MESA LABORATORIES INC /CO/ - Quarter Report: 2012 June (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 June 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 3,346,145 shares of the Issuer’s common stock, no par value, outstanding as of July 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	3
	Notes to Condensed Financial Statements	4
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
3.	Quantitative and Qualitative Disclosures About Market Risk	16
4.	Controls and Procedures	16
PART II.  OTHER INFORMATION
1A.	Risk Factors	16
2.	Unregistered Sales of Equity Securities and Use of Proceeds	17
6.	Exhibits	17
	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

(Dollars in thousands)

 

		June 30, 2012 (Unaudited)			March 31, 2012
ASSETS
Current assets:
Cash and cash equivalents		$	4,593		$	7,191
Accounts receivable, net		7,147			6,486
Inventories, net		5,575			4,438
Prepaid expenses and other		969			1,046
Total current assets		18,284			19,161
Property, plant and equipment, net		7,311			7,266
Intangibles and other, net		17,466			9,819
Goodwill		23,650			14,450
Total assets		$	66,711		$	50,696
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	985		$	573
Accrued salaries and payroll taxes		1,498			2,134
Other accrued expenses		572			504
Taxes payable		1,899			1,051
Total current liabilities		4,954			4,262
Deferred income taxes payable		2,519			2,519
Contingent consideration		2,240			—
Long-term debt		11,000			—
Total liabilities		20,713			6,781
Stockholders’ equity:
Preferred stock, no par value		—			—
Common stock, no par value; authorized 8,000,000 shares; issued and outstanding, 3,343,159 shares (June 30, 2012) and 3,321,965 shares (March 31, 2012)		7,129			6,699
Employee loans to purchase stock		(262		)	(396		)
Retained earnings		39,131			37,612
Total stockholders’ equity		45,998			43,915
Total liabilities and stockholders’ equity		$	66,711		$	50,696

 

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Mesa Laboratories, Inc.

Condensed Statements of Income

(Unaudited)

(Dollars in thousands except earnings per share)

 

		Three months ended June 30,
		2012			2011
Revenues		$	10,559		$	9,297
Cost of revenues		4,104			3,909
Gross profit		6,455			5,388
Operating expenses
Selling		1,002			939
General and administrative		1,854			1,348
Research and development		380			408
Total operating expenses		3,236			2,695
Operating income		3,219			2,693
Other expense		34			50
Earnings before income taxes		3,185			2,643
Income taxes		1,086			964
Net income		$	2,099		$	1,679
Net income per share:
Basic		$	0.63		$	0.51
Diluted		0.59			0.49
Average common shares outstanding:
Basic		3,337			3,274
Diluted		3,541			3,414

 

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Mesa Laboratories, Inc.

Condensed Statements of Cash Flows

(Unaudited))

(Dollars in thousands)

 

		Three months ended June 30,
		2012			2011
Cash flows from operating activities:
Net income		$	2,099		$	1,679
Depreciation and amortization		784			541
Stock based compensation		149			96
Gain on loan settlement		—			(13		)
Change in assets and liabilities, net of acquisitions
Accounts receivable, net		(120		)	498
Inventories		(227		)	337
Prepaid expenses and other		105			101
Accounts payable		412			55
Accrued liabilities		210			(406		)
Net cash flows from operating activities		3,412			2,888
Cash flows from investing activities:
Business acquisitions and intangibles		(16,660		)	—
Capital expenditures		(185		)	(187		)
Net cash used in investing activities		(16,845		)	(187		)
Cash flows from financing activities:
Proceeds from debt		11,000			—
Payments on debt		—			(250		)
Dividends paid		(434		)	(394		)
Treasury stock purchases		(43		)	(27		)
Proceeds from stock options exercised		312			478
Net cash (used in) provided by financing activities		10,835			(193		)
Net increase (decrease) in cash and cash equivalents		(2,598		)	2,508
Cash and cash equivalents at beginning of period		7,191			3,546
Cash and cash equivalents at end of period		$	4,593		$	6,054
Cash paid for:
Income taxes		$	408		$	50
Interest		—			54

 

Supplemental disclosure of non-cash activity (dollars in thousands):

 

We issued employee loans totaling $155 and $220 for the exercise of stock options during the three month periods ended June 30, 2012 and 2011, respectively. Loans of $289 and $304, respectively, were retired in the three month period ended June 30, 2012 and 2011.

