MESA LABORATORIES INC /CO/ - Quarter Report: 2011 December (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark one)

 

 

For the quarterly period ended December 31, 2011

 

 

For the transition period from        to      

 

Commission File No: 0-11740

 

 

MESA LABORATORIES, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’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 o No x

 

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 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 3,291,093 shares of the Issuer’s common stock, no par value, outstanding as of January 31, 2012.

 

 

Table of Contents

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION	1
ITEM 1. FINANCIAL STATEMENTS	1
CONDENSED BALANCE SHEETS	1
CONDENSED STATEMENTS OF INCOME	2
CONDENSED STATEMENTS OF INCOME	3
CONDENSED STATEMENTS OF CASH FLOWS	4
MESA LABORATORIES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS	5
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	16
ITEM 4T. CONTROLS AND PROCEDURES	17
PART II. OTHER INFORMATION	17
ITEM 1. LEGAL PROCEEDINGS	17
ITEM 1A. RISK FACTORS	17
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES	18
PART III. EXHIBITS AND SIGNATURES	18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K	18
SIGNATURES	19
EXHIBIT 31.1 CERTIFICATIONS PURSUANT TO RULE 13A-14(A)	20
EXHIBIT 31.2 CERTIFICATIONS PURSUANT TO RULE 13A-14(A)	21
EXHIBIT 32.1 CERTIFICATIONS PURSUANT TO RULE 13A-14(B) AND 18 U.S.C SECTION 1350	22
EXHIBIT 32.2 CERTIFICATIONS PURSUANT TO RULE 13A-14(B) AND 18 U.S.C SECTION 1350	23

 

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MESA LABORATORIES, INC.

CONDENSED BALANCE SHEETS

(Dollars in Thousands)

 

		December 31, 2011 (Unaudited)			March 31, 2011
ASSETS
Current assets:
Cash and cash equivalents		$	5,691		$	3,546
Accounts receivable, net		6,089			7,041
Inventories, net		4,857			5,714
Prepaid expenses and other		827			961
Total current assets		17,464			17,262
Property, plant and equipment, net		7,342			7,308
Intangibles and other, net		10,966			11,964
Goodwill		14,450			14,450
Total assets		$	50,222		$	50,984
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	604		$	723
Accrued salaries and payroll taxes		1,581			2,332
Debt, current portion		1,000			5,000
Due to Apex Laboratories, Inc.		—			600
Other accrued expenses		79			176
Taxes payable		1,366			1,100
Total current liabilities		4,630			9,931
Deferred Income Taxes Payable		3,136			3,136
Long-term debt		750			1,500
Total liabilities		8,516			14,567
Stockholders’ equity:
Preferred stock, no par value		—			—
Common stock, no par value; authorized 8,000,000 shares; issued and outstanding, 3,287,490 shares (December 31, 2011) and 3,250,736 shares (March 31, 2011)		6,243			5,505
Employee loans to purchase stock		(371		)	(437		)
Retained earnings		35,834			31,349
Total stockholders’ equity		41,706			36,417
Total liabilities and stockholders’ equity		$	50,222		$	50,984

 

1

Table of Contents

 

MESA LABORATORIES, INC.

CONDENSED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands except earnings per share)

 

		Three months ended December 31,
		2011			2010
Revenues		$	9,259		$	7,652
Cost of revenues		3,374			3,212
Gross profit		5,885			4,440
Operating expenses
Selling		949			900
General and administrative		1,432			1,145
Research and development		342			393
Total operating expenses		2,723			2,438
Operating income		3,162			2,002
Other expense		31			33
Earnings before income taxes		3,131			1,969
Income taxes		1,144			711
Net income		$	1,987		$	1,258
Net income per share:
Basic		$	0.60		$	0.39
Diluted		$	0.57		$	0.37
Average common shares outstanding:
Basic		3,286,000			3,234,000
Diluted		3,498,000			3,355,000

 

2

Table of Contents

 

MESA LABORATORIES, INC.

