MESA LABORATORIES INC /CO/ - Quarter Report: 2010 December (Form 10-Q)

 

Form 10-Q

 

U.S. Securities and Exchange Commission

Washington, D.C. 20549

 

Form 10-Q

 

 

For the transition period from                          to                         

 

Commission File Number 0-11740

 

MESA LABORATORIES, INC.

(Exact Name of Small Business Issuer as Specified in its Charter)

 

 

 

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

 

Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act, during the past 12 months and (2) has been subject to the 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 o  NO o

 

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):

 

 

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

 

State the number of shares outstanding of each of the Issuer’s classes of common stock, as of the latest practicable date:

 

There were 3,247,002  shares of the Issuer’s common stock, no par value, outstanding as of January 31, 2011.

 

 

 

PART I-FINANCIAL INFORMATION

 

ITEM 1.    FINANCIAL STATEMENTS

 

MESA LABORATORIES, INC.

BALANCE SHEETS

 

		DEC 31, 2010			MARCH 31,2010
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents		$	2,129,000		$	10,471,000
Accounts Receivable, Net		5,434,000			4,426,000
Inventories, Net		6,059,000			4,820,000
Prepaid Expenses and Other		621,000			757,000
TOTAL CURRENT ASSETS		14,243,000			20,474,000
PROPERTY, PLANT & EQUIPMENT, NET		7,409,000			4,239,000
OTHER ASSETS
Goodwill, Intangibles and Other, Net		25,968,000			8,926,000
TOTAL ASSETS		$	47,620,000		$	33,639,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts Payable		$	494,000		$	480,000
Accrued Salaries & Payroll Taxes		1,535,000			1,190,000
Notes Payable — Current Portion		750,000			100,000
Revolving Line of Credit		4,000,000			—
Due To Apex Laboratories, Inc.		600,000			—
Other Accrued Expenses		171,000			41,000
Taxes Payable		962,000			133,000
TOTAL CURRENT LIABILITIES		8,512,000			1,944,000
LONG TERM LIABILITIES
Deferred Income Taxes Payable		2,912,000			498,000
Notes Payable — Long Term		1,750,000			—
STOCKHOLDERS’ EQUITY
Preferred Stock, No Par Value		—			—
Common Stock, No Par Value; authorized 8,000,000 shares; issued and outstanding, 3,246,252 shares (12/31/10) and 3,203,726 shares (3/31/10)		5,408,000			4,883,000
Employee Loans to Purchase Stock		(394,000		)	—
Retained Earnings		29,432,000			26,314,000
TOTAL STOCKHOLDERS’ EQUITY		34,446,000			31,197,000
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	47,620,000		$	33,639,000

 

2

 

ITEM 1.    FINANCIAL STATEMENTS  (CONTINUED)

 

MESA LABORATORIES, INC.

STATEMENTS OF INCOME

(UNAUDITED)

 

		Three Months Ended Dec. 31, 2010			Three Months Ended Dec. 31, 2009
Sales		$	7,652,000		$	5,318,000
Cost of Goods Sold		3,212,000			2,020,000
Selling, General & Administrative		2,045,000			1,295,000
Research and Development		393,000			185,000
Other Expenses and (Income)		33,000			(14,000		)
		5,683,000			3,486,000
Earnings Before Income Taxes		1,969,000			1,832,000
Income Taxes		711,000			678,000
Net Income		$	1,258,000		$	1,154,000
Net Income Per Share (Basic)		$	.39		$	.36
Net Income Per Share (Diluted)		$	.37		$	.35
Average Common Shares Outstanding (Basic)		3,234,000			3,193,000
Average Common Shares Outstanding (Diluted)		3,355,000			3,317,000

 

3

 

MESA LABORATORIES, INC.

STATEMENTS OF INCOME

(UNAUDITED)

 

		Nine Months Ended Dec. 31, 2010			Nine Months Ended Dec. 31, 2009
Sales		$	22,861,000		$	15,702,000
Cost of Goods Sold		9,488,000			6,109,000
Selling, General & Administrative		5,877,000			3,685,000
Research and Development		958,000			508,000
Other Expenses and (Income)		79,000			(26,000		)
		16,402,000			10,276,000
Earnings Before Income Taxes		6,459,000			5,426,000
Income Taxes		2,453,000			2,002,000
Net Income		$	4,006,000		$	3,424,000
Net Income Per Share (Basic)		$	1.24		$	1.07
Net Income Per Share (Diluted)		$	1.21		$	1.04
Average Common Shares Outstanding (Basic)		3,226,000			3,191,000
Average Common Shares Outstanding (Diluted)		3,316,000			3,284,000

 

4

 

ITEM 1.    FINANCIAL STATEMENTS (CONTINUED)

 

MESA LABORATORIES, INC.

STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Nine Months Ended Dec. 31, 2010			Nine Months  Ended Dec. 31, 2009
Cash Flows From Operating Activities:
Net Income		$	4,006,000		$	3,424,000
Depreciation and Amortization		1,299,000			537,000
Stock Based Compensation		287,000			212,000
Change in Assets and Liabilities-
(Increase) Decrease in Accounts Receivable, net		652,000			774,000
(Increase) Decrease in Inventories		(406,000		)	(132,000		)
(Increase) Decrease in Prepaid Expenses		331,000			160,000
Increase (Decrease) in Accounts Payable		(230,000		)	24,000
Increase (Decrease) in Accrued Liabilities		1,092,000			(117,000		)
Net Cash Provided by Operating Activities		7,031,000			4,882,000
Cash Flows From Investing Activities:
Acquisition of Product Lines and Company		(17,973,000		)	(2,400,000		)
Capital Expenditures, Building		(2,150,000		)	—
Capital Expenditures, Net of Retirements		(428,000		)	(488,000		)
Net Cash (Used) in Investing Activities		(20,551,000		)	(2,888,000		)
Cash Flows From Financing Activities:
Bank Borrowing, Net of Retirements		6,500,000			—
Repayment of SGM Shareholder loans		(278,000		)	—
Dividends Paid		(1,097,000		)	(991,000		)
Treasury Stock Purchases		(84,000		)	(263,000		)
Proceeds From Stock Options Exercised		137,000			89,000
Net Cash (Used) in Provided by Financing Activities		5,178,000			(1,165,000		)
Net Increase (Decrease) In Cash and Cash Equivalents		(8,342,000		)	829,000
Cash and Cash Equivalents at Beginning of Period		10,471,000			9,111,000
Cash and Cash Equivalents at End of Period		$	2,129,000		$	9,940,000
Cash paid for Interest		$	91,000		$	—

 

Supplemental disclosure of non-cash activity:

 

The Company issued employee loans totaling $394,000 for the purchase of common stock during the nine month period ended December 31, 2010.

 

The Company completed its purchase of SGM Biotech, Inc. during the nine months ended December 31, 2010. See Note 2.

 

The Company completed its purchase of certain assets of Apex Laboratories, Inc. during the nine months ended December 31, 2010. See Note 2.

 

5

 

MESA LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

 

NOTE 1.    SUMMARY OF ACCOUNTING POLICIES

 

The summary of the Issuer’s significant accounting policies are incorporated by reference to the Company’s annual report on Form 10-K, at March 31, 2010.

 

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles for interim financial information and with the instructions to Form 10-Q and reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of operations, financial position and cash flows.  The results of the interim period are not necessarily indicative of the results for the full year.

 

Recently Adopted Accounting Pronouncements

 

In September 2009, the FASB ratified its guidance on two revenue recognition standards which were to become effective for us beginning April 1, 2011. Under EITF 08-1, Multiple-Deliverable Revenue Arrangements, now codified in ASC Topic 605, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method.  Under EITF 09-3, Certain Revenue Arrangements That Include Software Elements, now codified in ASC Topic 985, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to the new guidance for multiple deliverable arrangements discussed above.  The adoption of this guidance did not have a material impact on our financial statements.

 

In January 2010, the FASB updated the disclosure requirements for fair value measurements, codified in ASC Topic 820, Fair Value Measurements and Disclosure.  The updated guidance requires companies to disclose separately the investments that transfer in and out of Levels 1 and 2 and the reasons for those transfers. Additionally, in the reconciliation for fair value measurement using significant unobservable inputs (Level 3), companies should present separately information about purchases, sales, issuances and settlements.  We adopted the updated guidance on April 1, 2010, except for the disclosures about purchases, sales, issuances and settlements in the Level 3 reconciliation, which will be effective for us beginning April 1, 2011.  The adoption of the required guidance did not have an impact on our financial statements.  We do not expect that the adoption of the remaining guidance will have an impact on our financial statements.

