MESA LABORATORIES INC /CO/ - Quarter Report: 2012 December (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark  one)

 

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

 

For the quarterly period ended December 31, 2012

 

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)

 

 

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

 

Indicate by check mark whether the registrant  (1) has filed all reports required to be filed by Section 13 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 this 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

 

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

 

There were 3,379,518 shares of the Issuer’s common stock, no par value, outstanding as of January 31, 2013.

 

 

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	PART I. FINANCIAL INFORMATION
1.	Financial Statements	1
	Condensed Balance Sheets	1
	Condensed Statements of Income	2
	Condensed Statements of Cash Flows	3
	Notes to Condensed Financial Statements	4
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
3.	Quantitative and Qualitative Disclosures About Market Risk	16
4.	Controls and Procedures	17
	PART II. OTHER INFORMATION
1A.	Risk Factors	17
2.	Unregistered Sales of Equity Securities and Use of Proceeds	18
6.	Exhibits	18
	Signatures
	Exhibit Index
	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
	Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350
	Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350

 

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Part I. Financial Information

 

Item 1. Financial Statements

 

Mesa Laboratories, Inc.

Condensed Balance Sheets

(In thousands, except share amounts)

 

		December 31, 2012 (Unaudited)			March 31, 2012
ASSETS
Current assets:
Cash and cash equivalents		$	2,722		$	7,191
Accounts receivable, net		7,595			6,486
Inventories, net		5,281			4,438
Prepaid expenses and other		960			1,046
Total current assets		16,558			19,161
Property, plant and equipment, net		7,328			7,266
Intangibles and other, net		16,091			9,819
Goodwill		23,640			14,450
Total assets		$	63,617		$	50,696
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	883		$	573
Accrued salaries and payroll taxes		2,219			2,134
Other accrued expenses		488			504
Income taxes payable		269			1,051
Total current liabilities		3,859			4,262
Deferred income taxes payable		2,519			2,519
Long-term debt		5,000			—
Contingent consideration		2,140			—
Total liabilities		13,518			6,781
Stockholders’ equity:
Common stock, no par value; authorized 25,000,000 shares; issued and outstanding, 3,370,819 shares (December 31, 2012) and 3,321,965 shares (March 31, 2012)		7,613			6,699
Employee loans to purchase stock		(226		)	(396		)
Retained earnings		42,712			37,612
Total stockholders’ equity		50,099			43,915
Total liabilities and stockholders’ equity		$	63,617		$	50,696

 

See accompanying notes to condensed financial statements.

 

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Mesa Laboratories, Inc.

Condensed Statements of Income

(Unaudited)

(In thousands except per share data)

 

		Three months ended December 31,						Nine months ended December 31,
		2012			2011			2012			2011
Revenues		$	11,361		$	9,650		$	33,627		$	28,648
Cost of revenues		4,414			3,765			12,976			11,601
Gross profit		6,947			5,885			20,651			17,047
Operating expenses
Selling		1,223			949			3,297			2,926
General and administrative		2,759			1,432			6,782			3,924
Research and development		501			342			1,399			1,056
Total operating expenses		4,483			2,723			11,478			7,906
Operating income		2,464			3,162			9,173			9,141
Other expense, net		38			31			109			130
Earnings before income taxes		2,426			3,131			9,064			9,011
Income taxes		883			1,144			3,173			3,291
Net income		$	1,543		$	1,987		$	5,891		$	5,720
Net income per share:
Basic		$	0.46		$	0.60		$	1.76		$	1.74
Diluted		0.44			0.57			1.67			1.66
Weighted average common shares outstanding:
Basic		3,360			3,286			3,349			3,280
Diluted		3,542			3,498			3,527			3,454

 

See accompanying notes to condensed financial statements.

 

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Mesa Laboratories, Inc.

Condensed Statements of Cash Flows

(Unaudited)

(In thousands)

 

		Nine months ended December 31,
		2012			2011
Cash flows from operating activities:
Net income		$	5,891		$	5,720
Depreciation and amortization		2,585			1,636
Stock based compensation		897			349
Change in assets and liabilities, net of acquisitions
Accounts receivable, net		(631		)	914
Inventories, net		67			857
Prepaid expenses and other		114			134
Accounts payable		310			(119		)
Accrued liabilities		(782		)	(582		)
Net cash flows provided by operating activities		8,451			8,909
Cash flows from investing activities:
Acquisition of net assets of a business		(16,660		)	(712		)
Purchases of property, plant and equipment		(656		)	(545		)
Net cash used in investing activities		(17,316		)	(1,257		)
Cash flows from financing activities:
Proceeds from the issuance of debt		11,000			—
Payments on debt		(6,000		)	(4,750		)
Dividends		(1,341		)	(1,216		)
Purchases of stock for treasury		(57		)	(60		)
Proceeds from the exercise of stock options		794			519
Net cash provided by (used in) financing activities		4,396			(5,507		)
Net (decrease) increase in cash and cash equivalents		(4,469		)	2,145
Cash and cash equivalents at beginning of period		7,191			3,546
Cash and cash equivalents at end of period		$	2,722		$	5,691
Cash paid for:
Income taxes		$	4,125		$	3,280
Interest		120			134
Supplemental non-cash activity:
Employee loans issued for the exercise of stock options		$	177		$	235
Repayment of employee loans related to the exercise of stock options		347			301
Contingent consideration as part of the acquisition of net assets of a business		$	2,140		$	—

 

See accompanying notes to condensed financial statements.

