Innovative Products
and Services
for critical monitoring and
testing applications
2014 Annual Report
Year Ended March 31st
Revenues
$39,616
$34,227
$52,724
$46,435
$23,087
2010
2011
2012
2013
2014
Adjusted Net Income*
$11,046
$10,144
$8,876
$6,933
$5,052
2010
2011
2012
2013
2014
Dividends and Net Income
$2.29
$2.35
$2.49
$1.86
$1.45
$0.42
$0.46
$0.50
$0.54
$0.58
2010
2011
Dividends per share
2012
2013
2014
Net income per diluted share
$60,000
$50,000
$40,000
$30,000
$20,000
$11,500
$10,000
$8,500
$7,000
$5,500
$4,000
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$-
In thousands, except per share data
*The non-GAAP measure of adjusted net income is defined to exclude the non-cash impact
of amortization of intangible assets, net of tax.
Letter to Our Shareholders,
August 14, 2014
I am happy to report that Mesa Laboratories, Inc. (“Mesa” or the “Company”) had another excellent year in fiscal
2014, in which the Company grew significantly and achieved new records for revenues, net income and adjusted
net income. In some respects, fiscal 2014 was a year of transformation for Mesa. Beyond the growth initiatives
that resulted in record revenues, we entered new markets and made significant improvements in our business
processes and management team. We completed three business acquisitions during the fiscal year, and two more
shortly after the end of the fiscal year. All of the newly acquired U.S. businesses are synergistic with Mesa’s
existing product lines. The acquisition of our French biological indicator (“BI”) distributor (“Amilabo”),
immediately after the end of the fiscal year, lays the groundwork for increased direct selling of Mesa’s BI products
into Europe, which will enable us to be more competitive and profitable. This was a significant first step in
building a more effective international sales and support organization for our products. We also invested in
building out our infrastructure and management team during fiscal 2014 to support our anticipated growth, both this
year and for years ahead. We are in a much better position now with our ability to expand the business than we
were previously.
Growth
Organic revenues growth was approximately five percent during fiscal 2014, which when combined with
approximately nine percent revenues growth through acquisitions, resulted in a healthy growth rate of 14 percent,
compared to fiscal 2013. I am particularly happy about Mesa’s continued ability to grow at a rate above the
average for other companies in our industries. Our adjusted net income, which excludes the non-cash impact of
amortization of intangible assets, net of tax associated with Mesa’s past acquisitions, grew nine percent, exceeding
$3.00 per diluted share for the first time. We believe that adjusted net income is a good measure of profitability for
an acquisitive company like Mesa, as the exclusion of these acquisition related expenses provides the ability to
understand the benefits of acquisitions based on their cash returns. We expect that the momentum we have
established in our traditional product lines and the recent acquisitions we have made will fuel additional growth in
the years ahead.
Acquisitions
Business acquisitions have been an important part of Mesa’s strategy for many years, and I am happy to report that
fiscal 2014 was no different. During, or shortly after the end of the year, we purchased businesses that have
allowed us to enter new markets or solidify our position in existing ones. Early in the fiscal year, we acquired the
SureTorque line of bottle cap torque testing instruments. Our existing Torqo products have gained wide acceptance
in the beverage industry, with somewhat limited acceptance in the pharmaceutical industry. The SureTorque
products, on the other hand, are widely used in the pharmaceutical and biotechnology industries for quality control
of bottling processes. With the combination of the two lines of bottle cap torque testing instrumentation, we will be
able to offer a wider range of products to a broader set of potential customers. We already are seeing signs of this
strategy starting to play out.
In November, we acquired two businesses involved in continuous monitoring which focuses on the measurement of
critical environmental parameters in a variety of regulated industries. We have wanted to enter the continuous
monitoring market for several years, as a complement to our closely related data logger product line, and the
acquisition of the Amega and TempSys businesses provides an ideal platform to accomplish this. (More on
continuous monitoring later.)
Immediately after the end of the fiscal year, we acquired our first business outside the United States; Amilabo, our
distributor of BI’s in France. This acquisition allows us to sell directly to BI end users, and it may allow us to
expand direct sales of BI products to other countries as well which we believe would further improve gross margins
for this product line.
Lastly, in April 2014, we acquired the BGI business. This acquisition is synergistic with Mesa’s Bios line of gas
flow calibrators, which are used extensively for the calibration of air samplers in both industrial hygiene and
environmental monitoring applications. The combined Bios/BGI product lines will offer a more complete solution
to Mesa’s existing customers and worldwide distributors. We will be moving the BGI product line to the Bios
facility and anticipate an improved cost structure as a result.
Positioning for Growth
In order to better position the Company for future growth, we continued our efforts to improve our infrastructure by
adding key talent to the management team. We also kicked off a major project to replace Mesa’s antiquated ERP
system with a modern, cloud-based system that is better suited to support Mesa’s expanding operations, including
our international subsidiary. The bulk of this project should be completed in fiscal 2015, but follow-on
enhancements will extend into the following fiscal year. While a new ERP system is costly to implement, the
efficiencies that will be realized should help control costs and support growth for years to come. On the personnel
front, we enhanced the senior management team by adding a General Counsel, and Vice Presidents of both
Engineering and European Operations. These new positions are critical in supporting our expanding organization
and driving the engineering efforts to support future organic growth.
Outlook
There were two recent events that should have a major impact on Mesa’s future. The first was our entry into the
continuous monitoring market, and the other was our first international acquisition. Why continuous monitoring?
A major trend in many industries, and even in the consumer world, is to provide more and more information that
can be acted upon to improve efficiency, enhance safety and increase security. Sensor networks are cropping up
everywhere, including manufacturing, healthcare, retail, the home and even your automobile. Mesa now provides
sensor networks to critical monitoring applications in regulated industries, primarily in healthcare and
pharmaceutical manufacturing. As institutions realize the advantages of an integrated sensor network, we should
see steady growth from this product line for many years to come. Additionally, the nature of this market lends
itself to an ever expanding base of repeat business. Since regulators require frequent re-calibration of the sensors
installed in these networks, the initial sale of a system is only the beginning of a long-term relationship with the
customer. Most customers require the vendor to provide annual calibration and service of the installed sensors,
providing an annuity that should grow continually, as the installed base expands. To support this effort, Mesa now
has a large field service organization in the U.S., which we can leverage across our other product lines or into other
services, such as performance validation of critical equipment. Entering the continuous monitoring market this past
year provides not only a growing field service business, but also the opportunity to expand into new markets.
Equally as important as continuous monitoring will be to Mesa in the years ahead, so was Mesa’s first international
acquisition. The purchase of Amilabo provides a platform, from which Mesa can further expand direct BI sales and
possibly launch other products into Europe. Amilabo is one of Mesa’s largest and most profitable BI distributors in
Europe. This acquisition allows Mesa to capture the profits from these sales, and it puts the Company in more
direct contact with our end users in Europe. Expansion internationally, including the capability of performing local
calibration services, will be important in our ability to take all of our product lines to new levels of growth outside
the U.S.
Lastly, I would like to thank our shareholders for their continued support. We look forward to reporting our fiscal
2015 progress to you in the months ahead. As always, you can track our progress by visiting our web site at
www.mesalabs.com.
Sincerely,
John J. Sullivan, Ph.D.
President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2014
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)
Colorado
(State or other jurisdiction of
Incorporation or organization)
84-0872291
(I.R.S. Employer
Identification number)
12100 West Sixth Avenue
Lakewood, Colorado
(Address of principal executive offices)
80228
(Zip Code)
Registrant’s telephone number, including area code: (303) 987-8000
Securities registered under Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, no par value
NASDAQ
Securities registered under Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES
NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES
NO
Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section13 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
NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of the
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). YES
NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of the Form 10-K or any amendment to this Form 10-K.
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):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a
smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES
NO
The aggregate market value as of September 30, 2013 (the last business day of the registrant's most recently completed
second fiscal quarter), of the voting and non-voting common equity of Mesa Laboratories Inc. held by non-affiliates
(assuming, for this purpose, that all directors, officers and owners of 5% or more of the registrant’s common stock are deemed
affiliates) computed by reference to the price at which the common equity was last sold ($67.36 per share) was $164,839,000.
The number of outstanding shares of the common stock as of May 28, 2014 was 3,502,433.
Table of Contents
Forward Looking Statements
Part I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
1
6
11
11
11
11
12
14
15
25
25
49
49
49
FORWARD-LOOKING STATEMENTS
This report contains information that may constitute "forward-looking statements.” Generally, the words "believe,"
"expect," "intend," "anticipate," "estimate," "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 I,
"Item 1A. Risk Factors" and elsewhere in this report and those described from time to time in our future reports to be filed
with the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS
Introduction
Mesa Laboratories, Inc. was incorporated under the laws of the State of Colorado on March 26, 1982. The terms “we,” “us,”
“our,” the “Company” or “Mesa” are used in this report to refer collectively to the parent company and the subsidiaries
through which our various businesses are actually conducted. 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 three
divisions across seven 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 and semiconductor 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. Our
Continuous Monitoring Division designs, develops and markets systems which are used to monitor various environmental
parameters such as temperature, humidity and differential pressure to ensure that critical storage and processing conditions are
maintained in hospitals, pharmaceutical and medical device manufacturers, blood banks, pharmacies and a number of other
laboratory and industrial environments.
Our Lakewood, Colorado; Butler, New Jersey; and Waltham, Massachusetts facilities manufacture our Instruments Division
products, which include the DataTrace®, Dialyguard®, Bios DryCal®, Challenger®, TetraCal®, OMNI FTTM, Torqo®, and
SureTorque® brands. Our Omaha, Nebraska and Bozeman, Montana locations manufacture our Biological Indicators
Division products – the Mesa and Apex™ brands, while our Lakewood, Colorado facility also manufactures our Continuous
Monitoring Division products, which include the CheckPoint®, ViewPoint and AmegaView brands.
Our philosophy is to manufacture a quality product and provide a high level of on-going service for those products. Our
revenues come from two main sources – product sales and services. Our strategic goals involve continuing to grow
revenues and profits through three key strategies – a) improving our distribution channels, b) introducing new products to
the market, and c) seeking out companies or product lines to acquire.
In April 2014, we completed a business combination (the “BGI Acquisition”) whereby we acquired substantially all of the
assets (other than cash and accounts receivable) and certain liabilities of BGI, Incorporated and BGI Instruments, Inc.,
(collectively “BGI”), businesses focused on the sale of equipment primarily used for particulate air sampling.
In April 2014, we completed a business combination (the “Amilabo Acquisition”) whereby we acquired all of the common
stock of Amilabo SAS (“Amilablo”), a distributor of our biological indicator products.
PAGE 1
In November 2013, we completed a business combination (the “TempSys Acquisition”) whereby we acquired all of the
common stock of TempSys, Inc. (“TempSys”), a company in the business of providing continuous monitoring systems to
regulated industries.
In November 2013, we completed a business combination (the “Amega Acquisition”) whereby we acquired substantially
all the assets and certain liabilities of Amega Scientific Corporation’s (“Amega”) business which provides continuous
monitoring systems to regulated industries.
In August 2013, we entered into an agreement whereby we sold our NuSonics product line.
In July 2013, we completed a business combination (the “Suretorque Acquisition”) whereby we acquired substantially all
of the assets of ST Acquisitions, LLC’s (“ST Acquisitions”) business involving the design, manufacturing, sale and service
of its SureTorque line of bottle cap torque testing instrumentation.
In May 2012, we completed a business combination (the “Bios Acquisition”) whereby we acquired substantially all of the
assets and certain liabilities of Bios International Corporation’s (“Bios”) business involving the design, manufacturing, sale
and service of flow calibration equipment.
Our principal executive offices and corporate headquarters are located at 12100 West Sixth Ave., Lakewood, Colorado
80228, and our telephone number is 303-987-8000. Our website is www.mesalabs.com. The information contained or
connected to our website is not incorporated by reference into this Annual Report on Form 10-K and should not be
considered part of this report.
Instruments Division
Our Instruments Division designs, manufactures and markets quality control instruments and disposable products utilized in
the healthcare, pharmaceutical, food and beverage, medical device, industrial hygiene and semiconductor industries.
Generally, our instrument products are used for testing, quality control, safety, validation and regulatory compliance. Our
Instruments Division products include: 1) Data loggers, which are used in critical manufacturing and quality control
processes in the food, pharmaceutical and medical device industries; 2) Medical meters and calibration solutions, which are
used for quality control in dialysis clinics and dialysis machine manufacturing operations; 3) Gas flow calibration and air
sampling equipment, which are used for industrial hygiene assessments, calibration of gas metering equipment and
environmental air monitoring by a variety of organizations, including metrology labs, manufacturing companies and
government agencies; and 4) torque testing systems, which are used to measure bottle cap tightness in the beverage and
pharmaceutical industries.
Data Loggers
Our data logger products are self-contained, wireless, high precision instruments that are used in critical manufacturing,
quality control and validation applications. They are used to measure temperature, humidity and pressure inside a process
or a product during manufacturing. In addition, data loggers can be used to validate the proper operation of laboratory or
manufacturing equipment, either during its installation or for annual re-certifications. The products consist of individual
data loggers, a personal computer (“PC”) interface, software and various accessories. A customer typically purchases a
large number of data loggers along with a single PC interface and the software package. In practice, using the PC
interface, the user programs the loggers to collect environmental data at a pre-determined interval, places the data loggers
in the product or process, and then collects stored process data from the data logger either through the PC interface or
wirelessly via a radio link. The user can then prepare tabular and graphical reports using the software. Unique aspects of
our data loggers are their ability to operate at elevated temperatures and in explosive environments – important
differentiating factors in the marketplace and, consequently, they are used by companies to control their most critical
processes, such as sterilization. Industries utilizing the data loggers include food processing, pharmaceutical
manufacturing, medical device companies and contract sterilizers.
Medical Meters and Calibration Solutions
Our medical meters are used to test various parameters of the dialysis fluid (dialysate), and the proper calibration and
operation of the dialysis machine. Each measures some combination of temperature, pressure, pH and conductivity to ensure
that the dialysate has the proper composition to promote the transfer of waste products from the blood to the dialysate. The
PAGE 2
meters provide a digital readout that the patient, physician or technician uses to verify that the dialysis machine is working
within prescribed limits and delivering properly prepared dialysate. We manufacture two styles of medical meters; those
designed for use by dialysis machine manufacturers and biomedical technicians, and those used primarily by dialysis nurses.
The meters for technicians are characterized by exceptional accuracy, stability and flexibility, and are used by the industry as
the primary standard for the calibration of dialysis machines. The meters designed for use by dialysis nurses are known
primarily for their ease of use and incorporate a patented, built-in syringe sampling system. These meters are used as the final
quality control check on the dialysate just prior to starting a treatment. In addition to the dialysate meters, we market a line of
standard solutions for use in dialysis clinics for calibration and testing. These standard solutions are regularly consumed by
the dialysis clinics thus, along with calibration services, are less impacted by general economic conditions than instrument
sales. Customers that utilize these products include dialysis facilities, medical device manufacturers and biomedical service
companies.
Gas Flow Calibration and Air Sampling Equipment
We manufacture a variety of instruments and equipment for gas flow calibration and for environmental air sampling. In the
air sampling area, our technology is used primarily for the determination of particulate concentrations in air as a measure of
urban or industrial air pollution, and for industrial hygiene assessments. The primary products include air samplers, particle
separators and pumps. In the environmental area, our particle samplers were some of the first on the market and they were
recognized early-on as “reference samplers” by the U.S. Environmental Protection Agency.
