Mesa Laboratories Inc.
Annual Report 2016

Plain-text annual report

2016 Annual Report Year ended March 31st (cid:90)(cid:286)(cid:448)(cid:286)(cid:374)(cid:437)(cid:286)(cid:400) $84,659(cid:3) $71,330(cid:3) $52,724(cid:3) $46,435(cid:3) $39,616(cid:3) 2012 2013 2014 2015 2016 (cid:28)(cid:258)(cid:396)(cid:374)(cid:349)(cid:374)(cid:336)(cid:400) $15,324(cid:3) $12,502(cid:3) $11,046(cid:3) $10,144(cid:3) $8,876(cid:3) $7,919(cid:3) $8,450(cid:3) $11,169(cid:3) $9,583(cid:3) $9,000(cid:3) 2012 2013 2014 2015 2016 Net(cid:3)income Adjusted(cid:3)net(cid:3)income* (cid:28)(cid:258)(cid:396)(cid:374)(cid:349)(cid:374)(cid:336)(cid:400)(cid:3)(cid:87)(cid:286)(cid:396)(cid:3)(cid:94)(cid:346)(cid:258)(cid:396)(cid:286) $4.08(cid:3) $2.82(cid:3) $3.06(cid:3) $2.49(cid:3) $2.63(cid:3) $3.43(cid:3) $2.97(cid:3) $2.56(cid:3) $2.35(cid:3) $2.29(cid:3) (cid:3)$100,000 (cid:3)$90,000 (cid:3)$80,000 (cid:3)$70,000 (cid:3)$60,000 (cid:3)$50,000 (cid:3)$40,000 (cid:3)$30,000 $15,500 $14,500 $13,500 $12,500 $11,500 $10,500 $9,500 $8,500 $7,500 (cid:3)$5.00 (cid:3)$4.50 (cid:3)$4.00 (cid:3)$3.50 (cid:3)$3.00 (cid:3)$2.50 (cid:3)$2.00 (cid:3)$1.50 (cid:3)$1.00 2012 2013 2014 2015 2016 Net(cid:3)income(cid:3)per(cid:3)diluted(cid:3)share Adjusted(cid:3)net(cid:3)income(cid:3)per(cid:3)diluted(cid:3)share* 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. Dear Shareholders, August 12, 2016 I am pleased to report that Mesa Laboratories, Inc. (“Mesa,” “we,” “our” or the “Company”) posted another solid year of financial growth, market expansion and infrastructure improvements in fiscal 2016. Last year in this letter I detailed some of the important Company re-engineering efforts that are underway, which are designed to support Mesa’s goal of annual revenues and earnings growth of 10 to 20 percent. Fiscal 2016’s excellent financial results are largely due to these multi-year initiatives. In this letter I’d like to highlight some of the more significant achievements during fiscal 2016 along with future opportunities in fiscal 2017 and beyond. Growing Your Company Fiscal 2016 saw the advancement of our initiatives to position Mesa for the $100M revenue milestone, and more. Our multi-year project to implement a new Enterprise Resource Planning (ERP)/Customer Relationship Management (CRM) system came to fruition on October 1 with “go live” of the new NetSuite cloud-based ERP/CRM. While there will be enhancements to the system in the future, the core functionalities of NetSuite were fully implemented on October 1. We are now reaping the benefits of improved control, better compliance, a foundation for enhancing customer interactions and increased visibility over our sales, operations and finances. The successful NetSuite implementation was a significant achievement this year, which was only made possible by extraordinary efforts on the part of dozens of colleagues at Mesa. In April, 2014, we purchased the French distributor of our Biological Indicators (BIs), representing Mesa’s first direct foray into international markets. Later that same fiscal year, we purchased three additional distributorships and in fiscal 2016 we completed the buildout of our direct western European BI channel by purchasing eight more distributorships. We now have a growing organization in Lyon, France that is distributing BIs throughout this region directly to thousands of end users. This new channel has allowed us to better understand the needs of our BI customers and, with the direct relationship with our customers, we are seeing excellent growth of the BI business in Europe. By servicing all of Europe through a single, cost effective structure, we have seen a significant improvement in BI gross margins. This is a prime example of the initiative to improve our distribution channels and it serves as a model for additional direct selling initiatives for other products and geographies. Aside from our push on BI direct selling, one of Mesa’s real successes has been the growth and development of the BI business in general. This started with the acquisition of Raven Labs in 2006, which added about $4M of revenues in a completely new line of business at the time. Ten years later, after excellent organic growth and twenty BI related acquisitions, the BI business is approaching $40M in revenues and is a key contributor to Mesa’s financial success. As you might imagine, our BI operations have outgrown their current manufacturing spaces, which are located in three separate facilities today. To remedy this situation, this year we started construction of a new BI manufacturing facility in Bozeman, Montana. We expect the new facility will be ready in January, 2017 and we plan to consolidate all three BI operations there in the succeeding months. We set our sights beyond the needs of today and built a facility with room for significant growth, whether it is additional BI or instrumentation businesses. Initially, the BI business will occupy only a portion of the 108,000 square feet of the total building, leaving plenty of room for expansion. We expect that this new building will facilitate increased efficiency and decreased operating expenses in the years ahead for the BI business and any other businesses we locate to the facility. Growth This Year and Beyond Mesa’s primary strategic focus is on “profitable growth”. Everyone in the company and all of our initiatives are focused on growing revenues, but always in ways that increase profitability, and hopefully shareholder value. Fiscal 2016 saw a number of significant achievements geared to our growth strategy, with probably the most significant, the entry into the cold chain market through the acquisition of the Canadian company, Infitrak Inc. (“Infitrak”), in July. “Cold Chain” is maintaining a temperature controlled distribution channel, important for sensitive pharmaceuticals, foods and biologicals, as prime examples. Infitrak provides consulting services, monitoring instruments and packaging products to the Cold Chain markets in Canada and the U.S. Cold Chain products are synergistic with our DataTrace dataloggers, compliance and validation services, and continuous monitoring (CM) products, allowing Mesa to be one of the few providers of a complete line of services and quality control products for monitoring and controlling temperature sensitive goods from the time of manufacture, through distribution, and all the way to point of use. Going forward, we expect that the packaging products will be particularly important for Mesa’s growth. Prior to the acquisition, Infitrak’s packaging products were growing by double-digits and it appears that this growth is continuing today. The August acquisition of the North Bay Bioscience, LLC (“North Bay”) business was also a significant milestone for Mesa. North Bay provides sterilizer testing services for dental offices, along with distributing BIs to the Canadian market. Mesa has long been a supplier of BIs to the dental sterilizer testing market, but this is the first entry into actually conducting mail-in testing services. In some ways, it is analogous to establishing a more direct distribution channel, in that we are now in direct contact with the end users of our products. We didn’t stop after the North Bay acquisition, and in early fiscal 2017, we acquired two other smaller dental testing businesses, one in the U.S. and one in Canada. The acquisition of these dental testing businesses is expected to not only increase BI revenues, but also expand gross margins, especially after certain of the operations are relocated to the new Bozeman facility. Recent acquisitions have allowed Mesa to establish a new presence in Canada, comprising our second international subsidiary. We plan to use this new organization to help grow revenues for all of Mesa’s products in the years ahead. Beyond the acquisitions and distribution channel development highlighted above, fiscal 2016 saw progress in product development initiatives to support organic growth. For the BI business, a significant milestone was FDA 510(K) clearance for a new BI used in certain hydrogen peroxide (H2O2) sterilizers. Development and market introduction of this new BI will be completed in early fiscal 2017. While we have had H2O2 BIs for a number of years, the significant advancements we made with this new BI and the FDA clearance will open up a large worldwide hospital market that we have not been able to access previously. For the Instruments product lines, we completed the development of a new dialysis quality control meter that replaces our “standard in the marketplace” that was originally designed about 20 years ago. We have been working closely with the two primary USA dialysis clinic operators and we anticipate that our new meter will become the new standard and enjoy the same success as the one it replaces. We completed a significant new software product for our Continuous Monitoring products that allows us to move into cloud storage of data, increasing our competitiveness in the marketplace. In the gas flow product line, we completed a re-design of the high-end calibrator that is a significant improvement over the older product. There were also a number of lesser new enhancements to several of our other product lines. In addition to the completed products, our expanded development teams and standard “bring to market” methodology we recently implemented have allowed us to make significant progress on the development of products that will be introduced in fiscal 2017, and beyond. These new products will help toward achieving our organic revenues growth goal of 5% per year. Financial Results Fiscal 2016 was another record-setting year, with 19 percent growth of revenues and 23 percent growth of adjusted net income (ANI)1. While our four percent organic growth was slightly below the five percent target, we made up for that, and more, with all of our recent acquisitions. Gross profit margins held steady compared to fiscal 2015 at 61 percent of revenues, selling expenses declined from 10 percent to nine percent of revenues, and R&D remained constant at five percent of revenues. Two unusual items that had a significant impact on Mesa’s reported profitability in fiscal 2016 deserve a bit of further explanation. The first of these was the settlement of an employee termination lawsuit that resulted in a pre-tax expense of $1.7M. As painful as this was financially, it was good to get a final resolution to this issue, including the relief from paying any sums that would have been due under the earn- out that was put in place as a part of one of the acquisitions completed in fiscal 2014. The second unusual item was a decrease in our effective tax rate due to a change in an accounting standard that Mesa effectively adopted at the beginning of the year. Adoption of this new standard is more fully explained on page 42 of our annual report and in the fourth quarter earnings press release. Due primarily to this new accounting standard, Mesa’s effective tax rate decreased from 37.6 percent in fiscal 2015 to 28.2 percent in fiscal 2016. The new accounting standard changed the way excess tax benefits and deficiencies associated with stock option exercises are accounted for, with these exercises now directly impacting our effective tax rate. For a company like Mesa, where our historical significant share price increases have widened the difference between the original book stock compensation expense and the employee’s eventual gain, there can be a significant tax benefit recognized in our consolidated statements of income. Of course, significant tax expense could occur if we ever get into a situation where the employee’s gains are lower than our book stock-based compensation expense. The end result of this new standard is that our effective tax rate going forward, from quarter to quarter, and on an annual basis could vary significantly based on stock option exercises during the period. We anticipate that on a go forward basis, our effective tax rate, absent any stock option exercise influence will approximate 33 to 36 percent. Our final effective tax rate could be significantly higher or lower than this, depending on stock option exercise activity. For fiscal 2016, the benefit realized on our consolidated statement of income related to stock option exercises nearly offset the post-tax expense of the lawsuit settlement. Absent these two unusual items, growth of adjusted net income would have been approximately 22 percent. An important metric for Mesa is ANI, as a percentage of revenues, and in fiscal 2016 we achieved 18 percent, against our goal of 20 percent. I am very pleased with this result, which is about a 0.5 percent increase over the prior fiscal year, especially considering the investments that we have made in the business, such as significant spending on implementation of the new ERP/CRM system. I can assure you that the entire Mesa team is focused on growing ANI and achieving our 20 percent target. Outlook First, I want to thank each and every Mesa employee for all the effort during fiscal 2016 and their dedication to achieving the Company’s goals. My nearly 400 Mesa colleagues are “the Company” and it is their hard work that has built Mesa into the company it is today. I am very excited about our prospects for fiscal 2017. With the excellent team we have in place, the upgrades we have made in our infrastructure, and our current sales momentum, especially with the packaging business, I am hopeful for another year of significant revenues and profit growth. Lastly, I would like to thank our shareholders for their continued support. We look forward to reporting our fiscal 2017 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 1Adjusted net income is defined to exclude the non-cash impact of amortization of intangible assets, net of tax.  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, 2016 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, 2015 (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 ($111.04 per share) was $240,104,000. The number of outstanding shares of the Issuer’s common stock as of May 27, 2016 was 3,638,723. 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 8 14 14 15 15 15 18 20 32 32 63 63 63  FORWARD-LOOKING STATEMENTS This report contains information that may constitute "forward-looking statements.” Generally, the words "believe," "expect," "project," "anticipate," "intend," "estimate," "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 revenues 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 and services, 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 four divisions across eight 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, environmental air sampling and semiconductor industries. Our Biological Indicators Division provides testing services, along with the manufacturing and marketing of biological indicators and distribution of chemical indicators used to assess the effectiveness of sterilization processes, including steam, hydrogen peroxide, ethylene oxide 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 Cold Chain Division provides parameter (primarily temperature) monitoring of products in a cold chain, consulting services such as compliance monitoring, packaging development and validation or mapping of transport and storage containers, and thermal packaging products such as coolers, boxes, insulation materials and phase- change products to control temperature during transport. Our Lakewood, Colorado, and Butler, New Jersey, facilities manufacture our Instruments Division products which include the DataTrace®, DialyGuard®, DryCal®, Torqo®, SureTorque® and BGI brands. Our Omaha, Nebraska, and Bozeman, Montana locations manufacture our Biological Indicators Division products which include the Mesa, PCD® and Apex® brands, while our Lakewood, Colorado, facility also manufactures our Continuous Monitoring Division products which include CheckPoint® and AmegaView brands. Our Markham, Ontario facility manufactures our Mesa brand real time monitoring solutions and outsources the manufacture of our TempTrust® brand of packaging materials. Our philosophy is to manufacture exceptional quality products 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. PAGE 1 Acquisitions Subsequent to our year ended March 31, 2016, we completed the following two acquisitions: In April 2016, we completed a business combination (the “ATS Acquisition”) whereby we acquired substantially all the assets (other than cash and certain inventories and fixed assets) and certain liabilities of Autoclave Testing Services, Inc. and Autoclave Testing Supplies, Inc., (collectively, “ATS”). ATS was in the business of supplying products and services for dental sterilizer testing in both the U.S. and Canada. In April 2016, we completed a business combination (the “Pulse Acquisition) whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of Pulse Scientific, Inc.’s (“Pulse”) business segment associated with the distribution of our biological indicator products. Year Ended March 31, 2016 Acquisitions During the year ended March 31, 2016, we completed the following ten acquisitions: In January 2016, we completed two business combinations (the “January 2016 European BI Distributor Acquisitions”) whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of the business segment associated with the distribution of our biological indicator products from CoaChrom Diagnostica GmbH of Austria and bioTRADING Benelux B.V of the Netherlands; In October 2015, we completed six business combinations (the “October 2015 European BI Distributor Acquisitions”) whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of the business segment associated with the distribution of our biological indicator products from BIOLOGIK S.R.L.