 

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Mesa Laboratories, Inc. Notes to Condensed 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

 

The accompanying condensed balance sheet as of March 31, 2012, has been derived from audited financial statements. The accompanying unaudited interim condensed financial statements of Mesa have been prepared on the same basis as the annual audited financial statements and in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. In the opinion of management, such unaudited information includes all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of this interim information. Operating results and cash flows for interim periods are not necessarily indicative of results that can be expected for the entire year. The information included in this report should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended March 31, 2012.

 

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.

 

Approximately $390,000 and $1,210,000, respectively, of customer payments for shipping services were reclassified from cost of revenues to revenues in the condensed statements of income for the three and nine months ended December 31, 2011.  This reclassification affected revenues and cost of revenues, but had no other impact on amounts in the accompanying condensed statements of income.

 

The summary of our significant accounting policies is incorporated by reference to our annual report on Form 10-K as of March 31, 2012.

 

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, this guidance does not have an impact on our financial statements or 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 and disclosures.

 

Note 2 - Acquisition of Net Assets of a Business

 

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.

 

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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 Bios operations and marketing functions.  These factors, among others, contributed to a purchase price in excess of the estimated fair value of Bios’ net identifiable 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 constitutes 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
Inventory		910
Other current assets		28
Property, plant and equipment		63
Intangibles		8,200
Goodwill		9,190
Current liabilities		(69		)
Total purchase price allocation		$	18,800

 

The accompanying condensed 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 and 2011, are as follows (in thousands, except per share data):

 

		Nine months ended December 31,
		2012			2011
Total net revenues		$	34,408		$	34,036
Net income		5,912			5,863
Net income per common share:
Basic		$	1.77		$	1.79
Diluted		1.68			1.70

 

The above pro forma results include adjustments for amortization of acquired intangibles, 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.

 

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Note 3 - Inventories

 

Inventories consist of the following (in thousands):

 

		December 31, 2012			March 31, 2012
Raw materials		$	3,890		$	3,242
Work-in-process		446			331
Finished goods		1,360			1,090
Less: reserve		(415		)	(225		)
		$	5,281		$	4,438

 

Note 4 - Long-Term Debt

 

Long-term debt consists of the following (in thousands):

 

		December 31, 2012			March 31, 2012
Line of credit (1.5% at December 31, 2012)		$	5,000		$	—
Less: current portion		—			—
Long-term portion		$	5,000		$	—

 

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, maturing in February 2015.  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.

 

Under the Credit Facility, indebtedness bears interest at either: (1) LIBOR, as defined, 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%.  We elect the interest rate with each borrowing under the line of credit.  In addition, there is an unused capacity fee of 0.15% to 0.30%.  The adjustments and unused capacity fee depend on the ratio of funded debt to our trailing four quarters of EBITDA, as defined, with four tiers ranging from a ratio of less than one to greater than two.  Letter of credit fees are based on the applicable LIBOR rate.

 

The Credit Facility is secured by all of our assets and requires us to maintain a ratio of funded debt to our trailing four quarters of EBIDTA, as defined, of 2.5 to 1.0, and a minimum fixed charge coverage ratio of 1.5 to 1.0.  We were in compliance with these covenants at December 31, 2012.

 

In order to facilitate the Bios Acquisition, in May 2012 we borrowed $11,000,000 under the terms of the Line of Credit.  During the three and nine months ended December 31, 2012 we made principal repayments of $3,000,000 and $6,000,000, respectively.  As a result, the amount outstanding under the Line of Credit was $5,000,000 as of December 31, 2012.  In January 2013, we made an additional principal payment of $1,000,000.

 

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

 

Year ending March 31,
2013		$	—
2014		—
2015		5,000
		$	5,000

 

In April 2010, we 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, which was retired in February 2012; 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 were subject to a variable rate of interest and a rate floor.