We also manufacture gas flow calibration instruments to support the use of our air sampling equipment, and for broader
industrial applications. Our gas flow calibration instruments provide the precise standards required by laboratories and
industry in the design, development, manufacture, installation and calibration of various gas flow meters and air sampling
devices. Our flow meters are used in many industries where professionals require the superior accuracy, reliability and ease of
operation that our flow meters provide, including 1) industrial hygienists, 2) calibration and research laboratories, 3)
manufacturers who design, develop and manufacture gas flow meters, and 4) industrial engineering and manufacturing
companies that utilize gas flow meters.
Torque Testing Systems
Our automated torque testing systems are durable and reliable motorized cap torque analyzers used throughout the
packaging industry. The primary advantages of our torque instruments are their high accuracy and long term consistency
of measurement. Unlike manual torque testing instruments, our motorized torque systems eliminate the effects on the
measurement results of different operators and different cap removal speeds. With a motorized torque testing system, the
force applied to a cap is precisely the same in each testing cycle, regardless of who may be operating the machine, or how
strong they may be. Our torque systems provide the information that helps the packaging operation track events, and
potential problems, during the manufacturing process so that corrections can be performed in a timely fashion. Industries
utilizing these instruments include food processors, beverage companies, pharmaceutical, and consumer product
manufacturers.
Biological Indicators Division
Our Biological Indicators Division manufactures and markets biological indicators and distributes chemical indicators used to
assess the effectiveness of sterilization processes, including steam, gas (such as Ethylene Oxide or Chlorine Dioxide),
hydrogen peroxide and radiation, in the hospital, dental, medical device and pharmaceutical industries. Our biological
indicators are registered medical devices manufactured under International Standards Organization (“ISO”) 13485 controlled
processes. They are developed and used according to the Association for the Advancement of Medical Instrumentation
(“AAMI”) guidelines, which are adopted as the worldwide standard under ISO.
Biological indicators consist of resistant spores of certain microorganisms that are applied on a convenient substrate, such as a
small piece of filter paper. The spores are well characterized in terms of numbers and resistance to sterilization. In use, the
biological indicator is exposed to a sterilization process and then tested to determine the presence of surviving organisms. Our
biological indicators include a) spore strips, which require post-processing transfer to a growth media, b) self-contained
products, which have the growth media already pre-packaged in crushable ampoules, and c) culture media. Chemical
indicators are similar to biological indicators, except that a chemical change (generally determined by color) is used to assess
the exposure to sterilization conditions. Biological indicators and chemical indicators are often used together to monitor
processes. Biological indicators are used to validate equipment and monitor the effectiveness of a process in any industrial or
PAGE 3
healthcare setting which uses sterilization. Key markets include healthcare, such as dental offices and hospitals, and industrial,
such as medical device and pharmaceutical manufacturers.
Our biological indicators are distinguished in the marketplace by their high level of quality, consistency and flexibility. A
variety of different formats allows our biological indicators to be used in many different types of processes and products. For
example, the simple spore strips are used most often in the small table-top steam sterilizers in dental offices, while a more
complex self-contained biological indicator may be used by a medical device manufacturer to assure the sterility in a complex
ethylene oxide sterilization process. In either case, the number of spores contained on the carrier and the resistance of the
spores to the sterilization process must be well characterized in order to accurately assess the effectiveness of sterilization.
During manufacturing, extensive quality control steps are used to insure that the microorganism spores are well characterized
and their resistance is known following placement on the target carrier.
Continuous Monitoring Division
Our Continuous Monitoring Division designs, develops and markets systems which are used to monitor various environmental
parameters such as temperature, humidity and differential pressure to ensure that critical storage and processing conditions are
maintained. Continuous monitoring systems are used in controlled environments such as refrigerators, freezers, warehouses,
laboratory incubators, clean rooms and a number of other settings. The continuous monitoring systems consist of wireless
sensors that are placed in controlled environments, hardware modules to receive the wireless data, and various software
programs to collect, store and process the data. Our systems are designed to operate continuously, providing data around the
clock, 365 days per year. A critical function of our systems is the ability to provide local alarms and notifications via e-mail,
text or telephone, in the case where established environmental conditions are exceeded. Key markets for our continuous
monitoring systems are hospitals, pharmaceutical and medical device manufacturers, blood banks, pharmacies and a number
of other laboratory and industrial environments.
Among the important competitive differentiators for our continuous monitoring systems, are 1) their high degree of reliability
and up-time; 2) a large variety of sensor types to meet the needs of most applications; 3) a large, distributed installation and
service team; and 4) a full-featured and validated software program, providing extensive reporting and alarm capability. An
important aspect of our continuous monitoring business is the ability to provide post-installation service and support. For
most systems, annual re-calibration of each sensor is required, and we provide this service through our large, dedicated service
organization.
Market Factors
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 and continuous monitoring systems have a longer life, and their purchase by our customers is
somewhat discretionary, so sales are more sensitive to general economic conditions. Service demand is driven by our
customers’ quality control and regulatory environments, which require periodic repair and recalibration or certification of our
instrument products and continuous monitoring systems. 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.
Manufacturing
We conduct research, manufacturing and support of our Instruments Division products from our facilities in Lakewood,
Colorado; Butler, New Jersey; and Waltham, Massachusetts. Our instrument products are manufactured primarily by
assembling the products from purchased components and calibrating the final products prior to release. The manufacture and
support of our Continuous Monitoring Division systems are conducted from our facility in Lakewood, Colorado. Our
continuous monitoring systems are manufactured primarily by assembling the systems from purchased components and
calibrating the final system at the point of installation at the customer’s facility. Facilities in Bozeman, Montana and Omaha,
Nebraska are used for the Biological Indicators Division. Our biological indicator products are manufactured by growing
microbiological spores from raw materials, forming the finished products and testing the finished biological indicators using
established quality control tests.
Most of the materials and components used in our product lines are available from a number of different suppliers. We
generally maintain multiple sources of supply, but are dependent on a single source for certain items. We believe that
PAGE 4
alternative sources could be developed, if required, for present single supply sources. Although our dependence on these
single supply sources may involve a degree of risk, to date we have been able to acquire sufficient stock to meet our
production requirements.
Marketing and Distribution
Domestically, we generate sales to end users through our sales and marketing staff and distributors. We use approximately
290 distributors throughout Europe, Africa, Asia, South America, Australia, Canada and Central America for international
sales and distribution. Sales promotions include trade shows, direct mail campaigns, internet and other digital forms of
advertising.
Our Instruments Division marketing effort is focused on offering quality products to our customers that will aid them in
containing cost, improving the quality of their products and services, and helping them meet their regulatory requirements.
Customers primarily include manufacturers of foods, beverages, pharmaceutical products, medical devices, contract sterilizing
services and dialysis clinics.
Our Biological Indicators Division marketing focuses on providing quality test products in a variety of different formats,
which minimize incubation and test result time. Customers include companies providing sterility assurance testing to dental
offices, hospitals, contract sterilization services and various industrial users involved in pharmaceutical and medical device
manufacturing.
Our Continuous Monitoring Division marketing focuses on providing quality systems to our customers that monitor various
environmental parameters such as temperature, humidity and differential pressure to ensure that critical storage and processing
conditions are maintained. Customers include hospitals, pharmaceutical and medical device manufacturers, blood banks,
pharmacies and a number of other laboratory and industrial environments.
As of and for the years ended March 31, 2014, 2013 and 2012, no individual customer represented more than 10% of our
accounts receivable or revenues.
Competition
Our products compete across several industries with a variety of companies, many of which are well established, with
substantially greater capital resources and larger research and development capabilities. Furthermore, many of these
companies have established product lines and a significant operating history. Accordingly, we may be at a competitive
disadvantage with some competitors due to their respective size and market presence.
Companies with which our Instruments Division products compete include the Myron L Company, IBP Medical GmbH, GE
Kaye, Inc., Ellab, TMI Orion, Danaher, Inc., Thermo Fisher Scientific, Inc., Mecmesin and Steinfurth. Our Biological
Indicators Division products compete with 3M, Terragene, NAMSA and Steris, among others. Our Continuous Monitoring
Division systems compete with Rees Scientific Corporation, GE Kaye, Inc. and Cooper-Atkins, among others.
Research and Development
We are committed to an active research and development program dedicated to innovating new products and improving the
quality and performance of our existing products. We spent $2,320,000, $2,011,000 and $1,534,000 for the years ended
March 31, 2014, 2013 and 2012, respectively, on research and development activities, including amounts capitalized as
intangible assets.
Government Regulation
While our quality system and manufacturing processes are generally the same throughout the Instruments Division, specific
products are compliant under ISO 13485, ISO 17025, ISO 9001 and certain U.S. Federal regulations. Compliance requires us
to obtain third party certification for certain products.
Several products in both the Instruments and Biological Indicators Divisions are medical devices subject to the provisions of
the Federal Food, Drug and Cosmetic Act, as amended by the Medical Device Amendments of 1976 (hereinafter referred to as
the "Act"). The Act requires any company proposing to market a medical device to notify the Food and Drug Administration
PAGE 5
(“FDA”) of its intention at least ninety days before doing so and in such notification must advise the FDA as to whether the
device is substantially equivalent to a device marketed prior to May 28, 1976. We have received permission from the FDA to
market all of the products requiring such permission.
Some of our facilities are subject to FDA regulations and inspections, which may be time-consuming and costly. This
includes on-going compliance with the FDA's current Good Manufacturing Practices regulations that require, among other
things, the systematic control of manufacture, packaging and storage of products intended for human use. Failure to comply
with these practices renders the product adulterated and could subject us to an interruption of manufacturing and selling these
products, and possible regulatory action by the FDA.
The manufacture and sale of medical devices is also regulated by some states. Although there is substantial overlap between
state regulations and the regulations of the FDA, some state laws may apply. We do not anticipate that complying with state
regulations, however, will create any significant problems. Foreign countries also have laws regulating medical devices sold
in those countries, which may cause us to expend additional resources on compliance.
Employees
On March 31, 2014, we had 273 employees, of which 162 are employed for manufacturing and quality assurance, 24 for
research and development and engineering, 51 for sales and marketing, and 36 for administration.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Annual Report on Form 10-K and other documents we filed with the
SEC, you should carefully consider the following factors, which could materially affect our business, financial condition or
results of operations in future periods. The risks and uncertainties described below are those that we have identified as
material, but are not the only risks and uncertainties facing us. Additional risks and uncertainties not currently known to
us or that we currently believe are immaterial also may impair our business, including our results of operations, liquidity
and financial condition.
Conditions in the global economy, the markets we serve and the financial markets may adversely affect our business and
results of operations.
Our business is sensitive to general economic conditions and since 2008 the effects of the global financial crisis have
adversely impacted the global economy. Slower global economic growth, the credit market crisis and European debt crisis,
uncertainty relating to the Euro, high levels of unemployment, reduced levels of capital expenditures, changes in government
fiscal and monetary policies, government deficit reduction and budget negotiation dynamics, sequestration, other austerity
measures and other challenges affecting the global economy could affect us and our distributors, customers and suppliers,
including having the effect of:
(cid:2)
(cid:2)
(cid:2)
reducing demand for our products and services, limiting financing available to our customers, increasing order
cancellations and resulting in longer sales cycles;
increasing the difficulty in collecting accounts receivable and the risk of excess and obsolete inventories; and
increasing the risk that counterparties to our contractual arrangements will become insolvent or otherwise unable to
fulfill their contractual obligations, which could increase the risks identified above.
Improvement in the global economy remains uneven and uncertain. If slower growth in the global economy or in any of the
markets we serve continues for a significant period, if there is a significant deterioration in the global economy or such
markets, or if improvements in the global economy don’t benefit the markets we serve, our business and results of operations
could be adversely affected.
PAGE 6
We face competition and if we are unable to compete effectively, we may experience decreased demand and decreased
market share.
The markets for some of our current and potential products are competitive. Because of the range of products we sell and the
variety of markets we serve, we encounter a wide variety of competitors, including several that possess both larger sales forces
and more capital resources. In order to compete effectively, we must retain longstanding relationships with major customers,
continue to grow our business by establishing relationships with new customers, continually develop new products and
services to maintain and expand our brand recognition and leadership position in various product and service categories, and
penetrate new markets, including in developing countries. Our failure to compete effectively and/or pricing pressures
resulting from competition may adversely impact our results of operations, and our expansion into new markets may result in
greater-than-expected risks, liabilities and expenses.
Changing industry trends may affect our results of operations.
Various changes within the industries we serve may limit future demand for our products and may include the following:
(cid:2)
changes in dialysis reimbursements;
(cid:2) mergers within the dialysis provider industry, concentrating our medical meter and solutions sales with a few, large
customers;
(cid:2) mergers within other industries we serve, making us more dependent upon fewer, larger customers for our sales;
(cid:2)
(cid:2)
decreased product demand, driven by changes in our customer’s regulatory environments or standard industry
practices; and
price competition for key products.
Our growth depends in part on the timely development and commercialization, and customer acceptance, of new and
enhanced products and services and the efforts of third party distributors.
Our growth depends on the acceptance of our products and services in the marketplace, the penetration achieved by the
companies which we sell to, and rely on, to distribute and represent our products, and our ability to introduce new and
innovative products that meet the needs of the various markets we serve. We can offer no assurance that we will be able to
continue to introduce new and enhanced products, that the products we introduce, or have introduced, will be widely accepted
by the marketplace, or that the companies that we contract with to distribute and represent our products will continue to
successfully penetrate our various markets. Our failure to continue to introduce new and enhanced products or gain
widespread acceptance of our products and services could adversely affect our results of operations. In order to successfully
commercialize our products and services in new markets, we will need to enter into distribution arrangements with companies
that can successfully distribute and represent our products and services into various markets.
Any inability to consummate acquisitions at our historical rate and at appropriate prices could negatively impact our
growth rate and stock price.
Our ability to grow revenues, earnings and cash flow at or above our historic rates depends in part upon our ability to identify
and successfully acquire and integrate businesses at appropriate prices and realize anticipated synergies. We may not be able
to consummate acquisitions at rates similar to the past, which could adversely impact our growth rate and our stock price.
Promising acquisitions are difficult to identify and complete for a number of reasons, including high valuations, competition
among prospective buyers, the availability of affordable funding in the capital markets and the need to satisfy applicable
closing conditions. In addition, competition for acquisitions in our current and anticipated business areas is significant and
may result in higher purchase prices. Changes in accounting or regulatory requirements, or instability in the credit markets
could also adversely impact our ability to consummate acquisitions.
PAGE 7
Our acquisition of businesses could negatively impact our results of operations.
As an important part of our business strategy, we acquire businesses, some of which may be material. Please see “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional details. Our
acquisitions involve a number of financial, accounting, managerial, operational, legal and other risks and challenges, including
the following, any of which could adversely affect our results of operations:
(cid:2)
any acquired business, technology, service or product could under-perform relative to our expectations and the price
that we paid for it, or not perform in accordance with our anticipated timetable;
(cid:2) we may incur or assume significant debt in connection with our acquisitions;
(cid:2)
(cid:2)
(cid:2)
acquisitions could cause our results of operations to differ from our own or the investment community’s expectations
in any given period, or over the long-term;
pre-closing and post-closing acquisition-related earnings charges could adversely impact our results of operations in
any given period, and the impact may be substantially different from period to period;
acquisitions could create demands on our management, operational resources and financial and internal control
systems that we are unable to effectively address, or for which we may incur additional costs;
(cid:2) we could experience difficulty in integrating personnel, operations, financial and other systems, and in retaining key
employees and customers;
(cid:2) we may be unable to achieve cost savings or other synergies anticipated in connection with an acquisition;
(cid:2) we may assume by acquisition unknown liabilities, known contingent liabilities that become realized, known
liabilities that prove greater than anticipated, internal control deficiencies or exposure to regulatory sanctions
resulting from the acquired company’s activities. The realization of any of these liabilities or deficiencies may
increase our expenses, adversely affect our financial position or cause us to fail to meet our public financial reporting
obligations;
(cid:2)
(cid:2)
in connection with acquisitions, we often enter into post-closing financial arrangements such as purchase price
adjustments, earn-out obligations and indemnification obligations, which may have unpredictable financial results;
and
as a result of our acquisitions, we have recorded significant goodwill and other intangible assets on our consolidated
balance sheet. If we are not able to realize the value of these assets, we may be required to incur charges relating to
the impairment of these assets, which could materially impact our results of operations.