 

We recorded $2,240 of Contingent consideration as part of the Bios Acquisition.

 

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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 our annual report on Form 10-K, at March 31, 2012.

 

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.

 

Reclassification — Approximately $409,000 of customer payments for shipping was reclassified from cost of revenue to revenue in the condensed statement of income for the three month period ended June 30, 2011.  This reclassification affects revenues and cost of revenues, but has no impact on other figures in the condensed statements of income.

 

2.  Acquisition

 

On May 15, 2012, we completed a business combination (“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, while maintaining our historic profitability measures.

 

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

 

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 have recorded goodwill in connection with this transaction.  The goodwill is expected to be deductible for tax purposes.  All of the goodwill is 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.  Due to the recency of the transaction, the purchase price allocation was based on preliminary estimated fair value of the assets and liabilities acquired, including the preliminary contingent purchase price liability.  We determined the preliminary estimated fair values using discounted cash flow analyses and estimates made by management.  Upon completing our valuation analysis, the preliminary contingent purchase price liability, and the allocation between intangibles and goodwill may change.  The following reflects our preliminary allocation of the consideration, subject to customary purchase price adjustments in accordance with the Bios Agreement (dollars in thousands):

 

Cash consideration		$	16,660
Preliminary contingent purchase price liability		2,240
Aggregate consideration		$	18,900
The purchase price was allocated as follows:
Accounts receivable, net		$	541
Inventory		910
Other current assets		28
Property, plant and equipment		63
Intangibles		8,228
Goodwill		9,200
Current liabilities		(70		)
Total purchase price allocation		$	18,900

 

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Our condensed statement of income includes 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 April 1, 2012 and 2011, are as follows:

 

		Three months ended June 30,
(Dollars in thousands, except earnings per share)		2012 (Unaudited)			2011 (Unaudited)
Total net revenue		$	11,340		$	11,080
Net income		2,120			1,726
Net income per common share:
Basic		$	0.64		$	0.53
Diluted		0.60			0.51

 

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 indicative of results of operations that would have been achieved if the acquisition had taken place at the dates identified.

 

3.  Inventories

 

(Dollars in thousands)		June 30, 2012 (Unaudited)			March 31, 2012
Raw materials		$	3,935		$	3,241
Work-in-process		376			331
Finished goods		1,546			1,091
Less: reserve		(282		)	(225		)
		$	5,575		$	4,438

 

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 condensed balance sheets, is being amortized over ten years.  In addition, sales of products covered by this license agreement will be subject to royalty payments.

 

5.  Debt

 

(Dollars in thousands)		June 30, 2012 (Unaudited)			March 31, 2012
Credit Facility (1.5% at June 30, 2012)		$	11,000		$	—
Less: current portion		—			—
Long-term portion		$	11,000		$	—

 

In February 2012, we entered into a three year agreement for a $20,000,000 revolving line of credit and up to $1,000,000 of letters of credit (the “Credit Facility”), 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 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

 

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of funded debt to the Company’s 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 assets of the Company.  The Credit Facility requires us to maintain a ratio of funded debt to the Company’s 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.

 

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

 

Fiscal year
2013		$	—
2014		—
2015		11,000
		$	11,000

 

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.

