisms that are applied on a convenient substrate, such as a small piece of filter paper.  The spores are well characterized in terms of numbers and resistance to sterilization.  In use, the biological indicator is exposed to a sterilization process and then tested to determine the presence of surviving organisms.  Our biological indicators include a) spore strips, which require post-processing transfer to a growth media, b) self-contained products, which have the growth media already pre-packaged in crushable ampoules, and c) culture media.  Chemical indicators are similar to biological indicators, except that a chemical change (generally determined by color) is used to assess the exposure to sterilization conditions.  Biological indicators and chemical indicators are often used together to monitor processes.  Biological indicators are used to validate equipment and monitor the effectiveness of a process in any industrial or healthcare setting which uses sterilization. Key markets include healthcare, such as dental offices and hospitals, and industrial, such as medical device and pharmaceutical manufacturers.

 

Our biological indicators are distinguished in the marketplace by their high level of quality, consistency and flexibility.  A variety of different formats allows the biological indicators to be used in many different types of processes and products.  For example, the simple spore strips are used most often in the small table-top steam sterilizers in dental offices, while a more complex self-contained biological indicator may be used by a medical device manufacturer to assure the sterility in a complex ethylene oxide sterilization process.  In either case, the number of spores contained on the carrier and the resistance of the spores to the sterilization process must be well characterized in order to accurately assess the effectiveness of sterilization.  During manufacturing, extensive quality control steps are used to insure that the microorganism spores are well characterized and their resistance is known following placement on the target carrier.

 

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Market Factors

 

Product sales are dependent on several factors, including general economic conditions, both domestic and international, customer capital spending trends, competition, introduction of new products and acquisitions.  Biological indicator products are disposable and are used on a routine basis for quality control, thus product sales are less sensitive to general economic conditions.  Instrument products have a longer life, and their purchase by our customers is somewhat discretionary, so sales are more sensitive to general economic conditions.  Parts and service demand is driven by our customers’ quality control and regulatory environments, which require periodic repair and recalibration or certification of our instrument products.  We typically evaluate costs and pricing annually.  Our policy is to price our products competitively and, where possible, we try to pass along cost increases in order to maintain our margins.  As part of the integration of our previous biological indicator acquisitions we have adjusted prices to achieve price parity for similar products.

 

Manufacturing

 

We conduct research, manufacturing, and support of our Instruments Division products from our facilities in Lakewood, Colorado and Butler, New Jersey.  Our instrument products are manufactured primarily by assembling the products from purchased components and calibrating the final products prior to release.  Our torque testing products previously were manufactured in Amherst, New Hampshire until December 2010, when they were permanently moved to the Lakewood facility.  Facilities in Bozeman, Montana and Omaha, Nebraska are used for the Biological Indicators Division.  Our biological indicator products are manufactured by growing microbiological spores from raw materials, forming the finished products and testing the finished biological indicators using established quality control tests.  The Apex brand biological indicator products were manufactured at the Apex Laboratories facility in Sanford, North Carolina until April 2011, when manufacturing commenced at our Bozeman, Montana operations.

 

Most of the materials and components used in our product lines are available from a number of different suppliers.  We generally maintain multiple sources of supply, but are dependent on a single source for certain items.  We believe that alternative sources could be developed, if required, for present single supply sources.  Although our dependence on these single supply sources may involve a degree of risk, to date we have been able to acquire sufficient stock to meet our production requirements.

 

Marketing and Distribution

 

Domestically, we generate sales to end users through our sales and marketing staff and distributors.  We use approximately 275 distributors throughout Europe, Africa, Asia, South America, Australia, Canada and Central America for international sales and distribution.  Sales promotions include trade shows, direct mail campaigns, internet and other digital forms of advertising.

 

Our Instruments Division marketing effort is focused on offering quality products to our customers that will aid them in containing cost, improving the quality of their products and services, and helping them meet their regulatory requirements.  Customers primarily include manufacturers of foods, beverages, pharmaceutical products, medical devices, contract sterilizing services and dialysis clinics.

 

Our Biological Indicators Division marketing focuses on providing quality test products in a variety of different formats, which minimize incubation and test result time.  Customers include companies providing sterility assurance testing to the dental office market, hospitals, contract sterilizing services and various industrial users involved in pharmaceutical and medical device manufacturing.

 

As of and for the years ended March 31, 2013, 2012 and 2011, no individual customer represented more than 10% of our accounts receivable or revenues.

 

Competition

 

Our products compete across several industries with a variety of companies, many of which are well established, with substantially greater capital resources and larger research and development capabilities.  Furthermore, many of these companies have established product lines and a significant operating history.  Accordingly, we may be at a competitive disadvantage with some competitors due to their respective size and market presence.

 

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Companies with which our Instruments Division products compete include the Myron L Company, IBP Medical GmbH, GE Kaye, Ellab, TMI Orion, SureTorque, Mecmesin and Steinfurth.  Our Biological Indicators Division products compete with 3M, Terragene, NAMSA and Steris, among others.

 

Research and Development

 

We are committed to an active research and development program dedicated to innovating new products and improving the quality and performance of our existing products.  We spent $2,011,000, $1,534,000 and $1,441,000 for the years ended March 31, 2013, 2012 and 2011, respectively, on research and development activities, including amounts capitalized as intangible assets.

 

Government Regulation

 

While our quality system and manufacturing processes are generally the same throughout the Instruments Division, specific products are compliant under ISO 13485, ISO 17025 and certain U.S. Federal regulations.  Compliance requires us to obtain third party certification for these products.

 

Several products in both the Instruments and Biological Indicators Divisions are medical devices subject to the provisions of the Federal Food, Drug and Cosmetic Act, as amended by the Medical Device Amendments of 1976 (hereinafter referred to as the “Act”).  The Act requires any company proposing to market a medical device to notify the Food and Drug Administration (“FDA”) of its intention at least ninety days before doing so and in such notification must advise the FDA as to whether the device is substantially equivalent to a device marketed prior to May 28, 1976.  We have received permission from the FDA to market all of the products requiring such permission.

 

Some of our facilities are subject to FDA regulations and inspections, which may be time-consuming and costly.  This includes on-going compliance with the FDA’s current Good Manufacturing Practices regulations that require, among other things, the systematic control of manufacture, packaging and storage of products intended for human use.  Failure to comply with these practices renders the product adulterated and could subject us to an interruption of manufacturing and selling these products, and possible regulatory action by the FDA.

 

The manufacture and sale of medical devices is also regulated by some states.  Although there is substantial overlap between state regulations and the regulations of the FDA, some state laws may apply.  We do not anticipate that complying with state regulations, however, will create any significant problems.  Foreign countries also have laws regulating medical devices sold in those countries, which may cause us to expend additional resources on compliance.

 

Employees

 

On March 31, 2013, we had 215 employees, of which 139 are employed for manufacturing and quality assurance, 15 for research and development, 38 for sales and marketing, and 23 for administration.

 

ITEM 1A.  RISK FACTORS

 

In addition to the other information set forth in this Annual Report on Form 10-K and other documents we filed with the SEC, you should carefully consider the following factors, which could materially affect our business, financial condition or results of operations in future periods.  The risks and uncertainties described below are those that we have identified as material, but are not the only risks and uncertainties facing us.  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.

 

Conditions in the global economy, the markets we serve and the financial markets may adversely affect our business and results of operations.

 

Our business is sensitive to general economic conditions, both inside and outside the United States.  Slower global economic growth, credit market crisis, high levels of unemployment, reduced levels of capital expenditures, government deficit reduction, sequestration and other austerity measures and other challenges affecting the global economy could affect us and our distributors, customers and suppliers, including having the effect of:

 

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·                  reducing demand for our products and services, limiting financing available to our customers, increasing order cancellations and resulting in longer sales cycles;

 

·                  increasing the difficulty in collecting accounts receivable and the risk of excess and obsolete inventories; and

 

·                  increasing the risk that counterparties to our contractual arrangements will become insolvent or otherwise unable to fulfill their contractual obligations, which could increase the risks identified above.

 

If slower growth in the global economy or in any of the markets we serve continues for a significant period, if there is a significant deterioration in the global economy or such markets, or if improvements in the global economy do not benefit the markets we serve, our business and results of operations could be adversely affected.

 

We face competition and if we are unable to compete effectively, we may experience decreased demand and decreased market share.

 

The markets for some of our current and potential products are competitive.  Because of the range of products we sell and the variety of markets we serve, we encounter a wide variety of competitors, including several that possess both larger sales forces and more capital resources.  In order to compete effectively, we must retain longstanding relationships with major customers, continue to grow our business by establishing relationships with new customers, continually develop new products and services to maintain and expand our brand recognition and leadership position in various product and service categories, and penetrate new markets, including in developing countries.  Our failure to compete effectively and/or pricing pressures resulting from competition may adversely impact our results of operations.

 

Changing industry trends may affect our results of operations.

 

Various changes within the industries we serve may limit future demand for our products and may include the following:

 

·                  changes in dialysis reimbursements;

 

·                  mergers within the dialysis provider industry, concentrating our medical meter and solutions sales with a few, large customers;

 

·                  mergers within other industries we serve, making us more dependent upon fewer, larger customers for our sales;

 

·                  decreased product demand, driven by changes in our customer’s regulatory environments or standard industry practices; and

 

·                  price competition for key products.

 

Our growth depends in part on the timely development and commercialization, and customer acceptance, of new products and the efforts of third party distributors.

 

Our growth depends on the acceptance of our products in the marketplace, the penetration achieved by the companies which we sell to, and rely on, to distribute and represent our products, and our ability to introduce new and innovative products that meet the needs of the various markets we serve.  We can offer no assurance that we will be able to continue to introduce new and innovative products, that the products we introduce, or have introduced, will be widely accepted by the marketplace, or that the companies that we contract with to distribute and represent our products will continue to successfully penetrate our various markets.  Our failure to continue to introduce new products or gain widespread acceptance of our products could adversely affect our results of operations.  In order to successfully commercialize our products in new markets, we will need to enter into distribution arrangements with companies that can successfully distribute and represent our products into various markets.