The contingent consideration from the Bios Acquisition may negatively impact our available cash and results from
operations.
As part of the Bios Acquisition, we are required to make a contingent consideration payment based on revenue growth related
to the acquired assets over a three year earn-out period. The ultimate amount we pay may differ significantly from the liability
we recorded at the time of the acquisition. If we are required to pay more than the amount initially recorded, the difference
will be recorded as expense in our consolidated statements of income, which could materially impact our results of operations.
The contingent consideration from the Amega Acquisition may negatively impact our available cash and results from
operations.
As part of the Amega Acquisition, we are required to make a contingent consideration payment if the cumulative revenues for
our Continuous Monitoring Division for the three years subsequent to the acquisition meet certain levels. The ultimate amount
we pay may differ significantly from the liability we recorded at the time of the acquisition. If we are required to pay more
than the amount initially recorded, the difference will be recorded as expense in our consolidated statements of income, which
could materially impact our results of operations.
PAGE 8
If we do not or cannot adequately protect our intellectual property, or if third parties infringe our intellectual property
rights, we may suffer competitive injury or expend significant resources enforcing our rights.
We own numerous patents, trademarks, copyrights, trade secrets and other intellectual property and licenses to intellectual
property owned by others, which in aggregate are important to our business. The intellectual property rights that we obtain,
however, may not be sufficiently broad or otherwise may not provide us a significant competitive advantage, and patents may
not be issued for pending or future patent applications owned by or licensed to us. In addition, the steps that we and our
licensors have taken to maintain and protect our intellectual property may not prevent it from being challenged, invalidated,
circumvented or designed-around, particularly in countries where intellectual property rights are not highly developed or
protected. In some circumstances, enforcement may not be available to us because an infringer has a dominant intellectual
property position or for other business reasons, or countries may require compulsory licensing of our intellectual property.
Our failure to obtain or maintain intellectual property rights that convey competitive advantage, adequately protect our
intellectual property, detect or prevent circumvention or unauthorized use of such property, and the cost of enforcing our
intellectual property rights could adversely impact our competitive position and results of operations.
We also rely on nondisclosure and noncompetition agreements with employees, consultants and other parties to protect, in
part, our trade secrets and other proprietary rights. There can be no assurance that these agreements will adequately protect
our trade secrets and other proprietary rights, will not be breached, that we will have adequate remedies for any breach, that
others will not independently develop substantially equivalent proprietary information, or that third parties will not otherwise
gain access to our trade secrets or other proprietary rights.
Several of our products are extensively regulated, which could delay product introduction or halt sales.
The process of obtaining and maintaining required regulatory approvals is lengthy, expensive and uncertain. Although we
have not experienced any substantial regulatory delays to date, we can offer no assurance that delays will not occur in the
future, which could have a significant adverse effect on our ability to introduce new products on a timely basis. Regulatory
agencies periodically inspect our manufacturing facilities to ascertain compliance with “good manufacturing practices” and
can subject approved products to additional testing and surveillance programs. Failure to comply with applicable regulatory
requirements can, among other things, result in fines, suspension of regulatory approvals, product recalls, operating
restrictions and criminal penalties. While we believe that we are currently in compliance, if we fail to comply with regulatory
requirements it could have an adverse effect on our results of operations and financial condition.
Product defects and unanticipated use or inadequate disclosure with respect to our products could adversely affect our
business, reputation and our results of operations.
Manufacturing or design defects in, unanticipated use of, safety or quality issues with respect to, or inadequate disclosure of
risks relating to the use of products that we make or sell (including in products or components that we source from third
parties) can lead to personal injury or property damage. These events could lead to recalls or safety alerts relating to our
products, and result in product liability claims being brought against us. Recalls and product liability claims can result in
significant costs, as well as negative publicity and damage to our reputation that could reduce demand for our products and
have an adverse effect on our results of operations and financial condition.
Catastrophic events or environmental conditions may disrupt our business.
A disruption or failure of our systems or operations because of a major weather event, cyber-attack, terrorist attack, or
other catastrophic event could cause delays in completing sales, providing services or performing other mission-critical
functions. A catastrophic event that results in the destruction or disruption of any of our critical business or IT systems
could harm our ability to conduct normal business operations. Abrupt political change, terrorist activity, and armed conflict
pose a risk of general economic disruption in affected countries, which may increase our operating costs or adversely affect
our revenues. These conditions also may add uncertainty to the timing and budget for purchase/investment decisions by our
customers, and may result in supply chain disruptions for hardware manufacturers, either of which may adversely affect
our revenue. The long-term effects of climate change on the global economy in general or the Industrial Instruments
industry in particular are unclear. Environmental regulations or changes in the supply, demand or available sources of
energy may affect the availability or cost of goods and services, including natural resources, necessary to run our business.
Changes in weather where we operate may increase the costs of powering and maintaining the equipment we need to
produce our product lines.
PAGE 9
We may be required to recognize impairment charges that could materially affect our results of operations.
We assess our goodwill and other intangible assets, and our other long-lived assets as and when required by accounting
principles generally accepted in the United States (“GAAP”) to determine whether they are impaired. If they are impaired, we
would record appropriate impairment charges. It is possible that we may be required to record significant impairment charges
in the future and, if we do so, our results of operations could be materially adversely affected.
Changes in accounting standards could affect our reported financial results.
New accounting standards or pronouncements that may become applicable to our Company from time to time, or changes in
the interpretation of existing standards and pronouncements, could have a significant effect on our reported results of
operations for the affected periods.
Our business is subject to sales tax in numerous states
The application of indirect taxes, such as sales tax, is a complex and evolving issue. A company is required to collect and
remit state sales tax from certain of its customers if that company is determined to have “nexus” in a particular state. The
determination of nexus varies by state and often requires knowledge of each jurisdiction’s tax case law. The application and
implementation of existing, new or future laws could change the states in which we collect and remit sales taxes. Historically,
if we have not properly identified states in which we have nexus, we could be held responsible for payment of sales taxes for
the years in which it is determined we had nexus. We have determined that we most likely have an obligation for sales taxes
in numerous states and as a result, we have recorded accruals of approximately $1,500,000 to cover this exposure. This
estimate was based upon facts and circumstances known at such time and our ultimate liability may change as further analysis
is completed and state sales tax returns are filed. 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, the number of years of
exposure, and any penalties and interest. If the assumptions used in our estimate are not correct or if it is determined that we
have “nexus” in additional states that we have not contemplated, it could have an adverse effect on our results of operations
and financial condition.
We are utilizing variable rate financing.
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. 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%.
In April 2014, the Credit Facility was amended to include a $15,000,000 term loan (the “Term Loan”) and to extend the
maturity date of the Credit Facility to June 30, 2017. The Term Loan bears interest at LIBOR, as defined plus 2% and
requires 11 quarterly principal payments (the first due date being July 15, 2014) in the amount of $750,000 with the
remaining balance of principal and accrued interest due on April 15, 2017.
A change in interest rate market conditions could increase our interest costs in the future and may have an adverse effect on
our results of operations.
Our indebtedness may limit our operations and our use of our cash flow, and any failure to comply with the covenants that
apply to our indebtedness could adversely affect our liquidity and financial statements.
As of May 31, 2014, we had $27,000,000 in outstanding indebtedness. In addition, based on the availability under our Credit
Facility, we have the ability to incur an additional $8,000,000 of indebtedness. Our debt level and related debt service
obligations can have negative consequences, including (1) requiring us to dedicate significant cash flow from operations to the
payment of principal and interest on our debt, which reduces the funds we have available for other purposes such as
acquisitions and capital investment; (2) reducing our flexibility in planning for or reacting to changes in our business and
market conditions; and (3) exposing us to interest rate risk since our debt obligations are at variable rates. We may incur
significantly more debt in the future, particularly to finance acquisitions.
PAGE 10
We may face continuing challenges in complying with certain sections of the Sarbanes-Oxley Act.
Like many public companies, we face challenges in complying with the internal control requirements of the Sarbanes-Oxley
Act (Section 404). Under current frameworks, compliance in areas such as separation of duties, information system controls,
etc. may prove problematic for a smaller company with limited human resources. We may also be forced to incur on-going
expense in order to comply with the law under current control frameworks or if the framework changes. These expenses may
have a material adverse effect on our results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
Set forth below is a listing of our facilities. The Lakewood, Butler, Bozeman, Omaha and Waltham facilities all have
manufacturing, research and development, marketing and administrative functions. The Marlton and Chassieu facilities have
marketing and administrative functions.
Location
Lakewood, Colorado
Butler, New Jersey
Bozeman, Montana
Omaha, Nebraska
Marlton, New Jersey
Chassieu, France
Waltham, Massachusetts
Operations
Instruments and corporate headquarters
Instruments
Biological Indicators
Biological Indicators
Continuous Monitoring
Biological Indicators
Instruments
Square Feet
40,000
13,900
22,500
28,000
6,910
3,380
5,840
Owned
Leased
Owned
Owned
Leased
Leased
Leased
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PAGE 11
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our common stock is traded on the Nasdaq Global Market (“NASDAQ”) under the symbol "MLAB.”
The following table sets forth the high and low market prices per share for our common stock, as reported by NASDAQ, and
dividend per share information:
Quarter Ended
June 30, 2013
September 30, 2013
December 31, 2013
March 31, 2014
Quarter Ended
June 30, 2012
September 30, 2012
December 31, 2012
March 31, 2013
High
$ 55.26
71.32
82.76
94.21
High
$ 51.45
48.94
52.00
57.00
Low
$ 47.12
53.71
65.74
73.88
Low
$ 38.64
40.00
45.10
49.38
Dividends Per Share
$ 0.14
0.14
0.15
0.15
Dividends Per Share
$ 0.13
0.13
0.14
0.14
While we have paid dividends to holders of our common stock on a quarterly basis since 2003, the declaration and payment of
future dividends will depend on many factors, including, but not limited to, our earnings, financial condition, business
development needs and regulatory considerations, and is at the discretion of our Board of Directors.
The NASDAQ Global Market quotations set forth herein reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
As of March 31, 2014, there were approximately 164 record holders of our common stock. This amount does not include
“street name” holders or beneficial holders of our common stock, whose holder of record are banks, brokers and other
financial institutions.
During the year ended March 31, 2014, we did not sell any equity securities that were not registered under the Securities Act
of 1933, as amended.
We made the following repurchases of our common stock, by month, within the fourth quarter of the year covered by this
report:
January 1 – 31, 2014
February 1 – 29, 2014
March 1 – 31, 2014
Total
Shares
Purchased
675
--
--
675
Avg. price Paid
$ 76.11
--
--
76.11
Total Shares
Purchased as
Part of Publicly
Announced Plan
162,306
162,306
162,306
Remaining
Shares to
Purchase Under
Plan
137,694
137,694
137,694
On November 7, 2005, our Board of Directors adopted a share repurchase plan which allows for the repurchase of up to
300,000 of our common shares. This plan will continue until the maximum is reached or the plan is terminated by further
action of the Board of Directors.
We have certain equity compensation plans, all of which were approved by our shareholders. As of March 31, 2014,
398,172 shares of common stock may be issued upon exercise of outstanding options, with a weighted-average exercise
price of $38.75 and 210,888 shares are available for future issuance under the plans. Please see notes contained in “Item 8.
Financial Statements and Supplementary Data” of this report for additional details.
PAGE 12
Set forth below is a line graph comparing, for the period March 31, 2009 through March 31, 2014, the cumulative total
stockholder return on our common stock against the cumulative total return of (a) the S&P Composite Stock Index and (b)
a self-selected peer group, comprised of the following companies: Danaher Corp., ARCA Biopharma, Inc., Steris Corp.,
MOCON Inc., Utah Medical Products, Inc., Cantel Medical Corp., Merit Medical Systems, Inc., Transcat Inc., Electro-
Sensors Inc., Rudolph Technologies Inc., and Measurement Specialties Inc. The graph shows the value at March 31 of
each year, assuming an original investment of $100 in each and reinvestment of cash dividends.
700.00
600.00
500.00
400.00
300.00
200.00
100.00
-
3/31/2009
3/31/2010
3/31/2011
3/31/2012
3/31/2013
3/31/2014
Mesa Laboratories, Inc
S&P 500 Index
Peer Group Index
PAGE 13
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and financial statements and notes hereto contained in “Item 8.
Financial Statements and Supplementary Data” of this report.
(In thousands, except per share data)
Cash and cash equivalents
Working capital
Average return on:
Stockholder investment (1)
Assets
Invested capital (2)
2014
$ 5,575
$ 16,351
As Of And For The Year Ended March 31,
2012
$ 7,191
$ 14,899
2013
$ 4,006
$ 14,793
2011
$ 3,546
$ 7,387
2010
$ 10,471
$ 18,530
15%
11%
13%
17%
14%
18%
20%
16%
21%
18%
15%
21%
16%
15%
24%
Revenues
$ 52,724
$ 46,435
$ 39,616
$ 34,227
$ 23,087
Gross profit
Gross profit margin
Net income
Net income margin
$ 31,688
60%
$ 28,862
62%
$ 23,511
59%
$ 19,568
57%
$ 13,194
57%
$ 9,000
17%
$ 8,450
18%
$ 7,919
20%
$ 6,183
18%
$ 4,769
21%
Net income per diluted share
$ 2.49
$ 2.35
$ 2.29
$ 1.86
$ 1.45
Adjusted net income (3)
$ 11,046
$ 10,144
$ 8,876
$ 6,933
$ 5,052
(1)
(2)
(3)
Average return on stockholder investment is calculated by dividing total net income by the average of end
and beginning of year total stockholders’ equity.
Average return on invested capital (invested capital = total assets – current liabilities – cash and cash
equivalents) is calculated by dividing total net income by the average of end and beginning of year
invested capital.
Adjusted net income is defined to exclude the non-cash impact of amortization of intangible assets, net of tax.
The tax effect is calculated using the average corporate rate for that year multiplied by the amortization.
Reconciliation of Non-GAAP Measure
Adjusted net income (which excludes the non-cash impact of amortization of intangible assets, net of tax), is used by
management as a supplemental performance and liquidity measure, primarily to exclude the impact of acquisition-related
intangible assets in order to compare current financial performance to historical performance, assess the ability of our assets to
generate cash and the evaluation of potential acquisitions.