 

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 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 June 30,
(Dollars in thousands except earnings per share)		2012			2011
Total cost of stock-based compensation charged against income before income taxes		$	149		$	96
Amount of income tax benefit recognized in earnings		51			35
Amount charged against net income		$	98		$	61
Impact on net income per common share:
Basic		$	0.03		$	0.02
Diluted		0.03			0.02

 

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:

 

		Three months ended June 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 summarizes 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			6.2
Options forfeited		(7,900	)	30.36
Options expired		—
Options exercised		(29,780	)	20.97
Outstanding at June 30, 2012		499,985		28.46			4.3		$	9,016
Exercisable at June 30, 2012		210,305		20.86			3.3		1,805

 

We issue new shares of common stock upon exercise of stock options.  The total intrinsic value of options exercised was $851,000 and $495,000 during the three month periods ended June 30, 2012 and 2011, respectively.

 

A summary of the status of our unvested option shares as of June 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		(7,900	)	7.86
Options vested		(91,175	)	6.80
Unvested at June 30, 2012		289,680		9.19

 

As of June 30, 2012, there was approximately $1,918,000 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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7.  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 June 30,
(Amounts in thousands except earnings per share)		2012			2011
Net income available for shareholders		$	2,099		$	1,679
Weighted average outstanding shares of common stock		3,337			3,274
Dilutive effect of stock options		204			140
Common stock and equivalents		3,541			3,414
Earnings per share:
Basic		$	0.63		$	0.51
Diluted		0.59			0.49

 

For the three months ended June 30, 2012, 101,433 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 period ended June 30, 2011.

 

8.  Contingencies

 

As part of our 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 the former owners of Bios if cumulative revenues from the acquisition for the three years subsequent to the acquisition exceed approximately $22,127,000.  The potential undiscounted future payments that we could be required to make is between $0 and $6,710,000.  The preliminary fair value of the contingent consideration arrangement included in the purchase price was estimated based on Bios’ historic revenue growth.  We have recorded a contingent consideration liability of $2,240,000 on the condensed balance sheet as of June 30, 2012.  This amount may change as we finalize our purchase price allocation, with the difference affecting the allocation to the acquired assets and assumed liabilities.  Any changes to the contingent consideration subsequent to our finalizing purchase accounting, however, would impact the income statement.  An increase would be recorded as expense, while a decrease would be recorded as income.  The contingent consideration is payable in the first quarter of fiscal 2016.

 

During the third quarter of fiscal 2012, we determined that the Company had a potential liability for state sales taxes.  During the first quarter of fiscal 2013, we completed our analysis and determined that no additional liability is required.

 

9.  Subsequent Events

 

In August 2012, our Board of Directors declared a quarterly cash dividend of $0.13 per share of common stock, payable on September 17, 2012, to shareholders of record at the close of business on August 29, 2012.

 

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10.  Segment Data

 

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

 

(Dollars in thousands)		Biological Indicators			Instruments			Total
Three months ended June 30, 2012
Revenue		$	5,118		$	5,441		$	10,559
Operating Income		1,449			1,770			3,219
Other (Income) and Expense		(2		)	36			34
Capital Expenditures		33			152			185
Bios Acquisition.		—			18,900			18,900
Depreciation		128			75			203
Amortization		403			178			581
Three months ended June 30, 2011
Revenue		$	4,668		$	4,629		$	9,297
Operating Income		941			1,752			2,693
Other (Income) and Expense		53			(3		)	50
Capital Expenditures		125			62			187
Depreciation		113			52			165
Amortization		336			40			376
Total assets
June 30, 2012		$	31,077		$	35,634		$	66,711
March 31, 2012		32,915			17,781			50,696

 

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 June 30,
(Dollars in thousands)		2012			2011
Net revenues from unaffiliated customers:
United States		$	6,369		$	5,746
Foreign (no country exceeds 10% of total)		4,190			3,551
		$	10,559		$	9,297

 

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

 

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

 

Overview

 

Mesa Laboratories, Inc. has two segments — Our Instruments 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.  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 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.  As we have integrated our acquisitions and taken advantage of manufacturing efficiencies, the Biological Indicator segment gross margins have improved and are now more comparable to the Instruments segment.  The mix between segments, however, 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.