 

Any inability to consummate acquisitions at our historical rate and at appropriate prices could negatively impact our growth rate and stock price.

 

We may not be able to consummate acquisitions at rates similar to the past, which could adversely impact our growth rate and our stock price.  Promising acquisitions are difficult to identify and complete for a number of reasons, including high

 

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valuations, the availability of affordable funding in the capital markets and the need to satisfy applicable closing conditions.  In addition, competition for acquisitions in our current and anticipated business areas is significant and may result in higher purchase prices.  Changes in accounting or regulatory requirements, or instability in the credit markets could also adversely impact our ability to consummate acquisitions.  Our ability to grow revenues, earnings and cash flow at or above our historic rates depends in part upon our ability to identify and successfully acquire and integrate businesses at appropriate prices and realize anticipated synergies.

 

Our acquisition of businesses could negatively impact our results of operations.

 

As an important part of our business strategy, we acquire businesses, some of which may be material.  Please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional details.  Our acquisitions involve a number of financial, accounting, managerial, operational, legal and other risks and challenges, including the following, any of which could adversely affect our results of operations:

 

·                  any acquired business, technology, service or product could under-perform relative to our expectations and the price that we paid for it, or not perform in accordance with our anticipated timetable;

 

·                  we may incur or assume significant debt in connection with our acquisitions;

 

·                  acquisitions could cause our results of operations to differ from our own or the investment community’s expectations in any given period, or over the long-term;

 

·                  pre-closing and post-closing acquisition-related earnings charges could adversely impact our results of operations in any given period, and the impact may be substantially different from period to period;

 

·                  acquisitions could create demands on our management, operational resources and financial and internal control systems that we are unable to effectively address, or for which we may incur additional costs;

 

·                  we could experience difficulty in integrating personnel, operations, financial and other systems, and in retaining key employees and customers;

 

·                  we may be unable to achieve cost savings or other synergies anticipated in connection with an acquisition;

 

·                  we may assume by acquisition unknown liabilities, known contingent liabilities that become realized, known liabilities that prove greater than anticipated, internal control deficiencies, or exposure to regulatory sanctions resulting from the acquired company’s activities.  The realization of any of these liabilities or deficiencies may increase our expenses, adversely affect our financial position or cause us to fail to meet our public financial reporting obligations;

 

·                  in connection with acquisitions, we often enter into post-closing financial arrangements such as purchase price adjustments, earn-out obligations and indemnification obligations, which may have unpredictable financial results; and

 

·                  as a result of our acquisitions, we have recorded significant goodwill and other intangible assets on our balance sheet.  If we are not able to realize the value of these assets, we may be required to incur charges relating to the impairment of these assets, which could materially impact our results of operations.

 

The contingent consideration from the Bios Acquisition may negatively impact our available cash and results from operations.

 

As part of the Bios Acquisition, we are required to make a contingent consideration payment based on revenue growth related to the acquired assets over a three year earn-out period.  The ultimate amount we pay may differ significantly from the liability we recorded at the time of the acquisition.  If we are required to pay more than the amount initially recorded, the difference will be recorded as expense in our statement of income, which could materially impact our results of operations.

 

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If we do not or cannot adequately protect our intellectual property, or if third parties infringe our intellectual property rights, we may suffer competitive injury or expend significant resources enforcing our rights.

 

We own numerous patents, trademarks, copyrights, trade secrets and other intellectual property and licenses to intellectual property owned by others, which in aggregate are important to our business.  The intellectual property rights that we obtain, however, may not be sufficiently broad or otherwise may not provide us a significant competitive advantage, and patents may not be issued for pending or future patent applications owned by or licensed to us.  In addition, the steps that we and our licensors have taken to maintain and protect our intellectual property may not prevent it from being challenged, invalidated, circumvented or designed-around, particularly in countries where intellectual property rights are not highly developed or protected.  In some circumstances, enforcement may not be available to us because an infringer has a dominant intellectual property position or for other business reasons, or countries may require compulsory licensing of our intellectual property.  Our failure to obtain or maintain intellectual property rights that convey competitive advantage, adequately protect our intellectual property, detect or prevent circumvention or unauthorized use of such property, and the cost of enforcing our intellectual property rights could adversely impact our competitive position and results of operations.

 

We also rely on nondisclosure and noncompetition agreements with employees, consultants and other parties to protect, in part, our trade secrets and other proprietary rights.  There can be no assurance that these agreements will adequately protect our trade secrets and other proprietary rights, will not be breached, that we will have adequate remedies for any breach, that others will not independently develop substantially equivalent proprietary information, or that third parties will not otherwise gain access to our trade secrets or other proprietary rights.

 

Several of our products are extensively regulated, which could delay product introduction or halt sales.

 

The process of obtaining and maintaining required regulatory approvals is lengthy, expensive and uncertain.  Although we have not experienced any substantial regulatory delays to date, we can offer no assurance that delays will not occur in the future, which could have a significant adverse effect on our ability to introduce new products on a timely basis.  Regulatory agencies periodically inspect our manufacturing facilities to ascertain compliance with “good manufacturing practices” and can subject approved products to additional testing and surveillance programs.  Failure to comply with applicable regulatory requirements can, among other things, result in fines, suspension of regulatory approvals, product recalls, operating restrictions and criminal penalties.  While we believe that we are currently in compliance, if we fail to comply with regulatory requirements it could have an adverse effect on our results of operations and financial condition.

 

Product defects and unanticipated use or inadequate disclosure with respect to our products could adversely affect our business, reputation and our results of operations.

 

Manufacturing or design defects in, unanticipated use of, safety or quality issues with respect to, or inadequate disclosure of risks relating to the use of products that we make or sell (including in products or components that we source from third parties) can lead to personal injury or property damage.  These events could lead to recalls or safety alerts relating to our products, and result in product liability claims being brought against us.  Recalls and product liability claims can result in significant costs, as well as negative publicity and damage to our reputation that could reduce demand for our products and have an adverse effect on our results of operations and financial condition.

 

We may be required to recognize impairment charges that could materially affect our results of operations.

 

We assess our goodwill and other intangible assets, and our other long-lived assets as and when required by accounting principles generally accepted in the United States (“GAAP”) to determine whether they are impaired.  If they are impaired, we would record appropriate impairment charges.  It is possible that we may be required to record significant impairment charges in the future and, if we do so, our results of operations could be materially adversely affected.

 

Changes in accounting standards could affect our reported financial results.

 

New accounting standards or pronouncements that may become applicable to our Company from time to time, or changes in the interpretation of existing standards and pronouncements, could have a significant effect on our reported results of operations for the affected periods.

 

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Table of Contents

 

Our business is subject to sales tax in numerous states

 

The application of indirect taxes, such as sales tax, is a complex and evolving issue.  A company must collect and remit state sales tax from its customers if the company has “nexus” in a particular state.  The determination of nexus varies by state and often requires knowledge of each state’s sales tax case law.  The application and implementation of existing, new or future laws could change the states in which we collect and remit sales taxes.  Historically, if we have not properly identified states in which we have nexus, we could be held responsible for payment of sales taxes for the years in which it is determined we had nexus.  We have determined that we have an obligation for sales taxes in numerous states.  The ultimate amount due will depend upon a number of factors, including the amount of sales that were made to customers who already paid the tax or who are exempt, the number of years of exposure, and any penalties and interest.  We continue to evaluate our exposure in additional states, but at this time the amount of the liability is not estimable.  The resolution of these sales tax obligations is likely to have an adverse effect on our results of operations.

 

We are utilizing variable rate financing.

 

In February 2012, we entered into a three year agreement (the “Credit Facility”) for a $20,000,000 revolving line of credit (“Line of Credit”) and up to $1,000,000 of letters of credit.  Under the Credit Facility, indebtedness bears interest at either: (1) LIBOR plus an applicable margin, ranging from 1.25% to 2.00%, or (2) the bank’s commercial bank floating rate (“CBFR”), which is the greater of the bank’s prime rate or one month LIBOR + 2.50%, adjusted down, from 1.25% to 0.50%.  A change in interest rate market conditions could increase our interest costs in the future and may have an adverse effect on our results of operations.

 

We may face continuing challenges in complying with certain sections of the Sarbanes-Oxley Act.

 

Like many public companies, we face challenges in complying with the internal control requirements of the Sarbanes-Oxley Act (Section 404).  Under current frameworks, compliance in areas such as separation of duties, information system controls, etc. may prove problematic for a smaller company with limited human resources.  We may also be forced to incur on-going expense in order to comply with the law under current control frameworks or if the framework changes.  These expenses may have a material adverse effect on our results of operations.

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

None

 

ITEM 2.  PROPERTIES

 

Set forth below is a listing of our facilities.  All locations have manufacturing, research and development, marketing and administrative functions.

 

Location

 

Operations

 

Square Feet

 

 

 

Lakewood, Colorado

 

Instruments and corporate headquarters

 

40,000

 

Owned

 

Butler, New Jersey

 

Instruments

 

13,900

 

Leased

 

Bozeman, Montana

 

Biological indicators

 

21,500

 

Owned

 

Omaha, Nebraska

 

Biological indicators

 

28,000

 

Owned

 

 

ITEM 3.  LEGAL PROCEEDINGS

 

Not applicable.

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

 

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Table of Contents

 

PART II

 

ITEM 5.  MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is traded on the Nasdaq Global Market (“NASDAQ”) under the symbol “MLAB.”