Adjusted net income 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 adjusted net income, a non-GAAP measure:
(In thousands)
Net income
Amortization of intangible
assets, net of tax
Adjusted net income
2014
$ 9,000
Year Ended March 31,
2012
$ 7,919
2013
$ 8,450
2011
$ 6,183
2,046
$ 11,046
1,694
$ 10,144
957
$ 8,876
750
$ 6,933
2010
$ 4,769
283
$ 5,052
PAGE 14
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
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 three divisions across seven 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 and semiconductor 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. Our Continuous Monitoring Division designs, develops and markets
systems which are used to monitor various environmental parameters such as temperature, humidity and differential pressure
to ensure that critical storage and processing conditions are maintained in hospitals, pharmaceutical and medical device
manufacturers, blood banks, pharmacies and a number of other laboratory and industrial environments. 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 – product sales 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 and continuous
monitoring systems have a longer life, and their purchase by our customers is somewhat discretionary, so sales are more
sensitive to general economic conditions. Service demand is driven by our customers’ quality control and regulatory
environments, which require periodic repair and recalibration or certification of our instrument products and continuous
monitoring systems. We typically evaluate costs and pricing annually. Our policy is to price our products and systems
competitively and, where possible, we try to pass along cost increases in order to maintain our margins.
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 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 the substantial majority of general and administrative expense.
Research and development expense is predominantly comprised of labor costs and third party consultants.
In April 2014, we completed the BGI Acquisition whereby we acquired substantially all of the assets (other than cash and
accounts receivable) and certain liabilities of BGI for $9,900,000, subject to a post-closing adjustment.
In November 2013, we completed the Amega Acquisition whereby we acquired substantially all of the assets and certain
liabilities of Amega for $12,268,000 (subject to a post-closing adjustment). The asset acquisition agreement (the “Amega
Agreement”) also includes a provision for contingent consideration if the cumulative revenues for our Continuous
Monitoring Division for the three years subsequent to the acquisition meet certain levels.
In November 2013, we completed the TempSys Acquisition whereby we acquired all of the common stock of TempSys for
$9,826,000 (subject to a post-closing adjustment).
In May 2012, we completed the Bios Acquisition whereby we acquired substantially all of the assets and certain liabilities
of Bios for $16,660,000. The asset acquisition agreement (the “Bios Agreement”) also included a provision for contingent
consideration based on revenues growth over a three year earn-out period.
In August 2013, we entered into an agreement whereby we sold our NuSonics product line (the “NuSonics Disposal”) for
$661,000, which resulted in a pre-tax gain of $468,000.
PAGE 15
General Trends and Outlook
Our strategic objectives include both growth organically and through further acquisitions. During the year ended March 31,
2014, we continued to build our infrastructure to prepare for future growth, including the addition of key personnel to our
operations, research and development, and finance teams. We also invested in upgrading our information systems and intend
to continue doing so.
The markets for our biological indicators remain strong, as the disposable nature of these products makes them less sensitive
to general economic conditions. The worldwide market for biological indicators is growing as more countries focus on
verifying the effectiveness of sterilization processes. General economic conditions over the past few years have hampered the
organic growth of our instruments business, due to the discretionary nature of these products. Additionally, uncertainty about
global economic conditions may cause businesses to postpone spending in response to tighter credit, unemployment, negative
financial news and/or declines in income or asset values. Worldwide and regional economic conditions could also reduce the
demand for our products and services, as our customers reduce or delay capital equipment and other types of purchases.
Demand for our instruments products and our newly acquired continuous monitoring systems, however, is still strong and we
strive to maintain or grow revenues going forward.
We are working on several research and development projects that, if completed, may result in new products for both existing
customers and in new markets. We are hopeful that both our Biological Indicators and Instruments Divisions will have new
products available for sale in the coming year.
Results of Operations
The following table sets forth, for the periods indicated, condensed consolidated statements of income data. The table and the
discussion below should be read in conjunction with the accompanying consolidated financial statements and the notes thereto
appearing elsewhere in “Item 8. Financial Statements and Supplementary Data” (in thousands, except percent data):
Year Ended March 31,
2014 vs 2013
2013 vs 2012
Change
Percent
Change
Change
Percent
Change
Revenues
Cost of revenues
Gross profit
2014
$ 52,724
21,036
2013
$ 46,435
17,573
2012
$ 39,616
16,105
$ 31,688
$ 28,862
$ 23,511
$ 6,289
3,463
$ 2,826
14%
20%
10%
Gross profit margin
60%
62%
59%
(2%)
Operating Expenses:
Selling
$ 6,119
$ 4,630
$ 3,909
General and administrative
Research and development
Impairment of intangibles
11,464
2,320
--
9,117
2,011
--
5,416
1,359
350
$ 1,489
2,347
309
--
Operating income
Net income
Net profit margin
$ 19,903
$ 15,758
$ 11,034
$ 4,145
$ 11,785
$ 13,104
$ 9,000
$ 8,450
17%
18%
$ 12,477
$ 7,919
20%
$(1,319)
$ 550
(1%)
32%
26%
15%
--
26%
(10)%
7%
$ 6,819
1,468
$ 5,351
3%
$ 721
3,701
652
(350)
$ 4,724
$ 627
$ 531
(2)%
17%
9%
23%
18%
68%
48%
(100)%
43%
5%
7%
PAGE 16
Revenues
The following table summarizes our revenues by source (in thousands, except percent data):
Biological Indicators
Product
Service
Instruments
Product
Service
Continuous Monitoring
Product
Service
Year Ended March 31,
2014 vs 2013
2013 vs 2012
2014
2013
2012
Change
Percent
Change
Change
Percent
Change
$ 22,111
$ 20,641
$ 19,653
$ 1,470
881
22,992
20,858
5,531
26,389
1,570
1,773
3,343
823
21,464
19,949
5,022
24,971
--
--
--
769
20,422
15,548
3,646
19,194
--
--
--
58
1,528
909
509
1,418
1,570
1,773
3,343
7%
7%
7%
5%
10%
6%
100%
100%
100%
$ 988
54
1,042
4,401
1,376
5,777
--
--
--
5%
7%
5%
28%
38%
30%
--
--
--
Total
$ 52,724
$ 46,435
$ 39,616
$ 6,289
14%
$ 6,819
17%
Year ended March 31, 2014 versus March 31, 2013
Biological Indicators revenues increased as a result of continued organic growth which was achieved through existing
customers, expansion into new markets and price increases.
Instruments revenues increased primarily from organic growth in our gas flow calibration equipment, the acquisition of the
SureTorque product line and the timing of the Bios Acquisition in the prior year, partially offset by the disposal of our
Nusonics product line in August 2013. Our other Instruments product lines remained relatively unchanged.
Continuous Monitoring revenues were negatively impacted by integration activities that commenced soon after the Amega
and TempSys acquisitions were completed. These integration activities, which are ongoing, are expected to be
substantially completed by the start of the second half of our year ending March 31, 2015, at which time we expect that
revenues will increase.
Year ended March 31, 2013 versus March 31, 2012
Biological Indicators revenues increased as a result of continued organic growth which was achieved through existing
customers, expansion into new markets and price increases. Instruments revenues increased as a result of the Bios
Acquisition, while legacy Instruments product line revenues remained relatively unchanged.
PAGE 17
Gross Profit
The following table summarizes our gross profit by segment (in thousands, except percent data)
Year Ended March 31,
2014 vs 2013
2013 vs 2012
Biological Indicators
2014
$ 13,187
2013
$ 12,365
Gross profit margin
57%
58%
2012
$ 11,236
55%
Instruments
$ 16,904
$ 16,497
$ 12,275
Gross profit margin
64%
Continuous Monitoring
$ 1,597
Gross profit margin
48%
66%
--
--%
64%
--
--%
Change
Percent
Change
Change
Percent
Change
$ 822
(1)%
$ 407
(2)%
7%
$ 1,129
10%
3%
2%
$ 4,222
34%
2%
1,597
100%
--
--
--
Total gross profit
$ 31,688
$ 28,862
$ 23,511
$ 2,826
10%
$ 5,351
23%
Gross profit margin
60%
62%
59%
(2)%
3%
Year ended March 31, 2014 versus March 31, 2013
Biological Indicators gross profit margin percentage remained relatively flat as compared to the prior year.
Instruments gross profit margin percentage decreased as compared to the prior year. The current year was negatively
impacted from the application of purchase accounting and increased manufacturing costs associated with migrating the
operations associated with the Suretorque Acquisition to our Lakewood facility and minor decreases in our legacy
Instrument products, partially offset by an increase in our gas flow calibration equipment product line due to increased
revenues and the timing of the Bios Acquisition in the prior year.
Continuous Monitoring gross profit margin percentage was negatively impacted by integration activities that commenced
soon after the Amega and TempSys acquisitions were completed. These integration activities, which are ongoing, are
expected to be substantially completed by the start of the second half of our year ending March 31, 2015, at which time we
expect that the gross profit margin percentage for this segment will be closer to our historical results.
Year ended March 31, 2013 versus March 31, 2012
Biological Indicator gross profit margin percentage increased as a result of improved manufacturing efficiencies which
were driven by successfully completing the integration of the SGM Acquisition and Apex Acquisition, and increased sales.
Instruments gross profit margin percentage increased as a result of the Bios Acquisition, while legacy Instruments product
line gross profit remained relatively unchanged.
PAGE 18
Operating Expenses
The following table summarizes the change in our operating expenses (in thousands):
Selling
General and administrative
Chief Financial Officer transition
ERP system upgrade and SOX compliance
Acquisition costs
Amortization
Personnel costs
Taxes and fees
Other, net
Research and development
Impairment of intangible asset
Increase (Decrease)
Year Ended March 31,
2014 vs 2013
$ 1,489
2013 vs 2012
$ 721
(526)
(86)
252
462
470
1,408
367
2,347
309
--
526
245
150
1,110
1,144
(88)
614
3,701
652
(350)
Operating expenses
$ 4,145
$ 4,724
Selling
Year ended March 31, 2014 versus March 31, 2013
Selling expense increased primarily as a result of the Bios, Amega, TempSys and SureTorque acquisitions. As a percentage
of revenues, selling expense increased to 11.6% as compared to 10% in the prior year. The increase was due primarily to
additional sales personnel associated with the Amega and TempSys acquisitions along with a revenues run rate associated
with Continuous Monitoring that was negatively impacted as a result of integration activities.
Year ended March 31, 2013 versus March 31, 2012
Selling expense increased due to the Bios Acquisition, with minor increases in other product lines. As a percentage of
revenues, selling expense remained relatively flat.
General and Administrative
Year ended March 31, 2014 versus March 31, 2013
General and administrative expenses increased due to the recording of a $1,408,000 accrual associated with not properly
collecting and remitting sales tax in states in which we most likely had established nexus during prior periods, increased
amortization and personnel costs resulting primarily from the Amega and TempSys acquisitions and increased acquisition
costs associated with the Amega, TempSys, Amilabo and BGI acquisitions, partially offset by Chief Financial Officer
transition costs incurred in the prior year.
Year ended March 31, 2013 versus March 31, 2012
As part of our Chief Financial Officer transition, certain unvested options were modified, resulting in incremental stock option
expense of approximately $240,000. The balance of the Chief Financial Officer transition impact includes a severance
package and miscellaneous other costs. All costs associated with the transition were expensed during the year ended March
31, 2013. We upgraded our ERP system and implemented computer-based controls as part of our Sarbanes-Oxley compliance
efforts, which we believe makes us better prepared for any future growth we may experience. Amortization expense increased
PAGE 19
due to the Bios Acquisition, in May 2012, and the amortization of trademarks, which began in February 2012. We recorded
estimated sales tax liabilities of $100,000 and $250,000, respectively, for the years ended March 31, 2013 and 2012.
Personnel costs increased primarily due to the Bios Acquisition, but also for additional personnel and salary adjustments. The
remaining increase primarily consists of expenses associated with the acquired operations from the Bios Acquisition and
general growth initiatives.
Research and Development
Year ended March 31, 2014 versus March 31, 2013
Research and development expenses increased as compared to the prior year as a result of the Bios Acquisition and timing of
external research and development consulting costs, as we continue our commitment to research and development.
Year ended March 31, 2013 versus March 31, 2012
The increase is due to additional internal personnel added as a result of the Bios Acquisition, and external research and
development consulting costs, as we continue our commitment to research and development. The cost of intangible assets that
are purchased from others for use in research and development activities and have alternative future uses, however, are
capitalized and amortized over their expected useful life. During the year ended March 31, 2012, we capitalized $175,000 of
Biological Indicator research as an intangible asset, as it had alternative future uses, and are amortizing it through research and
development expense over ten years.
Impairment of Intangible Asset
We determined that the carrying value of an Instruments indefinite-lived intangible asset was greater than its estimated fair
value and in February, 2012 we recorded an impairment charge of $350,000. Fair value was estimated using the royalty
replacement approach, whereby a royalty percentage was applied to forecasted revenues and discounted to determine the
present value. While gross profit and cash flows had shown improvement since the intangible asset was acquired, revenues
had not grown at the level originally used to value the intangible asset.
Net Income
Other income (expense) increased primarily as a result of a $1,020,000 gain associated with the revision of our estimate on the
amount that will ultimately be paid associated with contingent consideration related to the Bios Agreement and the $468,000
gain on the Nusonics Disposal. Please see “Item 8. Financial Statements and Supplementary Data” for additional discussion.
Our income tax rate for the current year was impacted by several items including an increase in our research and development
credit which reduced our effective rate to 31.3%. Our tax rate will continue to vary based upon many factors but in general,
we anticipate our future income tax rate to approximate 35%. Otherwise, net income varied with the changes in revenues,
gross profit and operating expenses.
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. In addition, over the next 10-16
months, we expect to implement a new ERP system which may require a significant use of cash.
Working capital is the amount by which current assets exceed current liabilities. We had working capital of $16,351,000 and
$14,793,000, respectively, at March 31, 2014 and 2013. The increase in working capital is primarily due to an increase in
deferred income taxes partially offset by the impact of purchase accounting associated with the Amega and TempSys
acquisitions.
In February 2012, we entered into the Credit Facility for a $20,000,000 revolving line of credit and up to $1,000,000 of letters
of credit. 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,
PAGE 20
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%.
In April 2014, the Credit Facility was amended to include a $15,000,000 term loan and to extend the maturity date of the
Credit Facility to June 30, 2017. The Term Loan bears interest at LIBOR, as defined plus 2% and requires 11 quarterly
principal payments (the first due date being July 15, 2014) in the amount of $750,000 with the remaining balance of
principal and accrued interest due on April 15, 2017. The proceeds from the Term Loan may be used to support
acquisition financing and to repay amounts outstanding under the Line of Credit.
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 1.35 to 1.0. We were in compliance with
these covenants at March 31, 2014.
As of May 31, 2014, we had $27,000,000 in outstanding indebtedness and unused capacity under our Credit Facility of
$8,000,000.
On October 1, 2012, we amended our articles of incorporation to increase the number of authorized shares of common stock
from 8 million to 25 million.
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 believe that 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 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 are canceled and repurchases are made with existing cash reserves.
We do not maintain a set policy or schedule for our buyback program. We have purchased 162,306 shares of common stock
under this program from inception through March 31, 2014.
We have been paying regular quarterly dividends since 2003. Dividends per share paid by quarter were as follows:
First quarter
Second quarter
Third quarter
Fourth quarter
Year Ended March 31,
2013
$ 0.13
0.13
0.14
0.14
2014
$ 0.14
0.14
0.15
0.15
2012
$ 0.12
0.12
0.13
0.13
On April 23, 2014, our Board of Directors declared a quarterly cash dividend of $0.15 per share of common stock, payable on
June 16, 2014, to stockholders of record at the close of business on May 30, 2014.