(Italy), VWR International PBI S.R.L.(Italy), Cruinn Diagnostics Ltd.(Ireland), Mecolab AG (Switzerland), Miclev Medical Products AB (Sweden) and Tiselab S.L.(Spain); In August 2015, we completed a business combination (the “North Bay Acquisition”) whereby we acquired substantially all of the assets (other than certain fixed assets) and certain liabilities of the dental sterilizer testing business of North Bay Bioscience, LLC (“North Bay”); and In July 2015, we completed a business combination (the “Infitrak Acquisition”) whereby we acquired all of the common stock of 2396081 Ontario Inc. and its wholly owned operating subsidiary, Infitrak Inc. (collectively “Infitrak”), a company whose business provides consulting, packaging and measuring solutions for cold chain applications. Year Ended March 31, 2015 Acquisitions During the year ended March 31, 2015, we completed the following six acquisitions: In March 2015, we completed a business combination (the “Früh Acquisition”) whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of Dr. Früh Control GmbH’s (“Fruh”) business segment associated with the distribution of our biological indicator products; In February 2015, we completed a business combination (the “Cherwell Acquisition”) whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of Cherwell Laboratories Limited’s (“Cherwell”) business segment associated with the distribution of our biological indicator products; In October 2014, we completed a business combination (the “ATI Acquisition”) whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of ATI Atlas Limited (“ATI”), a distributor of our biological indicator products; In October 2014, we completed a business combination (the “PCD Acquisition”) with PCD-Process Challenge Devices, LLC (“PCD”) whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of PCD’s business segment associated with the sale of process challenge devices, which are used for quality control purposes in the field of ethylene oxide sterilization of medical devices; PAGE 2 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 used primarily for particulate air sampling; and In April 2014, we completed a business combination (the “Amilabo Acquisition”) whereby we acquired all of the common stock of Amilabo SAS (“Amilabo”), a distributor of our biological indicator products. Year Ended March 31, 2014 Acquisitions During the year ended March 31, 2014, we completed the following three acquisitions: 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 (other than cash) and certain liabilities of Amega Scientific Corporation’s (“Amega”) business which provides continuous monitoring systems to regulated industries; and In July 2013, we completed a business combination (the “Suretorque Acquisition”) whereby we acquired substantially all of the assets (other than cash) of ST Acquisitions, LLC’s (“ST Acquisitions”) business segment involving the design, manufacture, sale and service of its SureTorque line of bottle cap torque testing instrumentation. 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, environmental air sampling 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 processors, pharmaceutical and medical device manufacturers, and contract sterilization providers. PAGE 3 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 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 of our meters. 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 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 calibrators are used in many industries where professionals require the superior accuracy, reliability and ease of operation that they provide, including 1) industrial hygienists, 2) calibration and research laboratories, 3) manufacturers who design, develop and manufacture gas flow metering devices, and 4) industrial engineering and manufacturing companies that utilize gas flow metering devices. 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 provides testing services, along with the manufacture and marketing of biological indicators and distribution of chemical indicators used to assess the effectiveness of sterilization processes, including steam, hydrogen peroxide, ethylene oxide 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 often adopted as the worldwide standard under ISO. PAGE 4 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, c) culture media, and d) process challenge devices (“PCD’s”) which increase the resistance of biological indicators, mimicking the packaging or other unique characteristics of a product being sterilized. 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 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, either with or without a PCD, 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. Cold Chain Division Our Cold Chain Division provides parameter (primarily temperature) monitoring of products in a cold chain, consulting services such as compliance monitoring, packaging development and validation or mapping of transport and storage containers, and thermal packaging products such as coolers, boxes, insulation materials and phase-change products to control temperature during transport. We provide a full suite of products and services to help our customers meet the requirements of their Good Distribution Practices (“GDP”) regulations. Our compliance services help customers validate the effectiveness of their cold chain, high efficiency packaging products are used to control temperature of materials during shipping and our monitoring systems record temperature during shipment and provide alarms in case of temperature excursions. The competitive advantages of our Cold Chain Division include 1) our in-depth knowledge of cold chain characteristics and requirements, 2) packaging materials that are very durable and can control temperatures for up to 168 hours during transport, 3) extensive package development and testing capability to help in the design and validation of custom packaging solutions, and 4) web-based monitoring products that allow for measurement of parameters (primarily temperature) throughout a cold chain, from point of manufacture or collection, all the way to point of use. PAGE 5 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 indicators and many of the packaging products of our Cold Chain Division are disposable and are used on a routine basis, thus product sales are less sensitive to general economic conditions. Instrument products, continuous monitoring systems, and cold chain monitoring products 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 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 and Butler, New Jersey. 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 sensors, either at the factory or at the point of installation at the customer’s facility. Facilities in Bozeman, Montana, Omaha, Nebraska and Traverse City, Michigan 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. Our dental sterilizer testing products are assembled into kits containing BI spore strips and our microbiological laboratory tests these kits when they are returned to us to determine the effectiveness of our customer’s sterilization process. Our Cold Chain Division monitoring products are manufactured in our Markham, Canada facility primarily by assembling the systems from purchased components and calibrating the sensors, while the packaging products are manufactured by third party suppliers. 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 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 266 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, governmental agencies, environmental testing labs 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. PAGE 6 Our Cold Chain Division marketing focuses on being the “one stop shop” for all of our customers’ cold chain requirements. While competitors can provide one or two products or services, our cold chain offering provides all of our customers’ needs, including package design, validation, packaging materials, and complete monitoring solutions. Customers include pharmaceutical manufacturers, distribution companies, retail pharmacies and healthcare clinics. As of and for the years ended March 31, 2016, 2015 and 2014, 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, Amphenol Corporation, Ellab, TMI Orion, Danaher, Inc., Thermo Fisher Scientific, Inc., Mecmesin, Steinfurth, Met One Instruments, Inc. and Tisch Environmental. Our Biological Indicators Division products compete with 3M, Terragene, Crosstex and Steris, among others. Our Continuous Monitoring Division systems compete with Rees Scientific Corporation, Amphenol Corporation and Cooper-Atkins, among others. Our Cold Chain Division products compete with Sonoco Thermosafe, Cold Chain Technologies, Inc., Pelican Biothermal LLC and Cryopak. 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 $4,976,000, $3,800,000 and $2,320,000 for the years ended March 31, 2016, 2015 and 2014, respectively, on research and development activities, including amounts capitalized as intangible assets and construction-in-progress. Amounts capitalized, which relate primarily to the development of Continuous Monitoring product were $1,044,000, $506,000 and $0 for the years ended March 31, 2016, 2015 and 2014, respectively. 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 (“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 our 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. PAGE 7 Employees On March 31, 2016, we had 367 employees, of which 205 are employed for manufacturing and quality assurance, 33 for research and development and engineering, 74 for sales and marketing, and 55 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. Slower global economic growth, actual or anticipated default on sovereign debt, volatility in the currency and credit markets, high levels of unemployment or underemployment, reduced levels of capital expenditures, changes in government fiscal and monetary policies, changes in capital requirements for financial institutions, government deficit reduction and budget negotiation dynamics, sequestration, austerity measures and other challenges that affect the global economy adversely could affect us and our distributors, customers and suppliers, including having the effect of: (cid:120) (cid:120) (cid:120) (cid:120) reducing demand for our products and services, limiting the financing available to our customers and suppliers, increasing order cancellations and resulting in longer sales cycles; increasing the difficulty in collecting accounts receivable and the risk of excess and obsolete inventories; supply interruptions, which could disrupt our ability to produce our products; 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. If growth in the global economy or in any of the markets we serve slows for a significant period, if there is 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. Our growth could suffer if the markets into which we sell our products and services decline, do not grow as anticipated or experience cyclicality. Our growth depends in part on the growth of the markets which we serve, and visibility into our markets is limited (particularly for markets into which we sell through distributors). Our quarterly results of operations depend substantially on the volume and timing of orders received during the quarter, which are difficult to forecast. Any decline or lower than expected growth in our served markets could diminish demand for our products and services, which could adversely affect our consolidated financial statements. Certain of our businesses operate in industries that may experience periodic, cyclical downturns. In addition, in certain of our businesses, demand depends on customers’ capital spending budgets as well as government funding policies, and matters of public policy and government budget dynamics, as well as product and economic cycles can affect the spending decisions of these entities. Demand for our products and services is also sensitive to changes in customer order patterns, which may be affected by announced price changes, new product introductions, competition and customer inventory. Any of these factors could adversely affect our growth and results of operations in any given period. PAGE 8 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 maintain 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:120) changes in dialysis reimbursements; (cid:120) mergers within the dialysis provider industry, concentrating our medical meter and solutions sales with a few, large customers; (cid:120) mergers within other industries we serve, making us more dependent upon fewer, larger customers for our sales; (cid:120) decreased product demand, driven by changes in our customers’ regulatory environments or standard industry practices; and (cid:120) 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. Our reputation, ability to do business and consolidated financial statements may be impaired by improper conduct by any of our employees, agents or business partners. We cannot provide assurance that our internal controls and compliance systems will always protect us from acts committed by employees, agents or business partners of ours (or of businesses we acquire or partner with) that would violate U.S. and/or non-U.S. laws, including the laws governing payments to government officials, bribery, fraud, kickbacks and false claims, pricing, sales and marketing practices, conflicts of interest, competition, export and import compliance, money laundering and data privacy. In particular, the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Any such improper actions or allegations of such acts could damage our reputation and subject us to civil or criminal investigations in the U.S. and in other jurisdictions and related shareholder lawsuits, could lead to substantial civil and criminal, monetary and non-monetary penalties and could cause us to incur significant legal and investigatory fees. PAGE 9 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 flows 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 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. 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. These acquisitions involve a number of financial, accounting, managerial, operational, legal, compliance and other risks and challenges, including the following, any of which could adversely affect our results of operations: (cid:120) 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:120) we may incur or assume significant debt in connection with our acquisitions; (cid:120) (cid:120) (cid:120) 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:120) we could experience difficulty in integrating personnel, operations, financial and other systems, and in retaining key employees and customers; (cid:120) we may be unable to achieve cost savings or other synergies anticipated in connection with an acquisition; (cid:120) 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:120) (cid:120) 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 indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and as a result we may face unexpected liabilities. Certain of the acquisition agreements by which we have acquired companies require the former owners to indemnify us against certain liabilities related to the operation of the company before we acquired it. In most of these agreements, however, PAGE 10 the liability of the former owners is limited and certain former owners may be unable to meet their indemnification responsibilities. We cannot assure you that these indemnification provisions will protect us fully or at all, and as a result we may face unexpected liabilities that could adversely impact our results of operations. The contingent consideration associated with certain of our acquisitions may negatively impact our available cash and results from operations. As part of certain of our acquisitions, we are required to make contingent consideration payments based on defined growth metrics over a specified 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 is recorded as expense in our consolidated statements of income, which could materially impact our results of operations. 