 

In July 2010, FASB issued a new pronouncement that requires enhanced disclosures regarding the nature of credit risk inherent in an entity’s portfolio of financing receivables, how that risk is analyzed, and the changes and reasons for those changes in the allowance for credit losses. The new disclosures will require information for both the financing receivables and the related allowance for credit losses at more disaggregated levels. Disclosures related to information as of the end of a reporting period will become effective for Mesa in the fourth quarter of Fiscal 2011. Specific disclosures regarding activities that occur during a

 

6

 

reporting period, such as the disaggregated roll forward disclosures, will be required for Mesa beginning in the first quarter of Fiscal 2012. As these changes only relate to disclosures, they will not have an impact on Mesa’s consolidated financial results.

 

NOTE 2.    ACQUISITION OF PRODUCT LINES AND COMPANIES

 

On April, 27, 2010, the Company completed the purchase of SGM Biotech, Inc. located in Bozeman, MT.  Under the terms of this acquisition the Company acquired all of the stock of SGM Biotech for $11,722,000.  A cash payment of $11,122,000 was made at closing with an additional $600,000 placed into a joint escrow account.  The $600,000 placed in escrow is to be paid to the sellers in $200,000 increments at three months, six months and one year following closing.  The purchase price was subject to a final working capital adjustment of $361,000 as defined in the Stock Purchase Agreement and was subsequently paid in October, 2010. After the completion of the acquisition, the Company repaid $278,000 of loans owed to the shareholders of SGM Biotech.  The Company incurred approximately $168,000 in third party acquisition costs related to this transaction.  On April 30, 2010, the Company also completed the acquisition of the facility that houses the SGM Biotech, Inc. operations for $2,150,000.

 

Due to the increase in intangible assets as a result of this acquisition, amortization expense is expected to rise significantly in fiscal 2011 and subsequent years.  The Company will not be able to deduct the step up from cost to fair value for the assets acquired for tax purposes and therefore have recorded a deferred tax liability of $2,239,000 as of the acquisition date.

 

The purchase price was allocated to the assets acquired based on their estimated fair value at the acquisition date, and was subject to a final working capital adjustment.  Intangible assets were valued using the income approach.

 

Assets and liabilities acquired consisted of:

 

Accounts Receivable		$	1,116,000
Inventory		758,000
Other Assets		195,000
Property and Equipment		1,035,000
Liabilities		(1,021,000		)
Customer Relationships		3,739,000
Non-compete Agreements		104,000
Trademarks		1,195,000
Patents		396,000
Goodwill		4,566,000
		$	12,083,000

 

Intangible assets acquired are amortized over their estimated useful lives; customer relationships (8.5 years), non-compete agreements (5 years) and patents (14 years).  Trademarks were determined to have an indefinite life and therefore are not being amortized.

 

On December 21, 2010, Mesa announced that it had purchased the assets associated with the biological indicator line of products of Apex Laboratories, Inc.  The products acquired by Mesa include their biological indicators for use in vapor hydrogen peroxide disinfection processes.  The purchase price consisted of a

 

7

 

$5,890,000 cash payment at closing and a $600,000 holdback amount to be paid in two equal payments on the six month and one year anniversary of closing.  The holdback amount accrues interest at two percent per annum, and the ultimate payment may be reduced as defined in the asset purchase agreement.  Assets acquired consisted of:

 

Inventory		$	75,000
Accounts Receivable		544,000
Property and Equipment		49,000
Intangibles and Goodwill		5,822,000
		$	6,490,000

 

The Company is in the process of determining fair value estimates of the assets acquired, and will adjust its valuation when it is completed later in the fourth quarter of fiscal 2011.

 

Due to the timing of the acquisition of the Apex Laboratories products, they only made a minor contribution to sales and gross profits in the fiscal third quarter of $18,000 and $13,000, respectively.  During the quarter, legal and accounting expenses for the acquisition of the Apex Laboratories products were approximately $38,000.

 

To help finance these acquisitions, the Company entered into a credit facility consisting of a 36 month reducing line of credit for $3,000,000 and maturing at April 27, 2013, which had a remaining principal balance of $2,500,000 at December 31, 2010.  The bank also deferred one payment for $250,000 on the reducing line of credit, which would have been due January 27, 2011 until maturity at April 27, 2013.  There is also a revolving line of credit for $4,000,000 of which $4,000,000 was utilized at December 31, 2010.  Both of these lines of credit are subject to a variable rate of interest and a rate floor, and at December 31, 2010, the rate of interest on both loans was 3.25%.

