MESA LABORATORIES INC /CO/ - Quarter Report: 2012 September (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 UNDER SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

o         TRANSITION REPORT UNDER 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 3,356,843 shares of the Issuer’s common stock, no par value, outstanding as of October 31, 2012.

 

 

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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	4
	Notes to Condensed Financial Statements	5
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
3.	Quantitative and Qualitative Disclosures About Market Risk	17
4.	Controls and Procedures	17
	PART II. OTHER INFORMATION
1A.	Risk Factors	18
2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
6.	Exhibits	19
	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)

 

		September 30, 2012 (Unaudited)			March 31, 2012
ASSETS
Current assets:
Cash and cash equivalents		$	2,772		$	7,191
Accounts receivable, net		7,416			6,486
Inventories, net		5,630			4,438
Prepaid expenses and other		940			1,046
Total current assets		16,758			19,161
Property, plant and equipment, net		7,274			7,266
Intangibles and other, net		16,769			9,819
Goodwill		23,640			14,450
Total assets		$	64,441		$	50,696
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	667		$	573
Accrued salaries and payroll taxes		1,635			2,134
Other accrued expenses		387			504
Income taxes payable		698			1,051
Total current liabilities		3,387			4,262
Deferred income taxes payable		2,519			2,519
Contingent consideration		2,140			—
Long-term debt		8,000			—
Total liabilities		16,046			6,781
Stockholders’ equity:
Common stock, no par value; authorized 25,000,000 shares; issued and outstanding, 3,356,273 shares (September 30, 2012) and 3,321,965 shares (March 31, 2012)		7,422			6,699
Employee loans to purchase stock		(215		)	(396		)
Retained earnings		41,188			37,612
Total stockholders’ equity		48,395			43,915
Total liabilities and stockholders’ equity		$	64,441		$	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 September 30,
		2012			2011
Revenues		$	11,706		$	9,701
Cost of revenues		4,458			3,927
Gross profit		7,248			5,774
Operating expenses
Selling		1,072			1,038
General and administrative		2,169			1,144
Research and development		519			306
Total operating expenses		3,760			2,488
Operating income		3,488			3,286
Other expense		36			50
Earnings before income taxes		3,452			3,236
Income taxes		1,204			1,183
Net income		$	2,248		$	2,053
Net income per share:
Basic		$	0.67		$	0.63
Diluted		$	0.64		$	0.59
Weighted average common shares outstanding:
Basic		3,349			3,282
Diluted		3,538			3,453

 

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)

 

		Six months ended September 30,
		2012			2011
Revenues		$	22,266		$	18,998
Cost of revenues		8,562			7,836
Gross profit		13,704			11,162
Operating expenses
Selling		2,074			1,977
General and administrative		4,023			2,492
Research and development		899			714
Total operating expenses		6,996			5,183
Operating income		6,708			5,979
Other expense		70			99
Earnings before income taxes		6,638			5,880
Income taxes		2,290			2,147
Net income		$	4,348		$	3,733
Net income per share:
Basic		$	1.30		$	1.14
Diluted		$	1.23		$	1.09
Weighted average common shares outstanding:
Basic		3,343			3,278
Diluted		3,531			3,433

 

See accompanying notes to condensed financial statements.

 

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Mesa Laboratories, Inc.

Condensed Statements of Cash Flows

(Unaudited)

(In thousands)

 

		Six months ended September 30,
		2012			2011
Cash flows from operating activities:
Net income		$	4,348		$	3,733
Depreciation and amortization		1,675			1,102
Stock based compensation		438			192
Change in assets and liabilities, net of acquisitions
Accounts receivable, net		(452		)	361
Inventories, net		(282		)	722
Prepaid expenses and other		134			167
Accounts payable		103			(122		)
Accrued liabilities		(1,038		)	(1,550		)
Net cash flows provided by operating activities		4,926			4,605
Cash flows from investing activities:
Acquisition of net assets of a business		(16,660		)	—
Purchases of property, plant and equipment		(370		)	(343		)
Net cash used in investing activities		(17,030		)	(343		)
Cash flows from financing activities:
Proceeds from the issuance of debt		11,000			—
Payments on debt		(3,000		)	(2,500		)
Dividends		(871		)	(788		)
Purchases of stock for treasury		(57		)	(80		)
Proceeds from the exercise of stock options		613			512
Net cash provided by (used in) financing activities		7,685			(2,856		)
Net (decrease) increase in cash and cash equivalents		(4,419		)	1,406
Cash and cash equivalents at beginning of period		7,191			3,546
Cash and cash equivalents at end of period		$	2,772		$	4,952
Cash paid for:
Income taxes		$	2,814		$	2,134
Interest		$	75		$	111
Supplemental non-cash activity:
Employee loans issued for the exercise of stock options		$	166		$	235
Repayment of employee loans related to the exercise of stock options		$	347		$	304
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 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 certificate of incorporation was amended to increase the number of authorized shares of common stock from 8,000,000 to 25,000,000.