 

The following table sets forth the high and low market prices per share for our common stock, as reported by NASDAQ, and dividend per share information:

 

Quarter Ended

 

High

 

Low

 

Dividends Per Share

 

June 30, 2012

 

$

51.45

 

$

38.64

 

$

0.13

 

September 30, 2012

 

48.94

 

40.00

 

0.13

 

December 31, 2012

 

52.00

 

45.10

 

0.14

 

March 31, 2013

 

57.00

 

49.38

 

0.14

 

 

Quarter Ended

 

High

 

Low

 

Dividends Per Share

 

June 30, 2011

 

$

32.06

 

$

28.90

 

$

0.12

 

September 30, 2011

 

37.45

 

32.40

 

0.12

 

December 31, 2011

 

41.90

 

33.90

 

0.13

 

March 31, 2012

 

58.50

 

41.24

 

0.13

 

 

While we have paid dividends to holders of our common stock on a quarterly basis since 2003, the declaration and payment of future dividends will depend on many factors, including, but not limited to, our earnings, financial condition, business development needs and regulatory considerations, and is at the discretion of our Board of Directors.

 

The NASDAQ Global Market quotations set forth herein reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 

As of March 31, 2013, there were approximately 183 record holders of our common stock.  This amount does not include “street name” holders or beneficial holders of our common stock, whose holder of records are banks, brokers and other financial institutions.

 

During the year ended March 31, 2013, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.

 

We made the following repurchases of our common stock, by month, within the fourth quarter of the year covered by this report:

 

 

 

Shares Purchased

 

Avg. price Paid

 

Total Shares
Purchased as
Part of Publicly
Announced Plan

 

Remaining
Shares to
Purchase Under
Plan

 

January 1 – 31, 2013

 

 

$

 

156,412

 

143,588

 

February 1 – 29, 2013

 

3,110

 

52.56

 

159,522

 

140,478

 

March 1 – 31, 2013

 

 

 

159,522

 

140,478

 

Total

 

3,110

 

52.56

 

 

 

 

 

 

On November 7, 2005, our Board of Directors adopted a share repurchase plan which allows for the repurchase of up to 300,000 of our common shares.  This plan will continue until the maximum is reached or the plan is terminated by further action of the Board of Directors.

 

We have certain equity compensation plans, all of which were approved by our stockholders.  As of March 31, 2013, 416,125 shares of common stock may be issued upon exercise of outstanding options, with a weighted-average exercise price of $29.87 and 310,820 shares are available for future issuance under the plans.  Please see notes contained in “Item 8.  Financial Statements and Supplementary Data” of this report for additional details.

 

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Table of Contents

 

Set forth below is a line graph comparing, for the period March 31, 2008 through March 31, 2013, the cumulative total stockholder return on our common stock against the cumulative total return of (a) the S&P Composite Stock Index and (b) a self-selected peer group, comprised of the following companies: Danaher Corp., ARCA Biopharma, Inc., Steris Corp., MOCON Inc., Utah Medical Products, Inc., Cantel Medical Corp., Rochester Medical Corporation, Merit Medical Systems, Inc., Transcat Inc., Electro-Sensors Inc., Rudolph Technologies Inc., and Measurement Specialties Inc.  The graph shows the value at March 31 of each year, assuming an original investment of $100 in each and reinvestment of cash dividends.

 

GRAPHIC

 

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Table of Contents

 

ITEM 6.  SELECTED FINANCIAL DATA

 

The following selected financial data should be read in conjunction with “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations” and financial statements and notes hereto contained in “Item 8.  Financial Statements and Supplementary Data” of this report.

 

 

 

As of and for the Year Ended March 31,

 

(In thousands, except per share data)

 

2013

 

2012

 

2011

 

2010

 

2009

 

Cash and cash equivalents

 

$

4,006

 

$

7,191

 

$

3,546

 

$

10,471

 

$

9,111

 

Working capital

 

$

14,793

 

$

14,899

 

$

7,387

 

$

18,530

 

$

17,109

 

 

 

 

 

 

 

 

 

 

 

 

 

Average return on:

 

 

 

 

 

 

 

 

 

 

 

Stockholder investments (1)

 

17

%

20

%

18

%

16

%

19

%

Assets

 

13

%

16

%

15

%

15

%

17

%

Invested capital (2)

 

18

%

21

%

21

%

24

%

26

%

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

46,435

 

$

39,616

 

$

34,227

 

$

23,087

 

$

22,649

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

$

28,862

 

$

23,511

 

$

19,568

 

$

13,194

 

$

13,817

 

Gross margin

 

62

%

59

%

57

%

57

%

61

%

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,450

 

$

7,919

 

$

6,183

 

$

4,769

 

$

4,790

 

Net profit margin

 

18

%

20

%

18

%

21

%

21

%

 

 

 

 

 

 

 

 

 

 

 

 

Net income per diluted share

 

$

2.35

 

$

2.29

 

$

1.86

 

$

1.45

 

$

1.48

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before amortization of intangible assets, net of tax

 

$

10,144

 

$

8,876

 

$

6,933

 

$

5,052

 

$

5,103

 

 


(1)                                 Average return on stockholder investment is calculated by dividing total net income by the average of end and beginning of year total stockholders’ equity.

(2)                                 Average return on invested capital (invested capital = total assets – current liabilities – cash and cash equivalents) is calculated  by dividing total net income by the average of end and beginning of year invested capital.

 

Reconciliation of Non-GAAP Measure

 

Earnings before amortization of intangible assets, net of tax, is used by management as a supplemental performance and liquidity measure, primarily to exclude the impact of acquisition-related intangible assets in order to compare current financial performance to historical performance, assess the ability of our assets to generate cash and the evaluation of potential acquisitions.

 

Earnings before amortization of intangible assets, net of tax, should not be considered an alternative to, or more meaningful than, net income, operating income, cash flow from operating activities or any other measure of financial performance presented in accordance with GAAP as measures of operating performance or liquidity.

 

The following table sets forth our reconciliation of earnings before amortization of intangible assets, net of tax, a non-GAAP measure:

 

 

 

Year Ended March 31,

 

(In thousands)

 

2013

 

2012

 

2011

 

2010

 

2009

 

Net income

 

$

8,450

 

$

7,919

 

$

6,183

 

$

4,769

 

$

4,790

 

Amortization of intangible assets, net of tax

 

1,694

 

957

 

750

 

283

 

313

 

 

 

$

10,144

 

$

8,876

 

$

6,933

 

$

5,052

 

$

5,103

 

 

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Table of Contents

 

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

We pursue a strategy of focusing primarily on quality control products, which are sold into niche markets that are driven by regulatory requirements.  We prefer markets that have limited competition where we can establish a commanding presence and achieve high gross margins.  We are organized into two divisions across four physical locations.  Our Instruments Division designs, manufactures and markets quality control instruments and disposable products utilized in connection with the healthcare, pharmaceutical, food and beverage, medical device, industrial hygiene, semiconductor and petrochemical industries.  Our Biological Indicators Division manufactures and markets biological indicators and distributes chemical indicators used to assess the effectiveness of sterilization processes, including steam, gas, hydrogen peroxide and radiation, in the hospital, dental, medical device and pharmaceutical industries.  We follow a philosophy of manufacturing a high quality product and providing a high level of on-going service for those products.

 

Our revenues come from two main sources – products sales, and parts and services.  Product sales are dependent on several factors, including general economic conditions, both domestic and international, customer capital spending trends, competition, introduction of new products and acquisitions.  Biological indicator products are disposable and are used on a routine basis for quality control, thus product sales are less sensitive to general economic conditions.  Instrument products have a longer life, and their purchase by our customers is somewhat discretionary, so sales are more sensitive to general economic conditions.  Parts and service demand is driven by our customers’ quality control and regulatory environments, which require periodic repair and recalibration or certification of our instrument products.  We typically evaluate costs and pricing annually.  Our policy is to price our products competitively and, where possible, we try to pass along cost increases in order to maintain our margins.  As part of the integration of our previous biological indicator acquisitions we have been adjusting prices to achieve price parity for similar products.

 

Gross profit is affected by our product mix, manufacturing efficiencies and price competition.  Historically, as we have integrated our acquisitions and taken advantage of manufacturing efficiencies, our gross margins for some of the products have improved.  There are, however, differences in gross margins between different product lines, and ultimately the mix of sales may continue to impact our overall gross margin.

 

Selling expense is driven primarily by labor costs, including salaries and commissions.  Accordingly, it may vary with sales levels.  Labor costs and amortization of intangible assets drive 70-80% of general and administrative expense.  Research and development expense is predominantly comprised of labor costs and third party consultants.

 

In May 2012, we completed the Bios Acquisition by acquiring specific assets and assuming certain liabilities of Bios, a New Jersey corporation.  The purchase price for the acquired net assets was $16,660,000 and potential contingent consideration based on revenue growth over a three year earn-out period.  The contingent consideration arrangement requires us to pay Bios if cumulative revenues related to the acquisition for the three years subsequent to the acquisition exceed $22,127,000.  The potential undiscounted future payment that we could be required to make ranges from $0 to $6,710,000.  We borrowed $11,000,000 under our Line of Credit to finance the acquisition, with the balance being paid from available cash.  On December 21, 2010, we acquired the assets associated with the biological indicator line of products of Apex Laboratories, Inc. (the “Apex Acquisition”) for $6,490,000.  On April 27, 2010, we acquired all of the common stock of SGM Biotech, Inc. (the “SGM Acquisition”), another biological indicator business, for $12,083,000.

 

General Trends and Outlook

 

Acquisitions in May 2012, December 2010, and April 2010 impacted our current assets and working capital, as we used available cash and incurred debt to complete those transactions.  Our key indicators were impacted following each acquisition as we integrated the acquired operations.  Revenues, gross profit and net income have all increased due to the acquisitions and organic growth.

 

Our strategic objectives include both growth organically and through further acquisitions.  During the year ended March 31, 2013, we continued to build our infrastructure to prepare for future growth, including the addition of key personnel to our operations, research and development, and finance teams.  We also invested in upgrading our information systems and intend to continue doing so.

 

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Table of Contents

 

The markets for our biological indicators remain strong, as the disposable nature of these products makes them less sensitive to general economic conditions.  The worldwide market for biological indicators is growing, as more countries focus on verifying the effectiveness of sterilization processes.  Recent general economic conditions have slowed the organic growth of our instruments business, due to the discretionary nature of these products.  Demand for our instruments products, however, is still strong and we strive to maintain or grow revenue going forward.