 

The results of SGM Biotech and Apex Laboratories product operations have been included in the financial statements commencing from their acquisition dates of April 27, 2010 and December 21, 2010, respectively.  The pro forma effect of the acquisition on the combined results of operations as if the acquisition had been completed on April 1, 2010 and 2009 are as follows:

 

		Quarter Ended			Quarter Ended
		Dec. 31,			Dec. 31,
		2010			2009
		(Unaudited)			(Unaudited)
Total net sales		$	8,311,000		$	7,667,000
Income from operations		$	2,256,000		$	2,142,000
Net income		$	1,418,000		$	1,358,000
Net income per common share (Basic)		$	.44		$	.43
Net income per common share (Diluted)		$	.42		$	.41

 

8

 

		Nine Months Ended			Nine Months Ended
		Dec. 31,			Dec. 31,
		2010			2009
		(Unaudited)			(Unaudited)
Total net sales		$	25,563,000		$	22,287,000
Income from operations		$	8,007,000		$	6,707,000
Net income		$	4,930,000		$	4,244,000
Net income per common share (Basic)		$	1.53		$	1.33
Net income per common share (Diluted)		$	1.49		$	1.29

 

NOTE 3.    STOCK BASED COMPENSATION

 

We account for share-based compensation awards made to employees and directors using the fair value based methodology prescribed by ASC 718 Share-Based Payments (“ASC 718”).  Compensation costs for award grants are valued at fair value and recognized on a straight line basis over the service periods of each award.  We estimated forfeiture rates for the year based on historical experience.

 

Amounts recognized in the financial statements related to stock-based compensation are as follows:

 

		Three Months Ended Dec. 31, 2010			Three Months Ended  Dec. 31, 2009			Nine Months Ended Dec. 31, 2010			Nine Months  Ended  Dec. 31, 2009
Total cost of stock-based compensation charged against income before taxes		$	125,000		$	78,000		$	287,000		$	212,000
Amount of income tax benefit recognized in earnings		46,000			29,000			109,000			78,000
Amount charged against net income		$	79,000		$	49,000		$	178,000		$	134,000
Impact on net income per common share:
Basic		$	.02		$	.02		$	.06		$	.04
Diluted		$	.02		$	.01		$	.05		$	.04

 

Stock-based compensation expense was reflected as selling, general and administrative expense and cost of goods sold expense in the statements of income.

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model (Black-Scholes). We use historical data to estimate the expected price volatility, the expected option life and expected forfeiture rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The dividend yield is calculated based upon the dividend payments made during the prior four quarters as a percent of the average stock price for that period. The following assumptions were used to estimate the fair value of options granted during the first nine months of fiscal 2011 and 2010 using the Black-Scholes model:

 

9

 

		Nine Months Ended Dec. 31,
		2010		2009
Stock options:
Volatility		33.8-36.1	%	34.0	%
Risk-free interest rate		1.11-3.89	%	1.7-2.7	%
Expected option life (years)		5-10		5-10
Dividend yield		1.78-1.81	%	2.00	%

 

A summary of the option activity for the first nine months of fiscal 2011 is as follows:

 

		Number of Shares		Weighted- average Exercise Price per Share			Weighted- average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at March 31, 2010		391,765		$	17.37		4.3
Options granted		137,060		25.43			5.3
Options forfeited		(6,725	)	21.74			—
Options expired		(150	)	11.65			—
Options exercised		(57,275	)	14.76			—
Outstanding at Dec. 31, 2010		464,675		$	20.00		4.3		$	4,646,000
Exercisable at Dec 31, 2010		162,610		$	17.31		3.4		$	2,063,000

 

The weighted average grant date fair value based on the Black-Scholes model for options granted in the first nine months of fiscal 2011 was $7.54, and $4.43 in the first nine months of fiscal 2010. The Company issues new shares of common stock upon exercise of stock options.  The total intrinsic value of options exercised was $624,000 and $430,000 during the first nine months of fiscal 2011 and 2010, respectively.