 

Approximately $411,000 and $820,000, 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 six months ended September 30, 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 any indefinite-lived intangible assets, so this guidance would not have any 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.  We have not yet assessed the impact of this guidance 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 was accounted for under the purchase method of accounting.  Our 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):

 

		Three months ended September 30,
		2012			2011
Total net revenues		$	12,487		$	11,614
Net income		2,269			2,104
Net income per common share:
Basic		$	0.68		$	0.64
Diluted		0.64			0.61

 

		Six months ended September 30,
		2012			2011
Total net revenues		$	23,047		$	22,694
Net income		4,369			3,831
Net income per common share:
Basic		$	1.31		$	1.17
Diluted		1.24			1.12

 

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):

 

		September 30, 2012			March 31, 2012
Raw materials		$	3,998		$	3,241
Work-in-process		417			331
Finished goods		1,560			1,091
Less: reserve		(345		)	(225		)
		$	5,630		$	4,438

 

Note 4 — Intangibles

 

On September 30, 2011, we entered into a license agreement with Photonic Biosystems, Inc. for certain biological indicator technology.  Under the terms of this agreement, we paid $175,000 for rights to the technology, and up to $225,000 of additional payments may be made in the future, depending on meeting certain development and performance milestones.  The $175,000, included in intangible assets on the accompanying condensed balance sheet as of September 30, 2012 is being amortized over ten years.  In addition, sales of products that may result from this license agreement will be subject to royalty payments.

 

Note 5 -   Long-Term Debt

 

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

 

		September 30, 2012			March 31, 2012
Line of credit (1.5% at September 30, 2012)		$	8,000		$	—
Less: current portion		—			—
Long-term portion		$	8,000		$	—

 

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%.  Management elects the interest rate with each borrowing under the line of credit.  There is also 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.  The Credit Facility 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.

 

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 six months ended September 30, 2012 we made principal repayments of $3,000,000.  As a result, the amount outstanding under the Line of Credit was $8,000,000 as of September 30, 2012.  In October 2012, we made an additional principal payment of $1,500,000.

 

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

 

Year ending March 31,
2013		$	—
2014		—
2015		8,000
		$	8,000

 

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.

 

Note 6 - 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 September 30,						Six months ended September 30,
		2012			2011			2012			2011
Total cost of stock-based compensation charged against income before income taxes		$	289		$	96		$	438		$	192
Amount of income tax benefit recognized in earnings		101			35			151			70
Amount charged against net income		$	188		$	61		$	287		$	122
Impact on net income per common share:
Basic		$	0.06		$	0.02		$	0.09		$	0.04
Diluted		0.05			0.02			0.08			0.04

 

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:

 

		Six months ended September 30,
		2012		2011
Volatility		31.1	%	33.4	%
Risk-free interest rate		0.6 – 1.0	%	2.2 - 3.6	%
Expected option life (years)		5 – 10		5 – 10
Dividend yield		1.5	%	1.7	%

 

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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		103,880		50.20			5.9
Options forfeited		(31,050	)	33.06
Options expired		(40	)	18.98
Options exercised		(47,495	)	21.56
Outstanding at September 30, 2012		459,080		28.41					$	13,041
Exercisable at September 30, 2012		192,530		20.70			3.1		3,986

 

We issue new shares of common stock upon exercise of stock options.  The total intrinsic value of options exercised was $1,300,000 and $588,000 for the six months ended September 30, 2012 and 2011, respectively.

 

A summary of the status of our unvested option shares as of September 30, 2012 is as follows:

 

		Number of Shares		Weighted- average Grant-Date Fair Value
Unvested at March 31, 2012		284,875		$	7.23
Options granted		103,880		12.37
Options forfeited		(31,050	)	8.92
Options vested		(91,155	)	6.80
Unvested at September 30, 2012		266,550		9.18

 

As of September 30, 2012, there was approximately $1,930,000 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.

 

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Note 7 - 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 September 30,						Six Months Ended September 30,
		2012			2011			2012			2011
Net income available for stockholders		$	2,248		$	2,053		$	4,348		$	3,733
Weighted average outstanding shares of common stock		3,349			3,282			3,343			3,278
Dilutive effect of stock options		189			171			188			155
Common stock and equivalents		3,538			3,453			3,531			3,433
Net income per share:
Basic		$	0.67		$	0.63		$	1.30		$	1.14
Diluted		0.64			0.59			1.23			1.09

 

For the three and six months ended September 30, 2012, 84,000 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 six months ended September 30, 2011.