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 the 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. We also rely on nondisclosure and noncompetition agreements with employees, consultants and other parties to protect, in part, trade secrets and other proprietary rights. There can be no assurance that these agreements will adequately protect our trade secrets and other proprietary rights and 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. 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. 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, property damage or other liability. These events could lead to recalls or safety alerts, result in the removal of a product or service from the market and result in product liability or similar claims being brought against us. Recalls, removals and product liability and similar claims (regardless of their validity or ultimate outcome) can results in significant costs, as well as negative publicity and damage to our reputation that could reduce demand for our products and services. PAGE 11 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 revenues. 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. 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. For the year ended March 31, 2016, we adopted Financial Accounting Standards Board Accounting Standards Update No. 2016-09, Compensation—Stock Compensation (Topic 718). The adoption of this ASU reduced our income tax expense by $860,000, for the year ended March 31, 2016. For additional discussion, please see Note 1 of Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data”). Foreign currency exchange rates may adversely affect our consolidated financial statements. Sales and purchases in currencies other than the U.S. dollar expose us to fluctuations in the exchange rates of foreign currencies relative to the U.S. dollar and may adversely affect our consolidated financial statements. Increased strength of the U.S. dollar increases the effective price of our products sold in U.S. dollars into other countries, which may require us to lower our prices or adversely affect sales to the extent we do not increase local currency prices. Decreased strength of the U.S. dollar could adversely affect the cost of materials, products and services we purchase overseas. Revenues and expenses of our non-U.S. businesses are also translated into U.S. dollars for reporting purposes and the strengthening or weakening of the U.S. dollar could result in unfavorable translation effects. In addition, we face exchange rate risk from our investment in subsidiaries owned and operated in foreign countries. Changes in our tax rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods. We are subject to income taxes in the U.S. and in various non-U.S. jurisdictions. The impact of these factors may be substantially different from period to period. In addition, the amount of income taxes we pay is subject to ongoing audits by the U.S. federal, state and local tax authorities and by non-U.S. tax authorities. Due to the potential for changes to tax laws (or changes to the interpretation thereof) and the ambiguity of tax laws, the subjectivity of factual interpretations, the complexity of our intercompany arrangements and other factors, our estimates of income tax liabilities may differ from actual payments or assessments. If an audit results in payments or assessments greater than our reserves, our future results may include unfavorable adjustments to our tax liabilities and our consolidated financial statements could be adversely affected. If we determine to repatriate earnings from foreign jurisdictions that have been considered permanently re-invested under existing accounting standards, it could also increase our tax rate. In addition, any significant change to the tax system in the U.S. or in other jurisdictions, including changes in the taxation of international income, could adversely affect our consolidated financial statements. PAGE 12 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 are required to collect and remit sales taxes. If any jurisdiction determines that we have “nexus” in additional locations that we have not contemplated, it could have an adverse effect on our results of operations and financial condition. We are subject to the possibility of a variety of litigation and other legal and regulatory proceedings in the course of our business that could adversely affect our consolidated financial statements. We are subject to the possibility of a variety of litigation and other legal and regulatory proceedings incidental to our business, including claims for damages arising out of the use of products or services and claims relating to intellectual property matters, employment matters, tax matters, commercial disputes, competition and sales and trading practices, environmental matters, personal injury, insurance coverage and acquisition or divestiture-related matters, as well as regulatory investigations or enforcement. We may also become subject to lawsuits as a result of past or future acquisitions or as a result of liabilities retained from, or representations, warranties or indemnities provided in connection with, divested businesses. Any of these lawsuits may include claims for compensatory damages, punitive and consequential damages and/or injunctive relief. The defense of these lawsuits may divert our management’s attention, we may incur significant expenses in defending these lawsuits, and we may be required to pay damage awards or settlements or become subject to equitable remedies that could adversely affect our operations and consolidated financial statements. Moreover, any insurance or indemnification rights that we may have may be insufficient or unavailable to protect us against such losses. In addition, developments in proceedings in any given period may require us to adjust the loss contingency estimates that we have recorded in our consolidated financial statements, record estimates for liabilities or assets previously not susceptible of reasonable estimates or pay cash settlements or judgments. Any of these developments could adversely affect our consolidated financial statements in any given period. We cannot make assurances that our liabilities in connection with litigation and other legal regulatory proceedings will not exceed our estimates or adversely affect our consolidated financial statements and/or reputation. We are utilizing variable rate financing. As of May 31, 2016 we had $44,500,000 in outstanding indebtedness which bears interest at either: (1) LIBOR, as defined, plus an applicable margin ranging from 1.5% to 2.25%; or (2) the bank’s commercial bank floating rate (“CBFR”), which is the bank’s prime rate adjusted down by 0.5%. 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 consolidated financial statements. As of May 31, 2016, we had $44,500,000 in outstanding indebtedness and, based on the remaining availability under our Credit Facility, we have the ability to incur an additional $22,500,000 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 would reduce the funds we would 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. If global credit market conditions deteriorate, our financial performance could be adversely affected. The cost and availability of credit are subject to changes in the global economic environment. If conditions in major credit markets deteriorate, our ability to obtain debt financing or the terms associated with that debt financing may be negatively affected, which could affect our results of operations. PAGE 13 If we suffer loss to our facilities, supply chains, distribution systems or information technology systems due to catastrophe or other events, our operations could be seriously harmed. Our facilities, supply chains, distribution systems and information technology systems are subject to catastrophic loss due to fire, flood, earthquake, hurricane, public health crisis, war, terrorism or other natural or man-made disasters. If any of these facilities, supply chains or systems were to experience catastrophic loss, it could disrupt our operations, delay production and shipments, result in defective products or services, damage customer relationships and our reputation and result in legal exposure and large repair or replacement expenses. The third-party insurance coverage that we maintain will vary from time to time in both type and amount depending on cost, availability and our decisions regarding risk retention, and may be unavailable or insufficient to protect us against losses. A significant disruption in, or breach in security of, our information technology systems could adversely affect our business. We rely on information technology systems, some of which are managed by third parties, to process, transmit and store electronic information (including sensitive data such as confidential business information and personally identifiable data relating to employees, customers and other business partners), and to manage or support a variety of critical business processes and activities. These systems may be damaged, disrupted or shut down due to attacks by computer hackers, computer viruses, employee error or malfeasance, power outages, hardware failures, telecommunication or utility failures, catastrophes or other unforeseen events, and in any such circumstances our system redundancy and other disaster recovery planning may be ineffective or inadequate. In addition, security breaches of our systems (or the systems of our customers, suppliers or other business partners) could result in the misappropriation, destruction or unauthorized disclosure of confidential information or personal data belonging to us or to our employees, partners, customers or suppliers. Like many multinational corporations, our information technology systems have been subject to computer viruses, malicious codes, unauthorized access and other cyber-attacks and we expect to be subject to similar attacks in the future as such attacks become more sophisticated and frequent. Any of the attacks, breaches or other disruptions or damage described above could interrupt our operations, delay production and shipments, result in theft of our and our customers’ intellectual property and trade secrets, damage customer and business partner relationships and our reputation or result in defective products or services, legal claims and proceedings, liability and penalties under privacy laws and increased costs for security and remediation, each of which could adversely affect our business and consolidated financial statements. 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, Traverse City, Markham and Omaha facilities all have manufacturing, research and development, marketing and administrative functions. The Berlin and Chassieu facilities have marketing and administrative functions. PAGE 14 Location Lakewood, Colorado Lakewood, Colorado Butler, New Jersey Bozeman, Montana Omaha, Nebraska Berlin, New Jersey Traverse City, Michigan Chassieu, France Markham, Canada Operations Instruments, Continuous Monitoring and corporate headquarters Corporate administration Instruments Biological Indicators Biological Indicators Continuous Monitoring Biological Indicators Biological Indicators Cold Chain and Biological Indicators Square Feet 40,000 7,000 20,000 22,000 23,000 2,000 10,000 3,000 8,000 Owned Leased Leased Owned Owned Leased Leased Leased Leased ITEM 3. LEGAL PROCEEDINGS None ITEM 4. MINE SAFETY DISCLOSURES Not applicable. Part II ITEM 5. MARKET FOR REGISTRANT’S 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, 2015 September 30, 2015 December 31, 2015 March 31, 2016 Quarter Ended June 30, 2014 September 30, 2014 December 31, 2014 March 31, 2015 High $ 92.80 126.05 119.54 106.00 High $ 89.59 84.66 83.92 79.88 Low $ 67.70 86.55 89.71 77.00 Low $ 74.38 54.89 57.38 69.72 Dividends Per Share $ 0.16 0.16 0.16 0.16 Dividends Per Share $ 0.15 0.15 0.16 0.16 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 sole 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, 2016, there were 142 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, 2016, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended. PAGE 15 We made the following repurchases of our common stock, by month, within the fourth quarter of the year covered by this report: Shares Purchased Average Price Paid January 1 – 31, 2016 February 1 – 29, 2016 March 1 – 31, 2016 Total -- -- -- -- -- -- -- -- Total Shares Purchased as Part of Publicly Announced Plan 162,486 162,486 162,486 Remaining Shares Able to Purchase Under Plan 137,514 137,514 137,514 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, 2016, 515,720 shares of common stock may be issued upon exercise of outstanding options, with a weighted-average exercise price of $64.32 and 913,630 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. Set forth below is a line graph comparing, for the period March 31, 2011 through March 31, 2016, the cumulative total shareholder 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. PAGE 16 $400 $350 $300 $250 $200 $150 $100 $50 $0 3/31/2011 3/31/2012 3/31/2013 3/31/2014 3/31/2015 3/31/2016 Mesa Laboratories, Inc S&P 500 Index Peer Group Index PAGE 17 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 thereto 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) Revenues Gross profit Gross profit margin Operating income Operating income margin Net income Net income margin 2016 $ 5,695 $ 13,215 As of and for The Year Ended March 31, 2014 $ 5,575 $ 16,351 2015 $ 2,034 $ 14,965 2013 $ 4,006 $ 14,793 2012 $ 7,191 $ 14,899 14% 8% 10% 14% 9% 11% 15% 11% 13% 17% 14% 18% 20% 16% 21% $ 84,659 $ 71,330 $ 52,724 $ 46,435 $ 39,616 $ 51,413 61% $ 43,392 61% $ 31,688 60% $ 28,862 62% $ 23,511 59% $ 16,323 19% $ 11,169 13% $ 15,864 22% $ 9,583 13% $ 11,785 22% $ 9,000 17% $ 13,104 28% $ 8,450 18% $ 12,477 31% $ 7,919 20% Net income per diluted share $ 2.97 $ 2.63 $ 2.49 $ 2.35 $ 2.29 Adjusted net income (3) $ 15,324 $ 12,502 $ 11,046 $ 10,144 $ 8,876 Adjusted net income per diluted share $ 4.08 $ 3.43 $ 3.06 $ 2.82 $ 2.56 Average return on: Adjusted invested capital (4) 13% 14% 16% 21% 23% (1) (2) (3) (4) 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. Adjusted invested capital is a non-GAAP measure which substitutes adjusted net income for net income in the average return on invested capital calculation (2). 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. PAGE 18 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 2016 $ 11,169 Year Ended March 31, 2014 $ 9,000 2015 $ 9,583 2013 $ 8,450 4,155 $ 15,324 2,919 $ 12,502 2,046 $ 11,046 1,694 $ 10,144 2012 $ 7,919 957 $ 8,876 PAGE 19 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 and services, 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 four divisions across eight 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, environmental air sampling and semiconductor industries. Our Biological Indicators Division provides testing services, along with the manufacturing and marketing of biological indicators and distribution of chemical indicators used to assess the effectiveness of sterilization processes, including steam, hydrogen peroxide, ethylene oxide 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 Cold Chain Division provides parameter (primarily temperature) monitoring of products in a cold chain, consulting services such as compliance monitoring, packaging development and validation or mapping of transport and storage containers, and thermal packaging products such as coolers, boxes, insulation materials and phase-change products to control temperature during transport. 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 indicators and many of the packaging products of our Cold Chain Division are disposable and are used on a routine basis, thus product sales are less sensitive to general economic conditions. Instrument products, continuous monitoring systems, and cold chain monitoring products 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 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 will 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. Subsequent to our year ended March 31, 2016, we completed the following two acquisitions: In April 2016, we completed the ATS Acquisition whereby we acquired substantially all the assets (other than cash and certain inventories and fixed assets) and certain liabilities of ATS. ATS was in the business of supplying products and services for dental sterilizer testing in both the U.S. and Canada. In April 2016, we completed the Pulse Acquisition whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of Pulse’s business segment associated with the distribution of our biological indicator products. Year Ended March 31, 2016 Acquisitions During the year ended March 31, 2016, we completed the following ten acquisitions (the “2016 Acquisitions”): In January 2016, we completed the January 2016 European BI Distributor Acquisitions whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of the business segment associated with the PAGE 20 distribution of our biological indicator products from CoaChrom Diagnostica GmbH of Austria and bioTRADING Benelux B.V of the Netherlands; In October 2015, we completed the October 2015 European BI Distributor Acquisitions whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of the business segment associated with the distribution of our biological indicator products from BIOLOGIK S.R.L.