 

A summary of the status of our unvested option shares as of December 31, 2010 is as follows:

 

		Number of Shares		Weighted- average Grant-Date Fair Value
Unvested at March 31, 2010		247,085		$	5.51
Options granted		137,060		$	7.54
Options forfeited		(6,725	)	$	5.93
Options vested		(75,355	)	$	5.38
Unvested at Dec. 31, 2010		302,065		$	6.45

 

As of Dec. 31, 2010, there was $1,230,000 of total unrecognized compensation cost related to unvested share-based compensation granted under our plans. That cost is expected to be recognized over a weighted-average period of 2.6 years.

 

10

 

NOTE 4.    NET INCOME PER COMMON SHARE

 

Basic net income per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share is computed using the treasury stock method to compute the weighted average common stock outstanding assuming the conversion of potentially dilutive common shares.

 

The following table presents a reconciliation of the denominators used in the computation of net income per common share - basic and net income per common share - diluted for the three and nine month periods ended December 31, 2010 and 2009:

 

		Three Months Ended Dec.31						Nine Months Ended Dec.31
		2010			2009			2010			2009
Net income available for shareholders		$	1,258,000		$	1,154,000		$	4,006,000		$	3,424,000
Weighted avg. outstanding shares of common stock		3,234,000			3,193,000			3,226,000			3,191,000
Dilutive effect of stock options		121,000			124,000			90,000			93,000
Common stock and equivalents		3,355,000			3,317,000			3,316,000			3,284,000
Earning per share:
Basic		$	0.39		$	0.36		$	1.24		$	1.07
Diluted		$	0.37		$	0.35		$	1.21		$	1.04

 

For the three and nine months ended December 31, 2010 and 2009, no shares for each period, attributable to outstanding stock options were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the average price of the common shares, and therefore their inclusion would have been anti-dilutive.

 

NOTE 5.    RELATED PARTY TRANSACTIONS

 

On April 30, 2010, the Company purchased the building housing the facilities of SGM Biotech, Inc. for $2,150,000 from Surreal, LLC.  Surreal, LLC is owned by the former owners of SGM Biotech, Inc., which was acquired by the Company on April 27, 2010.

 

NOTE 6.    DEBT

 

To help finance the acquisition of Apex Laboratories, Inc. and SGM Biotech, Inc and the related building that houses the SGM Biotech facility, the Company entered into a credit facility consisting of a 36 month reducing line of credit for $3,000,000 and maturing at April 27, 2013, which had a remaining principal balance of $2,500,00 at December 31, 2010, and a revolving line of credit for $4,000,000

 

11

 

maturing on April 27, 2011 and which was fully utilized at December 31, 2010.  The 36 month reducing line of credit requires quarterly principal payments of $250,000 beginning July 27, 2010 through maturity. In December 2010, the bank deferred the January 27, 2011 payment of $250,000 until maturity at April 27, 2013, which allowed the Company to complete the acquisition of Apex Laboratories, Inc without further alteration of its existing credit facility. Both of these lines of credit are subject to a variable rate of interest and a rate floor, both of which were 3.25% at December 31, 2010.  Both of these lines of credit also require monthly interest payments, are subject to restrictive covenants and are secured by most of the assets of the Company.

 

Future maturities on debt are as follows:

 

Fiscal Year 2011		$	0
Fiscal Year 2012		5,000,000
Fiscal Year 2013		1,000,000
Fiscal Year 2014		500,000
		$	6,500,000

 

NOTE 7.    SEGMENT DATA

 

The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information now codified as ASC 280. ASC 280 designates the internal reporting that is used by management for making operating decisions and assessing performance as the source of the Company’s reportable segments. ASC 280 also requires disclosure about products and sources, geographic areas and major customers. The Company aggregates its product lines as two reportable segments based on the similar characteristics and markets of our product lines.

 

Revenues related to operations in the U.S. and foreign countries for the quarters and nine month periods ended December 31, 2010 and 2009 are presented below. Revenues from external customers are attributed to individual countries based upon locations to which the product is shipped or exported. Net revenues from unaffiliated customers and long-lived assets related to continuing operations in the U.S. and foreign countries as of the nine months ended December 31, 2010 and 2009 are as follows:

 

		Quarter Ended Dec 31,
		2010			2009
Net revenues from unaffiliated customers:
United States		$	4,801,000		$	3,747,000
Foreign (no country exceeds 10% of total)		$	2,851,000		$	1,571,000
		Dec. 31,			March. 31,
		2010			2010
Long-lived assets at end of quarter:
United States		$	33,377,000		$	13,165,000
		Nine Months Ended Dec. 31,
		2010			2009
Net revenues from unaffiliated customers:
United States		$	14,410,000		$	11,487,000
Foreign (no country exceeds 10% of total)		$	8,451,000		$	4,215,000