Cash Flow – Operating, investing and financing activities were as follows (in thousands):
Year Ended March 31,
2014
2013
2012
Net cash provided by operating
activities
Net cash used in investing activities
Net cash provided by (used in)
financing activities
$ 12,373
(23,138)
12,334
$ 11,402
(17,568)
2,981
$ 12,489
(1,420)
(7,424)
Generally, net cash provided by operating activities changes primarily due to increases in revenues and corresponding net
income, offset by the timing of certain working capital expenditures. The year ended March 31, 2014 was impacted by
positive results from our efforts to collect long-outstanding receivables offset by significant increases in inventory purchases
associated with the Amega and TempSys acquisitions. The year ended March 31, 2013 saw an increase in accounts receivable
due to our expanding international customer base, which has extended payment terms, and an increase in inventory, as we
PAGE 21
strive to take advantage of volume discounts for raw materials. The year ended March 31, 2012 saw an increase in sales
levels, which resulted in a reduction in inventory levels.
Net cash used in investing activities was driven primarily by the Amega and TempSys acquisitions in November 2013, the
SureTorque Acquisition in July 2013 and the Bios Acquisition in May 2012. The final payment for the acquisition of Apex
Laboratories, Inc. was made in December 2011. Purchases of property, plant and equipment were $1,041,000, $908,000 and
$683,000, respectively, for the years ended March 31, 2014, 2013 and 2012.
Financing activities for the year ended March 31, 2014 resulted from borrowings under our Line of Credit of $21,000,000 and
proceeds from the exercise of stock options of $1,845,000, partially offset by payments on long-term debt of $8,500,000 and
the payment of dividends of $1,989,000. Financing activities for the year ended March 31, 2013 resulted from borrowings
under our Line of Credit of $11,000,000 and proceeds from the exercise of stock options of $894,000, partially offset by
payments on long-term debt of $7,000,000 and the payment of dividends of $1,815,000. Financing activities for the year
ended March 31, 2012 resulted from the repayment of debt of $6,500,000 and the payment of dividends of $1,645,000,
partially offset by proceeds from the exercise of stock options of $813,000.
At March 31, 2014, we had contractual obligations for open purchase orders of approximately $1,500,000 for routine
purchases of supplies and inventory, which were payable in less than one year. In September 2011, we entered into a license
agreement for certain biological indicator technology. Under the terms of this agreement, we made payments of $175,000 for
rights to the technology. Up to $225,000 of additional payments may be made in the future, depending on meeting certain
development and performance milestones.
Under the terms of the Amega Agreement, we are required to pay contingent consideration if the cumulative revenues for
our Continuous Monitoring Division for the three years subsequent to the acquisition meet certain levels. The potential
consideration payable ranges from $0 to $10,000,000 and is based upon a sliding scale of three-year cumulative revenues
between $31,625,000 and $43,500,000. Based upon both historical and projected growth rates, we recorded $500,000 of
contingent consideration payable which represents our best estimate of the amount that will ultimately be paid. Any
changes to the contingent consideration ultimately paid will result in additional income or expense in our consolidated
statements of income. We will continue to monitor the results of our Continuous Monitoring Division and we will adjust
the contingent liability on a go forward basis, based on then current information. The contingent consideration is payable
in the third quarter of our year ending March 31, 2017.
Under the terms of the Bios Agreement, we are required to pay contingent consideration if the cumulative revenues related to
the acquisition for the three years subsequent to the acquisition exceed $22,127,000. The potential future payment that we
could be required to make ranges from $0 to $6,710,000. Based upon historical growth rates, we initially recorded $2,140,000
of contingent consideration payable which represented our best estimate of the amount that would ultimately be paid. Based
upon actual results and current run rates, during the year ended March 31, 2014, we revised our estimate of the ultimate
contingent liability that would be paid, which resulted in reducing the contingent consideration payable to $1,120,000. Any
further changes to the contingent consideration ultimately paid will result in additional income or expense in our consolidated
statements of income. We will continue to monitor the results associated with the Bios Acquisition and we will adjust the
contingent liability on a go forward basis, based on then current information. The contingent consideration is payable in the
first quarter of our year ending March 31, 2016.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the
United States, which require management to make estimates, judgments, and assumptions that affect the amounts reported
in our consolidated financial statements and accompanying notes. We believe that the following are the more critical
judgment areas in the application of our accounting policies that currently affect our financial condition and results of
operations. Management has discussed the development, selection, and disclosure of critical accounting policies and
estimates with the Audit Committee of our Board of Directors. While our estimates and assumptions are based on our
knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these
estimates and assumptions. For a discussion of our significant accounting policies, please see Note 1 of Notes to Financial
Statements contained in “Item 8. Financial Statements and Supplementary Data.”
PAGE 22
Accounts Receivable
We estimate an allowance for doubtful accounts based on overall historic write-offs, the age of our receivable balances,
and the payment history and creditworthiness of the customer. If actual results are not consistent with our assumptions and
judgments or our assumptions and estimates change due to new information, we may experience material changes in our
allowance for doubtful accounts and bad debt expense.
Inventories
Inventories are stated at the lower of cost or market, based on standards using the first-in, first-out method (FIFO) to determine
cost. We evaluate standard costs annually, unless circumstances necessitate a mid-year evaluation for specific items. Our work
in process and finished goods inventory includes labor and overhead, which are estimated based on trailing twelve months of
expense and standard labor hours for each product. Our biological indicator inventory is tracked by lot number, thus labor is
generally based on actual hours.
We monitor inventory cost compared to selling price in order to determine if a lower of cost or market reserve is necessary.
At year end we perform a complete physical inventory observation. Throughout the year, we estimate and maintain an
inventory reserve, as needed, for such matters as obsolete inventory, shrink and scrap. This reserve may fluctuate as our
assumptions change due to new information, discrete events, or changes in our business, such as entering new markets or
discontinuing a specific product.
Recoverability of Long-lived Assets
For property, plant and equipment, and amortizable intangible assets, recoverability and/or impairment tests are required only
when conditions exist that indicate the carrying value may not be recoverable. We monitor the same conditions for our
goodwill, but an annual evaluation is also required. For years ended March 31, 2012 and earlier, indefinite-lived intangible
assets were evaluated for impairment by comparing the fair value to the carrying amount.
Monitoring these conditions requires significant management judgment, including evaluating general economic conditions,
industry and market considerations, changes in production costs, cash flow trends, and other relevant entity-specific events such
as changes in management, key personnel, strategy or customers.
If conditions exist that indicate the carrying value may not be recoverable, we would be required to estimate the fair value of the
asset, asset group, or reporting unit. We determine fair value using widely accepted valuation techniques, primarily discounted
cash flow and market multiple analyses. These techniques are also used when initially allocating the purchase price to acquired
assets and liabilities. These types of analyses require us to make assumptions and estimates regarding industry and economic
factors, the profitability of future business strategies, and cash flow.
We did not record any impairment charges for the year ended March 31, 2014. If actual results are not consistent with our
assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to an
impairment charge in the future.
Purchase Accounting for Acquisitions
We apply the acquisition method of accounting for a business combination. In general, this methodology requires companies to
record assets acquired and liabilities assumed at their respective fair market values at the date of acquisition. Any amount of the
purchase price paid that is in excess of the estimated fair value of the net assets acquired is recorded as goodwill. For the
Amega and Bios Acquisitions, we also recorded a liability for contingent consideration based on estimated future revenues. We
monitor our assumptions surrounding these estimated future cash flows and, if there is a significant change, would record an
adjustment to the contingent consideration liability and a corresponding adjustment to either income or expense.
We determine fair value using widely accepted valuation techniques, primarily discounted cash flow and market multiple
analyses. These types of analyses require us to make assumptions and estimates regarding industry and economic factors, the
profitability of future business strategies, and cash flow.
PAGE 23
If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new
information, we may be exposed to an impairment charge in the future. If the contingent consideration paid for either the Bios
or Amega Acquisition differs from the amount initially recorded, we would record either income or expense.
Stock-based Compensation
We estimate the fair value of option grants using the Black-Scholes model, which requires us to estimate the volatility and
forfeiture rate. Under our current stock-based compensation plan, we recognize the expense on a straight-line basis over
the service period.
Contingent Liabilities
We accrue a loss for contingencies if it is probable that an asset has been impaired or a liability has been incurred, and
when the amount of loss can be reasonably estimable. When no accrual is made because one or both of these conditions
does not exist, we disclose the contingency if there is at least a reasonable possibility that a loss may be incurred. We
estimate contingent liabilities, such as for state sales taxes, based on the best information available at the time. If there is a
range of possible outcomes, we accrue the low end of the range.
Recent Accounting Standards and Pronouncements
None
Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
Off-Balance Sheet Arrangements
In accordance with the definition under SEC rules, the following qualify as off-balance sheet arrangements:
•
•
•
•
any obligation under certain guarantee contracts;
a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves
as credit, liquidity or market risk support to that entity for such assets;
any obligation under certain derivative instruments; and
any obligation arising out of a material variable interest held by the registrant in an unconsolidated entity that
provides financing, liquidity, market risk or credit risk support to the registrant, or engages in leasing, hedging or
research and development services with the registrant.
As of March 31, 2014, we have no obligations or interests which qualify as off-balance sheet arrangements.
Contractual Obligations
As of March 31, 2014, our contractual obligations, including payments due by period, are as follows (in thousands):
Purchase Commitments
Line of Credit
Other
Total
Payments Due For Years Ending March 31,
Total
$ 1,500
16,500
476
$ 18,476
2015
$ 1,500
--
355
$ 1,855
2016-2017
$ --
16,500
121
$ 16,621
2018-2019
$ --
--
--
$ --
Thereafter
$ --
--
--
$ --
Our purchase commitments consist primarily of open purchase orders, which we have established to take advantage of volume
discounts for materials and to ensure a reliable supply of critical parts.
PAGE 24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have no derivative instruments and minimal exposure to foreign currency and commodity market risks.
We are subject to interest rate volatility with regard to existing and future issuances of debt, as our current credit facility is
variable-rate. Based on annualized variable-rate debt for the year ended March 31, 2014, a one percentage point increase in
interest rates would have increased interest expense by $74,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
26
28
29
30
31
32
PAGE 25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Mesa Laboratories, Inc.
Lakewood, Colorado
We have audited the accompanying consolidated balance sheets of Mesa Laboratories, Inc. and Subsidiaries (the
“Company”) as of March 31, 2014 and 2013 and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended March 31, 2014. We have also audited the Company’s internal
control over financial reporting as of March 31, 2014, based on criteria established in Internal Control – Integrated
Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As
described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its
assessment the internal control over financial reporting of TempSys, Inc. (“TempSys Acquisition”), which was acquired on
November 6, 2013, and whose financial statements constitute approximately 16% of total assets and 3% of net sales of the
financial amounts of the Company as of and for the year ended March 31, 2014. Accordingly, our audit of internal control
over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of the
TempSys Acquisition. The Company’s management is responsible for these financial statements, for maintaining effective
internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion
on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall consolidated
financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control over financial reporting based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of consolidated financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PAGE 26
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company as of March 31, 2014 and 2013, and the results of their operations and their
cash flows for each of the three years in the period ended March 31, 2014, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of March 31, 2014, based on criteria established in Internal Control-
Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
June 4, 2014
Denver, Colorado
/s/ EKS&H LLLP
EKS&H LLLP
PAGE 27
March 31,
2014
2013
Mesa Laboratories, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Prepaid expenses and other
Deferred income taxes
Total current assets
Property, plant and equipment, net
Intangibles, net
Goodwill
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued salaries and payroll taxes
Unearned revenues
Other accrued expenses
Income taxes payable
Total current liabilities
Deferred income taxes
Long-term debt
Contingent consideration
Total liabilities
Commitments and Contingencies (Note 12)
Stockholders’ equity:
Common stock, no par value; authorized 25,000,000 shares;
issued and outstanding, 3,490,628 shares (March 31,
2014) and 3,388,548 shares (March 31, 2013)
Employee loans to purchase stock
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
$ 5,575
9,278
7,771
2,064
1,878
26,566
7,680
25,417
37,866
$ 97,529
$ 2,019
3,567
1,886
2,743
--
10,215
4,861
16,500
1,620
33,196
--
15,796
(24)
48,561
64,333
$ 97,529
See accompanying notes to consolidated financial statements.
$ 4,006
8,474
5,576
553
846
19,455
7,406
15,418
23,640
$ 65,919
$ 1,010
2,085
--
422
1,145
4,662
2,364
4,000
2,140
13,166
--
11,352
(149)
41,550
52,753
$ 65,919
PAGE 28
Mesa Laboratories, Inc.
Consolidated Statements of Income
(In thousands, except per share data)
Revenues
Product
Service
Total revenues
Cost of revenues
Cost of products
Cost of services
Total cost of revenues
Gross profit
Operating expenses
Selling
General and administrative
Research and development
Impairment of intangible asset
Total operating expenses
Operating income
Other income (expense), net
Earnings before income taxes
Income taxes
Net income
Net income per share:
Basic
Diluted
2014
Year Ended March 31,
2013
2012
$ 44,539
8,185
52,724
$ 40,590
5,845
46,435
$ 35,201
4,415
39,616
16,062
4,974
21,036
31,688
6,119
11,464
2,320
--
19,903
11,785
1,318
13,103
15,489
2,084
17,573
28,862
4,630
9,117
2,011
--
15,758
13,104
(126)
12,978
12,505
3,600
16,105
23,511
3,909
5,416
1,359
350
11,034
12,477
(146)
12,331
4,103
$ 9,000
4,528
$ 8,450
4,412
$ 7,919
$2.61
2.49
$ 2.52
2.35
$ 2.41
2.29
Weighted average common shares outstanding:
Basic
Diluted
3,445
3,611
3,357
3,593
3,285
3,462
See accompanying notes to consolidated financial statements.
PAGE 29
Mesa Laboratories, Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands, except share amounts)
March 31, 2011
Common stock issued for conversion
of stock options net of 12,634 shares
returned as payment
Purchase and retirement of common
stock
Dividends paid
Stock-based compensation
Tax benefit on exercise of stock
options
Net income
March 31, 2012
Common stock issued for conversion
of stock options net of 15,572 shares
returned as payment
Purchase and retirement of common
stock
Dividends paid
Stock-based compensation
Tax benefit on exercise of stock
options
Net income
March 31, 2013
Common stock issued for conversion
of stock options net of 13,021 shares
returned as payment
Purchase and retirement of common
stock
Dividends paid
Stock-based compensation
Tax benefit on exercise of stock
options
Net income
March 31, 2014
Common Stock
Number of
Shares
3,250,736
Amount
$ 7,180
Employee
Loans
Retained
Earnings
$ (437)
$ 29,674
Total
$ 36,417
88,043
1,277
(16,814)
--
--
--
--
3,321,965
77,753
(11,170)
--
--
(60)
--
441
62
--
8,900
1,101
(56)
--
1,112
--
--
3,388,548
295
--
11,352
104,864
1,845
(2,784)
--
--
(147)
--
840
41
--
--
--
--
--
(396)
--
1,318
(537)
(1,645)
--
--
7,919
35,411
(597)
(1,645)
441
62
7,919
43,915
(203)
--
898
450
--
--
--
--
(149)
--
125
--
--
(496)
(1,815)
--
--
8,450
41,550
(102)
(1,815)
1,112
295
8,450
52,753
--
1,845
--
(1,989)
--
(22)
(1,989)
840
--
--
3,490,628
1,906
--
$ 15,796
--
--
$ (24)
--
9,000
$ 48,561
1,906
9,000
$ 64,333
See accompanying notes to consolidated financial statements.