CONDENSED STATEMENTS OF INCOME

(Unaudited)

 (Dollars in thousands except earnings per share)

 

		Nine months ended December 31,
		2011			2010
Revenues		$	27,438		$	22,861
Cost of revenues		10,391			9,488
Gross profit		17,047			13,373
Operating expenses
Selling		2,926			2,632
General and administrative		3,924			3,245
Research and development		1,056			958
Total operating expenses		7,906			6,835
Operating income		9,141			6,538
Other expense		130			79
Earnings before income taxes		9,011			6,459
Income taxes		3,291			2,453
Net income		$	5,720		$	4,006
Net income per share:
Basic		$	1.74		$	1.24
Diluted		$	1.66		$	1.21
Average common shares outstanding:
Basic		3,280,000			3,226,000
Diluted		3,454,000			3,316,000

 

3

Table of Contents

 

MESA LABORATORIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited))

(Dollars in Thousands)

 

		Nine months ended December 31,
		2011			2010
Cash flows from operating activities:
Net income		$	5,720		$	4,006
Depreciation and amortization		1,636			1,299
Stock based compensation		349			287
Change in assets and liabilities, net of acquisitions
Accounts receivable, net		914			652
Inventories		857			(406		)
Prepaid expenses		134			331
Accounts payable		(119		)	(230		)
Accrued liabilities		(582		)	1,092
Net cash flows from operating activities		8,909			7,031
Cash flows from investing activities:
Business acquisitions and intangibles		(712		)	(17,973		)
Capital expenditures, building		—			(2,150		)
Capital expenditures		(545		)	(428		)
Net cash used in investing activities		(1,257		)	(20,551		)
Cash flows from financing activities:
Proceeds from debt		—			7,000
Payments on debt		(4,750		)	(778		)
Dividends paid		(1,216		)	(1,097		)
Treasury stock purchases		(60		)	(84		)
Proceeds from stock options exercised		519			137
Net cash (used in) provided by financing activities		(5,507		)	5,178
Net increase (decrease) in cash and cash equivalents		2,145			(8,342		)
Cash and cash equivalents at beginning of period		3,546			10,471
Cash and cash equivalents at end of period		$	5,691		$	2,129
Cash paid for:
Income taxes		$	3,280		$	1,206
Interest		$	134		$	91

 

Supplemental disclosure of non-cash activity:

 

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

 

The Company issued employee loans totaling $235 and $394 for the exercise of stock options during the nine month periods ended December 31, 2011 and 2010, respectively. Loans of $301 were retired in the nine month periods ended December 31, 2011.

 

4

Table of Contents

 

MESA LABORATORIES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS

 

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, 2011.

 

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 financial position, results of operations 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 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 became effective for us beginning April 1, 2011.  The adoption of the required guidance did not 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 became effective for Mesa in the fourth quarter of Fiscal 2011. Specific disclosures regarding activities that occur during a reporting period, such as the disaggregated roll forward disclosures, became required for Mesa beginning in the first quarter of Fiscal 2012. As these changes only relate to disclosures, they did not have an impact on Mesa’s financial results.

 

In September 2011, the FASB issued ASC 2011-8 “Intangibles - Goodwill and Other”. The amended guidance will allow companies to first assess qualitative factors to determine if it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, the Company would not be required to determine the fair value of the reporting unit, unless it determines, on a qualitative basis, that it is more likely than not that the fair value of the reporting unit is less than the carrying value. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not anticipate any material impact from the adoption of this amended guidance.

 

2.              Inventories

 

(Dollars in thousands)		December 31, 2011			March 31, 2011
Raw materials		$	3,722		$	4,387
Work-in-process		589			337
Finished goods		1,020			1,280
Less: reserve		(474		)	(290		)
		$	4,857		$	5,714

 

3.              Intangibles

 

On September 30, 2011, the Company entered into a license agreement with Photonic Biosystems, Inc. for certain biological indicator technology.  Under the terms of this agreement, in October 2011 the Company made an initial payment of $150,000 for rights to the technology.  An additional payment of $25,000 was due by the end of January

 

5

Table of Contents

 

2012, and up to $225,000 of additional payments may be made in the future, depending on meeting certain development and performance milestones.  The $150,000, included in intangible assets on the condensed balance sheet at December 31, 2011, is being amortized over ten years.  In addition, sales of products covered by this license agreement will be subject to royalty payments.