(Italy), VWR International PBI S.R.L.(Italy), Cruinn Diagnostics Ltd.(Ireland), Mecolab AG (Switzerland), Miclev Medical Products AB (Sweden) and Tiselab S.L.(Spain)’s; In August 2015, we completed the North Bay Acquisition whereby we acquired substantially all of the assets (other than certain fixed assets) and certain liabilities of the dental sterilizer testing business of North Bay; and In July 2015, we completed the Infitrak Acquisition whereby we acquired all of the common stock of Infitrak, a company whose business provides consulting, packaging and measuring solutions for cold chain applications. Year Ended March 31, 2015 Acquisitions During the year ended March 31, 2015, we completed the following six acquisitions (the “2015 Acquisitions”): In March 2015, we completed the Früh Acquisition whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of Früh’s business segment associated with the distribution of our biological indicator products; In February 2015, we completed the Cherwell Acquisition whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of Cherwell’s business segment associated with the distribution of our biological indicator products; In October 2014, we completed the ATI Acquisition whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of ATI, a distributor of our biological indicator products; In October 2014, we completed the PCD Acquisition whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of PCD’s business segment associated with the sale of PCD’s which are used for quality control purposes in the field of ethylene oxide sterilization of medical devices; 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’s business which is focused on the sale of equipment used primarily for particulate air sampling; and In April 2014, we completed the Amilabo Acquisition whereby we acquired all of the common stock of Amilabo, a distributor of our biological indicator products. Year Ended March 31, 2014 Acquisitions During the year ended March 31, 2014, we completed the following three acquisitions (the “2014 Acquisitions”): In November 2013, we completed the TempSys Acquisition whereby we acquired all of the common stock of TempSys, a company in the business of providing continuous monitoring systems to regulated industries; In November 2013, we completed the Amega Acquisition whereby we acquired substantially all of the assets (other than cash) and certain liabilities of Amega, a company in the business of providing continuous monitoring services to regulated industries; and In July 2013, we completed the Suretorque Acquisition whereby we acquired substantially all the assets (other than cash) of ST Acquisition’s business segment involving the design, manufacture, sale and service of its SureTorque line of bottle cap torque testing instrumentation. PAGE 21 General Trends and Outlook Our strategic objectives include growth both organically and through further acquisitions. During the year ended March 31, 2016, we continued to build our infrastructure to prepare for future growth, including the addition of key personnel to our operations, sales and marketing, research and development, and finance teams. In addition, on October 1, 2015 we converted from our legacy enterprise resource planning (“ERP”) system to our new cloud based system. This represented a significant upgrade and we will continue to make smaller modifications in future periods. The markets for our biological indicators and cold chain packaging products 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. In general, our instruments products, cold chain services and our continuous monitoring systems are impacted more by general economic conditions than our biological indicator and cold chain packaging products. As a result, 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. However, demand for our instruments products, cold chain services and continuous monitoring systems remains strong and we strive to continue to 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 new markets. We are hopeful that all of our 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, 2016 vs 2015 2015 vs 2014 Revenues Cost of revenues Gross profit 2016 $ 84,659 33,246 2015 2014 Change $ 71,330 $ 52,724 $ 13,329 27,938 21,036 5,308 $ 51,413 $ 43,392 $ 31,688 $ 8,021 Gross profit margin 61% 61% 60% --% Operating Expenses: Selling $ 7,500 $ 7,176 $ 6,119 $ 324 General and administrative Research and development 23,618 3,972 17,058 3,294 11,464 2,320 6,560 678 Operating income Net income Net income margin $ 35,090 $ 27,528 $ 19,903 $ 7,562 $ 16,323 $ 15,864 $ 11,785 $ 11,169 $ 9,583 $ 9,000 $ 459 $ 1,586 13% 13% 17% --% Percent Change Change Percent Change 19% 19% 18% 5% 38% 21% 27% 3% 17% $ 18,606 6,902 $ 11,704 1% $ 1,057 5,594 974 $ 7,625 $ 4,079 $ 583 (4%) 35% 33% 37% 17% 49% 42% 38% 35% 6% PAGE 22 Revenues The following table summarizes our revenues by source (in thousands, except percent data): Year Ended March 31, 2016 vs 2015 2015 vs 2014 2016 2015 2014 Change Percent Change Change Percent Change Biological Indicators Product Service Instruments Product Service Continuous Monitoring Product Service Cold Chain Product Service $ 30,348 $ 26,330 $ 22,111 $ 4,018 3,301 33,649 25,957 9,735 35,692 5,901 4,891 10,792 3,879 647 4,526 1,060 27,390 26,789 6,265 33,054 5,791 5,095 10,886 -- -- -- 881 22,992 20,858 5,531 26,389 1,570 1,773 3,343 -- -- -- 2,241 6,529 (832) 3,470 2,638 110 (204) (94) 3,879 647 4,526 Total $ 84,659 $ 71,330 $ 52,724 $ 13,329 Year ended March 31, 2016 versus March 31, 2015 15% 211% 23% (3)% 55% 8% 2% (4)% (1)% 100% 100% 100% 19% $ 4,219 179 4,398 5,931 734 6,665 4,221 3,322 7,543 -- -- -- $ 18,606 19% 20% 19% 28% 13% 25% 269% 187% 226% --% --% --% 35% Biological Indicators revenues increased as a result of the ATI, PCD, Früh, Cherwell, North Bay, October 2015 European BI Distributor and the January 2016 European BI Distributor Acquisitions and organic growth of two percent which was achieved through existing customers, expansion into new markets and price increases. This growth was partially offset by the impact to revenues generated from our wholly owned subsidiary in France due to the decrease in the value of the Euro as compared to the U.S. dollar during our year ended March 31, 2016. Instruments revenues increased as a result of the timing of the BGI Acquisition and organic growth of eight percent in our existing product lines which was achieved primarily through existing and new customers. Continuous Monitoring revenues were essentially flat. On a go forward basis, we anticipate the run rate for our Continuous Monitoring segment to approximate $2,500,000 - $3,000,000 per quarter over the next few quarters. Cold Chain revenues were $4,526,000 for the year ended March 31, 2016. We anticipate that revenues for the next few quarters to grow organically at a rate greater than ten percent. Year ended March 31, 2015 versus March 31, 2014 Biological Indicators revenues increased as a result of the Amilabo, ATI, PCD, Früh and Cherwell Acquisitions and organic growth of four percent which was achieved through existing customers, expansion into new markets and price increases. PAGE 23 Instruments revenues increased as a result of the BGI Acquisition and organic growth of six percent in our existing product lines and the timing of the prior year acquisition of the SureTorque product line, partially offset by the disposal of the Nusonics product. Continuous Monitoring revenues increased as a result of organic growth of 52 percent and the timing of the prior year acquisition of TempSys and Amega. Gross Profit The following table summarizes our gross profit by operating segment (in thousands, except percent data): Year Ended March 31, 2016 vs 2015 2015 vs 2014 2016 2015 2014 Change Percent Change Change Percent Change Biological Indicators $ 22,205 $ 17,142 $ 13,187 $ 5,063 30% $ 3,955 30% Gross profit margin 66% 63% 57% 3% 6% Instruments $ 23,223 $ 20,763 $ 16,904 $ 2,460 12% $ 3,859 23% Gross profit margin 65% 63% 64% 2% (1)% Continuous Monitoring $ 4,154 $ 5,487 $ 1,597 $ (1,333) (24)% $ 3,890 244% Gross profit margin 38% 50% 48% (12)% Cold Chain $ 1,831 $ -- $ -- $ 1,831 100% Gross profit margin 40% --% --% --% 2% $ -- --% --% Total gross profit $ 51,413 $ 43,392 $ 31,688 $ 8,021 18% $ 11,704 37% Gross profit margin 61% 61% 60% --% 1% Year ended March 31, 2016 versus March 31, 2015 Biological Indicators gross profit margin percentage increased as a result of the ATI, PCD, Früh, Cherwell, North Bay, October 2015 European BI Distributor and the January 2016 European BI Distributor Acquisitions, price increases and volume-based efficiencies associated with revenues growth. Instruments gross profit margin percentage increased primarily as a result of changes in product and service mix and volume-based efficiencies associated with revenues growth. Continuous Monitoring gross profit margin percentage decreased primarily as a result of changes in product and service mix. In addition, the prior year gross margin percentage was positively impacted by the timing of revenue recognition on several larger installations that were one-time in nature. We have made substantial progress on our integration activities associated with this segment and we are now focused on cost reduction initiatives to streamline the operations and increase profitability. One of the critical components of our integration activities was to introduce a new system (consisting of both new software and hardware) which we believe will give us a competitive advantage in the marketplace. In addition to significant new features and functionality, we believe that the new system will reduce our costs (both from an installation and on-going maintenance perspective) which will lead to higher gross and operating margins. This system was originally planned to be rolled out during our year ended March 31, 2015. The software component of the system was completed in February 2016 but the remaining hardware component will not be ready until the end of our second quarter ending September 30, 2016. We are hopeful to meet the newly stated release dates and that this new system will improve both our gross and operating income margins, however it is unclear as to how significant those improvements will be. PAGE 24 We expect that our Cold Chain gross profit margin percentage will continue to be lower than the historical results of our other segments due to the nature of our cold chain products. This lower gross profit percentage, however, is offset by lower operating expenses (as a percentage of revenues) and as a result, we expect that operating income margins for our Cold Chain segment to be similar to those of our other segments. Year ended March 31, 2015 versus March 31, 2014 Biological Indicators gross profit margin percentage increased as a result of the Amilabo, ATI, PCD, Früh and Cherwell Acquisitions, price increases and volume-based efficiencies associated with revenues growth. In addition, the year ended March 31, 2014 was negatively impacted by the requirement to replace three product batches that had longer than expected incubation times. Instruments gross profit margin percentage decreased as a result of integration activities associated with the BGI Acquisition and a change in our product/service mix, partially offset by the impact of six percent organic revenues growth and the application of purchase accounting associated with the Suretorque Acquisition in the prior year. Continuous Monitoring gross profit margin percentage was negatively impacted by integration activities that commenced soon after the acquisitions were completed. These integration activities have been decreasing over the year and are now substantially complete. As a result, we believe that the Continuous Monitoring gross profit margin percentages on a go forward basis will be impacted more by total revenues available to cover fixed costs and product mix as opposed to ongoing integration activities. We are hopeful that we will continue to improve these gross profit margin percentages in the future but it is unclear as to how much improvement we will be able to obtain. Operating Expenses The following table summarizes the change in our operating expenses (in thousands): Selling General and administrative ERP system implementation Recurring software related costs Amortization Personnel costs Acquisition costs Litigation settlement Administrative costs related to acquired entities Sales tax accrual Other, net Research and development Increase (Decrease) Year Ended March 31, 2016 vs 2015 $ 324 2015 vs 2014 $ 1,057 748 197 1,121 1,594 40 1,709 815 (549) 885 6,560 678 673 320 1,696 2,835 354 -- 459 (948) 205 5,594 974 Operating expenses $ 7,562 $ 7,625 Selling Year ended March 31, 2016 versus March 31, 2015 Selling expense increased primarily due to additional personnel related to the 2016 and 2015 Acquisitions. As a percentage of revenues, selling expense decreased to nine percent as compared to 10 percent in the prior year. PAGE 25 Year ended March 31, 2015 versus March 31, 2014 Selling expense increased primarily due to the 2015 and 2014 Acquisitions, along with negligible increases from other product lines. As a percentage of revenues, selling expense decreased to 10 percent as compared to 12 percent in the prior period. The decrease was due primarily to streamlining sales processes associated with acquisitions along with corresponding increases in revenues. General and Administrative Year ended March 31, 2016 versus March 31, 2015 General and administrative expenses increased primarily due to increased amortization, personnel and other administrative costs resulting from the 2016 and 2015 Acquisitions, increased spending on our ERP system implementation and a litigation settlement, partially offset by a decrease in sales tax accruals. Year ended March 31, 2015 versus March 31, 2014 General and administrative expenses increased primarily due to increased amortization, personnel and ERP system implementation costs and acquisition costs resulting from the 2015 and 2014 Acquisitions, partially offset by a decrease in accruals for sales tax liabilities associated with not properly collecting and remitting sales tax in states in which we likely had established nexus during prior periods. Research and Development Year ended March 31, 2016 versus March 31, 2015 Research and development expenses increased as a result of the addition of several new engineers to support existing and acquired businesses. Year ended March 31, 2015 versus March 31, 2014 Research and development expenses increased as a result of the Amega, TempSys and BGI Acquisitions and standard increases in personnel costs, partially offset by timing of external research and development consulting projects. Other (Expense) Income Other (expense) income, net for the year ended March 31, 2016 is comprised primarily of interest expense associated with our Credit Facility. Other expense (income), net for the year ended March 31, 2015 is comprised primarily of interest expense associated with our Credit Facility, partially offset by a $125,000 gain associated with the termination of a joint development project. Other (expense) income, net for the year ended March 31, 2014 is comprised 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 disposal of our Nusonics product line. Please see “Item 8. Financial Statements and Supplementary Data” for additional discussion. Net Income Our income tax rate varies based upon many factors but in general, we anticipate that on a go forward basis, our effective tax rate will approximate 33 to 36 percent, plus or minus the impact of excess tax benefits and deficiencies associated with share-based payment awards to employees (which may vary significantly from year to year). Net income for the year ended March 31, 2016 was significantly impacted by the $1,709,000 Amato Settlement, partially offset by $860,000, associated with the adoption of Financial Accounting Standards Board Accounting Standards Update No. 2016-09, Compensation—Stock Compensation (Topic 718) (please see Notes 12 and 1 of Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data, respectively.)” Otherwise, net income for the years ended March 31, 2016, 2015 and 2014 varied with the changes in revenue, gross profit and operating expenses (which includes $5,787,000, $4,675,000 and $2,979,000 of non-cash amortization of intangible assets, respectively). PAGE 26 Liquidity and Capital Resources Our sources of liquidity 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. Due to continued organic and acquisition related growth, we have outgrown the capacity of our current building in Bozeman, Montana and as a result, we are building a new facility in the same general area. Construction began in July 2015 and we are hopeful that the building will be completed no later than December 31, 2016. During our year ended March 31, 2015 we acquired the related land for $741,000 and have spent $5,970,000 during our year ended March 31, 2016, which is included in property, plant and equipment, net on the accompanying consolidated balance sheets. We anticipate that the total cost of the new facility will be approximately $14,750,000. Following the relocation from our current Bozeman building into the new facility, we expect to be able to sell the current facility for $2,000,000 - $3,000,000 to partially offset the cost of the new building. We implemented a new ERP system which required a significant amount of cash. We incurred approximately $2,100,000 of expense associated with this project of which approximately $1,400,000 was incurred during the year ended March 31, 2016. On a go forward basis, we expect our annual operating costs for our ERP system to approximate $450,000 plus any costs necessary for additional projects and enhancements. Working capital is the amount by which current assets exceed current liabilities. We had working capital of $13,215,000 and $14,965,000, respectively, at March 31, 2016 and 2015. 