PAGE 30
Mesa Laboratories, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended March 31,
2013
2012
2014
Cash flows from operating activities:
Net income
Depreciation and amortization
Gain on dispositions, net
Deferred income taxes
Stock-based compensation
Impairment of intangible asset
Contingent consideration
Change in assets and liabilities, net of effects of
acquisitions and dispositions
Accounts receivable, net
Inventories, net
Prepaid expenses and other
Accounts payable
Accrued liabilities and taxes payable
Unearned revenues
Net cash provided by operating activities
Cash flows from investing activities:
Acquisitions
Proceeds from disposition
Purchases of property, plant and equipment
Net cash used in investing activities
Cash flow from financing activities:
Proceeds from the issuance of debt
Payments on debt
Dividends
Proceeds from the exercise of stock options
Purchase and retirement of common stock
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Cash paid during the year for:
Income taxes
Cash paid for interest
Supplemental non-cash activity:
Employee loans issued for exercise of stock options
Repayment of employee loans for stock options
Contingent consideration as part of an acquisition
$ 9,000
3,844
(420)
(43)
840
--
(1,020)
$ 8,450
3,432
--
(291)
1,112
--
--
697
(1,300)
(1,479)
754
1,192
308
12,373
(22,758)
661
(1,041)
(23,138)
21,000
(8,500)
(1,989)
1,845
(22)
12,334
1,569
4,006
$ 5,575
(1,510)
(228)
(189)
437
189
--
11,402
(16,660)
--
(908)
(17,568)
11,000
(7,000)
(1,815)
898
(102)
2,981
(3,185)
7,191
$ 4,006
$ 7,919
2,215
--
(258)
464
350
--
493
1,276
38
(150)
142
--
12,489
(737)
--
(683)
(1,420)
-
(6,500)
(1,645)
1,318
(597)
(7,424)
3,645
3,546
$ 7,191
$ 4,714
133
$ 4,778
116
$ 4,457
176
$ --
92
500
$ 203
450
2,140
$ 396
437
-
In December 2011, we settled the $600 holdback amount from our acquisition of the assets of Apex Laboratories, Inc. by
paying $562 and returning $38 of accounts receivable.
See accompanying notes to consolidated financial statements.
PAGE 31
Mesa Laboratories, Inc.
Notes to Consolidated Financial Statements
Note 1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Mesa Laboratories, Inc. was incorporated under the laws of the State of Colorado on March 26, 1982. The terms “we,” “us,”
“our,” the “Company” or “Mesa” are used in this report to refer collectively to the parent company and the subsidiaries
through which our various businesses are actually conducted. 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 three
divisions across seven 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 and semiconductor 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. Our
Continuous Monitoring Division designs, develops and markets systems which are used to monitor various environmental
parameters such as temperature, humidity and differential pressure to ensure that critical storage and processing conditions are
maintained in hospitals, pharmaceutical and medical device manufacturers, blood banks, pharmacies and a number of other
laboratory and industrial environments.
Basis of Presentation
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United
States (“GAAP”). The consolidated financial statements include the accounts of Mesa Laboratories, Inc. and its subsidiaries.
Intercompany transactions and balances have been eliminated. The preparation of our consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses
and the disclosure of contingent assets and liabilities in our consolidated financial statements and accompanying notes.
Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual
results may ultimately differ from these estimates and assumptions. Furthermore, when testing assets for impairment in future
periods, if management uses different assumptions or if different conditions occur, impairment charges may result.
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.
Certain amounts for the years ended March 31, 2013 and 2012 were reclassified to conform to the March 31, 2014
presentation.
For the year ended March 31, 2013, $5,239,000 of other revenues was reclassified to product revenues with the remaining
amount of $5,845,000 being renamed as service revenues. For the year ended March 31, 2012, $4,805,000 of other revenues
was reclassified to product revenues with the remaining amount of $4,415,000 being renamed as service revenues. There
were no changes to total revenues for either period. For the years ended March 31, 2013 and 2012, total cost of revenues was
segregated between cost of products and cost of services. There were no changes to total cost of revenues for either period.
As of March 31, 2011, $272,000 of cumulative tax benefit on exercise of stock options was reclassified from retained
earnings to common stock. For the years ended March 31, 2013 and 2012, tax benefit on exercise of stock options of
$295,000 and $62,000, respectively, were presented as changes in common stock on the statements of stockholders’ equity.
The cumulative reclassification between retained earnings and common stock in the March 31, 2013 consolidated balance
sheet was $629,000. These reclassifications had no impact on other figures in the accompanying balance sheets or
statements of income and stockholders’ equity.
PAGE 32
Summary of Significant Accounting Policies
Revenue Recognition
We recognize revenue when the four revenue recognition criteria are met, as follows:
Product sales: Revenue is recognized upon shipment of the product. Evidence of an arrangement is typically in the form of a
customer purchase order. Custody is transferred upon shipment (FOB Shipping Point). Prices are fixed at the time of order and
no price protections or variables are offered. Collectability is reasonably assured via our customer credit and review processes.
Services: Revenue is recognized upon completion of the work/services to be performed. Evidence of an arrangement is
typically in the form of a contract and/or a customer purchase order. Custody is transferred upon completion and acceptance of
the service or installation process. Prices are fixed at the time of order and no price protections or variables are offered.
Collectability is reasonably assured via our customer credit and review processes.
Shipping and handling
Payments by customers to us for shipping and handling costs are included in revenues on the consolidated statements of
income, while our expense is included in cost of revenues. Shipping and handling for inventory and materials purchased by us
is included as a component of inventory on the consolidated balance sheets, and in cost of revenues when the product is sold.
Unearned Revenues
Certain of our products have associated annual service contracts whereby we provide repair, technical support and various
other maintenance services. In the event that these contracts are paid up front by the customer, the associated amounts are
deferred and recognized ratably over the term of the service period.
Accrued Warranty Expense
We provide limited product warranty on our products and, accordingly, accrue an estimate of the related warranty expense at
the time of sale.
Cash Equivalents
We classify time deposits and other investments that are highly liquid and have maturities of three months or less at the date of
purchase as cash equivalents.
Accounts Receivable
We record trade accounts receivable at net realizable value. This value includes an appropriate allowance for estimated
uncollectible accounts to reflect any loss anticipated on the trade accounts receivable balances and is charged to the provision
for doubtful accounts. We calculate this allowance based on our history of write-offs, the level of past-due accounts based on
the contractual terms of the receivables, and our relationships with, and the economic status of, our customers.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist of accounts receivable. For the years
ended March 31, 2014, 2013 and 2012, no individual customer represented more than 10% of our revenues and as of March
31, 2014, no individual customer represented more than 10% of our accounts receivable balance. Approximately 56% and
44% of our sales are to customers located in the United States and foreign countries, respectively.
Inventories
Inventories are stated at the lower of cost or market, based on standards using the first-in, first-out method (“FIFO”) to
determine cost. We evaluate standard costs annually, unless circumstances necessitate a mid-year evaluation for specific items.
Our work in process and finished goods inventory includes raw materials, labor and overhead, which are estimated based on
PAGE 33
trailing twelve months of expense and standard labor hours for each product. Our biological indicator inventory is tracked by
lot number, thus it is generally based on actual hours.
We monitor inventory cost compared to selling price in order to determine if a lower of cost or market reserve is necessary.
At year end we perform a complete physical inventory observation. Throughout the year, we estimate and maintain an
inventory reserve, as needed, for such matters as obsolete inventory, shrink and scrap.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Repair and maintenance costs that do not improve service potential or extend
the economic life are expensed as incurred. Depreciation is recorded using the straight-line method over the estimated useful
lives of our assets, which are reviewed periodically and generally have the following ranges: buildings: 40 years or less;
manufacturing equipment: seven years or less; and computer equipment: three years or less. Land is not depreciated and
construction in progress is not depreciated until placed in service.
Goodwill and Intangible Assets
We classify intangible assets into three categories: (1) intangible assets with definite lives subject to amortization, (2) intangible
assets with indefinite lives not subject to amortization and (3) goodwill. We determine the useful lives of our identifiable
intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors we consider
when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of
the asset, our long-term strategy for using the asset, any laws or other local regulations which could impact the useful life of the
asset and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to
have definite lives are amortized, primarily on a straight-line basis, over their useful lives, generally ranging from three to
sixteen years (See Note 5).
When facts and circumstances indicate that the carrying value of definite-lived intangible assets may not be recoverable,
management assesses the recoverability of the carrying value by preparing estimates of revenues and the resulting gross profit
and cash flows. These estimated future cash flows are consistent with those we use in our internal planning. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, we recognize an
impairment loss. The impairment loss recognized is the amount by which the carrying amount of the asset (or asset group)
exceeds the fair value. We use a variety of methodologies to determine the fair value of these assets, including discounted cash
flow models, which are consistent with the assumptions we believe hypothetical marketplace participants would use.
We test intangible assets determined to have indefinite useful lives, including trademarks, franchise rights and goodwill, for
impairment annually, or more frequently if events or circumstances indicate that assets might be impaired. We perform these
annual impairment reviews as of the first day of our fourth fiscal quarter. We use a variety of methodologies in conducting
impairment assessments of indefinite-lived intangible assets, including, but not limited to, discounted cash flow models, which
are based on the assumptions we believe hypothetical marketplace participants would use. For indefinite-lived intangible assets,
other than goodwill, if the carrying amount exceeds the fair value, an impairment charge is recognized in an amount equal to
that excess. Prior to February 2012, certain marketing intangible assets, such as trade names, were determined to have an
indefinite life and were not being amortized. In February 2012, management determined that in the future we may phase out
the use of these marketing intangible assets. Accordingly, we began amortizing them on a straight-line basis over an estimated
useful life of 10 years.
We have the option to perform a qualitative assessment of indefinite-lived intangible assets, other than goodwill, prior to
completing the impairment test described above. We must assess whether it is more likely than not that the fair value of the
intangible asset is less than its carrying amount. If we conclude that this is the case, we must perform the testing described
above. Otherwise, we do not need to perform any further assessment.
We perform impairment tests of goodwill at our reporting unit level, which is one level below our operating segments. Our
operating segments consist of our Instruments, Continuous Monitoring and Biological Indicators Divisions. These operating
segments are consistent with the way management runs our business. Our Instruments operating segment is subdivided into
smaller business units. These business units are also our reporting units. Goodwill is assigned to the reporting unit or units that
benefit from the synergies arising from each business combination.
PAGE 34
The goodwill impairment test consists of a two-step process, if necessary. The first step is to compare the fair value of a
reporting unit to its carrying value, including goodwill. We typically use discounted cash flow models to determine the fair
value of a reporting unit. The assumptions used in these models are consistent with those we believe hypothetical marketplace
participants would use. If the fair value of the reporting unit is less than its carrying value, the second step of the impairment
test must be performed in order to determine the amount of impairment loss, if any. The second step compares the implied fair
value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's
goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess. The loss
recognized cannot exceed the carrying amount of goodwill.
We have the option to perform a qualitative assessment of goodwill prior to completing the two-step process described above to
determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including
goodwill and other intangible assets. If we conclude that this is the case, we must perform the two-step process. Otherwise, we
will forego the two-step process and do not need to perform any further testing.
Research & Development Costs
Internal costs related to research and development efforts on existing or potential products are expensed as incurred. The costs
of intangible assets that are purchased from others for use in research and development activities, and also have alternative
future benefit, are capitalized and amortized over their expected useful life.
Under certain agreements, we may receive advance payments from customers to perform research and development on their
behalf. These payments are recovered by the customer through lower product prices and as such, are initially recorded as
unearned revenues in the accompanying consolidate balance sheets. As product is sold, this liability is reduced through
revenues on the consolidated statements of income.
Stock-based Compensation
Equity classified stock-based compensation is measured at fair value, based on the closing stock price at grant date, using the
Black-Scholes option-pricing model. We recognize expense on a straight-line basis over the service period, net of an
estimated forfeiture rate, resulting in a compensation cost for only those shares expected to vest. We do not have any liability
classified stock-based compensation. We allocate stock-based compensation expense to cost of revenues and general and
administrative expense in the accompanying consolidated statements of income.
Income Taxes
We recognize deferred income tax assets and liabilities for the expected future tax consequences of temporary differences
between the income tax and financial reporting carrying amount of our assets and liabilities. We monitor our deferred tax
assets and evaluate the need for a valuation allowance based on the estimate of the amount of such deferred tax assets that we
believe do not meet the more-likely-than-not recognition criteria. We also evaluate whether we have any uncertain tax
positions and would record a reserve if we believe it is more-likely-than-not our position would not prevail with the applicable
tax authorities. We have not recorded a valuation allowance or a reserve for uncertain tax positions. Any penalties and
interest are included in other expense, net on the consolidated statements of income.
Fair Value of Measurements
Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and
long-term debt. The carrying value of these financial instruments is considered to be representative of their fair value due to
the short maturity of these instruments. Our debt has a variable interest rate, so the carrying amount approximates fair value
because interest rates on these instruments approximate the interest rate on debt with similar terms available to us.
Note 2. Acquisitions and Dispositions
Acquisitions
For the year ended March 31, 2014, our acquisitions of businesses (net of cash acquired) totaled $22,758,000, which
consisted primarily of the following material acquisitions:
PAGE 35
Amega Scientific
On November 6, 2013, we completed a business combination (the “Amega Acquisition”) whereby we acquired
substantially all of the assets and certain liabilities of Amega Scientific Corporation’s (“Amega”) business which provides
continuous monitoring systems to regulated industries. The asset acquisition agreement (the “Amega Agreement”)
includes provisions for both contingent consideration based on the cumulative three year revenues of our Continuous
Monitoring Division and for a holdback payment (subject to a post-closing adjustment), payable to the seller no later than
November 6, 2014 less any losses incurred by the buyer, as defined.
Under the terms of the Amega Agreement, we are required to pay contingent consideration if the cumulative revenues for
our Continuous Monitoring Division for the three years subsequent to the acquisition meet certain levels. The potential
consideration payable ranges from $0 to $10,000,000 and is based upon a sliding scale of three-year cumulative revenues
between $31,625,000 and $43,500,000. Based upon both historical and projected growth rates, we recorded $500,000 of
contingent consideration payable which represents our best estimate of the amount that will ultimately be paid. Any
changes to the contingent consideration ultimately paid will result in additional income or expense in our consolidated
statements of income. We will continue to monitor the results of our Continuous Monitoring Division and we will adjust
the contingent liability on a go forward basis, based on then current information. The contingent consideration is payable
in the third quarter of our year ending March 31, 2017.
We expect to achieve savings and generate growth as we integrate the Amega operations and sales and marketing
functions. These factors, among others, contributed to a purchase price in excess of the estimated fair value of the net
identifiable assets acquired and, as a result, we recorded goodwill in connection with this transaction. The goodwill is
expected to be deductible for tax purposes and it was assigned to our Continuous Monitoring segment.