 

We are working on several research and development projects that, if completed, may result in new products for both existing customers and in new markets.  We are hopeful that both our Biological Indicators and Instruments Divisions will have new products available for sale in the coming year.

 

Results of Operations

 

The following table sets forth, for the periods indicated, condensed statements of income data.  The table and the discussion below should be read in conjunction with the accompanying financial statements and the notes thereto appearing elsewhere in “Item 8. Financial Statements and Supplementary Data” (in thousands, except percent data):

 

 

 

Year ended March 31,

 

2013 vs 2012

 

2012 vs 2011

 

 

 

2013

 

2012

 

2011

 

Change

 

Percent
Change

 

Change

 

Percent
Change

 

Revenues

 

$

46,435

 

$

39,616

 

$

34,227

 

$

6,819

 

17

%

$

5,389

 

16

%

Cost of revenues

 

17,573

 

16,105

 

14,659

 

1,468

 

9

%

1,446

 

10

%

Gross profit

 

$

28,862

 

$

23,511

 

$

19,568

 

$

5,351

 

23

%

$

3,943

 

20

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit margin

 

62

%

59

%

57

%

3

%

 

 

2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

$

4,630

 

$

3,909

 

$

3,687

 

$

721

 

18

%

$

222

 

6

%

General and administrative

 

9,117

 

5,416

 

4,576

 

3,701

 

68

%

840

 

18

%

Research and development

 

2,011

 

1,359

 

1,441

 

652

 

48

%

(82

)

(6

)%

Impairment of intangibles

 

 

350

 

 

(350

)

N/A

 

350

 

N/A

 

 

 

$

15,758

 

$

11,034

 

$

9,704

 

$

4,724

 

43

%

$

1,330

 

14

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,450

 

$

7,919

 

$

6,183

 

$

531

 

7

%

$

1,736

 

28

%

Net profit margin

 

18

%

20

%

18

%

(2

)%

 

 

2

%

 

 

 

Revenues

 

The following table summarizes our revenues by source (in thousands, except percent data):

 

 

 

Year ended March 31,

 

2013 vs 2012

 

2012 vs 2011

 

 

 

2013

 

2012

 

2011

 

Change

 

Percent
Change

 

Change

 

Percent
 Change

 

Biological Indicators:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

19,739

 

$

19,083

 

$

15,688

 

$

656

 

3

%

$

3,395

 

22

%

Other

 

1,725

 

1,339

 

1,134

 

386

 

29

%

205

 

18

%

 

 

21,464

 

20,422

 

16,822

 

1,042

 

5

%

3,600

 

21

%

Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

15,612

 

11,313

 

10,427

 

$

4,299

 

38

%

$

886

 

8

%

Other

 

9,359

 

7,881

 

6,978

 

1,478

 

19

%

903

 

13

%

 

 

24,971

 

19,194

 

17,405

 

5,777

 

30

%

1,789

 

10

%

Total

 

$

46,435

 

$

39,616

 

$

34,227

 

$

6,819

 

17

%

$

5,389

 

16

%

 

Year ended March 31, 2013 versus March 31, 2012

 

Biological Indicator revenues increased as a result of continued organic growth, achieved through existing customers, expansion into new markets and price increases.  Instruments revenues increased as a result of the Bios Acquisition, while legacy Instruments product line revenues remained relatively unchanged.

 

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Table of Contents

 

Effective January 1, 2013, we became subject to a 2.3% medical device excise tax on the domestic sales of a majority of our medical instruments and biological indicators.  Where possible, we renegotiated prices with our customers to recover this additional cost.  We can offer no assurance that we will be able to successfully recover the full amounts paid as medical device excise tax.

 

Year ended March 31, 2012 versus March 31, 2011

 

Approximately 50% of the Biological Indicators revenue growth of 21% was organic, due primarily to expanding markets.  The Apex Acquisition contributed a full year of revenues for the year ended March 31, 2012, as compared to three months of revenue for the year ended March 31, 2011.  The additional nine months of Biological Indicators revenue contributed approximately $1,780,000, or the remaining 50% of the growth.  The Instruments revenue increased as a result of organic growth, as well as customers upgrading or expanding as economic uncertainties from the year ended March 31, 2011 lessened.

 

Gross Profit

 

The following table summarizes our gross profit by segment (in thousands, except percent data)

 

 

 

Year ended March 31,

 

2013 vs 2012

 

2012 vs 2011

 

 

 

2013

 

2012

 

2011

 

Change

 

Percent
Change

 

Change

 

Percent
Change

 

Biological Indicators

 

$

12,365

 

$

11,236

 

$

8,918

 

$

1,129

 

10

%

$

2,318

 

26

%

Gross profit margin

 

58

%

55

%

53

%

3

%

 

 

2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Instruments

 

16,497

 

12,275

 

10,650

 

$

4,222

 

34

%

1,625

 

15

%

Gross profit margin

 

66

%

64

%

61

%

2

%

 

 

3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross profit

 

$

28,862

 

$

23,511

 

$

19,568

 

$

5,351

 

23

%

$

3,943

 

20

%

Gross profit margin

 

62

%

59

%

57

%

3

%

 

 

2

%

 

 

 

Year ended March 31, 2013 versus March 31, 2012

 

Biological Indicator gross profit increased as a result of improved manufacturing efficiencies, driven by successfully completing the integration of the SGM Acquisition and Apex Acquisition, and increased sales.  Instruments gross profit increased as a result of the Bios Acquisition, while legacy Instruments product line gross profit remained relatively unchanged.

 

Year ended March 31, 2012 versus March 31, 2011

 

Biological Indicator gross profit increased due to the Apex Acquisition in December 2010 and organic revenue growth.  The improvement in Instruments gross profit was driven by relatively flat fixed costs with increased sales volumes, coupled with manufacturing efficiencies.  We also integrated manufacturing of one Instruments product line from a third party to our Lakewood, Colorado facility in December 2010, which reduced manufacturing costs and contributed an additional gross profit of approximately $500,000 for the year ended March 31, 2012.

 

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Table of Contents

 

Operating Expenses

 

The following table summarizes the change in our operating expenses (in thousands):

 

 

 

Increase (Decrease)

 

 

 

Year ended March 31,

 

 

 

2013 vs 2012

 

2012 vs 2011

 

Selling

 

$

721

 

$

222

 

 

 

 

 

 

 

General and administrative

 

 

 

 

 

Chief Financial Officer transition

 

526

 

 

ERP system upgrade and SOX compliance

 

245

 

 

Acquisitions – professional fees

 

150

 

(75

)

Amortization:

 

 

 

 

 

Bios Acquisition

 

915

 

 

Trademarks

 

195

 

30

 

Apex Acquisition

 

 

310

 

Stock option expense

 

296

 

 

Sales tax accrual

 

(150

)

250

 

Medical device excise tax

 

62

 

 

Personnel costs

 

848

 

345

 

Bios and other, net

 

614

 

(20

)

 

 

3,701

 

840

 

 

 

 

 

 

 

Research and development

 

652

 

(82

)

 

 

 

 

 

 

Impairment of intangible asset

 

(350

)

350

 

 

 

 

 

 

 

Operating expenses

 

$

4,724

 

$

1,330

 

 

Selling

 

Year ended March 31, 2013 versus March 31, 2012

 

Selling expense increased due to the Bios Acquisition, with minor increases in other product lines.  As a percent of revenues, selling expense remained relatively flat.

 

Year ended March 31, 2012 versus March 31, 2011

 

Selling expense increased due to higher commissions, driven by increased revenues, and adding individuals to the sales force.  As a percent of revenues, selling expense remained relatively flat.

 

General and Administrative

 

Year ended March 31, 2013 versus March 31, 2012

 

As part of our Chief Financial Officer transition, certain unvested options were modified, resulting in incremental stock option expense of approximately $240,000.  The balance of the Chief Financial Officer transition impact includes a severance package and miscellaneous other costs.  All costs associated with the transition were expensed during the year ended March 31, 2013.  We upgraded our ERP system and implemented computer-based controls as part of our Sarbanes-Oxley compliance efforts, which we believe makes us better prepared for any future growth we may experience.  Amortization expense increased due to the Bios Acquisition, in May 2012, and the amortization of trademarks, which began in February 2012.  We recorded estimated sales tax liabilities of $100,000 and $250,000, respectively, for the years ended March 31, 2013 and 2012.  Personnel costs increased primarily due to the Bios Acquisition, but also for additional personnel and salary adjustments.  The remaining increase primarily consists of expenses associated with the acquired operations from the Bios Acquisition and general growth initiatives.

 

During the year ended March 31, 2013, we determined that we have an obligation for state sales taxes.  The ultimate amount due will depend upon a number of factors, including the amount of sales that were made to customers who already paid the tax

 

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or who are exempt, the number of years of exposure, and any penalties and interest.  We continue to evaluate this exposure, but as of March 31, 2013 the amount of the liability is not estimable.  The resolution of these sales tax obligations is likely to have an adverse effect on our results of operations.

 

Year ended March 31, 2012 versus March 31, 2011

 

Amortization expense increased due to the Apex Acquisition, in December 2010, and the amortization of trademarks, which began in February 2012.  We recorded an estimated sales tax liability of $250,000 for the year ended March 31, 2012, but none for the year ended March 31, 2011.  Personnel costs increased for additional personnel and compensation adjustments.

 

Research and Development

 

Year ended March 31, 2013 versus March 31, 2012

 

The increase is due to additional internal personnel added as a result of the Bios Acquisition, and external research and development consulting costs, as we continue our commitment to research and development.  The cost of intangible assets that are purchased from others for use in research and development activities and have alternative future uses, however, are capitalized and amortized over their expected useful life.  During the year ended March 31, 2012, we capitalized $175,000 of Biological Indicator research as an intangible asset, as it had alternative future uses, and are amortizing it through research and development expense over ten years.  This Biological Indicator research project is anticipated to continue through March 31, 2014.