 

4.              Stock-based Compensation

 

Stock-based compensation costs for award grants to employees and directors are valued at fair value and recognized on a straight line basis over the service periods of each award.  We estimate forfeiture rates for the year based on historical experience.  Amounts recognized in the condensed financial statements related to stock-based compensation are as follows:

 

		Three months ended December 31,						Nine months ended December 31,
(Dollars in thousands except earnings per share)		2011			2010			2011			2010
Total cost of stock-based compensation charged against income before income taxes		$	112		$	125		$	339		$	287
Amount of income tax benefit recognized in earnings		41			46			124			109
Amount charged against net income		$	71		$	79		$	215		$	178
Impact on net income per common share:
Basic		$	0.02		$	0.02		$	0.07		$	0.06
Diluted		$	0.02		$	0.02		$	0.06		$	0.05

 

Stock-based compensation expense is included in cost of revenues, and general and administrative expense in the condensed 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 summarizes the Black-Scholes assumptions:

 

		Nine months ended December 31,
		2011		2010
Volatility		33.4-33.7%		33.8-36.1%
Risk-free interest rate		0.9-2.2%		1.1-3.9%
Expected option life (years)		5-10		5-10
Dividend yield		1.8%		1.8%

 

The following summarizes option activity:

 

		Number of Shares		Weighted- average Exercise Price per Share			Weighted- average Remaining Contractual Term		Aggregate Intrinsic Value (000)
Outstanding at March 31, 2011		443,642		$	20.10		4.0
Options granted		103,780		29.87			4.9
Options forfeited		(8,650	)	26.51
Options expired		(1,020	)	14.91
Options exercised		(54,062	)	17.52
Outstanding at December 31, 2011		483,690		22.39			3.9		$	9,216
Exercisable at December 31, 2011		187,425		19.29			3.0		$	4,154

 

6

Table of Contents

 

The Company issues new shares of common stock upon exercise of stock options.  The total intrinsic value of options exercised was $738,000 and $624,000 during the nine month periods ended December 31, 2011 and 2010, respectively.

 

A summary of the status of our unvested option shares as of December 31, 2011 is as follows:

 

		Number of Shares		Weighted- average Grant-Date Fair Value
Unvested at March 31, 2011		291,425		$	6.46
Options granted		103,780		8.33
Options forfeited		(8,255	)	7.36
Options vested		(90,685	)	6.04
Unvested at December 31, 2011		296,265		7.22

 

As of December 31, 2011, there was approximately $1,260,000 of total unrecognized compensation cost related to unvested stock options granted under our plans, which is expected to be recognized over a weighted-average period of 2.3 years.

 

5.              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 uses 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 diluted:

 

		Three Months Ended December 31,						Nine Months Ended December 31,
(Amounts in thousands except earnings per share)		2011			2010			2011			2010
Net income available for shareholders		$	1,987		$	1,258		$	5,720		$	4,006
Weighted average outstanding shares of common stock		3,286			3,234			3,280			3,226
Dilutive effect of stock options		212			121			174			90
Common stock and equivalents		3,498			3,355			3,454			3,316
Earnings per share:
Basic		$	0.60		$	0.39		$	1.74		$	1.24
Diluted		$	0.57		$	0.37		$	1.66		$	1.21

 

For the three and nine months ended December 31, 2011 and 2010, no shares and no 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.

 

7

Table of Contents

 

6.              Debt

 

(Dollars in thousands)		December 31, 2011			March 31, 2011
Reducing line of credit		$	1,750		$	2,500
Revolving line of credit		—			4,000
		1,750			6,500
Less: current portion		1,000			5,000
Long-term portion		$	750		$	1,500

 

To help finance the acquisition of Apex Laboratories, Inc., 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, requiring quarterly principal payments of $250,000 beginning July 27, 2010. 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; and b) revolving line of credit for $4,000,000 maturing on December 23, 2011, which was retired in December 2011. 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, 2011.  The remaining line of credit requires monthly interest payments, is subject to restrictive covenants and is secured by most of the assets of the Company.  The Company was in compliance with the restrictive covenants as of December 31, 2011.

 

Future maturities of debt are as follows (dollars in thousands):

 

Fiscal year
2012		$	250
2013		1,000
2014		500
		$	1,750

 

7.              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., who became employees of the Company when SGM Biotech was acquired on April 27, 2010.

 

8.              Contingencies

 

During the third quarter of fiscal 2012, the Company determined that it has a potential liability for state sales taxes.  The ultimate amount due will depend on a number of factors, including the jurisdictional tax rates (ranging from 7.25-9.75%), the amount of sales to customers who already paid the tax or are exempt, and any penalties and interest.  The Company has recorded an estimate of $250,000 as taxes payable on the condensed balance sheet, and general and administrative expense in the condensed statements of income.  This estimate may change as further analysis is completed and sales tax returns are filed.  Management believes that this matter, after consideration of amounts accrued, will not have a material adverse effect on our results of operations, financial position or cash flows.