 

Discussion of Key Indicators and Trends

 

In May 2012, we completed a business combination (the “Bios Acquisition”) by acquiring specific assets and assuming certain liabilities of Bios International Corporation (“Bios”), a New Jersey corporation.  Consideration consisted of a $15,660,000 closing payment and a future payment of $1,000,000 held in escrow.  Contingent consideration involves a three year earn-out period.  If cumulative revenues from the acquisition for the three year period subsequent to acquisition exceed certain growth targets, additional consideration of up to $6,710,000 will be required.  We borrowed $11,000,000 under our Credit Facility to finance the acquisition, with the balance being paid from available cash.  Due to the recency of the transaction, the purchase price allocation was based on preliminary estimated fair value of the assets and liabilities acquired, including the preliminary contingent purchase price liability.  Upon completing our valuation analysis, the preliminary contingent purchase price liability, and the allocation between intangibles and goodwill may change.

 

Acquisitions in May 2012, 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.  It typically takes us from six to twelve months to fully integrate acquisitions, which impacts the key indicators during that time frame.

 

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(Dollars in thousands except earnings per		Key Financial Indicators As of and for the three months ended June 30,
share)		2012			2011			2010			2009			2008
Cash and cash equivalents		$	4,593		$	6,054		$	2,541		$	10,759		$	6,390
Trade Receivables Gross		$	7,519		$	6,851		$	5,350		$	3,748		$	3,768
Days Revenues Outstanding (1)		57			67			58			66			63
Inventory, Net		$	5,575		$	5,377		$	5,936		$	4,749		$	4,498
Inventory Turns		3.0			2.6			2.1			1.7			1.7
Working Capital		$	13,330		$	9,254		$	8,769		$	18,005		$	13,571
Current Ratio		4:1			2:1			3:1			13:1			11:1
Average Return On:
Stockholder Investments (2)		19		%	18		%	17		%	15		%	17		%
Assets		13		%	13		%	14		%	14		%	16		%
Invested Capital (3)		17		%	18		%	19		%	22		%	22		%
Revenues (4)		$	10,559		$	9,297		$	7,781		$	5,245		$	5,329
Gross Profit (4)		$	6,455		$	5,388		$	4,381		$	2,983		$	3,204
Gross Margin (4)		61		%	58		%	56		%	57		%	60		%
Operating Income		$	3,219		$	2,693		$	2,214		$	1,608		$	1,536
Operating Margin (4)		30		%	29		%	28		%	31		%	29		%
Net Income		$	2,099		$	1,679		$	1,320		$	1,026		$	1,016
Net Profit Margin (4)		20		%	18		%	17		%	20		%	19		%
Earnings Per Diluted Share		$	0.59		$	0.49		$	0.40		$	0.31		$	.31
Earnings Before Income Tax, Depreciation, Amortization and Impairment of intangible asset		$	3,969		$	3,184		$	2,619		$	1,800		$	1,756
Capital Expenditures, Net		$	185		$	187		$	2,346		$	29		$	63
Employees (average for the period)		200			178			170			114			118
Revenues Per Employee (annualized)		$	211		$	209		$	183		$	184		$	181

 

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

 

(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.

 

(4)  Customer payments for shipping have been reclassified from cost of revenue to revenue for all five periods presented.  This reclassification affects revenue, gross margin, gross margin percentage, operating margin percentage and net profit margin percentage, but has no impact on other figures in the income statement.

 

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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.