 

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Note 5 - 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 period for the entire award, with the amount of compensation cost recognized at any date equaling at least the portion of the award that is vested. We estimate forfeiture rates based on historical experience. Amounts recognized in the condensed financial statements related to stock-based compensation are as follows (in thousands, except per share data):

 

		Three months ended December 31,						Nine months ended December 31,
		2012			2011			2012			2011
Total cost of stock-based compensation charged against income before income taxes		$	459		$	157		$	897		$	349
Amount of income tax benefit recognized in earnings		163			57			314			127
Amount charged against net income		$	296		$	100		$	583		$	222
Impact on net income per common share:
Basic		$	0.09		$	0.03		$	0.17		$	0.07
Diluted		0.08			0.03			0.17			0.06

 

Stock-based compensation expense is included in cost of revenues and general and administrative expense in the accompanying 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 United States 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 used for option grants:

 

		Nine months ended December 31,
		2012		2011
Volatility		29.3%		33.5%
Risk-free interest rate		0.6-1.0%		0.9-2.2%
Expected option life (years)		5-10		5-10
Dividend yield		1.4%		1.8%

 

The following is a summary of option activity:

 

		Number of Shares		Weighted- average Exercise Price per Share			Weighted- average Remaining Contractual Term		Aggregate Intrinsic Value (000s)
Outstanding at March 31, 2012		433,785		$	22.77		3.9
Options granted		116,080		50.01			6.0
Options forfeited		(36,110	)	33.04
Options expired		(40	)	18.98
Options exercised		(63,375	)	20.17
Outstanding at December 31, 2012		450,340		29.33					$	9,392
Exercisable at December 31, 2012		180,925		21.30			3.0		5,212

 

We issue new shares of common stock upon exercise of stock options.  The total intrinsic value of options exercised was $1,800,000 and $738,000 for the nine months ended December 31, 2012 and 2011, respectively.

 

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A summary of the status of our unvested option shares as of December 31, 2012 is as follows:

 

		Number of Shares		Weighted- average Grant-Date Fair Value
Unvested at March 31, 2012		284,875		$	7.23
Options granted		116,080		12.45
Options forfeited		(36,110	)	8.97
Options vested		(95,430	)	6.80
Unvested at December 31, 2012		269,415		9.40

 

As of December 31, 2012, there was approximately $2,084,000 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 3 years.

 

Effective November 30, 2012, as part of our Chief Financial Officer transition, 14,400 unvested options were modified to a) extend the expiration date to 10 years following the original grant date, b) allow them to be exercised through their expiration date, and c) accelerate the vesting such that all options will vest by November 30, 2014.  This is a modification of the terms of an equity award and, accordingly, we have treated this as an exchange of the original award for a new award.  We recorded incremental compensation expense of approximately $240,000 during the three and nine months ended December 31, 2012, included in general and administrative expense on the accompanying condensed statements of income.

 

Note 6 - Net Income Per Share

 

Basic net income per 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 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 share - basic and diluted (in thousands, except per share data):

 

		Three Months Ended December 31,						Nine Months Ended December 31,
		2012			2011			2012			2011
Net income available for stockholders		$	1,543		$	1,987		$	5,891		$	5,720
Weighted average outstanding shares of common stock		3,360			3,286			3,349			3,280
Dilutive effect of stock options		182			212			178			174
Common stock and equivalents		3,542			3,498			3,527			3,454
Net income per share:
Basic		$	0.46		$	0.60		$	1.76		$	1.74
Diluted		0.44			0.57			1.67			1.66

 

For the three and nine months ended December 31, 2012, 81,000 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.  No stock options were excluded for the three and nine months ended December 31, 2011.

 

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Note 7 - Contingencies

 

As part of the Bios Acquisition, the Bios Agreement includes a provision for contingent consideration based on revenue growth over a three year earn-out period.  The contingent consideration arrangement requires us to pay Bios if the cumulative revenues from 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 was estimated based on the historic revenue growth of Bios.  We recorded a contingent consideration liability of $2,140,000 on the accompanying condensed balance sheet as of December 31, 2012.  Any changes to the contingent consideration ultimately paid would result in additional income or expense on the condensed statements of income.  There has been no material change to the contingent consideration liability as of December 31, 2012.  The contingent consideration is payable in the first quarter of our year ending March 31, 2016.

 

During the three months ended December 31, 2012, we determined that we have a potential liability 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 or who are exempt, and any penalties and interest.  We recorded an estimate of $100,000, which is included in other accrued expenses on the accompanying condensed balance sheets, and general and administrative expense in the accompanying condensed statements of income.  This estimate may change as further analysis is completed and sales tax returns are filed.  During the three months ended December 31, 2011, we determined that we had a separate liability for state sales taxes and recorded an estimate of $250,000.  During the three months ended June 30, 2012, we settled the liability and determined that no additional liability was required.  We continue to evaluate our exposure in additional states, but at this time the amount of the potential liability, if any, is not estimable.