 

9.              Subsequent Events

 

On February 8, 2012, the Company’s Board of Directors declared a quarterly cash dividend of $0.13 per share of common stock, payable on March 15, 2012, to shareholders of record at the close of business on February 27, 2012.

 

8

Table of Contents

 

10.       Segment Data

 

Our operations are organized into two reporting segments:  Biological Indicators and Instrumentation Products.  The following tables set forth our segment information:

 

(Dollars in thousands)		Biological Indicators			Instrumentation Products			Total
Three months ended December 31, 2011
Revenue		$	4,646		$	4,613		$	9,259
Operating Income		1,198			1,964			3,162
Other (Income) and Expense		30			1			31
Capital Expenditures		30			190			220
Depreciation		125			56			181
Amortization		322			40			362
Three months ended December 31, 2010
Revenue		$	3,729		$	3,923		$	7,652
Operating Income		853			1,149			2,002
Other (Income) and Expense		36			(3		)	33
Capital Expenditures		61			57			118
Depreciation		117			53			170
Amortization		256			39			295
Nine months ended December 31, 2011
Revenue		$	14,271		$	13,167		$	27,438
Operating Income		3,794			5,347			9,141
Other (Income) and Expense		135			(5		)	130
Capital Expenditures		238			307			545
Depreciation		226			296			522
Amortization		994			120			1,114
Nine months ended December 31, 2010
Revenue		$	11,081		$	11,780		$	22,861
Operating Income		2,683			3,855			6,538
Other (Income) and Expense		91			(12		)	79
Capital Expenditures		2,387			191			2,578
Depreciation		341			151			492
Amortization		688			119			807
Total assets
March 31, 2011		$	33,203		$	17,781		$	50,984
December 31, 2011		32,153			18,069			50,222

 

9

Table of Contents

 

Revenues from external customers are attributed to individual countries based upon locations to which the product is shipped or exported, as follows:

 

		Three months ended December 31,						Nine months ended December 31,
(Dollars in thousands)		2011			2010			2011			2010
Net revenues from unaffiliated customers:
United States		$	5,454		$	4,801		$	16,758		$	14,410
Foreign
(no country exceeds 10% of total)		3,805			2,851			10,680			8,451
		$	9,259		$	7,652		$	27,438		$	22,861

 

All long-lived assets are located in the United States.

 

10

Table of Contents

 

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

 

Overview

 

Mesa Laboratories, Inc. has two segments — Our Instrument Division manufactures and markets quality control instruments and disposable products utilized in connection with the healthcare, pharmaceutical, food and beverage, medical device, and petrochemical industries.  Our Biological Indicators Division manufactures and markets biological indicators and distributes chemical indicators used to assess the effectiveness of sterilization processes in the hospital, dental, medical device and pharmaceutical industries.  Our Company follows 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.  Instrumentation 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 instrumentation 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, where possible.  As part of the integration of our 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.  The biological indicator market is more competitive than that for our instrumentation products, thus the gross margin percentages are lower.  Generally, an increase in biological indicator product sales compared to instrumentation product sales would result in a lower overall gross margin.  Cost of revenue and gross profit also include an allocation of the amortization of acquired intangibles, which mostly affect the biological indicator results.

 

Selling expense is driven primarily by labor costs, including salaries and commissions.  Accordingly, they 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.

 

Discussion of Key Indicators and Trends

 

Acquisitions in December 2010, April 2010 and December 2009, impacted our current assets and working capital, as we used available cash and incurred debt to complete those transactions.  During the nine months ended December 31, 2010, we were still integrating these acquisitions, which impacted the key indicators.  The results for the nine months ended December 31, 2011, reflect our successful integration of these acquisitions - performance ratios (gross margin, operating margin and net profit margin) are at or near the same levels as 2009 and 2008.  Revenues, gross profit and net income have all increased due to having a full nine months of operations from the acquisitions, successfully integrating the acquisitions, and organic growth.  The decrease in revenues and profit indicators in 2009 was primarily attributable to poor general economic conditions.