 

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:

 

		Three months ended June 30,
(Dollars in thousands)		2012			2011			2010			2009			2008
Net income		$	2,099		$	1,679		$	1,320		$	1,026		$	1,016
Income taxes		1,086			964			882			588			549
Depreciation		203			165			167			82			65
Amortization		581			376			250			104			126
		$	3,969		$	3,184		$	2,619		$	1,800		$	1,756

 

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Results of Operations

 

		Three months ended June 30,									Percent
(Dollars in thousands)		2012			2011			Change			Change
Revenues		$	10,559		$	9,297		$	1,262		14	%
Cost of revenues		4,104			3,909			195			5	%
Gross profit		6,455			5,388			1,067			20	%
Gross margin		61		%	58		%	3		%
Operating expenses		3,236			2,695			541			20	%
Net income		2,099			1,679			420			25	%
Net profit margin		20		%	18		%	2		%

 

Revenues

 

The following table summarizes our revenues by source:

 

		Three months ended June 30,									Percent
(Dollars in thousands)		2012			2011			Change			Change
Biological Indicators — Product		$	5,118		$	4,668		$	450		10	%
Instruments:
Product		3,607			2,998			609			20	%
Parts and disposables		756			698			58			8	%
Service		1,078			933			145			16	%
Total Instruments		5,441			4,629			812			18	%
		$	10,559		$	9,297		1,262			14	%

 

Biological indicator product sales increased due to continued organic growth, achieved through existing customers and expanding into new markets.  Instruments revenues increased primarily due to the Bios Acquisition in May 2012, while our other Instruments revenues were relatively flat.

 

Cost of Revenues / Gross Profit

 

Biological indicator gross profit increased approximately $586,000 for the three month period ended June 30, 2012, compared to the prior year, due to improved manufacturing efficiencies and higher sales.

 

Gross profit for Instruments increased approximately $481,000 for the three month period ended June 30, 2012, compared to the prior year, primarily due to the Bios Acquisition.  Gross profit for other Instruments product lines was relatively unchanged.

 

Operating Expenses

 

Selling expenses increased approximately $63,000 for the three month period ended June 30, 2012, compared to the prior year.  The Bios Acquisition increased our costs, but we were able to offset these with cost savings elsewhere.  As a percent of sales, selling expense remained relatively flat.

 

General and administrative expense increased approximately $506,000 for the three month period ended June 30, 2012, compared to the prior year.  The increase relates primarily to a) additional amortization of approximately $200,000 from the Bios Acquisition and the amortization of trademarks, which we began in the fourth quarter of fiscal 2012; b) increased labor costs for additional personnel and salary adjustments; and c) professional fees of approximately $80,000 associated with the Bios Acquisition.

 

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Research and development expense decreased approximately $28,000 for the three month period ended June 30, 2012, compared to the prior year.  Our internal costs increased, but our external consulting expense decreased.  The cost of intangible assets that are purchased from others for use in research and development activities and have future use are capitalized and amortized over their expected useful lives. In fiscal 2012, we partially funded Biological Indicator research, which was capitalized as an intangible asset because it has alternative future uses.  That project continues in fiscal 2013.

 

Net Income

 

Net income varied consistently with the growth in revenues and gross profit, as we managed our other expenses.  Our effective income tax rate decreased period over period because the goodwill from the Bios acquisition is deductible for tax purposes.

 

Liquidity and Capital Resources

 

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

 

We invest surplus cash in various interest bearing instruments, including money market funds.  All investments are fixed dollar investments with variable rates in order to minimize the risk of principal loss.

 

Working capital is the amount by which current assets exceed current liabilities.  We had working capital of approximately $13,330,000 and $14,899,000, respectively, at June 30 and March 31, 2012.  The decrease in working capital is due to the use of cash for the Bios Acquisition, offset by higher sales and net income.

 

In February 2012, we entered into a three year agreement for a $20,000,000 revolving line of credit and up to $1,000,000 of letters of credit (the “Credit Facility”).  Funds from the Credit Facility may be used for general working capital and corporate needs, retiring existing debt, or to support acquisitions and capital expenditures.  In February 2012 we also extinguished our obligations under our previous debt agreement.  In May 2012, we borrowed $11,000,000 against the Credit Facility to partially finance the Bios Acquisition.  At June 30, 2012, we had unused capacity under our Credit Facility of $9,000,000.

 

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

 

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

 

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