 

12

 

The following table summarizes total sales by product line for the quarter and nine months ended December 31, 2010 and 2009 respectively:

 

		Quarter Ended Dec. 31,
		2010			2009
Dialysis Meter and Disposables		$	1,977,000		$	1,945,000
Datatrace Loggers		1,283,000			1,447,000
Biological Indicators		3,728,000			1,718,000
Torqo Bottle Cap Test Systems		474,000			30,000
Nusonics Ultrasonic Meters		190,000			178,000
Total sales		$	7,652,000		$	5,318,000

 

		Nine Months Ended Dec. 31,
		2010			2009
Dialysis Meter and Disposables		$	5,810,000		$	5,937,000
Datatrace Loggers		4,082,000			4,158,000
Biological Indicators		11,080,000			5,197,000
Torqo Bottle Cap Test Systems		1,360,000			30,000
Nusonics Ultrasonic Meters		529,000			380,000
Total sales		$	22,861,000		$	15,702,000

 

The Company categorizes its operations into two business segments: Biological Indicators and Instrumentation Products.  Operations in these segments include designing, manufacturing, marketing and selling disposable testing  products and analytical instruments.  In the Biological Indicator segment, the Company provides products used to prove sterility.  Analytical instruments sold in the Instrumentation Products segment are used for measuring a variety of conditions including temperature, pressure, relative humidity, flow rates, pH, conductivity, and bottle cap torque.

 

13

 

Following is the Company’s business segment information for December 31, 2010 and 2009 (in thousands):

 

		Biological			Instrumentation
		Indicators			Products			Total
FY 2011
3rd Quarter Revenue		$	3,728		$	3,924		$	7,652
Year to Date Revenue		$	11,080		$	11,781		$	22,861
3rd Quarter Operating Income		$	947		$	1,055		$	2,002
Year to Date Operating Income		$	2,777		$	3,761		$	6,538
3rd Quarter Interest (Income) and Expense		$	36		$	(3	)	$	33
Year to Date Interest (Income) and Expense		$	91		$	(12	)	$	79
Total Assets		$	31,058		$	16,562		$	47,620
Capital Expenditures		$	2,387		$	191		$	2,578
Depreciation and Amortization		$	1,029		$	270		$	1,299
FY 2010
3rd Quarter Revenue		$	1,718		$	3,600		$	5,318
Year to Date Revenue		$	5,197		$	10,505		$	15,702
3rd Quarter Operating Income		$	392		$	1,426		$	1,818
Year to Date Operating Income		$	1,127		$	4,273		$	5,400
3rd Quarter Interest (Income) and Expense		$	—		$	(14	)	$	(14	)
Year to Date Interest (Income) and Expense		$	—		$	(26	)	$	(26	)
Total Assets		$	10,399		$	21,851		$	32,250
Capital Expenditures		$	31		$	457		$	488
Depreciation and Amortization		$	446		$	91		$	537

 

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

Mesa Laboratories, Inc. manufactures and distributes electronic measurement systems and disposables for various niche applications, including renal treatment, food processing, medical sterilization, pharmaceutical processing and other industrial applications.  Our Company follows a philosophy of manufacturing a high quality product and providing a high level of on-going service for those products.  In order to optimize the performance of our Company and to build the value of the Company for its shareholders, we continually follow the trend of various key financial indicators.  A sample of some of the most important of these indicators is presented in the following table.

 

14

 

Key Financial Indicators

For The Nine Months Ended Dec. 31,

 