The Amega Acquisition constituted 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 Amega Agreement
(in thousands):
Cash consideration
Holdback payment liability
Contingent consideration liability
Aggregate consideration
The purchase price was allocated as follows:
Accounts receivable, net
Inventories, net
Prepaid expenses and other
Property, plant and equipment, net
Intangibles, net
Goodwill
Accrued salaries and payroll taxes
Unearned revenues
Total purchase price allocation
$ 11,268
1,000
500
$ 12,768
$ 663
410
11
115
5,838
6,827
(53)
(1,043)
$ 12,768
The accompanying consolidated statements of income include the results of the Amega Acquisition from the acquisition
date of Nov 6, 2013. The pro forma effects of the acquisition on the results of operations as if the acquisition had been
completed on April 1, 2013 and 2012, are as follows (in thousands, except per share data):
Revenues
Net income
Net income per common share:
Basic
Diluted
Year Ended March 31,
2013
$ 50,372
9,508
2014
$ 56,451
10,002
$ 2.90
2.77
$ 2.83
2.65
PAGE 36
Tempsys
On November 6, 2013, we completed a business combination (the “TempSys Acquisition”) whereby we acquired all of the
common stock of TempSys, Inc. (“TempSys”), a company in the business of providing continuous monitoring systems to
regulated industries, for $9,826,000 (subject to a post-closing adjustment).
We expect to achieve savings and generate growth as we integrate the TempSys operations and sales and marketing
functions. These factors, among others, contributed to a purchase price in excess of the estimated fair value of the net
identifiable assets acquired and, as a result, we recorded goodwill in connection with this transaction. The goodwill is not
expected to be deductible for tax purposes and it was assigned to our Continuous Monitoring segment.
The TempSys Acquisition constituted 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 TempSys
Agreement (in thousands):
The purchase price was allocated as follows:
Cash
Accounts receivable, net
Inventories, net
Prepaid expenses and other
Property, plant and equipment, net
Deferred income taxes
Intangibles, net
Goodwill
Accounts payable
Accrued salaries and payroll taxes
Unearned revenues
Other accrued expenses
Deferred income taxes
Total purchase price allocation
$ 57
838
447
21
25
585
6,135
6,820
(255)
(2,134)
(485)
(135)
(2,093)
$ 9,826
The accompanying consolidated statements of income include the results of the Tempsys Acquisition from the acquisition
date of Nov 6, 2013. The pro forma effects of the acquisition on the results of operations as if the acquisition had been
completed on April 1, 2013 and 2012, are as follows (in thousands, except per share data):
Revenues
Net income
Net income per common share:
Basic
Diluted
Year Ended March 31,
2013
$ 49,705
8,100
2014
$ 55,129
9,132
$ 2.65
2.53
$ 2.41
2.25
For the year ended March 31, 2013, our acquisitions of businesses totaled $16,660,000, which consisted primarily of the
following acquisition:
Bios
On May 15, 2012, we completed a business combination (the “Bios Acquisition”) whereby we acquired substantially all of
the assets and certain liabilities of Bios International Corporation (“Bios”), a New Jersey corporation. The asset
acquisition agreement (the “Bios Agreement”) included a provision for contingent consideration based on revenues growth
over a three year earn-out period.
Under the terms of the Bios Agreement, we are required to pay contingent consideration if the cumulative revenues related
to the acquisition for the three years subsequent to the acquisition exceed $22,127,000. The potential future payment that
we could be required to make ranges from $0 to $6,710,000. Based upon historical growth rates, we initially recorded
PAGE 37
$2,140,000 of contingent consideration payable which represented our best estimate of the amount that would ultimately be
paid. Based upon actual results and current run rates, during the year ended March 31, 2014, we revised our estimate of the
ultimate contingent liability that would be paid, which resulted in reducing the contingent consideration payable to
$1,120,000. This gain of $1,020,000 associated with the decrease in the contingent consideration payable is included in
other income (expense), net on the accompanying consolidated statements of income. Any further changes to the
contingent consideration ultimately paid will result in additional income or expense in our consolidated statements of
income. We will continue to monitor the results associated with the Bios Acquisition and we will adjust the contingent
liability on a go forward basis, based on then current information. The contingent consideration is payable in the first
quarter of our year ending March 31, 2016.
We expected to achieve significant savings and income growth as we integrated the Bios operations and sales and
marketing functions. These factors, among others, contributed to a purchase price in excess of the estimated fair value of
net identifiable assets acquired and, as a result, we recorded goodwill in connection with this transaction. The goodwill is
deductible for tax purposes and it was assigned to our Instruments segment.
The Bios Acquisition constituted 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
Contingent purchase price liability
Aggregate consideration
The purchase price was allocated as follows:
Accounts receivable, net
Inventories, net
Other current assets
Property, plant and equipment
Intangible assets
Goodwill
Current liabilities
Total purchase price allocation
$ 16,660
2,140
$ 18,800
$ 478
910
28
63
8,200
9,190
(69)
$ 18,800
The accompanying consolidated 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):
Revenues
Net income
Net income per common share:
Basic
Diluted
Dispositions
Year Ended March 31,
2012
$ 46,498
8,102
2013
$ 47,216
8,471
$ 2.52
2.36
$ 2.47
2.34
On August 12, 2013, we entered into an agreement whereby we sold our NuSonics product line for $661,000. The carrying
value of this product line was $193,000 which resulted in a pre-tax gain of $468,000.
PAGE 38
Note 3. Inventories
Inventories consist of the following (in thousands):
Raw materials
Work-in-process
Finished goods
Less reserve
March 31,
2014
$ 5,758
272
2,068
(327)
$ 7,771
2013
$ 4,052
271
1,514
(261)
$ 5,576
Note 4. Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
Land
Buildings
Manufacturing equipment
Computer equipment
Other
Less accumulated depreciation
March 31,
2014
$ 873
4,685
6,054
1,487
393
13,492
(5,812)
$ 7,680
2013
$ 873
4,553
5,665
1,129
384
12,604
(5,198)
$ 7,406
Depreciation expense for the years ended March 31, 2014, 2013 and 2012 was $865,000, $831,000 and $725,000, respectively.
Note 5. Goodwill and Intangible Assets
The change in the carrying amount of goodwill was as follows (in thousands):
April 1, 2012
Acquisitions
March 31, 2013
Acquisitions
March 31, 2014
Biological
Indicators
$ 9,279
--
9,279
--
$ 9,279
Instruments
$ 5,171
9,190
14,361
579
$ 14,940
Continuous
Monitoring
$ --
--
--
13,647
$ 13,647
Total
$ 14,450
9,190
23,640
14,226
$ 37,866
Other intangible assets are as follows:
(In thousands)
March 31, 2014
Intellectual property
Trade names
Customer relationships
Non-compete agreements
Carrying
Amount
$ 7,027
2,648
24,612
1,286
$ 35,573
Accumulated
Amortization
$ 1,641
519
7,326
670
$ 10,156
Useful Life
(Years)
10-16
3-10
7-10
3-10
Net
$ 5,386
2,129
17,286
616
$ 25,417
PAGE 39
Intellectual property
Trade names
Customer relationships
Non-compete agreements
March 31, 2013
Carrying
Amount
$ 4,991
2,296
14,485
823
$ 22,595
Accumulated
Amortization
$ 1,037
248
5,345
547
$ 7,177
Useful Life
(Years)
10-16
10
7-8.5
3-5
Net
$ 3,954
2,048
9,140
276
$ 15,418
The following is estimated amortization expense for the years ending March 31:
(In thousands)
2015
2016
2017
2018
2019
$ 3,711
3,690
3,550
3,376
3,048
Amortization expense for the years ended March 31, 2014, 2013 and 2012 was $2,979,000, $2,601,000 and $1,490,000,
respectively.
For the year ended March 31, 2012, we determined that the carrying value of an indefinite-lived trade name intangible asset
was greater than its estimated fair value and recorded an impairment loss of $350,000, which is disclosed separately on the
accompanying statements of income. Fair value was estimated using the royalty replacement approach, whereby a royalty
percentage is applied to forecasted revenues and discounted to determine the present value. While gross profit and cash flows
showed improvement since the intangible asset was acquired, revenues did not grow at the level originally used to value the
intangible asset. This impairment impacted the Instruments segment.
Note 6. Long-term Debt
Long-term debt consists of the following (in thousands):
Line of credit (1.4% at March 31, 2014)
Less: current portion
Long-term portion
March 31,
2014
$ 16,500
--
$ 16,500
March 31,
2013
$ 4,000
--
$ 4,000
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.
In April 2014, the Credit Facility was amended to include a $15,000,000 term loan (the “Term Loan”) and to extend the
maturity date of the Credit Facility to June 30, 2017. As a result of the extended maturity date, the $16,500,000 outstanding as
of March 31, 2014 has been classified as long term on the accompanying consolidated balance sheets.
Under the Line of Credit, indebtedness bears interest at either: (1) LIBOR, as defined, plus an applicable margin ranging from
1.25% to 2%; 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 (including amounts outstanding under the Term Loan) 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.
PAGE 40
The Term Loan bears interest at LIBOR, as defined plus 2% and requires 11 quarterly principal payments (the first due date
being July 15, 2014) in the amount of $750,000 with the remaining balance of principal and accrued interest due on April 15,
2017. The proceeds from the Term Loan may be used to support acquisition financing and to repay amounts outstanding
under the Line of Credit.
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 1.35 to 1.0. We were in compliance with
these covenants at March 31, 2014.
Subsequent to year end, we made additional principal payments which reduced the amount outstanding on the Line of Credit
by $4,500,000.
Future contractual maturities of debt as of March 31, 2014 are as follows (in thousands):
Year ending March 31,
2015
2016
2017
2018
$ --
--
--
16,500
$ 16,500
Note 7. Stockholders' Equity
Under applicable law, Colorado corporations are not permitted to retain treasury stock. The price paid for repurchased shares is
allocated between common stock and retained earnings, based on management’s estimate of the original sales price of the
underlying shares.
In November, 2005, our Board of Directors approved a program to repurchase up to 300,000 shares of our outstanding common
stock. Under the program, shares of common stock may be purchased from time to time in the open market at prevailing prices
or in negotiated transactions off the market. Shares of common stock purchased will be cancelled and repurchases of shares of
common stock will be funded through existing cash reserves. As of March 31, 2014, we have purchased 162,306 shares under
this plan.
Dividends per share paid by quarter were as follows:
First quarter
Second quarter
Third quarter
Fourth quarter
Note 8. Employee Benefit Plans
2014
$ 0.14
0.14
0.15
0.15
Year Ended March 31,
2013
$ 0.13
0.13
0.14
0.14
2012
$ 0.12
0.12
0.13
0.13
We adopted our 401(k) plan effective January 1, 2000. Participation is voluntary and employees are eligible the first day of the
following month that an employee attains an age of 21 and one hour of service time. We match 50% of the employee’s
contribution up to 6% of the employee’s salary and those contributions are vested immediately. Prior to the year ended March
31, 2014, our Bozeman, Montana facility (“Bozeman’) operated on a separate 401(k) plan. That plan was adopted effective
August 15, 1996. Participation was voluntary and employees were eligible to participate at age 21 and after one year of
employment. Bozeman matched 100% of the employee’s contribution up to 4% of the employee’s salary and those
contributions vested immediately. Bozeman also offered a Roth Savings Plan which was incorporated into their 401(k) Plan
with identical requirements and contributions. The Bozeman 401(k) plan was merged into our plan during the year ended
March 31, 2014. We contributed $214,000, $214,000 and $193,000, respectively, to all plans for the years ended March 31,
2014, 2013 and 2012.
PAGE 41
Note 9. Stock-Based Compensation
We adopted stock option plans for the benefit of our employees and outside directors. Under terms of the plans, stock options
are granted at an amount not less than 100% of the quoted market price of the underlying shares at the date of grant. Stock
options are exercisable for terms of five to ten years and vest ratably over terms of four to seven years. All of our stock option
plans have been approved by our stockholders.
On December 8, 2006, we adopted our current stock compensation plan (the “2006 Plan”). The purpose of the 2006 Plan is to
encourage ownership of our common stock by certain officers, directors, employees and advisors in order to provide incentive
to promote the success and business of the Company. A total of 400,000 shares of common stock were reserved for issuance
under the 2006 Plan and are subject to terms as set by the Compensation Committee of the Board of Directors at the time of
grant. On September 23, 2010, our shareholders approved an amendment to the 2006 Plan whereby the number of shares
authorized for issuance was increased to 800,000. As of March 31, 2014, we have 385,897 stock options outstanding under
the 2006 Plan. On February 27, 2013, we filed a Registration Statement on Form S-8 whereby we registered the additional
400,000 shares of common stock underlying stock options issuable under the 2006 Plan.
Under the October 21, 1999 plan (the “1999 Plan”), a total of 300,000 shares of common stock were reserved for issuance and
were subject to terms as set by the Compensation Committee of the Board of Directors at the time of grant. On October 18,
2004, our shareholders approved an amendment to the 1999 Plan to reserve an additional 200,000 shares of common stock for
issuance under the plan. The 1999 Plan has expired and no new grants can be made under this plan. As of March 31, 2014, we
have 12,275 stock options outstanding under the 1999 Plan.
Amounts recognized in the consolidated financial statements related to stock-based compensation are as follows (in
thousands, except per share data):
Total cost of stock based compensation
charged against income before income tax
Amount of income tax benefit recognized in earnings
Amount charged against net income
Impact on net income per common share:
Basic
Diluted
2014
$ 840
263
$ 577
$ 0.17
0.16
Year Ended March 31,
2013
$ 1,112
388
$ 724
$ 0.22
0.20
2012
$ 464
166
$ 298
$ 0.09
0.09
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses
assumptions noted in the following table. We use historical data to estimate volatility, expected option life and forfeiture rate.
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. 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.
Volatility
Risk-free interest rate
Expected option life (years)
Dividend yield
2014
26%-28.7%
.8%-2.1%
5-10
1.1%
Year Ended March 31,
2013
27.5-31.1%
0.6-1.0%
5-10
1.4%
2012
33.4-33.7%
0.9-2.2%
5-10
1.8%
PAGE 42
A summary of the option activity as of and for the years ended March 31, 2014, 2013 and 2012 is as follows:
Weighted-
average
Exercise
Price
$ 20.10
29.87
26.06
14.50
18.00
22.77
49.97
32.87
18.98
20.56
29.87
55.33
52.50
52.50
22.17
38.75
Weighted-
average
Remaining
Contractual
Term
4.0
5.4
--
--
--
3.9
5.9
--
--
--
3.7
6.4
--
--
--
4.4
Number of
Shares
443,642
103,780
(11,940)
(1,020)
(100,677)
433,785
116,080
(40,375)
(40)
(93,325)
416,125
128,124
(27,782)
(410)
(117,885)
398,172
140,825
158,320
148,910
26.70
21.00
19.28
3.5
3.0
3.2
Aggregate
Intrinsic
Value
(000s)
$ 3,861
--
--
--
--
11,516
--
--
--
--
9,529
--
--
--
--
20,505
8,949
5,031
4,473
Outstanding at March 31, 2011
Granted
Forfeited
Expired
Exercised
Outstanding at March 31, 2012
Granted
Forfeited
Expired
Exercised
Outstanding at March 31, 2013
Granted
Forfeited
Expired
Exercised
Outstanding at March 31, 2014
Exercisable at March 31,
2014
2013
2012
A summary of the status of our unvested option shares as of and for the years ended March 31, 2014, 2013 and 2012 is as
follows:
Unvested at March 31, 2011
Options granted
Options forfeited
Options vested
Unvested at March 31, 2012
Options granted
Options forfeited
Options vested
Unvested at March 31, 2013
Options granted
Options forfeited
Options vested
Unvested at March 31, 2014
Unvested
Shares
291,425
103,780
(11,395)
(98,935)
284,875
116,065
(38,720)
(104,415)
257,805
128,124
(27,782)
(100,800)
257,347
Weighted-average
Grant-date Fair Value
$ 6.46
8.33
7.31
5.97
7.28
12.43
8.86
6.69
9.55
15.90
14.75
8.53
11.86
The total intrinsic value of options exercised was $6,287,000, $2,742,000 and $2,228,000 during the years ended March 31,
2014, 2013 and 2012, respectively. As of March 31, 2014, there was $4,401,000 of total unrecognized compensation expense
related to unvested options. As of March 31, 2014, we have 210,888 shares available for future option grants.