 

Note 8 - Segment Information

 

Our operations are organized into two segments: Biological Indicators and Instruments. The following tables set forth our segment information (in thousands):

 

		Three Months Ended December 31, 2012									Three Months Ended December 31, 2011
		Biological Indicators			Instruments			Total			Biological Indicators			Instruments			Total
Revenues		$	5,154		$	6,207		$	11,361		$	4,742		$	4,908		$	9,650
Gross profit		$	2,936		$	4,011		$	6,947		$	2,540		$	3,345		$	5,885
Selling expenses		385			838			1,223			391			558			949
		$	2,551		$	3,173		5,724			$	2,149		$	2,787		4,936
Reconciling items (1)								(3,298		)							(1,805		)
Earnings before income taxes								$	2,426								$	3,131

 

		Nine Months Ended December 31, 2012									Nine Months Ended December 31, 2011
		Biological Indicators			Instruments			Total			Biological Indicators			Instruments			Total
Revenues		$	15,590		$	18,037		$	33,627		$	14,600		$	14,048		$	28,648
Gross profit		$	8,890		$	11,761		$	20,651		$	7,756		$	9,291		$	17,047
Selling expenses		1,165			2,132			3,297			1,194			1,732			2,926
		$	7,725		$	9,629		17,354			$	6,562		$	7,559		14,121
Reconciling items (1)								(8,290		)							(5,110		)
Earnings before income taxes								$	9,064								$	9,011

 

(1) Reconciling items include general and administrative, research and development, and other expenses.

 

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		December 31, 2012			March 31, 2012
Total assets
Biological Indicators		$	27,392		$	28,887
Instruments		32,511			13,572
Corporate and administrative		3,714			8,237
		$	63,617		$	50,696

 

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

 

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

 

		Three Months Ended December 31,						Nine Months Ended December 31,
		2012			2011			2012			2011
Net revenues from unaffiliated customers:
United States		$	7,013		$	5,684		$	20,504		$	17,497
Foreign		4,348			3,966			13,123			11,151
		$	11,361		$	9,650		$	33,627		$	28,648

 

No foreign country exceeds 10% of total revenues.

 

We have changed our presentation of segments to correspond to the discrete financial information reviewed by our chief operating decision maker and have stated all periods consistently.

 

Note 9 - Subsequent Event

 

In February 2013, our Board of Directors declared a quarterly cash dividend of $0.14 per share of common stock, payable on March 15, 2013, to shareholders of record at the close of business on February 27, 2013.

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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 II, “Item 1A. Risk Factors” and elsewhere in this report and in our Annual Report on Form 10-K for the year ended March 31, 2012, and those described from time to time in our subsequent reports filed with the Securities and Exchange Commission.

 

General Discussion

 

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.  Mesa Laboratories, Inc. has two divisions — Our Instruments division 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 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 between different segments 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.

 

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. Our New Jersey operations were not significantly impacted by Hurricane Sandy.

 

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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 condensed financial statements and the notes thereto appearing elsewhere in this report (in thousands, except percent data):

 

		Three months ended December 31,									Percent
		2012			2011			Change			Change
Revenues		$	11,361		$	9,650		$	1,711		18	%
Cost of revenues		4,414			3,765			649			17	%
Gross profit		6,947			5,885			1,062			18	%
Gross margin		61		%	61		%	—		%
Operating expenses		4,483			2,723			1,760			65	%
Net income		1,543			1,987			(444		)	(22	)%
Net profit margin		14		%	21		%	(7		)%

 

		Nine months ended December 31,									Percent
		2012			2011			Change			Change
Revenues		$	33,627		$	28,648		$	4,979		17	%
Cost of revenues		12,976			11,601			1,375			12	%
Gross profit		20,651			17,047			3,604			21	%
Gross margin		61		%	60		%	1		%
Operating expenses		11,478			7,906			3,572			45	%
Net income		5,891			5,720			171			3	%
Net profit margin		18		%	20		%	(2		)%

 

Revenues

 

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

 

		Three months ended December 31,									Percent
		2012			2011			Change			Change
Biological Indicators — Product		$	5,154		$	4,742		$	412		9	%
Instruments:
Product		4,316			3,305			1,011			31	%
Parts and disposables		698			719			(21		)	(3	)%
Service		1,193			884			309			35	%
Total Instruments		6,207			4,908			1,299			26	%
		$	11,361		$	9,650		$	1,711		18	%

 

		Nine months ended December 31,									Percent
		2012			2011			Change			Change
Biological Indicators — Product		$	15,590		$	14,600		$	990		7	%
Instruments:
Product		12,399			9,084			3,315			36	%
Parts and disposables		2,191			2,220			(29		)	(1	)%
Service		3,447			2,744			703			26	%
Total Instruments		18,037			14,048			3,989			28	%
		$	33,627		$	28,648		$	4,979		17	%

 

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