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. Funds from the Credit Facility were 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 “Initial Term Loan”) and to extend the maturity date of the Credit Facility to June 30, 2017. On July 1, 2015, we further amended our Credit Facility to extend the maturity date to June 30, 2020, increase the Line of Credit to $50,000,000 and establish a new $20,000,000 term loan (the “Term Loan”). The majority of the proceeds from the Term Loan were used to pay down the remaining $12,000,000 balance of the Initial Term Loan. Under the Line of Credit, indebtedness bears interest at either: (1) LIBOR, as defined, plus an applicable margin ranging from 1.5% to 2.25%; or (2) the bank’s commercial bank floating rate (“CBFR”), which is the bank’s prime rate adjusted down by 0.5%. The Term Loan bears interest at LIBOR, as defined, plus an applicable margin ranging from 1.5% to 2.25% and requires 20 quarterly principal payments (the first due date was July 15, 2015) in the amount of $750,000 with the remaining balance of principal and accrued interest due on June 30, 2020. 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 3.25 to 1.0 through March 31, 2016 and 3.0 to 1.0 thereafter, and a minimum fixed charge coverage ratio of 1.35 to 1.0. We were in compliance with the required covenants at March 31, 2016. As of May 31, 2016, we had $44,500,000 in outstanding indebtedness and unused capacity under our Credit Facility of $22,500,000. In April 2015, the SEC declared effective our Universal Shelf Registration Statement which allows us to sell, in one or more public offerings, common stock or warrants, or any combination of such securities for proceeds in an aggregate amount of up to $130,000,000. The terms of any offering, including the type of securities involved, would be established at the time of sale. PAGE 27 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 162,486 shares of common stock under this program from inception through March 31, 2016. We have paid 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, 2015 $ 0.15 0.15 0.16 0.16 2016 $ 0.16 0.16 0.16 0.16 2014 $ 0.14 0.14 0.15 0.15 In April 2016, our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on June 15, 2016, to shareholders of record at the close of business on May 31, 2016. Cash Flow – Operating, investing and financing activities were as follows (in thousands): Net cash provided by operating activities Net cash used in investing activities Net cash provided by financing activities 2016 $ 16,903 (31,840) 18,620 Year Ended March 31, 2015 $ 10,816 (23,371) 9,072 2014 $ 12,373 (23,138) 12,334 Net cash provided by operating activities for the year ended March 31, 2016 increased primarily due to the efficient management of working capital. Net cash provided by operating activities for the year ended March 31, 2015 decreased primarily due to increases in accounts receivable and inventories resulting from the 2014 and 2015 Acquisitions, decreases in unearned revenues and the payment of accrued liabilities and taxes payable, partially offset by decreases in payments of accounts payable and increases in net income and depreciation and amortization. Net cash provided by operating activities for the year ended March 31, 2014 increased primarily due to positive results from our efforts to collect long-outstanding receivables, partially offset by significant increases in inventory purchases associated with the Amega and TempSys Acquisitions. Net cash used in investing activities for the year ended March 31, 2016 resulted from $24,111,000 associated with the 2016 Acquisitions and the purchase of $7,729,000 of property, plant and equipment. Net cash used in investing activities for the year ended March 31, 2015 resulted from $20,543,000 associated with the 2015 Acquisitions and the purchase of $2,828,000 of property, plant and equipment. Net cash used in investing activities for the year ended March 31, 2014 resulted from $22,758,000 associated with the 2014 Acquisitions and the purchase of $1,041,000 of property, plant and equipment, partially offset by the proceeds from the disposal of the NuSonics product line of $661,000. Net cash provided by financing activities for the year ended March 31, 2016 resulted from borrowings under our Credit Facility of $25,000,000 and proceeds from the exercise of stock options of $1,923,000, partially offset by the repayment of debt of $6,000,000 and the payment of dividends of $2,303,000. Net cash provided by financing activities for the year ended March 31, 2015 resulted from borrowings under our Credit Facility of $23,000,000 and proceeds from the exercise of stock options of $1,504,000, partially offset by the repayment of debt of $13,250,000 and the payment of dividends of $2,182,000. Net cash provided by 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 the repayment of debt of $8,500,000 and the payment of dividends of $1,989,000. PAGE 28 At March 31, 2016, we had contractual obligations for open purchase orders of approximately $3,120,000 for routine purchases of supplies and inventory, which are payable in less than one year. Under the terms of the Infitrak Agreement, we are required to pay contingent consideration if the gross profit (as defined in the Earn-Out Agreement) for the packaging component of our cold chain business for the two years subsequent to the acquisition meets certain levels. The potential undiscounted consideration payable ranges from $0 to $15,000,000 CDN (approximately $0 to $11,500,000 as of March 31, 2016) and is based upon a sliding scale of growth in gross profit (as defined in the Earn-Out Agreement) for year one and year two of 30 to 70 percent and 15 to 75 percent, respectively. Based upon both historical and projected growth rates, we recorded $9,271,000 (valued at $9,037,000 as of March 31, 2016 based on the then current fair market value and exchange rate) of contingent consideration payable which represented our best estimate of the then current fair market value 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 the packaging component of our cold chain business and we will adjust the contingent liability on a go forward basis, based on then current information. The contingent consideration is payable in two annual installments beginning in the second quarter of our year ending March 31, 2017. Under the terms of the PCD Agreement, we are required to pay contingent consideration if the cumulative revenues for our process challenge device business for the three years subsequent to the acquisition meet certain levels. The potential consideration payable ranges from $0 to $1,500,000 and is based upon a sliding scale of three-year cumulative revenues between $9,900,000 and $12,600,000. Based upon both historical and projected growth rates, we recorded $300,000 of contingent consideration payable which represented our best estimate of the amount that will ultimately be paid. We paid $150,000 of the contingent consideration during the year ended March 31, 2016 (based upon the current run rate projected over the entire three-year contingent consideration period). This amount is subject to modification at the end of the second and third years of the earn-out period based upon the actual revenues earned over the contingent consideration period. 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 process challenge device business and we will adjust the contingent liability on a go forward basis, based on then current information. In October 2015, we entered into the Amato Settlement (for additional discussion, please see Note 12 of Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data”) whereby we paid Amato $3,165,000. In exchange, Amato agreed to dismiss the complaint, release Mesa of any and all claims by Amega and Amato, and relieve us of any future payment obligation under the Amega Earn-Out. Insurance covered $415,000 of the settlement payment and we had $1,041,000 accrued on our consolidated balance sheet remaining from the original hold back and contingent consideration payable. The remaining $1,709,000 was recorded as general and administrative expense in the accompanying consolidated statements of income for the year ended 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 Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data.” 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. PAGE 29 Inventories Inventories are stated at the lower of cost or market, using the weighted average method to determine cost. We evaluate labor and overhead costs annually, unless specific 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 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 intangible assets subject to amortization, 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. 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 years ended March 31, 2016, 2015 or 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 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 Infitrak, PCD and Amega 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, discount rates and cash flow. 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 any of our acquisitions 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. PAGE 30 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 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 In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation—Stock Compensation (Topic 718), as part of its simplification initiative, which affects all entities that issue share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. The ASU was effective for our fiscal year ending March 31, 2018 using either the prospective, retrospective or modified retrospective transition method, depending on the area covered in this update. As permitted within the amendment, we elected to early adopt and prospectively apply the provisions of this amendment as of April 1, 2015. In December 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). ASU 2015-17 simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The standard is effective for our fiscal year (and interim periods within that year) ending March 31, 2018. We do not expect this guidance to have a material impact on our results of operations or financial position. In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (Topic 805), which eliminates the requirement for an acquirer in a business combination to account for measurement- period adjustments retrospectively. The new guidance requires that the cumulative impact of a measurement-period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified which eliminates the requirement to restate prior period financial statements. The ASU requires disclosure of the nature and amount of measurement-period adjustments as well as information with respect to the portion of the adjustments recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustments to provisional amounts had been recognized as of the acquisition date. Due to the historical nature and volume of our acquisitions, we elected to early adopt this ASU and there was no impact to our consolidated financial statements. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which impacts virtually all aspects of an entity’s revenue recognition. The core principle of the new standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Companies can transition to the standard either retrospectively or as a cumulative effective adjustment as of the date of adoption. The new standard is effective for our fiscal year (and interim periods within that year) ending March 31, 2019. We are currently evaluating when to adopt the new standard, the impacts of adoption and the implementation approach to be used. PAGE 31 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, 2016, we have no obligations or interests which qualify as off-balance sheet arrangements. Contractual Obligations As of March 31, 2016, our contractual obligations, including payments due by period, are as follows (in thousands): Payments Due For Years Ending March 31, Purchase Commitments Line of Credit Term loan Other Total Total $ 3,120 27,500 17,750 483 $ 48,853 2017 $ 2,808 -- 3,000 274 $ 6,082 2018-2019 $ 312 -- 6,000 209 $ 6,521 2020-2021 Thereafter $ -- 27,500 8,750 -- $ 36,250 $ -- -- -- -- $ -- 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. 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, 2016, a one percentage point increase in interest rates would have increased interest expense by $380,000. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Stockholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 33 35 36 37 38 39 40 PAGE 32 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, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 2016. We have also audited the Company’s internal control over financial reporting as of March 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) 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 at Infitrak, (“Infitrak Acquisition”), which was acquired on July 6, 2015, and North Bay (“North Bay Acquisition”), which was acquired on August 6, 2015. Financial statements of the Acquisitions constitute approximately 10% and 9% of consolidated total assets and total revenues, respectively, of the consolidated financial statements amounts as of and for the year ended March 31, 2016. 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 Acquisitions. The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of 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 the effectiveness of 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 opinions. 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. PAGE 33 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. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mesa Laboratories, Inc. and subsidiaries as of March 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2016 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for share-based compensation in fiscal 2016, due to the adoption of Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic 718) Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). /s/ EKS&H LLLP June 6, 2016 Denver, Colorado PAGE 34 March 31, 2016 2015 Mesa Laboratories, Inc. Consolidated Balance Sheets (In thousands, except share amounts) ASSETS Current assets: Cash and cash equivalents Accounts receivable, less allowances of $375 and $700, respectively 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 Current portion of contingent consideration Other accrued expenses Income taxes payable Current portion of long-term debt 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, 3,637,273 shares (March 31, 2016) and 3,561,540 shares (March 31, 2015) Retained earnings Accumulated other comprehensive loss Total stockholders’ equity Total liabilities and stockholders’ equity $ 5,695 15,313 14,017 943 1,218 37,186 16,628 40,797 66,137 $ 160,748 $ 2,823 5,040 3,026 4,757 3,085 2,240 3,000 23,971 5,419 42,250 4,430 76,070 -- 21,001 64,828 (1,151) 84,678 $ 160,748 See accompanying notes to consolidated financial statements. $ 2,034 12,145 12,420 1,334 1,689 29,622 9,598 33,231 44,869 $ 117,320 $ 2,503 4,105 1,314 1,220 1,307 1,208 3,000 14,657 5,122 23,250 812 43,841 -- 17,751 55,962 (234) 73,479 $ 117,320 PAGE 35 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 Total operating expenses Operating income Other (expense) income, net Earnings before income taxes Income taxes Net income Net income per share: Basic Diluted 2016 Year Ended March 31, 2015 2014 $ 66,085 18,574 84,659 $ 58,910 12,420 71,330 $ 44,539 8,185 52,724 26,957 6,289 33,246 51,413 7,500 23,618 3,972 35,090 16,323 (768) 15,555 23,128 4,810 27,938 43,392 7,176 17,058 3,294 27,528 15,864 (517) 15,347 16,062 4,974 21,036 31,688 6,119 11,464 2,320 19,903 11,785 1,318 13,103 4,386 $ 11,169 5,764 $ 9,583 4,103 $ 9,000 $ 3.10 2.97 $ 2.72 2.63 $ 2.61 2.49 Weighted average common shares outstanding: Basic Diluted 3,605 3,757 3,521 3,650 3,445 3,611 See accompanying notes to consolidated financial statements. PAGE 36 Mesa Laboratories, Inc. Consolidated Statements of Comprehensive Income (In thousands except per share data) 2016 Year Ended March 31, 2015 2014 Net Income $ 11,169 $ 9,583 $ 9,000 Other comprehensive loss, net of tax: Foreign currency translation (917) (234) -- Total comprehensive income $ 10,252 $ 9,349 $ 9,000 See accompanying notes to consolidated financial statements. PAGE 37 Mesa Laboratories, Inc. Consolidated Statements of Stockholders’ Equity (In thousands, except share amounts) Common Stock Number of Shares 3,388,548 Amount $ 11,352 Employee Loans Retained Earnings $ (149) $ 41,550 Accumulated Other Comprehensive Loss $ -- Total $ 52,753 104,864 1,845 (2,784) -- -- -- -- 3,490,628 (147) -- 840 1,906 -- 15,796 70,912 1,504 -- -- -- -- -- -- 3,561,540 (28) -- 993 (514) -- -- 17,751 -- 125 -- -- -- -- (24) -- 24 -- -- -- -- -- -- -- -- (1,989) -- -- 9,000 48,561 -- -- (2,182) -- -- -- 9,583 55,962 -- -- -- -- -- -- -- -- -- -- -- -- (234) -- (234) 1,845 (22) (1,989) 840 1,906 9,000 64,333 1,504 (4) (2,182) 993 (514) (234) 9,583 73,479 75,733 -- -- -- -- 3,637,273 1,923 -- 1,327 -- -- $ 21,001 -- -- -- -- -- $ -- -- (2,303) -- -- 11,169 $ 64,828 -- -- -- (917) -- $ (1,151) 1,923 (2,303) 1,327 (917) 11,169 $ 84,678 See accompanying notes to consolidated financial statements. 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 impact on exercise of stock options Net income March 31, 2014 Common stock issued for conversion of stock options net of 11,266 shares returned as payment Purchase and retirement of common stock Dividends paid Stock-based compensation Tax impact on exercise of stock options Foreign currency translation Net income March 31, 2015 Common stock issued for conversion of stock options net of 13,491 shares returned as payment Dividends paid Stock-based compensation Foreign currency translation Net income March 31, 2016 PAGE 38 Mesa Laboratories, Inc. Consolidated Statements of Cash Flows (In thousands) Cash flows from operating activities: Net income Depreciation and amortization Loss (gain) on dispositions, net Deferred income taxes Stock-based compensation Foreign currency adjustments 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 Contingent consideration 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 financing activities Effect of exchange rate changes on cash and cash equivalents Year Ended March 31, 2016 2015 2014 $ 11,169 7,174 -- (807) 1,327 53 $ 9,583 5,656 16 450 993 (176) $ 9,000 3,844 (420) (43) 840 -- (1,958) (1,202) 391 (150) 2,865 99 (2,058) 16,903 (24,111) -- (7,729) (31,840) 25,000 (6,000) (2,303) 1,923 -- 18,620 (22) (2,291) (3,164) 772 410 (861) (572) -- 10,816 (20,543) -- (2,828) (23,371) 23,000 (13,250) (2,182) 1,504 -- 9,072 (58) 697 (1,300) (1,479) 754 1,192 308 (1,020) 12,373 (22,758) 661 (1,041) (23,138) 21,000 (8,500) (1,989) 1,845 (22) 12,334 -- Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 3,661 2,034 $ 5,695 (3,541) 5,575 $ 2,034 1,569 4,006 $ 5,575 Cash paid during the year for: Income taxes Interest $ 3,951 848 $ 3,345 499 $ 4,714 133 Supplemental non-cash activity: Repayment of employee loans for stock options Contingent consideration as part of an acquisition $ -- 9,271 $ 24 412 $ 92 500 See accompanying notes to consolidated financial statements. PAGE 39 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 and services, 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 four divisions across eight 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, environmental air sampling and semiconductor industries. Our Biological Indicators Division provides testing services, along with the manufacturing and marketing of biological indicators and distribution of chemical indicators used to assess the effectiveness of sterilization processes, including steam, hydrogen peroxide, ethylene oxide 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 Cold Chain Division provides parameter (primarily temperature) monitoring of products in a cold chain, consulting services such as compliance monitoring, packaging development and validation or mapping of transport and storage containers, and thermal packaging products such as coolers, boxes, insulation materials and phase- change products to control temperature during transport. 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. 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. PAGE 40 Unearned Revenues Certain of our products have associated annual service contracts whereby we provide repair, technical support and various other analytical or 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, 2016, 2015 and 2014, no individual customer represented more than 10 percent of our revenues or more than 10 percent of our accounts receivable balance. Approximately 63 percent and 37 percent of our sales for the year ended March 31, 2016 were to customers located in the United States and foreign countries, respectively. Inventories Inventories are stated at the lower of cost or market, using the weighted average method to determine cost. We evaluate labor and overhead costs annually, unless specific circumstances necessitate a mid-year evaluation. Our work in process and finished goods inventory includes raw materials, 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 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 PAGE 41 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 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. 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, there is no requirement 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, Biological Indicators and Cold Chain. 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. 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, there is no requirement to perform any further assessment. 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 consolidated balance sheets. As product is sold, this liability is reduced through revenues on the consolidated statements of income. PAGE 42 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 record a reserve if we believe it is more-likely-than-not our position would not prevail with the applicable tax authorities. Any penalties and interest are included in other expense, net on the consolidated statements of income. Acquisition Related Contingent Consideration Liability The acquisition related contingent consideration liability consists of estimated amounts due under various acquisition agreements and is typically based upon either revenues growth or specified profitability growth metrics. At each reporting period, we evaluate the expected future payments and the associated discount rate to determine the fair value of the contingent consideration. These amounts represent our best estimate of the amounts which will ultimately be paid. The discount rate represents our cost of borrowing at the reporting date that the fair value calculation is being performed. Changes in the fair value of the acquisition related contingent consideration is included in other (expense) income, net on the accompanying consolidated statements of net 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 (other than acquisition related contingent consideration liabilities, see above) 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. Recently Issued Accounting Pronouncements In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation—Stock Compensation (Topic 718), as part of its simplification initiative, which affects all entities that issue share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. The ASU was effective for our fiscal year ending March 31, 2018 using either the prospective, retrospective or modified retrospective transition method, depending on the area covered in this update. As permitted within the amendment, we elected to early adopt and prospectively apply the provisions of this amendment as of April 1, 2015. The adoption of this ASU decreased income tax expense by $860,000 for the year ended March 31, 2016. In December 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). ASU 2015-17 simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The standard is effective for our fiscal year (and interim periods within that year) ending March 31, 2018. We do not expect this guidance to have a material impact on our results of operations or financial position. PAGE 43 In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (Topic 805), which eliminates the requirement for an acquirer in a business combination to account for measurement- period adjustments retrospectively. The new guidance requires that the cumulative impact of a measurement-period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified which eliminates the requirement to restate prior period financial statements. The ASU requires disclosure of the nature and amount of measurement-period adjustments as well as information with respect to the portion of the adjustments recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustments to provisional amounts had been recognized as of the acquisition date. Due to the historical nature and volume of our acquisitions, we elected to early adopt this ASU and there was no impact to our consolidated financial statements. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which impacts virtually all aspects of an entity’s revenue recognition. The core principle of the new standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Companies can transition to the standard either retrospectively or as a cumulative effective adjustment as of the date of adoption. The new standard is effective for our fiscal year (and interim periods within that year) ending March 31, 2019. We are currently evaluating when to adopt the new standard, the impacts of adoption and the implementation approach to be used. Note 2. Acquisitions and Dispositions Acquisitions For the year ended March 31, 2016, our acquisitions of businesses (net of cash acquired) totaled $33,382,000, which consisted primarily of the following material acquisitions: Infitrak On July 6, 2015, we completed a business combination (the “Infitrak Acquisition”) whereby we acquired all of the common stock of 2396081 Ontario Inc. and its wholly owned operating subsidiary, Infitrak Inc. (collectively “Infitrak”), a company whose business provides consulting, packaging and measuring solutions for cold chain applications. The stock purchase agreement (the “Infitrak Agreement”) includes provisions for both contingent consideration based upon the two year growth in gross profit (as defined in the Earn-Out Agreement) of the packaging component of our cold chain business subsequent to the acquisition and for a holdback payment (subject to a post-closing adjustment), payable at the one year anniversary of the closing date. Under the terms of the Infitrak Agreement, we are required to pay contingent consideration if the gross profit (as defined in the Earn-Out Agreement) for the packaging component of our cold chain business for the two years subsequent to the acquisition meets certain levels. The potential undiscounted consideration payable ranges from $0 to $15,000,000 CDN (approximately $0 to $11,500,000 as of March 31, 2016) and is based upon a sliding scale of growth in gross profit (as defined in the Earn-Out Agreement) for year one and year two of 30 to 70 percent and 15 to 75 percent, respectively. Based upon both historical and projected growth rates, we recorded $9,271,000 (valued at $9,037,000 as of March 31, 2016 based on the then current fair market value and exchange rate) of contingent consideration payable which represented our best estimate of the then current fair market value 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 the packaging component of our cold chain business and we will adjust the contingent liability on a go forward basis, based on then current information. The contingent consideration is payable in two annual installments beginning in the second quarter of our year ending March 31, 2017. We expected to achieve savings and generate growth as we integrated the Infitrak 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 deductible for tax purposes and it was assigned to our Cold Chain segment. PAGE 44 The Infitrak 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 preliminary allocation of the consideration, subject to customary purchase price adjustments in accordance with the Infitrak Agreement (in thousands): Cash consideration Holdback payment liability Contingent consideration liability Aggregate consideration Accounts receivable Inventories Property, plant and equipment Intangibles Goodwill Accounts payable Accrued liabilities Deferred income taxes Total purchase price allocation $ 8,747 637 9,271 $ 18,655 $ 925 310 530 5,869 13,833 (470) (767) (1,575) $ 18,655 The accompanying consolidated statements of income include the results of the Infitrak Acquisition from the acquisition date of July 6, 2015. The pro forma effects of the acquisition on the results of operations as if the acquisition had been completed on April 1, 2015 and 2014, are as follows (in thousands, except per share data): Revenues Net income Net Income per common share: Basic Diluted North Bay Year Ended March 31, 2016 $ 86,499 11,471 $ 3.18 3.05 2015 $ 74,379 9,944 $ 2.82 2.72 On August 6, 2015, we completed a business combination (the “North Bay Acquisition”) whereby we acquired substantially all of the assets (other than certain fixed assets) and certain liabilities of the dental sterilizer testing business of North Bay Bioscience, LLC (“North Bay”). The asset purchase agreement (the “North Bay Agreement”) includes a provision for a holdback payment (subject to a post-closing adjustment), payable at the one year anniversary of the closing date. We expected to achieve savings and generate growth as we integrated the North Bay 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 deductible for tax purposes and it was assigned to our Biological Indicators segment. PAGE 45 The North Bay 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 reflected our allocation of the consideration, subject to customary purchase price adjustments in accordance with the North Bay Agreement (in thousands): Cash consideration Holdback payment liability Aggregate consideration Cash Accounts receivable Inventories Property, plant and equipment Intangibles Goodwill Accrued liabilities Unearned revenues Total purchase price allocation $ 10,322 1,000 $ 11,322 $ 20 285 85 229 4,454 7,962 (100) (1,613) $ 11,322 The accompanying consolidated statements of income include the results of the North Bay Acquisition from the acquisition date of August 6, 2015. The pro forma effects of the acquisition on the results of operations as if the acquisition had been completed on April 1, 2015 and 2014, are as follows (in thousands, except per share data): Revenues Net income Net Income per common share: Basic Diluted Year Ended March 31, 2016 $ 86,053 11,463 $ 3.18 3.05 2015 $ 75,649 10,182 $ 2.89 2.79 For the year ended March 31, 2015, our acquisitions of businesses (net of cash acquired) totaled $20,955,000, which consisted primarily of the following material acquisitions: PCD On October 15, 2014, we completed a business combination (the “PCD Acquisition”) with PCD-Process Challenge Devices, LLC (“PCD”) whereby we acquired substantially all the assets (other than cash and accounts receivable) and certain liabilities of PCD’s process challenge device business segment. The asset acquisition agreement (the “PCD Agreement”) includes provisions for both contingent consideration based upon the cumulative three year revenues of our process challenge device business subsequent to the acquisition and for a holdback payment (subject to a post-closing adjustment), payable at the one year anniversary of the closing date. Under the terms of the PCD Agreement, we are required to pay contingent consideration if the cumulative revenues for our process challenge device business for the three years subsequent to the acquisition meet certain levels. The potential consideration payable ranges from $0 to $1,500,000 and is based upon a sliding scale of three-year cumulative revenues between $9,900,000 and $12,600,000. Based upon both historical and projected growth rates, we recorded $300,000 of contingent consideration payable which represented our best estimate of the amount that will ultimately be paid. We paid $150,000 of the contingent consideration during the year ended March 31, 2016 (based upon the current run rate projected over the entire three-year contingent consideration period). This amount is subject to modification at the end of the second and third years of the earn-out period based upon the actual revenues earned over the contingent consideration period. 