2018 Annual Report
Dear Shareholders,
September 20, 2018
Always Learn is one of our key values and fiscal 2018 enabled deep learning about our markets,
processes, and team. Some of these lessons carried short-term costs, as reflected in our unusual
expenses, but from that pain came great insight and decisive action. Based on countermeasures
executed in the first half of fiscal 2018, we delivered strong core operating performance in the 2nd half of
the year enabling 3% revenues and 2% non-GAAP adjusted operating income growth for the full year.
Importantly, we refined our strategic direction, set higher organic performance expectations for the
Company, renewed our executive leadership team, substantially completed the Bozeman relocation
initiative, and most importantly, launched our new operating model, The Mesa Way!.
Financial Review
• Revenues increased 3% to $96.2M
• Consumables and highly recurring revenues (including services and sub $10,000 instruments)
increased to > 90% of revenues
• Adjusted Operating Income increased 2% to $24.6M
•
Inventory was reduced from $13.9M to $9.3M
• Strategic Capital Deployment: $16.4M related to the completion of 3 acquisitions and the
substantial completion of the Bozeman relocation initiative.
The Mesa Way!
The Mesa Way! is our customer focused, Lean-based system for efficiently and effectively operating a
set of high-margin, niche businesses. It is based on four pillars:
Measure what Matters: We take the customer’s perspective, our “True North”, both to measure
what matters most to customers and to set absolute standards for performance. We manage,
wherever possible, to leading indicators, which drive us to proactively avoid problems before they are
apparent to our customers.
Empower Teams: We move decision making as close to the customer as possible and provide
the structure and real time communication forum to align the whole organization behind
surpassing customer expectations.
Steadily Improve: We leverage a common and proven set of Lean-based tools to prioritize our
biggest opportunities, address those opportunities at root cause, and enable change to be
embraced and implemented quickly.
Always Learn: We ensure that improvements are sustained, enabling us to raise performance
expectations and repeat the cycle of improvement. Equally, this cycle strengthens the Mesa
team by providing endless learning opportunities for our employees and helps us to become an
employer of choice in our communities.
We don’t improve for the sake of “improvement”, we improve for the benefit of our customers and
ultimately, our shareholders. We are manically focused on the following leading indicators:
• Quality: declining rates of customer returns and customer complaints
• Delivery: exceeding our customer’s expectations of full implementation of their solution
•
Inventory: shortening our entire supply chain to lower risk and increase responsiveness
• Organic Growth: driving above market growth, or as we think about it, our customers voting
with their dollars that we are doing better than the competition
New ways of working require new skills. We have great confidence in the capability of our team and
have built an executive leadership group with over 40 years of Lean experience in high-value, regulated,
and technology driven markets to accelerate this transformation.
Looking Forward
Overall, our business has a solid foundation of leading share positions in niche applications for end
markets with strong regulatory requirements. Those markets, primarily Biopharmaceuticals, Medical
Device, and Healthcare Services provide steady, long term demand as well as opportunities for
innovating our offerings and improving how we engage with customers. During the course of FY18, we
trimmed overhead and unproductive investments across the company. With a revised growth plan and
clearly defined metrics for success, in FY19 we will make selective reinvestments in quota carrying sales
representatives, demand generating marketing, and low-risk product improvements that will enable our
commercial teams to compete more effectively. Our capital allocation profile will continue to have a
bias toward inorganic investment within our existing markets and complementary adjacencies that are
accretive to the long-term growth of our business portfolio at similarly high operating margins. While
there are no guarantees in life, with the on-going implementation of The Mesa Way!, an outstanding
team and tangible opportunities in front of us, we are well positioned to continue to flourish in the
coming year and deep into the future. We are playing to win!
We look forward to earning your continued support.
Sincerely,
Gary M. Owens
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, 2018
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, a smaller
reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting
Emerging growth
company
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, 2017 (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 ($149.32 per share) was $384,259,000.
The number of outstanding shares of the Issuer’s common stock as of May 31, 2018 was 3,808,436.
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
16
16
16
16
17
19
21
35
35
62
62
63
FORWARD-LOOKING STATEMENTS
This report contains information that may constitute "forward-looking statements.” Generally, the words "believe,"
“estimate,” “will,” "expect," "project," "anticipate," "intend," 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 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 where we can
establish a strong presence and achieve high gross margins. We are organized into four divisions across nine physical
locations. Our Sterilization and Disinfection Control Division (formerly named the Biological Indicators Division) provides
testing services, along with the manufacturing and marketing of biological, chemical and cleaning indicators used to assess the
effectiveness of sterilization and disinfection processes in the hospital, dental, medical device and pharmaceutical industries.
Our Instruments Division designs, manufactures and markets quality control instruments and disposable products utilized in
the healthcare, pharmaceutical, food and beverage, medical device, industrial hygiene and environmental air sampling
industries. Our Cold Chain 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
laboratory environments. Our Cold Chain Packaging Division provides packaging development consulting services and
thermal packaging products such as coolers, boxes, insulation materials and phase-change products to control temperature
during transport.
Our Bozeman, Montana and Munich, Germany locations manufacture our Sterilization and Disinfection Control Division
products which include the EZTest®, ProSpore®, PCD®, Apex® and Simicon biological and cleaning indicators, while
our Bozeman, Montana, facility also provides sterility assurance testing services to dental offices in the United States and
Canada. 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 Lakewood,
Colorado, facility also manufactures our Cold Chain Monitoring Division products which include CheckPoint®,
AmegaView, ViewPoint® and FreshLoc 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 products of exceptional quality 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 commercial channels, b) introducing new
products to the market, and c) seeking out companies or product lines to acquire.