 

Year ended March 31, 2012 versus March 31, 2011

 

While research and development expense decreased in 2012, overall spending on research and development increased, as we capitalized $175,000 associated with Biological Indicator technology.

 

Impairment of intangible asset

 

We determined that the carrying value of an Instruments indefinite-lived intangible asset was greater than its estimated fair value and in February, 2012 we recorded an impairment charge of $350,000.  Fair value was estimated using the royalty replacement approach, whereby a royalty percentage was applied to forecasted revenues and discounted to determine the present value.  While gross profit and cash flows have shown improvement since the intangible asset was acquired, revenues have not grown at the level originally used to value the intangible asset.

 

Net Income

 

Other expense remained consistent from year to year.  Generally, income tax expense increased commensurate with our growth in profitability.  Income tax expense was reduced for the year ended March 31, 2013, however, by approximately $250,000 for refunds received from amending state income tax returns for prior years.  Overall, net income tracked with the changes in revenue, gross profit and operating expenses.

 

Liquidity and Capital Resources

 

Our sources of liquidity may include cash generated from operations, working capital, capacity under our Credit Facility and potential equity and debt offerings.  We believe that cash generated from these sources will be sufficient to meet our Short-term and long-term needs.  Our more significant uses of resources include quarterly dividends to stockholders, payment of debt obligations, long-term capital equipment expenditures and potential acquisitions.

 

Working capital is the amount by which current assets exceed current liabilities.  We had working capital of $14,793,000 and $14,899,000, respectively, at March 31, 2013 and 2012.  The decrease in working capital is due to the use of cash for the Bios Acquisition and repayment of long-term debt, partially offset by cash flows from operations.

 

In February 2012, we entered into the Credit Facility, which is comprised of a three year agreement for a $20,000,000 revolving line of credit and up to $1,000,000 of letters of credit.  Funds from the Credit Facility may be used for general working capital and corporate needs, retiring existing debt, or to support acquisitions and capital expenditures.  In February 2012, we also extinguished our obligations under our previous debt agreement.  In May 2012, we borrowed $11,000,000 against the Line of Credit to partially finance the Bios Acquisition.  At March 31, 2013, we had unused capacity under our Credit Facility of $16,000,000.  In April 2013, we made an additional principal payment of $1,000,000.

 

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On October 1, 2012, we amended our articles of incorporation to increase the number of authorized shares of common stock from 8 million to 25 million.

 

We routinely evaluate opportunities for strategic acquisitions.  Future material acquisitions may require that we obtain additional capital, assume third party debt or incur other long-term obligations.  We believe that have the option to utilize both equity and debt instruments as vehicles for the long-term financing of our investment activities and acquisitions.

 

On November 7, 2005, our Board of Directors authorized a program to repurchase up to 300,000 shares of our outstanding common stock.  Under the plan, the shares may be purchased from time to time in the open market at prevailing prices or in negotiated transactions off the market.  Shares purchased will be canceled and repurchases will be made with existing cash reserves.  We do not maintain a set policy or schedule for our buyback program.  We have purchased 159,522 shares of common stock under this program from inception through March 31, 2013.

 

We have been paying regular quarterly dividends since 2003.  Dividends per share paid by quarter were as follows:

 

 

 

Year ended March 31,

 

 

 

2013

 

2012

 

2011

 

First quarter

 

$

0.13

 

$

0.12

 

$

0.11

 

Second quarter

 

0.13

 

0.12

 

0.11

 

Third quarter

 

0.14

 

0.13

 

0.12

 

Fourth quarter

 

0.14

 

0.13

 

0.12

 

 

On April 11, 2013, our Board of Directors declared a quarterly cash dividend of $0.14 per share of common stock, payable on June 14, 2013, to stockholders of record at the close of business on May 27, 2013.

 

Cash Flow – Operating, investing and financing activities were as follows (in thousands):

 

 

 

Year ended March 31,

 

 

 

2013

 

2012

 

2011

 

Net cash provided by operating activities

 

$

11,402

 

$

12,489

 

$

8,868

 

Net cash used in investing activities

 

(17,568

)

(1,420

)

(20,618

)

Net cash provided by (used in) financing activities

 

2,981

 

(7,424

)

4,825

 

 

Generally, net cash provided by operating activities changes primarily due to increases in revenues and corresponding net income, offset by the timing of certain working capital expenditures related to inventory and income taxes.  The year ended March 31, 2013 saw an increase in accounts receivable due to our expanding international customer base, which has extended payment terms, and an increase in inventory, as we strive to take advantage of volume discounts for raw materials.  The year ended March 31, 2012 saw an increase in sales levels, which resulted in a reduction in inventory levels.

 

Net cash used in investing activities was driven by the Bios Acquisition in May 2012, the Apex Acquisition in December 2010, and the SGM Acquisition in April 2010.  The final payment for the Apex Acquisition was made in December 2011.  Purchases of property, plant and equipment were $908,000, $683,000 and $2,645,000, respectively, for the years ended March 31, 2013, 2012 and 2011.

 

Financing activities for the year ended March 31, 3013 resulted from borrowings under our Line of Credit of $11,000,000 and proceeds from the exercise of stock options of $894,000, partially offset by payments on long-term debt of $7,000,000 and the payment of dividends of $1,815,000.  Activity for the year ended March 31, 2012 resulted from the repayment of debt of $6,500,000 and the payment of dividends of $1,645,000, partially offset by proceeds from the exercise of stock options of $813,000.  Activity for the year ended March 31, 2011, resulted from net borrowings under our debt agreement of $6,222,000 and payment of dividends of $1,488,000.

 

At March 31, 2013, we had contractual obligations for open purchase orders for routine purchases of supplies and inventory, which were payable in less than one year.  In September 2011, we entered into a license agreement for certain biological indicator technology.  Under the terms of this agreement, we made payments of $175,000 for rights to the technology.  Up to

 

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$225,000 of additional payments may be made in the future, depending on meeting certain development and performance milestones.

 

In May 2012, we completed the Bios Acquisition by acquiring specific assets and assuming certain liabilities of Bios, a New Jersey corporation.  The purchase price for the acquired net assets was $16,660,000 and potential contingent consideration based on revenue growth over a three year earn-out period.  The contingent consideration arrangement requires us to pay Bios if cumulative revenues related to the acquisition for the three years subsequent to the acquisition exceed $22,127,000.  The potential undiscounted future payment that we could be required to make ranges from $0 to $6,710,000.

 

Critical Accounting Policies and Estimates

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require management to make estimates, judgments, and assumptions that affect the amounts reporting in our financial statements and accompanying notes.  We believe that the following are the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations.  Management has discussed the development, selection, and disclosure of critical accounting policies and estimates with the Audit Committee of our Board of Directors.  While our estimates and assumptions are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions.  For a discussion of our significant accounting policies, please see Note 1 of Notes to Financial Statements contained in “Item 8.  Financial Statements and Supplementary Data.”

 

Accounts Receivable

 

We estimate an allowance for doubtful accounts based on overall historic write-offs, the age of our receivable balances, and the payment history and creditworthiness of the customer.  If actual results are not consistent with our assumptions and judgments or our assumptions and estimates change due to new information, we may experience material changes in our allowance for doubtful accounts and bad debt expense.

 

Inventories

 

Inventories are stated at the lower of cost or market, based on standards using the first-in, first-out method (FIFO) to determine cost.  We evaluate standard costs annually, unless circumstances necessitate a mid-year evaluation for specific items.  Our work in process and finished goods inventory includes labor and overhead, which are estimated based on trailing twelve months of expense and standard labor hours for each product.  Our biological indicator inventory is tracked by lot number, thus it is generally based on actual hours.

 

We monitor inventory cost compared to selling price in order to determine if a lower of cost or market reserve is necessary. At year end we perform a complete physical inventory observation.  Throughout the year, we estimate and maintain an inventory reserve, as needed, for such matters as obsolete inventory, shrink and scrap.  This reserve may fluctuate as our assumptions change due to new information, discrete events, or changes in our business, such as entering new markets or discontinuing a specific product.

 

Recoverability of Long-lived Assets

 

For property, plant and equipment, and amortizable intangible assets, recoverability and/or impairment tests are required only when conditions exist that indicate the carrying value may not be recoverable.  We monitor the same conditions for our goodwill, but an annual evaluation is also required.  For years ended March 31, 2012 and earlier, indefinite-lived intangible assets were evaluated for impairment by comparing the fair value to the carrying amount.

 

Monitoring these conditions requires significant management judgment, including evaluating general economic conditions, industry and market considerations, changes in production costs, cash flow trends, and other relevant entity-specific events such as changes in management, key personnel, strategy or customers.

 

If conditions exist that indicate the carrying value may not be recoverable, we would be required to estimate the fair value of the asset, asset group, or reporting unit.  We determine fair value using widely accepted valuation techniques, primarily discounted cash flow and market multiple analyses.  These techniques are also used when initially allocating the purchase price to acquired

 

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assets and liabilities.  These types of analyses require us to make assumptions and estimates regarding industry and economic factors, the profitability of future business strategies, and cash flow.

 

We did not record any impairment charges for the year ended March 31, 2013.  If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future.

 

Purchase Accounting for Acquisitions

 

We apply the acquisition method of accounting for a business combination.  In general, this methodology requires companies to record assets acquired and liabilities assumed at their respective fair market values at the date of acquisition.  Any amount of the purchase price paid that is in excess of the estimated fair value of the net assets acquired is recorded as goodwill.  For the Bios Acquisition, we also recorded a liability for contingent consideration based on estimated future revenue.  We monitor our assumptions surrounding these estimated future cash flows and, if there is a significant change, would record an adjustment to the contingent consideration liability and a corresponding adjustment to either income or expense.