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 process challenge device business and we will adjust the contingent liability on a go forward basis, based on then current information. PAGE 46 We expected to achieve savings and generate growth as we integrated the PCD 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 deductible for tax purposes and it was assigned to our Biological Indicators segment. The PCD 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 reflected our allocation of the consideration, subject to customary purchase price adjustments in accordance with the PCD Agreement (in thousands): Cash consideration Holdback payment liability Contingent consideration liability Aggregate consideration Inventories Property, plant and equipment Intangibles Goodwill Accrued expenses Total purchase price allocation $ 5,000 250 300 $ 5,550 $ 137 7 3,678 1,743 (15) $ 5,550 The accompanying consolidated statements of income include the results of the PCD Acquisition from the acquisition date of October 15, 2014. The pro forma effects of the acquisition on the results of operations as if the acquisition had been completed on April 1, 2014 and 2013, are as follows (in thousands, except per share data): Revenues Net income Net income per common share: Basic Diluted BGI Year Ended March 31, 2014 $ 56,541 9,512 2015 $ 73,068 9,673 $ 2.75 $ 2.76 2.65 2.63 On April 15, 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”), a business focused on the sale of equipment primarily used for particulate air sampling. The purchase price for the acquired assets was $10,268,000. We expected to achieve savings and generate growth as we integrated the BGI 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 deductible for tax purposes and it was assigned to our Instruments segment. PAGE 47 The BGI 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 reflected our allocation of the consideration, subject to customary purchase price adjustments in accordance with the BGI Agreement (in thousands): Inventories Property, plant and equipment Intangibles Goodwill Accrued expenses Total purchase price allocation $ 1,268 47 5,711 3,295 (53) $ 10,268 The accompanying consolidated statements of income include the results of the BGI Acquisition from the acquisition date of April 15, 2014. The pro forma effects of the acquisition on the results of operations as if the acquisition had been completed on April 1, 2014 and 2013, are as follows (in thousands, except per share data): Revenues Net income Net income per common share: Basic Diluted Year Ended March 31, 2014 $ 60,388 11,141 2015 $ 71,648 9,661 $ 2.74 2.65 $ 3.23 3.09 For the year ended March 31, 2014, our acquisitions of businesses (net of cash acquired) totaled $23,258,000, which consisted primarily of the following material acquisitions: 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), which was 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 were required to pay contingent consideration if the cumulative revenues for our Continuous Monitoring Division for the three years subsequent to the acquisition met certain levels. The potential consideration payable ranged from $0 to $10,000,000 and was 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 represented our best estimate of the amount that would ultimately be paid. Any changes to the contingent consideration ultimately paid would have resulted in additional income or expense in our consolidated statements of income. The contingent consideration was payable in the third quarter of our year ending March 31, 2017. In October 2015, we entered into a settlement agreement which relieved us of any future payment obligation under the Amega Earn-Out (see Note 12). We expected to achieve savings and generate growth as we integrated 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 deductible for tax purposes and it was assigned to our Continuous Monitoring segment. PAGE 48 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 reflected 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 Inventories Prepaid expenses and other Property, plant and equipment Intangibles 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 Tempsys Year Ended March 31, 2013 $ 50,372 9,508 2014 $ 56,451 10,002 $ 2.90 2.77 $ 2.83 2.65 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 expected to achieve savings and generate growth as we integrated 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 deductible for tax purposes and it was assigned to our Continuous Monitoring segment. PAGE 49 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 reflected 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 Inventories Prepaid expenses and other Property, plant and equipment Deferred income taxes Intangibles 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 Dispositions Year Ended March 31, 2013 $ 49,705 8,100 2014 $ 55,129 9,132 $ 2.65 2.53 $ 2.41 2.25 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. Note 3. Inventories Inventories consist of the following (in thousands): Raw materials Work-in-process Finished goods Less reserve March 31, 2016 $ 9,433 337 4,941 (694) $ 14,017 2015 $ 10,366 530 1,913 (389) $ 12,420 PAGE 50 Note 4. Property, Plant and Equipment Property, plant and equipment consist of the following (in thousands): Land Buildings Manufacturing equipment Computer equipment Construction in progress Other Less accumulated depreciation March 31, 2016 $ 1,614 4,723 7,802 2,649 7,333 685 24,806 (8,178) $ 16,628 2015 $ 1,614 4,721 6,797 1,845 817 526 16,320 (6,722) $ 9,598 Depreciation expense for the years ended March 31, 2016, 2015 and 2014 was $1,387,000, $981,000 and $865,000, respectively. Note 5. Goodwill and Intangible Assets The change in the carrying amount of goodwill was as follows (in thousands): March 31, 2014 Effect of foreign currency translation Acquisitions March 31, 2015 Effect of foreign currency translation Acquisitions March 31, 2016 Other intangible assets are as follows: Biological Indicators $ 9,279 -- 3,708 12,987 (624) 8,535 $ 20,898 Instruments $ 14,940 -- 3,295 18,235 -- -- $ 18,235 Continuous Monitoring $ 13,647 -- -- 13,647 -- -- $ 13,647 Cold Chain $ -- -- -- -- (476) 13,833 $ 13,357 Total $ 37,866 -- 7,003 44,869 (1,100) 22,368 $ 66,137 (In thousands) March 31, 2016 Intellectual property Trade names Customer relationships Non-compete agreements Intellectual property Trade names Customer relationships Non-compete agreements Carrying Amount $ 7,364 3,474 48,782 1,846 $ 61,466 Accumulated Amortization $ 3,093 1,271 15,228 1,077 $ 20,669 Useful Life (Years) 10-16 3-10 7-10 3-10 Net $ 4,271 2,203 33,554 769 $ 40,797 March 31, 2015 Carrying Amount $ 7,210 3,158 36,408 1,286 $ 48,062 Accumulated Amortization $ 2,362 863 10,752 854 $ 14,831 Useful Life (Years) 10-16 3-10 7-10 3-10 Net $ 4,848 2,295 25,656 432 $ 33,231 PAGE 51 The following is estimated amortization expense for the years ending March 31: (In thousands) 2017 2018 2019 2020 2021 $ 6,125 5,951 5,623 5,312 4,279 Amortization expense for the years ended March 31, 2016, 2015 and 2014 was $5,787,000, $4,675,000 and $2,979,000, respectively. Note 6. Long-term Debt Long-term debt consists of the following (in thousands): Line of credit (2.43% at March 31, 2016) Term loan (2.43% at March 31, 2016) Less: current portion Long-term portion March 31, 2016 $ 27,500 17,750 (3,000) $ 42,250 March 31, 2015 $ 13,500 12,750 (3,000) $ 23,250 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. Funds from the Credit Facility were 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 “Initial Term Loan”) and to extend the maturity date of the Credit Facility to June 30, 2017. On July 1, 2015, we further amended our Credit Facility to extend the maturity date to June 30, 2020, increase the Line of Credit to $50,000,000 and establish a new $20,000,000 term loan (the “Term Loan”). The majority of the proceeds from the Term Loan were used to pay down the remaining $12,000,000 balance of the Initial Term Loan. The remaining $8,000,000 was combined with a $1,000,000 draw under the Line of Credit to fund the Infitrak Acquisition (see Note 2). Under the Line of Credit, indebtedness bears interest at either: (1) LIBOR, as defined, plus an applicable margin ranging from 1.5% to 2.25%; or (2) the bank’s commercial bank floating rate (“CBFR”), which is the bank’s prime rate adjusted down by 0.5%. We elect the interest rate with each borrowing under the line of credit. In addition, there is an unused line fee of 0.25%. Letter of credit fees are based on the applicable LIBOR rate. The Term Loan bears interest at LIBOR, as defined, plus an applicable margin ranging from 1.5% to 2.25% and requires 20 quarterly principal payments (the first due date was July 15, 2015) in the amount of $750,000 with the remaining balance of principal and accrued interest due on June 30, 2020. 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 3.25 to 1.0 through March 31, 2016 and 3.0 to 1.0 thereafter, and a minimum fixed charge coverage ratio of 1.35 to 1.0. We were in compliance with the required covenants at March 31, 2016. Future contractual maturities of debt as of March 31, 2016 are as follows (in thousands): Year ending March 31, 2017 2018 2019 2020 2021 $ 3,000 3,000 3,000 3,000 33,250 $ 45,250 PAGE 52 Subsequent to year end, we made a $750,000 required principal payment on the Term Loan. 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, 2016, we have purchased 162,486 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 2016 $ 0.16 0.16 0.16 0.16 Year Ended March 31, 2015 $ 0.15 0.15 0.16 0.16 2014 $ 0.14 0.14 0.15 0.15 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 $387,000, $330,000 and $214,000, respectively, to all plans for the years ended March 31, 2016, 2015 and 2014. 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 shareholders. On August 8, 2014 we adopted The Mesa Laboratories, Inc. 2014 Equity Plan (the “2014 Plan”), which was subsequently approved by our shareholders on October 2, 2014 at our 2014 Annual Meeting of Shareholders. The purpose of the 2014 Plan is to promote the success and enhance the value of the Company by linking the personal interests of our employees, officers and directors to those of our shareholders by providing such persons with an incentive for outstanding performance. A total of 1,100,000 shares of common stock were reserved for issuance under the 2014 Plan and are subject to terms as set by the Compensation Committee of the Board of Directors at the time of grant. As of March 31, 2016, we have 186,370 stock options outstanding under the 2014 Plan. Under the December 8, 2006 plan (the “2006 Plan”), a total of 400,000 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 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 a result of the approval of the 2014 Plan by our shareholders, no further awards will be made under the 2006 Plan and it will remain in effect only as long as awards previously made thereunder remain outstanding. As of March 31, 2016, we have 329,350 stock options outstanding under the 2006 Plan. On February 27, 2013, we filed a PAGE 53 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, 2016, we have zero 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): Year Ended March 31, 2015 2016 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 $ 1,327 374 $ 953 $ 0.26 0.25 $ 993 373 $ 620 $ 0.18 0.17 2014 $ 840 263 $ 577 $ 0.17 0.16 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 United States 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 2016 27.1%-30.2% 1.09% 8 .7% Year Ended March 31, 2015 24.4%-27.1% 1.9%-2.3% 6-8 .9% 2014 26%-28.7% .8%-2.1% 5-10 1.1% PAGE 54 A summary of the option activity as of and for the years ended March 31, 2016, 2015 and 2014 is as follows: Number of Shares Weighted- average Exercise Price Outstanding at March 31, 2013 Granted Forfeited Expired Exercised Outstanding at March 31, 2014 Granted Forfeited Expired Exercised Outstanding at March 31, 2015 Granted Forfeited Expired Exercised Outstanding at March 31, 2016 Exercisable at March 31, 2016 2015 2014 416,125 128,124 (27,782) (410) (117,885) 398,172 147,720 (26,466) -- (82,178) 437,248 184,030 (16,334) -- (89,224) 515,720 157,457 163,210 140,825 29.87 55.33 52.50 52.50 22.17 38.75 88.62 64.62 -- 28.87 55.81 72.89 75.16 -- 38.28 64.32 42.49 33.35 26.70 Weighted- average Remaining Contractual Term 3.7 6.4 -- -- -- 4.4 7.0 -- -- -- 4.9 6.7 6.5 -- -- 5.2 3.6 3.6 3.5 Aggregate Intrinsic Value (000s) 9,529 -- -- -- -- 20,505 -- -- -- -- 9,445 -- -- -- -- 16,561 8,481 6,341 8,949 A summary of the status of our unvested option shares as of and for the years ended March 31, 2016, 2015 and 2014 is as follows: Unvested at March 31, 2013 Options granted Options forfeited Options vested Unvested at March 31, 2014 Options granted Options forfeited Options vested Unvested at March 31, 2015 Options granted Options forfeited Options vested Unvested at March 31, 2016 Unvested Shares 257,805 128,124 (27,782) (100,800) 257,347 147,720 (26,466) (104,563) 274,038 184,030 (16,334) (83,471) 358,263 Weighted-average Grant-date Fair Value 9.55 15.90 14.75 8.53 11.86 24.49 17.29 10.36 18.42 18.78 19.07 14.65 19.46 The total intrinsic value of options exercised was $5,260,000, $3,546,000 and $6,287,000 for the years ended March 31, 2016, 2015 and 2014, respectively. As of March 31, 2016, there was $4,595,000 of total unrecognized compensation expense related to unvested options. As of March 31, 2016, we have 913,630 shares available for future option grants. PAGE 55 Note 10. Income Taxes Earnings before income taxes are as follows (in thousands): Domestic Foreign 2016 $ 14,427 1,128 $ 15,555 Year Ended March 31, 2015 $ 14,896 451 $ 15,347 2014 $ 13,103 -- $ 13,103 The components of our provision for income taxes are as follows (in thousands): Current tax provision Federal State Foreign Deferred tax provision: Federal State Foreign 2016 $ 3,666 627 658 4,951 (189) (138) (238) (565) $ 4,386 Year Ended March 31, 2015 $ 4,186 1,135 212 5,533 252 51 (72) 231 $ 5,764 2014 $ 4,031 106 -- 4,137 (19) (15) -- (34) $ 4,103 The components of net deferred tax assets and liabilities are as follows (in thousands): Current deferred tax assets: Accrued employee-related expenses Allowances and reserves Stock option deductible differences Inventory Foreign tax credit mirror Currency translation adjustment Net operating loss Other Long-term deferred tax liability: Property, plant and equipment Goodwill and intangible assets Other March 31, 2016 2015 $ 257 $ 252 217 606 533 -- 12 110 3 1,738 (1,599) (4,335) (5) (5,939) 346 388 252 285 144 22 -- 1,689 (1,478) (3,644) -- (5,122) Net deferred tax liability $ (4,201) $ (3,433) PAGE 56 A reconciliation of our income tax provision and the amounts computed by applying statutory rates to income before income taxes is as follows (in thousands): 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 2016 $ 5,445 293 (751) (440) (345) 184 $ 4,386 Year Ended March 31, 2015 $ 5,374 860 209 (317) (248) (114) $ 5,764 2014 $ 4,586 78 5 (250) (159) (157) $ 4,103 We or one of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. Our federal tax returns for all years after 2012, state tax returns after 2011, and foreign tax returns after 2012 are subject to future examination by tax authorities for all our tax jurisdictions. Although the outcome of tax audits, if any is always uncertain, we believe that we have adequately accrued for all amounts of tax, including interest and penalties and any adjustments that may result. As of March 31, 2016, the gross amount of unrecognized tax benefits was $221,000. There would have been no impact on our effective tax rate for the year ended March 31, 2016 had these benefits been recognized. We recognize interest and penalties related to unrecognized tax benefits in other expense and general and administrative expense, respectively. Accrued interest and penalties related to unrecognized tax benefits were $3,000, $0 and $0 as of March 31, 2016, 2015 and 2014, respectively. A reconciliation of the changes in the gross balance of unrecognized tax benefit amounts is as follows (in thousands): Beginning balance Increases related to current period tax positions Ending balance Year Ended March 31, 2015 $ -- -- $ -- 2016 $ -- 221 $ 221 2014 $ -- -- $ -- We expect that the amount of unrecognized tax benefits will change in the next 12 months; however, we do not expect the change to have a significant impact on our consolidated statements of income or consolidated balance sheets. At this time, we expect resolution of the uncertain tax position within 12 months. As of March 31, 