 

11

Table of Contents

 

(Dollars in thousands except earnings		Key Financial Indicators As of and for the Nine Months Ended December 31,
per share)		2011			2010			2009			2008
Cash and Investments		$	5,691		$	2,129		$	9,940		$	7,962
Trade Receivables Gross		$	6,396		$	5,605		$	3,816		$	4,525
Days Revenues Outstanding (1)		60			65			66			77
Inventory, Net		$	4,857		$	6,059		$	4,789		$	4,498
Inventory Turns		2.4			2.1			1.7			1.8
Working Capital		$	12,834		$	5,731		$	17,129		$	15,944
Current Ratio		4:1			2:1			11:1			13:1
Average Return On:
Stockholder Investments (2)		20		%	16		%	16		%	19		%
Assets		15		%	13		%	15		%	18		%
Invested Capital (3)		20		%	18		%	23		%	26		%
Revenues		$	27,438		$	22,861		$	15,702		$	16,071
Gross Profit		$	17,047		$	13,373		$	9,593		$	10,285
Gross Margin		62		%	58		%	61		%	64		%
Operating Income		$	9,141		$	6,538		$	5,400		$	5,515
Operating Margin		33		%	29		%	34		%	34		%
Net Income		$	5,720		$	4,006		$	3,424		$	3,586
Net Profit Margin		21		%	18		%	22		%	22		%
Earnings Per Diluted Share		$	1.66		$	1.21		$	1.04		$	1.11
Earnings Before Income Tax, Depreciation and Amortization		$	10,647		$	7,758		$	5,963		$	6,175
Capital Expenditures, Net		$	545		$	2,578		$	488		$	506
Employees		186			172			113			110
Revenues Per Employee (Annualized)		$	197		$	177		$	185		$	195

 

(1)          Days revenues outstanding is based on specific Revenues in that period, not average Revenues for the 9 months.

 

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

 

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

 

Reconciliation of Non-GAAP Measure

 

Earnings before income tax, depreciation and amortization is used by management as a supplemental performance and liquidity measure, primarily to assess financial performance without regard to historical cost basis, the ability of our assets to generate cash, and the evaluation of potential acquisitions.

 

12

Table of Contents

 

Earnings before income tax, depreciation and amortization 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 income tax, depreciation and amortization, a non-GAAP measure:

 

		For the Nine Months Ended December 31,
(Dollars in thousands)		2011			2010			2009			2008
Net income		$	5,720		$	4,006		$	3,424		$	3,586
Income taxes		3,291			2,453			2,002			2,008
Depreciation		522			492			147			204
Amortization		1,114			807			390			377
		$	10,647		$	7,758		$	5,963		$	6,175

 

13

Table of Contents

 

RESULTS OF OPERATIONS

 

		For the Three Months Ended December 31,									Percent
(Dollars in Thousands)		2011			2010			Change			Change
Revenues		$	9,259		$	7,652		$	1,607		21	%
Cost of revenues		3,374			3,212			162			5	%
Gross profit		5,885			4,440			1,445			33	%
Gross margin		64		%	58		%	6		%	10	%
Operating expenses		$	2,723		$	2,438		$	285		12	%
Net income		$	1,987		$	1,258		$	729		58	%
Net profit margin		21		%	16		%	5		%	31	%

 

		For the Nine Months Ended December 31,									Percent
(Dollars in Thousands)		2011			2010			Change			Change
Revenues		$	27,438		$	22,861		$	4,577		20	%
Cost of revenues		10,391			9,488			903			10	%
Gross profit		17,047			13,373			3,674			27	%
Gross margin		62		%	58		%	4		%	7	%
Operating expenses		$	7,906		$	6,835		$	1,071		16	%
Net income		$	5,720		$	4,006		$	1,714		43	%
Net profit margin		21		%	18		%	3		%	17	%

 

Revenues

 

The following table summarizes our revenues by source:

 

		For the Three Months Ended December 31,						For the Nine Months Ended December 31,
(Dollars in Thousands)		2011			2010			2011			2010
Biological Indicators — Product		$	4,646		$	3,729		$	14,271		$	11,081
Instruments:
Product		3,047			2,495			8,361			7,454
Parts and disposables		682			621			2,061			1,819
Service		884			807			2,745			2,507
Total		$	9,259		$	7,652		$	27,438		$	22,861

 

Biological indicator product sales increased approximately $917,000 and $3,190,000, respectively, for the three and nine month periods ended December 31, 2011, compared to the prior year.  An asset acquisition in December 2010, contributed approximately $610,000 and $1,780,000, respectively, to the three and nine month revenue growth.  The remaining revenue growth was driven by organic growth.

 

Instrumentation revenues increased approximately $690,000 and $1,390,000, respectively, for the three and nine month periods ended December 31, 2011, compared to the prior year.  $200,000 of the increase related to sales to a single customer, while the rest of the increase is due to customers upgrading or expanding as economic uncertainties lessened.

 

14