 

We determine fair value using widely accepted valuation techniques, primarily discounted cash flow and market multiple analyses.  These types of analyses require us to make assumptions and estimates regarding industry and economic factors, the profitability of future business strategies, and cash flow.

 

If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future.  If the contingent consideration paid for the Bios Acquisition differs from the amount initially recorded, we would record either income or expense.

 

Stock-based Compensation

 

We estimate the fair value of option grants using the Black-Scholes model, which requires us to estimate the volatility and forfeiture rate.  Under our current stock-based compensation plan, we recognize the expense on a straight-line basis over the service period.

 

Contingent Liabilities

 

We accrue a loss for contingencies if it is probable that an asset has been impaired or a liability has been incurred, and when the amount of loss can be reasonably estimable.  When no accrual is made because one or both of these conditions does not exist, we disclose the contingency if there is at least a reasonable possibility that a loss may have been incurred.  We estimate contingent liabilities, such as for state sales taxes, based on the best information available at the time.  If we have a range of possible outcomes, we accrue the low end of the range.

 

Recent Accounting Standards and Pronouncements

 

Please see Note 1 of Notes to Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” for a discussion of recent accounting standards and pronouncements.

 

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

 

Off-Balance Sheet Arrangements

 

In accordance with the definition under SEC rules, the following qualify as off-balance sheet arrangements:

 

·                  any obligation under certain guarantee contracts;

·                  a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets;

·                  any obligation under certain derivative instruments; and

·                  any obligation arising out of a material variable interest held by the registrant in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the registrant, or engages in leasing, hedging or research and development services with the registrant.

 

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As of March 31, 2013, we have no obligations or interests which qualify as off-balance sheet arrangements.

 

Contractual Obligations

 

As of March 31, 2013, our contractual obligations, including payments due by period, are as follows (in thousands):

 

 

 

 

 

Payments due for years ending March 31,

 

 

 

Total

 

2014

 

2015-2016

 

2017-2018

 

Thereafter

 

Purchase Commitments

 

$

1,308

 

1,308

 

 

 

 

Line of Credit

 

4,000

 

 

4,000

 

 

 

Total

 

5,308

 

1,308

 

4,000

 

 

 

 

Our purchase commitments consist primarily of open purchase orders, which we have established to take advantage of volume discounts for materials and to ensure a reliable supply of critical parts.

 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We have no derivative instruments and minimal exposure to foreign currency and commodity market risks.

 

We are subject to interest rate volatility with regard to existing and future issuances of debt, as our current credit facility is variable-rate.  Based on annualized variable-rate debt for the year ended March 31, 2013, a one percentage point increase in interest rates would have increased interest expense by $70,000.

 

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Table of Contents

 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Reports of Independent Registered Public Accounting Firm

 

23

Balance Sheets

 

25

Statements of Income

 

26

Statements of Stockholders’ Equity

 

27

Statements of Cash Flows

 

28

Notes to Financial Statements

 

29

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders

Mesa Laboratories, Inc.

Lakewood, Colorado

 

We have audited the accompanying balance sheets of Mesa Laboratories, Inc. as of March 31, 2013 and 2012 and the related statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2013.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits 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 financial position of Mesa Laboratories, Inc. as of March 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Mesa Laboratories, Inc.’s internal control over financial reporting as of March 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated June 6, 2013, expressed an unqualified opinion.

 

/s/ EKS&H LLLP

EKS&H LLLP

 

June 6, 2013

Denver, Colorado

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders

Mesa Laboratories, Inc.
Lakewood, Colorado

 

We have audited Mesa Laboratories, Inc.’s internal control over financial reporting as of March 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).  As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting of the specific assets and certain assumed liabilities of Bios International Corporation (“Bios Acquisition”), which were acquired on May 15, 2012, and whose financial statements constitute 5% of total assets and 13% of net sales of the financial amounts of the Company as of and for the year ended March  31, 2013. Accordingly, our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of the Bios Acquisition.  The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s 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, and testing and evaluating the design and operating effectiveness of internal control over financial reporting based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Mesa Laboratories, Inc. maintained, in all material respects, effective internal control over financial reporting as of March 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by COSO.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of Mesa Laboratories, Inc. as of March 31, 2013 and 2012, and the related statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2013, and our report dated June 6, 2013 expressed an unqualified opinion.

 

/s/ EKS&H LLLP

EKS&H LLLP

 

June 6, 2013

Denver, Colorado

 

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Table of Contents

 

Mesa Laboratories, Inc.

Balance Sheets

(In thousands, except share amounts)

 

 

 

March 31,

 

 

 

2013

 

2012

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

4,006

 

$

7,191

 

Accounts receivable, net

 

8,474

 

6,486

 

Inventories, net

 

5,576

 

4,438

 

Prepaid expenses and other

 

553

 

336

 

Deferred income taxes

 

846

 

710

 

Total current assets

 

19,455

 

19,161

 

 

 

 

 

 

 

Property, plant and equipment, net

 

7,406

 

7,266

 

Intangibles, net

 

15,418

 

9,819

 

Goodwill

 

23,640

 

14,450

 

 

 

 

 

 

 

Total assets

 

$

65,919

 

$

50,696

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,010

 

$

573

 

Accrued salaries and payroll taxes

 

2,085

 

2,134

 

Other accrued expenses

 

422

 

504

 

Income taxes payable

 

1,145

 

1,051

 

Total current liabilities

 

4,662

 

4,262

 

 

 

 

 

 

 

Deferred income taxes

 

2,364

 

2,519

 

Long-term debt

 

4,000

 

 

Contingent consideration

 

2,140

 

 

Total liabilities

 

13,166

 

6,781

 

 

 

 

 

 

 

Commitments and Contingencies (Note 12)

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, no par value

 

 

 

Common stock, no par value; authorized 25,000,000 shares; issued and outstanding, 3,388,548 shares (March 31, 2013) and 3,321,965 shares (March 31, 2012)

 

10,723

 

8,566

 

Employee loans to purchase stock

 

(149

)

(396

)

Retained earnings

 

42,179

 

35,745

 

Total stockholders’ equity

 

52,753

 

43,915

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

65,919

 

$

50,696

 

 

See accompanying notes to financial statements.

 

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Mesa Laboratories, Inc.

Statements of Income

 (In thousands, except per share data)

 

 

 

Year ended March 31,

 

 

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

Product

 

$

35,351

 

$

30,396

 

$

26,115

 

Other

 

11,084

 

9,220

 

8,112

 

Total revenues

 

46,435

 

39,616

 

34,227

 

Cost of revenues

 

17,573

 

16,105

 

14,659

 

Gross profit

 

28,862

 

23,511

 

19,568

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

Selling

 

4,630

 

3,909

 

3,687

 

General and administrative

 

9,117

 

5,416

 

4,576

 

Research and development

 

2,011

 

1,359

 

1,441

 

Impairment of intangible asset

 

 

350

 

 

Total operating expenses

 

15,758

 

11,034

 

9,704

 

 

 

 

 

 

 

 

 

Operating income

 

13,104

 

12,477

 

9,864

 

Other expense, net

 

(126

)

(146

)

(113

)

 

 

 

 

 

 

 

 

Earnings before income taxes

 

12,978

 

12,331

 

9,751

 

 

 

 

 

 

 

 

 

Income taxes

 

4,528

 

4,412

 

3,568

 

 

 

 

 

 

 

 

 

Net income

 

$

8,450

 

$

7,919

 

$

6,183

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

Basic

 

$

2.52

 

$

2.41

 

$

1.91

 

Diluted

 

2.35

 

2.29

 

1.86

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

Basic

 

3,357

 

3,285

 

3,231

 

Diluted

 

3,593

 

3,462

 

3,330

 

 

See accompanying notes to financial statements.

 

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MESA LABORATORIES, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

Number of
Shares

 

Amount

 

Employee
Loans

 

Retained
Earnings

 

Total

 

March 31, 2010

 

3,203,726

 

$

5,903

 

$

 

$

25,294

 

$

31,197

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for conversion of stock options net of 12,446 shares returned as payment

 

51,432

 

633

 

(437

)

 

196

 

Purchase and retirement of common stock

 

(4,422

)

(11

)

 

(94

)

(105

)

Dividends paid

 

 

 

 

(1,488

)

(1,488

)

Stock-based compensation

 

 

383

 

 

 

383

 

Tax benefit on exercise of stock options

 

 

 

 

51

 

51

 

Net income

 

 

 

 

6,183

 

6,183

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2011

 

3,250,736

 

6,908

 

(437

)

29,946

 

36,417

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for conversion of stock options net of 12,634 shares returned as payment

 

88,043

 

1,277

 

41

 

 

1,318

 

Purchase and retirement of common stock

 

(16,814

)

(60

)

 

(537

)

(597

)

Dividends paid

 

 

 

 

(1,645

)

(1,645

)

Stock-based compensation

 

 

441

 

 

 

441

 

Tax benefit on exercise of stock options

 

 

 

 

62

 

62

 

Net income

 

 

 

 

7,919

 

7,919

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

3,321,965

 

$

8,566

 

$

(396

)

$

35,745

 

$

43,915

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for conversion of stock options net of 15,572 shares returned as payment

 

77,753

 

1,101

 

(203

)

 

898

 

Purchase and retirement of common stock

 

(11,170

)

(56

)

450

 

(496

)

(102

)

Dividends paid

 

 

 

 

(1,815

)

(1,815

)

Stock-based compensation

 

 

1,112

 

 

 

1,112

 

Tax benefit on exercise of stock options

 

 

 

 

295

 

295

 

Net income

 

 

 

 

8,450

 

8,450

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

3,388,548

 

$

10,723

 

$

(149

)

$

42,179

 

$

52,753

 

 

See accompanying notes to financial statements.

 

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Mesa Laboratories, Inc.