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 was a modification of the terms of
an equity award and, accordingly, we treated this as an exchange of the original award for a new award. We recorded
PAGE 43
incremental compensation expense of approximately $240,000 for the year ended March 31, 2013, which is included in general
and administrative expense on the accompanying consolidated statements of income.
Note 10. Income Taxes
Under current accounting standards, we must recognize the tax benefit from an uncertain tax position only if it is more likely
than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the
position. We measure the tax benefits recognized in our consolidated financial statements from such a position based on the
largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income
tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are
required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and
guidance surrounding income tax law and regulations change over time and may result in changes to our subjective
assumptions and judgments which can materially affect amounts recognized in our consolidated balance sheets and statements
of income. Our assessment of tax positions as of March 31, 2014 and 2013, determined that there were no material uncertain
tax positions. Our federal tax returns for all years after 2010 and our state tax returns after 2009 are subject to future
examination by tax authorities for all our tax jurisdictions. We recognize interest and penalties related to income tax matters
in other expense and general and administration expense, respectively. During the year ended March 31, 2013, we amended
several state income tax returns, resulting in tax refunds of $258,000. These tax refunds are included as an offset to income
tax expense in the accompanying consolidated statement of income for the year ended March 31, 2013.
The components of our provision for income taxes are as follows (in thousands):
Current tax provision
Federal
State
Deferred tax provision:
Federal
State
2014
$ 4,031
106
4,137
(19)
(15)
(34)
$ 4,103
Year Ended March 31,
2013
2012
$ 4,440
280
4,720
(180)
(12)
(192)
$ 4,528
$ 4,233
437
4,670
(237)
(21)
(258)
$ 4,412
The components of net deferred tax assets and liabilities are as follows (in thousands):
March 31,
Current deferred tax assets:
Accrued employee-related expenses
Allowances and reserves
Stock option deductible differences
Inventory
Net operating loss
Long-term deferred tax liability:
Property, plant and equipment
Goodwill and intangible assets
Net operating loss
2014
$ 298
701
301
281
297
1,878
(1,434)
(3,453)
26
(4,861)
2013
$ 125
226
243
252
--
846
(1,320)
(1,044)
--
(2,364)
Net deferred tax liability
$ (2,983)
$ (1,518)
PAGE 44
A reconciliation of our income tax provision and the amounts computed by applying statutory rates to income before income
taxes is as follows:
Federal income taxes at statutory rates
State income taxes, net of federal benefit
Tax benefit of stock option exercises
Section 199 manufacturing deduction
Research and development credit
Other
Note 11. Net Income Per Share
2014
$ 4,586
78
5
(250)
(159)
(157)
$ 4,103
Year Ended March 31,
2013
$ 4,543
158
197
(357)
(41)
28
$ 4,528
2012
$ 4,193
285
61
(347)
--
220
$ 4,412
Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding
during the reporting period. Diluted net income per share is computed similarly to basic net income per share, except that it
includes the potential dilution that could occur if dilutive securities were exercised.
The following table presents a reconciliation of the denominators used in the computation of net income per share - basic
and diluted (in thousands, except share data):
Net income available for stockholders
Weighted average outstanding shares of common stock
Dilutive effect of stock options
Common stock and equivalents
Net Income per share:
Basic
Diluted
2014
$ 9,000
Year Ended March 31,
2013
$ 8,450
2012
$ 7,919
3,445
166
3,611
$ 2.61
2.49
3,357
236
3,593
$ 2.52
2.35
3,285
177
3,462
$ 2.41
2.29
For the years ended March 31, 2014, 2013 and 2012, no shares attributable to outstanding stock options were excluded from
the calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the
average price of the common shares.
Note 12. Commitments and Contingencies
Under the terms of the Amega Agreement, we are required to pay contingent consideration if the cumulative revenues for
our Continuous Monitoring Division for the three years subsequent to the acquisition meet certain levels. The potential
consideration payable ranges from $0 to $10,000,000 and is based upon a sliding scale of three-year cumulative revenues
between $31,625,000 and $43,500,000. Based upon both historical and projected growth rates, we recorded $500,000 of
contingent consideration payable which represents our best estimate of the amount that will ultimately be paid. Any
changes to the contingent consideration ultimately paid will result in additional income or expense in our consolidated
statements of income. We will continue to monitor the results of our Continuous Monitoring Division and we will adjust
the contingent liability on a go forward basis, based on then current information. The contingent consideration is payable
in the third quarter of our year ending March 31, 2017.
Under the terms of the Bios Agreement, we are required to pay contingent consideration if the cumulative revenues related to
the acquisition for the three years subsequent to the acquisition exceed $22,127,000. The potential future payment that we
could be required to make ranges from $0 to $6,710,000. Based upon historical growth rates, we initially recorded $2,140,000
of contingent consideration payable which represented our best estimate of the amount that would ultimately be paid. Based
upon actual results and current run rates, during the year ended March 31, 2014, we revised our estimate of the ultimate
contingent liability that would be paid, which resulted in reducing the contingent consideration payable to $1,120,000. Any
further changes to the contingent consideration ultimately paid would result in additional income or expense in our
consolidated statements of income. We will continue to monitor the results associated with the Bios Acquisition and we will
PAGE 45
adjust the contingent liability on a go forward basis, based on then current information. The contingent consideration is
payable in the first quarter of our year ending March 31, 2016.
A company is required to collect and remit state sales tax from certain of its customers if that company is determined to
have “nexus” in a particular state. The determination of nexus varies state by state and often requires knowledge of each
jurisdiction’s tax case law. During the year ended March 31, 2013, we determined that there are states in which we most
likely had established nexus during prior periods without properly collecting and remitting sales tax. We recorded an
estimate of $100,000 associated with one specific state but we were unable to estimate our remaining exposure at that time.
The ultimate amount due in remaining states will depend upon a number of factors, including the amount of sales that were
made to customers who are either exempt or have already paid the tax, the number of years of exposure, and any penalties
or interest that might be due. During the year ended March 31, 2014, we completed our analysis associated with the
remaining states and we recorded an estimate of $1,408,000, which is included in other accrued expenses on the
accompanying consolidated balance sheets and in general and administrative expense on the accompanying consolidated
statements of income for the year ended March 31, 2014. This estimate was based upon facts and circumstances known at
such time and our ultimate liability may change as further analysis is completed and state sales tax returns are filed.
Note 13. Segment Data
Prior to the November 2013 acquisitions of TempSys and Amega, we had two reporting segments: Biological Indicators
and Instruments. As a result of these acquisitions, we now have a third reporting segment, Continuous Monitoring. The
following tables set forth our segment information (in thousands):
Revenues
Gross profit
Selling expenses
Reconciling items (1)
Earnings before income taxes
Revenues
Gross profit
Selling expenses
Reconciling items (1)
Earnings before income taxes
Biological
Indicators
$ 22,992
$ 13,187
1,350
$ 11,837
Biological
Indicators
$ 21,464
$ 12,365
1,552
$ 10,813
Year Ended March 31, 2014
Instruments
$ 26,389
Continuous
Monitoring
$ 3,343
$ 16,904
3,954
$ 12,950
$ 1,597
815
$ 782
Year Ended March 31, 2013
Instruments
$ 24,971
Continuous
Monitoring
$ --
$ 16,497
3,078
$ 13,419
$ --
--
$ --
Total
$ 52,724
$ 31,688
6,119
25,569
(12,466)
$ 13,103
Total
$ 46,435
$ 28,862
4,630
24,232
(11,254)
$ 12,978
PAGE 46
Revenues
Gross profit
Selling expenses
Impairment of intangible asset
Reconciling items (1)
Earnings before income taxes
Biological
Indicators
$ 20,422
$ 11,236
1,607
--
$ 9,629
Year Ended March 31, 2012
Instruments
$ 19,194
Continuous
Monitoring
$ --
$ 12,275
2,302
350
$ 9,623
$ --
--
$ --
Total
$ 39,616
$ 23,511
3,909
350
19,252
(6,921)
$ 12,331
(1) Reconciling items include general and administrative, research and development, and other expenses.
Revenues from external customers are attributed to individual countries based upon locations to which the product is shipped or
exported, as follows (in thousands):
Revenues from unaffiliated customers
United States
Foreign
Year Ended March 31,
2013
2012
2014
$ 29,551
23,173
$ 52,724
$ 28,590
17,845
$ 46,435
$ 23,770
15,846
$ 39,616
March 31,
2014
2013
$ 22,771
36,797
28,578
9,383
$ 97,529
$ 27,558
31,782
--
6,579
$ 65,919
Total assets
Biological Indicators
Instruments
Continuous Monitoring
Corporate and administrative
All long-lived assets are located in the United States.
Note 14. Quarterly Results (unaudited)
Quarterly financial information for the years ended March 31, 2014, 2013 and 2012 is summarized as follows (net income per
share per quarter will not add up to reported annual earnings per share due to differences in average outstanding shares as
reported on a quarterly basis) (in thousands, except per share data):
2014
Revenues
Gross profit
Net income
Net Income per share – basic
Net Income per share – diluted
First
Quarter
$ 11,218
6,797
1,860
$ 0.55
0.52
Second
Quarter
Third
Quarter
$ 12,676
7,600
1,932
$ 0.57
0.54
$ 13,116
7,706
1,746
$ 0.51
0.48
Fourth
Quarter
$ 15,714
9,585
3,462
$ 1.00
0.95
PAGE 47
2013
Revenues
Gross profit
Net income
Net Income per share – basic
Net Income per share – diluted
2012
Revenues
Gross profit
Net income
Net Income per share – basic
Net Income per share – diluted
Note 15. Subsequent Events
First
Quarter
$ 10,560
6,456
2,100
$ 0.63
0.59
First
Quarter
$ 9,297
5,388
1,679
$ 0.51
0.49
Second
Quarter
$ 11,706
7,248
2,248
$ 0.67
0.64
Second
Quarter
$ 9,702
5,774
2,054
$ 0.63
0.59
Third
Quarter
$ 11,361
6,947
1,543
$ 0.46
0.44
Third
Quarter
$ 9,649
5,885
1,987
$ 0.60
0.57
Fourth
Quarter
$ 12,808
8,211
2,559
$ 0.76
0.71
Fourth
Quarter
$ 10,968
6,464
2,199
$ 0.67
0.64
In April 2014, we completed a business combination (the “BGI Acquisition”) whereby we acquired substantially all of the
assets (other than cash and accounts receivable) and certain liabilities of BGI, Incorporated and BGI Instruments, Inc,
(collectively “BGI”), for $9,900,000, subject to a post-closing adjustment. The operations of the acquired business will be
included in our Instruments segment for reporting purposes.
On April 23, 2014, our Board of Directors declared a quarterly cash dividend of $0.15 per share of common stock, payable on
June 16, 2014, to stockholders of record at the close of business on May 30, 2014.
PAGE 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) that are designed to reasonably ensure that information required to be disclosed by us
in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms
and that such information is accumulated and communicated to our management, including our principal executive and
principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial
Officer, the effectiveness of our disclosure controls and procedures as of March 31, 2014. Based on that evaluation, our
management concluded that our disclosure controls and procedures were effective at March 31, 2014.
Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and
maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements in accordance with generally accepted accounting principles in the United States. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those
systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Management evaluated the effectiveness of our internal control over financial reporting based on the framework in
“Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in 1992.
Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the
effectiveness of our internal control over financial reporting as of March 31, 2014. Based on that evaluation, our
management concluded that our internal control over financial reporting was effective at March 31, 2014. As allowed, this
evaluation excludes the operations of the TempSys Acquisition due to the timing of the acquisition. Revenues related to
the TempSys Acquisition were 3% of total revenues for the year ended March 31, 2014.
Our independent auditors, EKS&H LLLP, a registered public accounting firm, are appointed by the Audit Committee of
our Board of Directors, subject to ratification by our shareholders. EKS&H LLLP has audited and reported on the
financial statements of Mesa Laboratories, Inc. and our internal control over financial reporting as of March 31, 2014. The
attestation reports of our registered public accounting firm are contained in this annual report.
Changes in internal control over financial reporting
There were no significant changes in our internal control over financial reporting that occurred during the quarter ended
March 31, 2014, that have materially affected, or are reasonably likely to materially affect our internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PAGE 49
Operational Data
Year Ended March 31,
Revenues
Gross profit
Gross margin
Net income
Net income per diluted share
Average shares outstanding
$
$
2014
52,724
31,688
60%
9,000
2.49
3,611
$
$
$
$
2013
46,435
28,862
62%
8,450
2.35
3,593
$
$
$
$
2012
39,616
23,511
59%
7,919
2.29
3,462
$
$
$
$
2011
34,227
19,568
57%
6,183
1.86
3,330
$
$
$
$
2010
23,087
13,194
57%
4,769
1.45
3,293
$
$
$
$
$
$
2009
22,649
13,817
61%
4,790
1.48
3,238
Financial Position
As of March 31,
Working capital
Total assets
Long-term debt
Stockholders' equity
Stockholders' equity per share
2014
16,351
97,529
16,500
64,333
17.82
$
$
$
$
$
2013
14,793
65,919
4,000
52,753
14.68
$
$
$
$
$
2012
14,899
50,696
-
43,915
12.68
$
$
$
$
$
2011
$
$
$
$
$
7,387
50,560
1,500
36,417
10.94
2010
18,530
$
$
33,639
$
-
$
31,197
$
9.47
2009
17,109
29,614
-
27,602
8.52
$
$
$
$
$
Average Return
Year Ended March 31,
Average return on:
Stockholders' investment
Assets
Invested capital
Dividends paid
2014
2013
2012
2011
2010
2009
15%
11%
13%
0.58
$
17%
14%
18%
0.54
20%
16%
21%
0.50
$
18%
15%
21%
0.46
16%
15%
24%
0.42
$
$
19%
17%
26%
0.40
$
$
In thousands, except per share data
Mesa Laboratories, Inc.
Glenn E. Adriance
Vice President,
Chief Sales and Marketing
Officer
John J. Sullivan, Ph.D.
Chief Executive Officer,
President and Director
John V. Sakys
Chief Financial Officer
Directors
Luke R. Schmieder
Chairman, Board of Directors
John J. Sullivan, Ph.D.
Director
H. Stuart Campbell
Chairman, Nominating and
Governance Committee
Michael T. Brooks
Director
Robert V. Dwyer
Director
Evan C. Guillemin
Chairman, Audit Committee
David M. Kelly
Chairman, Compensation
Committee
Corporate Offices
12100 West Sixth Avenue
Lakewood, CO 80228
(303) 987-8000
Omaha Manufacturing
8607 Park Drive
Omaha, NE 68127
(303) 987-8000
Transfer Agent
Computershare Investor Services
Denver, Colorado
Independent Auditors
EKS&H LLLP
Denver, Colorado
SEC Counsel
Andrew N. Bernstein, PC
Denver, Colorado
Butler Manufacturing
10 Park Place
Butler, NJ 07405
(973) 492-8400
Bozeman Manufacturing
10 Evergreen Drive
Bozeman, MT 59715
(303) 987-8000
European BI Sales
2 rue Augustin Fresnel
69684 CHASSIEU Cedex
France
+33 (0) 4 78 90 56 88
www.mesalabs.com
shares traded on the NASDAQ under the symbol MLAB