2016, undistributed earnings of our Canadian subsidiary amounted to $794,000. Those earnings are considered to be indefinitely reinvested and, accordingly, no U.S. federal and state income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credits would be available to reduce a portion of the U.S. tax liability. As of March 31, 2016, we had $0 and $2,309,000 of net operating losses for federal and state income tax purposes, respectively. The state net operating losses will expire between 2020 and 2030. Note 11. Net Income Per Share 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. PAGE 57 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 shareholders Weighted average outstanding shares of common stock Dilutive effect of stock options Common stock and equivalents Net Income per share: Basic Diluted 2016 $ 11,169 Year Ended March 31, 2015 $ 9,583 2014 $ 9,000 3,605 152 3,757 $ 3.10 2.97 3,521 129 3,650 $ 2.72 2.63 3,445 166 3,611 $ 2.61 2.49 For the years ended March 31, 2016, 2015 and 2014, 137,000, 152,000 and zero outstanding stock options, respectively were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the average price of the common shares and, therefore, their inclusion would have been anti-dilutive. Note 12. Commitments and Contingencies Under the terms of the Infitrak Agreement, we are required to pay contingent consideration if the gross profit (as defined in the Earn-Out Agreement) for the packaging component of our cold chain business for the two years subsequent to the acquisition meets certain levels. The potential undiscounted consideration payable ranges from $0 to $15,000,000 CDN (approximately $0 to $11,500,000 as of March 31, 2016) and is based upon a sliding scale of growth in gross profit (as defined in the Earn-Out Agreement) for year one and year two of 30 to 70 percent and 15 to 75 percent, respectively. Based upon both historical and projected growth rates, we recorded $9,271,000 (valued at $9,037,000 as of March 31, 2016 based on the then current fair market value and exchange rate) of contingent consideration payable which represented our best estimate of the then current fair market value 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 the packaging component of our cold chain business and we will adjust the contingent liability on a go forward basis, based on then current information. The contingent consideration is payable in two annual installments beginning in the second quarter of our year ending March 31, 2017. Under the terms of the PCD Agreement, we are required to pay contingent consideration if the cumulative revenues for our process challenge device business for the three years subsequent to the acquisition meet certain levels. The potential consideration payable ranges from $0 to $1,500,000 and is based upon a sliding scale of three-year cumulative revenues between $9,900,000 and $12,600,000. Based upon both historical and projected growth rates, we recorded $300,000 of contingent consideration payable which represented our best estimate of the amount that will ultimately be paid. We paid $150,000 of the contingent consideration during the year ended March 31, 2016 (based upon the current run rate projected over the entire three-year contingent consideration period). This amount is subject to modification at the end of the second and third years of the earn-out period based upon the actual revenues earned over the contingent consideration period. 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 process challenge device business and we will adjust the contingent liability on a go forward basis, based on then current information. Under the terms of the Amega Agreement, we were required to pay contingent consideration (the “Amega Earn-Out”) if the cumulative revenues for our Continuous Monitoring Division for the three years subsequent to the acquisition met certain levels. The potential consideration payable ranged from $0 to $10,000,000 and was 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 represented our best estimate of the amount that would ultimately be paid. Any changes to the contingent consideration ultimately paid would have resulted in additional income or expense in our consolidated statements of income. The contingent consideration would have been payable in the third quarter of our year ending March 31, 2017. In November 2014, Amega and its owner Anthony Amato (“Amato”) filed a complaint (Anthony Amato and Amega Scientific Corporation v. Mesa Laboratories, Inc., Civil Action No. 1:14-cv-03228) in the United States District Court for the District of Colorado asserting, among other items, that our termination of Amato as an employee impacted his ability to PAGE 58 maximize the potential consideration payable under the Amega Earn-Out and to exercise stock options that failed to vest. The plaintiff was seeking an immediate maximum payout of $10,000,000 under the Amega Earn-Out, the immediate acceleration of the 10,000 stock options granted Amato upon his initial employment along with other consequential damages in excess of $500,000, lost future earnings and punitive damages. In addition, Amato alleged that we improperly withheld $704,065.86 from the holdback consideration under the Amega Agreement. In January 2015, we filed a motion to dismiss the complaint with prejudice. In October 2015, we entered into a settlement agreement (the “Amato Settlement”) whereby we paid Amato $3,165,000. In exchange, Amato agreed to dismiss the complaint, release Mesa of any and all claims by Amega and Amato, and relieve us of any future payment obligation under the Amega Earn-Out. Insurance covered $415,000 of the settlement payment and we had $1,041,000 accrued on our consolidated balance sheet remaining from the original hold back and contingent consideration payable. The remaining $1,709,000 was recorded as general and administrative expense in the accompanying consolidated statements of income for the year ended 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 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. 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 was included in other accrued expenses on the consolidated balance sheets and in general and administrative expense on the consolidated statements of income for the year ended March 31, 2014. That estimate was based upon facts and circumstances known at such time and our ultimate liability was subject to change as further analysis was completed and state sales tax returns were filed. During the year ended March 31, 2015 we successfully completed and filed several state sales tax returns which concluded our obligation for historical sales taxes in those states. In addition, we continued to work through the process in the remaining states. As a result of this work, we determined that our exposure had increased above and beyond our original accrual and as a result, we recorded an additional accrual of $460,000 during the year ended March 31, 2015. During the year ended March 31, 2016, we successfully completed and filed additional state sales tax returns which concluded our obligation for historical sales taxes in those remaining states. Under the terms of the Bios Agreement, we were 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 have been required to make ranged 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. 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 for the year ended March 31, 2014. We finalized the contingent consideration and paid $1,120,000 in May 2015 Note 13. Comprehensive Income The following table summarizes the changes in each component of accumulated other comprehensive income (“AOCI”), net of tax (in thousands): Balance at March 31, 2013 Unrealized losses arising during the year Balance at March 31, 2014 Unrealized losses arising during the year Balance at March 31, 2015 Unrealized losses arising during the year Balance at March 31, 2016 Foreign Currency Translation $ -- -- -- (234) (234) (917) $ (1,151) AOCI $ -- -- -- (234) (234) (917) $ (1,151) PAGE 59 Note 14. Segment Data We have four operating segments: Biological Indicators, Instruments, Continuous Monitoring and Cold Chain. 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 Year Ended March 31, 2016 Biological Indicators $ 33,649 Instruments $ 35,692 Continuous Monitoring $ 10,792 Cold Chain $ 4,526 Total $ 84,659 $ 22,205 1,734 $ 20,471 $ 23,223 3,848 $ 19,375 $ 4,154 1,642 $ 2,512 $ 1,831 276 $ 1,555 $ 51,413 7,500 43,913 (28,358) $ 15,555 Year Ended March 31, 2015 Biological Indicators $ 27,390 Instruments $ 33,054 Continuous Monitoring $ 10,886 $ 17,142 1,551 $ 15,591 $ 20,763 3,441 $ 17,322 $ 5,487 2,184 $ 3,303 Cold Chain Total $ -- $ -- -- $ -- $ 71,330 $ 43,392 7,176 36,216 (20,869) $ 15,347 Year Ended March 31, 2014 Revenues Gross profit Selling expenses Biological Indicators $ 22,992 Instruments $ 26,389 Continuous Monitoring $ 3,343 $ 13,187 1,350 $ 11,837 $ 16,904 3,954 $ 12,950 $ 1,597 815 $ 782 $ -- $ -- -- $ -- Reconciling items (1) Earnings before income taxes (1) Reconciling items include general and administrative, research and development, and other expenses. Cold Chain Total $ 52,724 $ 31,688 6,119 25,569 (12,466) $ 13,103 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 No foreign country exceeds ten percent of total revenues. Year Ended March 31, 2015 2014 2016 $ 53,094 31,565 $ 84,659 $ 45,798 25,532 $ 71,330 $ 29,551 23,173 $ 52,724 PAGE 60  Total assets Biological Indicators Instruments Continuous Monitoring Cold Chain Corporate and administrative March 31, 2016 2015 $ 56,724 49,077 26,881 20,210 7,856 $ 160,748 $ 36,304 44,401 31,558 -- 5,057 $ 117,320 All long-lived assets are located in the United States except for $7,331,000 and $19,047,000 which are associated with our French and Canadian subsidiaries, respectively. Note 15. Fair Value Measurements We follow authoritative guidance (GAAP) which requires that assets and liabilities carried at fair value be classified and disclosed in one of the established categories. A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three categories are defined as follows: • Level 1: Quoted prices in active markets for identical assets. • Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. • Level 3: Significant inputs to the valuation model are unobservable inputs. Assets and liabilities measured on a recurring basis: Our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities (including certain contingent consideration amounts that are short-term in nature) are carried at cost, which is considered to be representative of their fair value due to the short term maturity of these instruments. The recorded value of the Line of Credit and Term Loan (See Note 6), approximates fair value due to their variable rate structure. The following table presents items required to be measured at fair value on a recurring basis by the level in which they are classified within the valuation hierarchy as follows: Year Ended March 31, 2016 Level 1 Level 2 Level 3 Total $ -- $ -- $ -- $ -- Assets: Liabilities: Contingent Consideration $ -- $ -- $ 9,037 $ 9,037 Under the Infitrak Agreement (See Note 2), we will make two annual payments to the former owners based on future growth in gross profit (as defined in the Earn-Out Agreement). This contingent consideration payable is a standalone liability that is measured at fair value on a recurring basis for which there is no available quoted market price, principal market or market participants. As such, the inputs for this instrument are unobservable and therefore classified as Level 3 inputs. This contingent consideration liability is valued using a discounted cash flow model based on internal forecasts and our current cost of borrowing. PAGE 61 The contingent consideration arising from this agreement is our only Level 3 asset or liability. The following table presents a roll forward of the contingent consideration payable for the years ended March 31, 2016 and 2015 (in thousands): Opening balance Amount related to Infitrak Acquisition Measurement period adjustment(s) Payments/accruals Transfers in/out of Level 3 Fair value adjustment – expense Foreign exchange rate impact – included in other comprehensive loss Ending Balance Note 16. Quarterly Results (unaudited) March 31, 2016 $ -- 9,271 -- -- -- 85 (319) $ 9,037 2015 $ -- -- -- -- -- -- -- $ -- Quarterly financial information for the years ended March 31, 2016, 2015 and 2014 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): 2016 Revenues Gross profit Net income Net Income per share – basic Net Income per share – diluted 2015 Revenues Gross profit Net income Net Income per share – basic Net Income per share – diluted 2014 Revenues Gross profit Net income Net Income per share – basic Net Income per share – diluted Note 17. Subsequent Events First Quarter Second Quarter Third Quarter $ 18,158 11,141 2,755 $ 0.77 0.74 $ 21,776 13,067 1,826 $ 0.51 0.48 $ 19,913 12,209 2,597 $ 0.72 0.69 First Quarter Second Quarter Third Quarter $ 16,400 9,705 1,881 $ 0.54 0.51 First Quarter $ 11,218 6,797 1,860 $ 0.55 0.52 $ 18,540 11,123 3,060 $ 0.87 0.84 $ 17,830 11,052 2,403 $ 0.68 0.66 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 $ 24,812 14,996 3,991 $ 1.10 1.06 Fourth Quarter $ 18,560 11,512 2,239 $ 0.63 0.61 Fourth Quarter $ 15,714 9,585 3,462 $ 1.00 0.95 In April 2016, our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on June 15, 2016, to shareholders of record at the close of business on May 31, 2016. PAGE 62 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, 2016. Based on that evaluation, our management concluded that our disclosure controls and procedures were effective at March 31, 2016. 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 2013. 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, 2016. Based on that evaluation, our management concluded that our internal control over financial reporting was effective at March 31, 2016. As allowed, this evaluation excludes the operations of acquired entities during the year ended March 31, 2016 due to the timing of the acquisitions. Revenues related to these acquisitions were nine percent of total revenues for the year ended March 31, 2016. 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, 2016. 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, 2016, that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. PAGE 63 Operational Data Year ended March 31, Revenues Gross profit Gross profit margin Net income Net income per diluted share Adjusted net income* Adjusted net income per diluted share* Average shares outstanding $ $ 2016 84,659 51,413 61% 11,169 2.97 15,324 4.08 3,757 $ $ $ $ $ $ 2015 71,330 43,392 61% 9,583 2.63 12,502 3.43 3,650 $ $ $ $ $ $ 2014 52,724 31,688 60% 9,000 2.49 11,046 3.06 3,611 $ $ $ $ $ $ 2013 46,435 28,862 62% 8,450 2.35 10,144 2.82 3,593 $ $ $ $ $ $ 2012 39,616 23,511 59% 7,919 2.29 8,876 2.56 3,462 $ $ $ $ Financial Position As of March 31, Working capital Total assets Long-term debt Stockholders' equity 2016 13,215 160,748 42,250 84,678 $ $ $ $ 2015 14,965 117,320 23,250 73,479 $ $ $ $ 2014 16,351 97,529 16,500 64,333 $ $ $ $ 2013 14,793 65,919 4,000 52,753 $ $ $ $ 2012 14,899 $ $ 50,969 $ - $ 43,915 Average Return Year ended March 31, Average return on: Stockholders' investment Assets Invested capital Adjusted invested capital^ Dividends paid per share 2016 2015 2014 2013 2012 14% 8% 10% 13% 0.64 $ 14% 9% 11% 14% 0.62 $ 15% 11% 13% 16% 0.58 $ 17% 14% 18% 21% 0.54 $ 20% 16% 21% 23% 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. ^Adjusted invested capital is a non-GAAP measure which substitues adjusted net income for net income in the average return on invested capital calculation Mesa Laboratories, Inc. Corporate Offices 12100 West Sixth Avenue Lakewood, CO 80228 (303) 987-8000 Omaha Operations 8607 Park Drive Omaha, NE 68127 (303) 987-8000 Butler Operations 10 Park Place Butler, NJ 07405 (973) 492-8400 Bozeman Operations 10 Evergreen Drive Bozeman, MT 59715 (303) 987-8000 Traverse City Operations 13606 S. West Bay Shore Dr. Traverse City, MI 49684 1-800-289-7786 Mesa France 2 rue Augustin Fresnel 69684 CHASSIEU Cedex France +33 (0) 4 78 90 56 88 Mesa Canada 3075 14th Ave. Suite #1 Markham, Ontario L3R 0G9 Canada 1-866-421-8367 Directors H. Stuart Campbell Chairman of the Board, Nominating and Governance Committee John J. Sullivan, Ph.D. Director Michael T. Brooks Director Robert V. Dwyer Director Evan C. Guillemin Chairman, Audit Committee David M. Kelly Chairman, Compensation Committee John B. Schmieder Director Transfer Agent Computershare Investor Services Denver, Colorado Independent Auditors EKS&H LLLP Denver, Colorado SEC Counsel Andrew N. Bernstein, PC Denver, Colorado John J. Sullivan, Ph.D. Chief Executive Officer, President and Director Glenn E. Adriance Chief Sales and Marketing Officer John V. Sakys Chief Financial Officer www.mesalabs.com shares traded on the NASDAQ under the symbol MLAB 

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