 

Note 8 - 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 have recorded a contingent consideration liability of $2,140,000 on the accompanying condensed balance sheet as of September 30, 2012.  Any changes to the contingent consideration ultimately paid would result in additional income or expense on the condensed statements of income.  The contingent consideration is payable in the first quarter of our year ending March 31, 2016.

 

During the third quarter of our year ended March 31, 2012, we determined that we had a potential liability related to the payment of state sales taxes.  We continue to evaluate this potential liability, and no adjustment was deemed necessary for the three or six month period ended September 30, 2012.

 

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Note 9 - 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 September 30, 2012									Three Months Ended September 30, 2011
		Biological Indicators			Instruments			Total			Biological Indicators			Instruments			Total
Revenues		$	5,320		$	6,386		$	11,706		$	5,190		$	4,511		$	9,701
Gross profit		$	3,063		$	4,185		$	7,248		$	2,911		$	2,863		$	5,774
Selling expenses		414			658			1,072			427			611			1,038
		$	2,649		$	3,527		6,176			$	2,484		$	2,252		4,736
Reconciling items (1)								(2,724		)							(1,500		)
Earnings before income taxes								$	3,452								$	3,236

 

		Six Months Ended September 30, 2012									Six Months Ended September 30, 2011
		Biological Indicators			Instruments			Total			Biological Indicators			Instruments			Total
Revenues		$	10,438		$	11,828		$	22,266		$	9,859		$	9,139		$	18,998
Gross profit		$	5,956		$	7,748		$	13,704		$	5,217		$	5,945		$	11,162
Selling expenses		780			1,294			2,074			802			1,175			1,977
		$	5,176		$	6,454		11,630			$	4,415		$	4,770		9,185
Reconciling items (1)								(4,992		)							(3,305		)
Earnings before income taxes								$	6,638								$	5,880

 

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

 

		September 30, 2012			March 31, 2012
Total assets
Biological Indicators		$	27,851		$	28,887
Instruments		32,851			13,572
Corporate and administrative		3,739			8,237
		$	64,441		$	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 September 30,						Six Months Ended September 30,
		2012			2011			2012			2011
Net revenues from unaffiliated customers:
United States		$	7,121		$	6,067		$	13,491		$	11,813
Foreign		4,585			3,634			8,775			7,185
		$	11,706		$	9,701		$	22,266		$	18,998

 

No country exceeds 10% of total revenues.

 

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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 10 -    Subsequent Event

 

In November 2012, our Board of Directors declared a quarterly cash dividend of $0.14 per share of common stock, payable on December 14, 2012, to shareholders of record at the close of business on November 30, 2012.

 

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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

 

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, 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.

 

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 September 30,									Percent
		2012			2011			Change			Change
Revenues		$	11,706		$	9,701		$	2,005		21	%
Cost of revenues		4,458			3,927			531			14	%
Gross profit		7,248			5,774			1,474			26	%
Gross margin		62		%	60		%	2		%
Operating expenses		3,760			2,488			1,272			51	%
Net income		2,248			2,053			195			9	%
Net profit margin		19		%	21		%	(2		)%

 

		Six months ended September 30,									Percent
(Dollars in thousands)		2012			2011			Change			Change
Revenues		$	22,266		$	18,998		$	3,268		17	%
Cost of revenues		8,562			7,836			726			9	%
Gross profit		13,704			11,162			2,542			23	%
Gross margin		62		%	59		%	3		%
Operating expenses		6,996			5,183			1,813			35	%
Net income		4,348			3,733			615			16	%
Net profit margin		20		%	20		%	0		%

 

Revenues

 

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

 

		Three months ended September 30,									Percent
		2012			2011			Change			Change
Biological Indicators – Product		$	5,320		$	5,190		$	130		3	%
Instruments:
Product		4,474			2,780			1,694			61	%
Parts and disposables		736			804			(68		)	(8	)%
Service		1,176			927			249			27	%
Total Instruments		6,386			4,511			1,875			42	%
		$	11,706		$	9,701		2,005			21	%

 

		Six months ended September 30,									Percent
		2012			2011			Change			Change
Biological Indicators – Product		$	10,438		$	9,859		$	579		6	%
Instruments:
Product		8,083			5,778			2,305			40	%
Parts and disposables		1,492			1,502			(10		)	(1	)%
Service		2,253			1,859			394			21	%
Total Instruments		11,828			9,139			2,689			29	%
		$	22,266		$	18,998		3,268			17	%

 

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