Statements of Cash Flows

(In thousands)

 

 

 

Year ended March 31,

 

 

 

2013

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

8,450

 

$

7,919

 

$

6,183

 

Depreciation and amortization

 

3,432

 

2,215

 

1,844

 

Deferred income taxes

 

(291

)

(258

)

(414

)

Stock-based compensation

 

1,112

 

464

 

383

 

Impairment of intangible asset

 

 

350

 

 

Change in assets and liabilities, net of acquisitions

 

 

 

 

 

 

 

Accounts receivable, net

 

(1,510

)

493

 

(931

)

Inventories, net

 

(228

)

1,276

 

(72

)

Prepaid expenses and other

 

(189

)

38

 

180

 

Accounts payable

 

437

 

(150

)

(1

)

Accrued liabilities and taxes payable

 

189

 

142

 

1,696

 

Net cash provided by operating activities

 

11,402

 

12,489

 

8,868

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Acquisitions

 

(16,660

)

(737

)

(17,973

)

Purchases of property, plant and equipment

 

(908

)

(683

)

(2,645

)

Net cash used in investing activities

 

(17,568

)

(1,420

)

(20,618

)

 

 

 

 

 

 

 

 

Cash flow from financing activities:

 

 

 

 

 

 

 

Proceeds from the issuance of debt

 

11,000

 

 

7,000

 

Payments on debt

 

(7,000

)

(6,500

)

(778

)

Dividends

 

(1,815

)

(1,645

)

(1,488

)

Proceeds from the exercise of stock options

 

894

 

813

 

196

 

Purchase and retirement of common stock

 

(98

)

(92

)

(105

)

Net cash provided by (used in) financing activities

 

2,981

 

(7,424

)

4,825

 

Net (decrease) increase in cash and cash equivalents

 

(3,185

)

3,645

 

(6,925

)

Cash and cash equivalents at beginning of year

 

7,191

 

3,546

 

10,471

 

Cash and cash equivalents at end of year

 

$

4,006

 

$

7,191

 

$

3,546

 

 

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

Income taxes

 

$

4,778

 

$

4,457

 

$

3,528

 

Cash paid for interest

 

116

 

176

 

141

 

 

 

 

 

 

 

 

 

Supplemental non-cash activity:

 

 

 

 

 

 

 

Employee loans issued for exercise of stock options

 

$

203

 

$

396

 

$

437

 

Repayment of employee loans for stock options

 

450

 

437

 

 

Contingent consideration as part of an acquisition

 

2,140

 

 

 

 

In December 2011, we settled the $600 holdback amount from our acquisition of the assets of Apex Laboratories, Inc. by paying $562 and returning $38 of accounts receivable.

 

See accompanying notes to financial statements.

 

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Mesa Laboratories, Inc.

Notes to Financial Statements

 

Note 1 - Description of Business and Summary of Significant Accounting Policies

 

Description of Business

 

Mesa Laboratories, Inc. (we, us, our, the “Company” or “Mesa”) was incorporated under the laws of the State of Colorado on March 26, 1982.  We pursue a strategy of focusing primarily on quality control products, which are sold into niche markets that are driven by regulatory requirements.  We prefer markets that have limited competition where we can establish a commanding presence and achieve high gross margins.  We are organized into two divisions across four physical locations.  Our Instruments Division designs, manufactures and markets quality control instruments and disposable products utilized in connection with the healthcare, pharmaceutical, food and beverage, medical device, industrial hygiene, semiconductor and petrochemical industries. Our Biological Indicators Division manufactures and markets biological indicators and distributes chemical indicators used to assess the effectiveness of sterilization processes, including steam, gas, hydrogen peroxide and radiation, in the hospital, dental, medical device and pharmaceutical industries.

 

Basis of Presentation

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements and accompanying notes.  Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions.  Furthermore, when testing assets for impairment in future periods, if management uses different assumptions or if different conditions occur, impairment charges may result.

 

On October 1, 2012 our articles of incorporation were amended to increase the number of authorized shares of common stock from 8,000,000 to 25,000,000.

 

Certain amounts as of and for the years ended March 31, 2012 and 2011 were reclassified to conform to the March 31, 2013 presentation.  As of March 31, 2010, $1,020,000 of cumulative stock-based compensation expense was reclassified from retained earnings to common stock.  For the years ended March 31, 2012 and 2011, stock-based compensation of $464,000 and $383,000, respectively, were presented as changes in common stock on the statements of stockholders’ equity.  The cumulative reclassification between retained earnings and common stock in the March 31, 2012 balance sheet was $1,867,000.  These reclassifications had no impact on other figures in the accompanying balance sheets or statements of income and stockholders’ equity.

 

Summary of Significant Accounting Policies

 

Revenue Recognition

 

We recognize revenue when the four revenue recognition criteria are met, as follows:

 

·                  Persuasive evidence of an arrangement exists — our customary practice is to obtain written evidence, typically in the form of a purchase order;

 

·                  Delivery — when custody is transferred to our customers either upon shipment to or receipt at our customers’ locations, with no right of return or further obligations, such as installation or training;

 

·                  The price is fixed or determinable — prices are typically fixed at the time the order is placed and no price protections or variables are offered; and

 

·                  Collectability is reasonably assured — new and existing customers are subject to a credit review process and pre-payment may be required.

 

Other revenues in the statements of income primarily consist of recalibration, installation, repairs, and shipping and handling.

 

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Shipping and handling

 

Payments by customers to us for shipping and handling costs are included in revenue on the statements of income, while our expense is included in cost of revenue.  Shipping and handling for inventory and materials purchased by us is included as a component of inventory on the balance sheets, and in cost of revenue when the product is sold.

 

Accrued Warranty Expense

 

We provide limited product warranty on our products and, accordingly, accrue an estimate of the related warranty expense at the time of sale.

 

Cash Equivalents

 

We classify time deposits and other investments that are highly liquid and have maturities of three months or less at the date of purchase as cash equivalents.

 

Accounts Receivable

 

We record trade accounts receivable at net realizable value.  This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on the trade accounts receivable balances and is charged to the provision for doubtful accounts.  We calculate this allowance based on our history of write-offs, the level of past-due accounts based on the contractual terms of the receivables, and our relationships with, and the economic status of, our customers.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject us to concentrations of credit risk consist of accounts receivable.  For the years ended March 31, 2013, 2012 and 2011, no individual customer represented more than 10% of our revenues and as of March 31, 2013, no individual customer represented more than 10% of our accounts receivable balance.  Approximately 60% and 40% of our sales are to customers located in the United States and foreign countries, respectively.

 

Inventories

 

Inventories are stated at the lower of cost or market, based on standards using the first-in, first-out method (“FIFO”) to determine cost.  We evaluate standard costs annually, unless circumstances necessitate a mid-year evaluation for specific items.  Our work in process and finished goods inventory includes raw materials, labor and overhead, which are estimated based on trailing twelve months of expense and standard labor hours for each product.  Our biological indicator inventory is tracked by lot number, thus it is generally based on actual hours.

 

We monitor inventory cost compared to selling price in order to determine if a lower of cost or market reserve is necessary.  At year end we perform a complete physical inventory observation.  Throughout the year, we estimate and maintain an inventory reserve, as needed, for such matters as obsolete inventory, shrink and scrap.

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost.  Repair and maintenance costs that do not improve service potential or extend economic life are expensed as incurred.  Depreciation is recorded using the straight-line method over the estimated useful lives of our assets, which are reviewed periodically and generally have the following ranges: buildings: 40 years or less; manufacturing equipment: 7 years or less; and computer equipment: 3 years or less.  Land is not depreciated and construction in progress is not depreciated until placed in service.

 

Goodwill and Intangible Assets

 

We classify intangible assets into three categories: (1) intangible assets with definite lives subject to amortization, (2) intangible assets with indefinite lives not subject to amortization and (3) goodwill.  We determine the useful lives of our identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset.  Factors we consider when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of

 

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the asset, our long-term strategy for using the asset, any laws or other local regulations which could impact the useful life of the asset and other economic factors, including competition and specific market conditions.  Intangible assets that are deemed to have definite lives are amortized, primarily on a straight-line basis, over their useful lives, generally ranging from three to sixteen years (See Note 5).

 

When facts and circumstances indicate that the carrying value of definite-lived intangible assets may not be recoverable, management assesses the recoverability of the carrying value by preparing estimates of revenues and the resulting gross profit and cash flows.  These estimated future cash flows are consistent with those we use in our internal planning.  If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, we recognize an impairment loss.  The impairment loss recognized is the amount by which the carrying amount of the asset (or asset group) exceeds the fair value.  We use a variety of methodologies to determine the fair value of these assets, including discounted cash flow models, which are consistent with the assumptions we believe hypothetical marketplace participants would use.

 

We test intangible assets determined to have indefinite useful lives, including trademarks, franchise rights and goodwill, for impairment annually, or more frequently if events or circumstances indicate that assets might be impaired.  We perform these annual impairment reviews as of the first day of our fourth fiscal quarter.  We use a variety of methodologies in conducting impairment assessments of indefinite-lived intangible assets, including, but not limited to, discounted cash flow models, which are based on the assumptions we believe hypothetical marketplace participants would use.  For indefinite-lived intangible assets, other than goodwill, if the carrying amount exceeds the fair value, an impairment charge is recognized in an amount equal to that excess.  Prior to February 2012, certain marketing intangible assets, such as trade names, were determined to have an indefinite life and were not being amortized.  In February 2012, management determined that in the future we may phase out the use of these marketing intangible assets.  Accordingly, we began amortizing them on a straight-line basis over an estimated useful life of 10 years.

 

We have the option to perform a qualitative assessment of indefinite-lived intangible assets, other than goodwill, prior to completing the impairment test described above.  We must assess whether it is more likely than not that the fair value of the intangible asset is less than its carrying amount.  If we conclude that this is the case, we must perform the testing described above.  Otherwise, we do not need to perform any further assessment.

 

We perform impairment tests of goodwill at our reporting unit level, which is one level below our operating segments.  Our operating segments consist of our Instruments and Biological Indicators Divisions.  These operating segments are consistent with the way management runs our business.  Our Instruments operating segment is subdivided into smaller business units.  These business units are also our reporting units.  Goodwill is assigned to the reporting unit or units that benefit from the synergies arising from each business combination.