		2010			2009			2008			2007
Cash and Investments		$	2,129,000		$	9,940,000		$	7,962,000		$	5,186,000
Trade Receivables Gross		$	5,605,000		$	3,816,000		$	4,525,000		$	3,137,000
Days Sales Outstanding		65			66			77			60
Inventory, Net		$	6,059,000		$	4,789,000		$	4,498,000		$	4,310,000
Inventory Turns		2.1			1.7			1.8			1.6
Working Capital		$	5,731,000		$	17,129,000		$	15,944,000		$	11,750,000
Current Ratio		2:1			11:1			13:1			12:1
Average Return On:
Stockholder Investments (1)		16.3		%	15.8		%	19.0		%	20.9		%
Assets		13.1		%	14.8		%	17.8		%	19.6		%
Invested Capital (2)		18.4		%	23.0		%	25.8		%	25.8		%
Net Sales		$	22,861,000		$	15,702,000		$	16,071,000		$	13,768,000
Gross Profit		$	13,373,000		$	9,593,000		$	10,285,000		$	9,274,000
Gross Margin		58		%	61		%	64		%	67		%
Operating Income		$	6,538,000		$	5,400,000		$	5,515,000		$	5,124,000
Operating Margin		29		%	34		%	34		%	37		%
Net Profit		$	4,006,000		$	3,424,000		$	3,586,000		$	3,415,000
Net Profit Margin		18		%	22		%	22		%	25		%
Earnings Per Diluted Share		$	1.21		$	1.04		$	1.11		$	1.04
Earnings Before Income Tax, Depreciation and Amortization		$	7,758,000		$	5,963,000		$	6,175,000		$	5,858,000
Capital Expenditures, Net		$	2,578,000		$	488,000		$	506,000		$	304,000
Head Count		172.0			113.0			110.0			108.0
Sales Per Employee(Annualized)		$	177,000		$	185,000		$	195,000		$	170,000

 

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

 

(2) Average return on invested capital (invested capital = total assets - current liabilities - cash and short-term investments) is calculated by dividing total annualized net income by the average of end of period and beginning of year invested capital.

 

While we continually try to optimize the overall performance and trends, the table above does highlight various exceptions.  These exceptions are usually influenced by a more important use of resources.  Most of the indicators above for the period ended December 31, 2010 are showing variation

 

15

 

from the trends of the past years.  Our balance sheet has increased due to acquisitions in December 2009, April 2010 and December 2010.  Factors currently impacting profitability include higher sales of biological indicator products, Torqo bottlecap torque testing products and increased amortization expense due to recent acquisitions.  While net income has increase by 17 percent in the most recent fiscal year to date, earnings before income tax, depreciation and amortization has increased 30 percent over the same period.

 

Results of Operations

 

Net Sales

 

Net sales for the third quarter and first nine months of fiscal 2011 increased 43.9 percent and 45.6 percent, respectively from fiscal 2010.  In real dollars, net sales of $7,652,000 for the quarter and $22,861,000 for the first nine months in fiscal 2011 increased $2,334,000 and $7,159,000, respectively from $5,318,000 and $15,702,000, respectively in 2010.

 

Our revenues come from two main sources, which include product revenues and parts and service revenues.  Parts and service revenues are derived from on-going repair and recalibration or certification of our products.  The certification or recalibration of product is usually a key component of the customer’s own quality system and many of our customers operate in regulated industries, such as food processing or medical and pharmaceutical manufacturing.  For this reason, these revenues tend to be fairly stable and grow slowly over time.  Also, it is important to note that the Raven and SGM products are disposables and thus do not contribute to the Company’s parts and service revenues.  During the first nine months of fiscal years 2011 and 2010 our Company had parts and service revenue of $2,980,000 and $2,645,000, respectively.  As a percentage of total revenue, parts and service revenues were 13% in 2011 and 17% in 2010.

 

The performance of new product sales is dependent on several factors, including general economic conditions in the United States and abroad, capital spending trends and the introduction of new products.  Although overall economic conditions remain soft this year we have seen an increase in our sales performance in total so far.  We attribute this to the industries we serve which include various medical related markets, food processing and pharmaceuticals. Sales this year also increased due to the acquisitions of our new Torqo and SGM Biotech product lines. For the fiscal first nine months of 2011 and 2010, product sales for our company were $19,881,000 and $13,057,000, respectively. Sales will be further increased in the fourth fiscal quarter of 2011 due to the acquisition of the Apex Laboratories, Inc. biological indicator line of products in late December 2010.

 

Due to the addition of SGM Biotech earlier this fiscal year, the company is in the process of changing its reporting to better reflect its two distinct business segments, Biological Indicator Products and Instrumentation Products.  The Instrumentation Products are based at the Company’s Lakewood, CO facility, while Biological Indicator Products are manufactured at our Bozeman, MT and Omaha, NE facilities.  This segmentation provides a clearer picture of how changes in our product mix impact net sales and profitability, especially at the gross profit level.

 

16