 

The goodwill impairment test consists of a two-step process, if necessary.  The first step is to compare the fair value of a reporting unit to its carrying value, including goodwill.  We typically use discounted cash flow models to determine the fair value of a reporting unit.  The assumptions used in these models are consistent with those we believe hypothetical marketplace participants would use.  If the fair value of the reporting unit is less than its carrying value, the second step of the impairment test must be performed in order to determine the amount of impairment loss, if any.  The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.  If the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess.  The loss recognized cannot exceed the carrying amount of goodwill.

 

We have the option to perform a qualitative assessment of goodwill prior to completing the two-step process described above to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill and other intangible assets.  If we conclude that this is the case, we must perform the two-step process.  Otherwise, we will forego the two-step process and do not need to perform any further testing.

 

Research & Development Costs

 

Internal costs related to research and development efforts on existing or potential products are expensed as incurred.  The costs of intangible assets that are purchased from others for use in research and development activities, and also have alternative future benefit, are capitalized and amortized over their expected useful life.

 

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Under certain agreements, we may receive advance payments from customers to perform research and development on their behalf.  These payments are recovered by the customer through lower product prices.  In these circumstances, we initially record deferred revenue, included in other accrued expenses on the accompanying balance sheets.  As product is sold, this liability will be reduced through revenues on the statements of income.

 

Stock-based Compensation

 

Equity classified stock-based compensation is measured at fair value, based on the closing stock price at grant date, using the Black-Scholes option-pricing model.  We recognize expense on a straight-line basis over the service period, net of an estimated forfeiture rate, resulting in a compensation cost for only those shares expected to vest.  We do not have any liability classified stock-based compensation.  We allocate stock-based compensation expense to cost of sales and general and administrative expense in the accompanying statements of income.

 

Income Taxes

 

We recognize deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between the income tax and financial reporting carrying amount of our assets and liabilities.  We monitor our deferred tax assets and evaluate the need for a valuation allowance based on the estimate of the amount of such deferred tax assets that we believe do not meet the more-likely-than-not recognition criteria.  We also evaluate whether we have any uncertain tax positions and would record a reserve if we believe it is more-likely-than-not our position would not prevail with the applicable tax authorities.  We have not recorded a valuation allowance or a reserve for uncertain tax positions.  Any penalties and interest are included in other expense on the statements of income.

 

Fair Value of Measurements

 

Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and long-term debt.  The carrying value of these financial instruments is considered to be representative of their fair value due to the short maturity of these instruments.  Our debt has a variable interest rate, so the carrying amount approximates fair value because interest rates on these instruments approximate the interest rate on debt with similar terms available to us.

 

Recently Issued Accounting Pronouncements

 

In July 2012, the Financial Accounting Standards Board (“FASB’) issued Accounting Standards Update (“ASU”) No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment.  We do not have indefinite-lived intangible assets; as a result, the adoption of this standard did not have an impact on our financial statements and disclosures.

 

In October 2012, the FASB issued ASU 2012-04, Technical Corrections and Improvements.  This standard includes: 1) source literature amendments to conform the language between current accounting literature and legacy source literature; 2) clarification of guidance and reference corrections; and 3) relocation of guidance to a more appropriate location.  The adoption of this standard did not have an impact on our financial statements or disclosures.

 

Note 2.  Acquisitions

 

On May 15, 2012, we completed a business combination (the “Bios Acquisition”) by acquiring specific assets and assuming certain liabilities of Bios International Corporation (“Bios”), a New Jersey corporation.  The asset acquisition agreement (the “Bios Agreement”) includes a provision for contingent consideration based on revenue growth over a three year earn-out period.  The Bios Acquisition further diversifies and grows our Instruments segment, and we believe that it will maintain our historic profitability measures.

 

The contingent consideration arrangement requires us to pay Bios if cumulative revenues related to the acquisition for the three years subsequent to the acquisition exceed $22,127,000.  The potential undiscounted future payment that we could be required to make ranges from $0 to $6,710,000.  The fair value of the contingent consideration arrangement included in the purchase price below was estimated based on the historic revenue growth rates of Bios.

 

We expect to achieve significant savings and income growth as we integrate the operations and marketing functions.  These factors, among others, contributed to a purchase price in excess of the estimated fair value of Bios’ net identifiable

 

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assets and, as a result, we recorded goodwill in connection with this transaction.  The goodwill is expected to be deductible for tax purposes.  All of the goodwill was assigned to our Instruments segment.

 

The Bios Acquisition constituted the acquisition of a business and was recognized at fair value.  We determined the estimated fair values using discounted cash flow analyses and estimates made by management.  The following reflects our allocation of the consideration, subject to customary purchase price adjustments in accordance with the Bios Agreement (in thousands):

 

Cash consideration

 

$

16,660

 

Contingent purchase price liability

 

2,140

 

Aggregate consideration

 

$

18,800

 

 

 

 

 

The purchase price was allocated as follows:

 

 

 

Accounts receivable, net

 

$

478

 

Inventories, net

 

910

 

Other current assets

 

28

 

Property, plant and equipment

 

63

 

Intangible assets

 

8,200

 

Goodwill

 

9,190

 

Current liabilities

 

(69

)

Total purchase price allocation

 

$

18,800

 

 

The accompanying statements of income include the results of the Bios Acquisition from the acquisition date of May 15, 2012.  The pro forma effects of the acquisition on the results of operations as if the acquisition had been completed on April 1, 2012, 2011 and 2010, are as follows (in thousands, except per share data):

 

 

 

Year ended March 31,

 

 

 

2013

 

2012

 

2011

 

Total revenues

 

$

47,216

 

$

46,498

 

$

40,496

 

Net income

 

8,471

 

8,102

 

6,349

 

Net income per common share:

 

 

 

 

 

 

 

Basic

 

$

2.52

 

$

2.47

 

$

1.97

 

Diluted

 

2.36

 

2.34

 

1.91

 

 

The above pro forma results include adjustments for amortization of acquired intangible assets, interest expense and income tax expense.  The pro forma information as presented above is for informational purposes only and is not necessarily indicative of results of operations that would have been achieved if the acquisition had taken place at the dates identified.

 

On December 21, 2010, we completed a business combination (the “Apex Acquisition”) by purchasing the assets associated with the biological indicator line of products of Apex Laboratories, Inc.  The products acquired include their biological indicators for use in vapor hydrogen peroxide disinfection processes.  The purchase price consisted of a $6,452,000 in cash and an accounts receivable settlement of $38,000.  The purchase price also included a $600,000 holdback that accrued interest at two percent per annum.

 

The transaction constituted the acquisition of a business and was recognized at fair value.  We determined the estimated fair value using discounted cash flow analyses and estimates made by management.  The purchase price allocation was as follows (in thousands):

 

Accounts Receivable, net

 

$

544

 

Inventories, net

 

65

 

Property and equipment

 

49

 

Intangible assets

 

4,571

 

Goodwill

 

1,261

 

 

 

$

6,490

 

 

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On April 27, 2010, we purchased SGM Biotech, Inc. located in Bozeman, Montana.  Under the terms of the agreement, we acquired all of the common stock of SGM Biotech, Inc. for $12,083,000 in cash.  We incurred approximately $168,000 in third party acquisition costs related to this transaction.  On April 30, 2010, we also acquired from the former owners of SGM Biotech, Inc. the facility that houses the operations for an additional $2,150,000.

 

The transaction constituted the acquisition of a business and was recognized at fair value.  We determined the estimated fair value using discounted cash flow analyses and estimates made by management.  The difference between the purchase price and the carryover tax basis was not deductible for tax purposes, resulting in a deferred tax liability.  The purchase price allocation was as follows (in thousands):

 

Accounts receivable, net

 

$

1,116

 

Inventories, net

 

758

 

Other assets

 

195

 

Property and equipment

 

1,035

 

Liabilities

 

(1,021

)

Deferred tax liability

 

(2,358

)

Intangible assets

 

5,434

 

Goodwill

 

6,924

 

 

 

$

12,083

 

 

Note 3.  Inventories

 

Inventories consist of the following (in thousands):

 

 

 

March 31,

 

 

 

2013

 

2012

 

Raw materials

 

$

4,052

 

$

3,242

 

Work-in-process

 

271

 

331

 

Finished goods

 

1,514

 

1,090

 

Less reserve

 

(261

)

(225

)

 

 

$

5,576

 

$

4,438

 

 

Note 4.  Property, Plant and Equipment

 

Property, plant and equipment consist of the following (in thousands):

 

 

 

March 31,

 

 

 

2013

 

2012

 

Land

 

$

873

 

$

873

 

Buildings

 

4,553

 

4,489

 

Manufacturing equipment

 

5,665

 

5,235

 

Computer equipment

 

1,129

 

811

 

Other

 

384

 

225

 

 

 

12,604

 

11,633

 

Less accumulated depreciation

 

(5,198

)

(4,367

)

 

 

$

7,406

 

$

7,266

 

 

Depreciation expense for the years ended March 31, 2013, 2012 and 2011 was $831,000, $725,000 and $661,000, respectively.

 

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Note 5.  Goodwill and Intangible Assets

 

The change in the carrying amount of goodwill was as follows (in thousands):

 

 

 

Biological
Indicators

 

Instruments

 

Total

 

April 1, 2011

 

$

9,279

 

$

5,171

 

$

14,450

 

Acquisitions

 

 

 

 

March 31, 2012

 

9,279

 

5,171

 

14,450

 

Acquisitions

 

 

9,190

 

9,190

 

March 31, 2013

 

$

9,279

 

$

14,361

 

$

23,640

 

 

Other intangible assets are as follows:

 

 

 

March 31, 2013

 

(In thousands)

 

Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Useful Life
(Years)

 

Intellectual property

 

$

4,991

 

$

1,037

 

$

3,954

 

10-16

 

Trade names