PAGE 1
Acquisitions
Year Ended March 31, 2018 Acquisitions
During the year ended March 31, 2018, we completed the following three acquisitions:
In November 2017, we completed a business combination (the “BAG Acquisition”) whereby we acquired substantially all
of the assets and certain liabilities of BAG Health Care GmbH’s (“BAG”) Hygiene Monitoring business which is
comprised of the distribution of biological, chemical and cleaning indicator products;
In October 2017, we completed a business combination (the “Simicon Acquisition”) whereby we acquired the common
stock of SIMICON GmbH (“Simicon”), a company whose business manufactures both biological and cleaning indicators;
and
In May 2017, we completed a business combination (the “Hucker Acquisition”) whereby we acquired substantially all of
the assets (other than cash and accounts receivable) and certain liabilities of Hucker & Hucker GmbH’s (“Hucker”)
business segment associated with the distribution of our biological indicator products.
Year Ended March 31, 2017 Acquisitions
During the year ended March 31, 2017, we completed the following six acquisitions:
In November 2016, we completed a business combination (the “Mydent Acquisition”) whereby we acquired substantially
all of the assets (other than cash and accounts receivable) and certain liabilities of Mydent International Corp’s business
segment associated with biological indicator mail-in testing services to the dental market in the United States;
In November 2016, we completed a business combination (the “FreshLoc Acquisition”) whereby we acquired substantially
all of the assets (other than cash and accounts receivable) and certain liabilities of the cold chain monitoring business of
FreshLoc Technologies, Inc.;
In August 2016, we completed a business combination (the “Rapid Aid Acquisition”) whereby we acquired certain assets
(consisting primarily of fixed assets) and certain liabilities of Rapid Aid Corp’s (“Rapid Aid”) business segment associated
with the manufacture and sale of cold chain packaging gel products;
In July 2016, we completed a business combination (the “HANSAmed Acquisition”) whereby we acquired substantially all
of the assets (other than cash and accounts receivable) and certain liabilities of HANSAmed Limited’s (“HANSAmed”)
business segment associated with the distribution of our biological indicator products and mail-in testing services to the
dental market in Canada;
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; and
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;
PAGE 2
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.
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.
Sterilization and Disinfection Control Division
Our Sterilization and Disinfection Control Division (formerly named the Biological Indicators Division) provides testing
services, along with the manufacture and marketing of biological, chemical and cleaning indicators used to assess the
effectiveness of sterilization processes, including steam, gas, hydrogen peroxide, ethylene oxide and radiation, in the hospital,
dental, medical device and pharmaceutical industries. Our biological indicators are developed and manufactured according to
International Standards Organization (“ISO”) 11138 under a quality system that complies with ISO 13485 and 21 CFR 820.
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 purity, 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. 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 ensure that the microorganism
spores are well-characterized and their resistance is known following placement on the target carrier.
Chemical indicators use a chemical change (generally determined by color) to assess the exposure to sterilization conditions.
Biological indicators and chemical indicators are often used together to monitor processes.
Cleaning indicators are used to assess the effectiveness of cleaning processes, including washer-disinfectors and ultrasonic
cleaners in healthcare settings. Cleaning is the critical first step performed prior to disinfection and sterilization. Debris
left on an instrument may interfere with microbial inactivation and can compromise the disinfection or sterilization
process. Cleaning indicators compliment sterilization and disinfection processes within central sterile supply departments
in hospitals.
PAGE 3
Instruments Division
Our Instruments Division designs, manufactures and markets quality control instruments and disposable products utilized in
the healthcare, pharmaceutical, medical device, food and beverage, industrial hygiene, and environmental air sampling
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 pharmaceutical, medical device, food and tool 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 monitoring, calibration of gas metering
equipment and environmental air assessments 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
pharmaceutical and beverage 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 pharmaceutical and medical device
manufacturers, and food processors.
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 meter 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 previously 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.
PAGE 4
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 beverage, pharmaceutical, and food processing companies.
Cold Chain Monitoring Division
Our Cold Chain 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. Cold chain monitoring systems are used in controlled environments such as refrigerators, freezers, warehouses,
laboratory incubators, clean rooms and a number of other settings. The cold chain 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 cold chain
monitoring systems are hospitals, pharmaceutical and medical device manufacturers, blood banks, pharmacies and laboratory
environments.
Among the important competitive differentiators for our cold chain 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 skilled, distributed installation and
service team; and 4) a full-featured and 21 CFR Part 11 validated software program, providing extensive reporting and alarm
capability. An important aspect of our cold chain 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 dedicated
service organization.
Our Cold Chain Monitoring Division also provides parameter (primarily temperature) monitoring of products during transport
in a cold chain and consulting services such as compliance monitoring and validation or mapping of transport and storage
containers. Our compliance services help customers validate the effectiveness of their cold chain and our monitoring
systems record temperature during shipment and provide alarms in case of temperature excursions throughout a cold chain,
from point of manufacture or collection, all the way to point of use.
Cold Chain Packaging Division
Our Cold Chain Packaging Division provides packaging development consulting services 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.
The competitive advantages of our Cold Chain Packaging 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, and 3) extensive package development and testing capability to help in the design and validation of
custom packaging solutions.
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. SDC products and most
products in our Cold Chain Packaging Division are disposable and are used on a routine basis, thus product sales are less
sensitive to general economic conditions. Instrument products and Cold Chain Monitoring products and systems have a
longer life, and their purchase by our customers is somewhat discretionary, so sales are more sensitive to general economic
conditions. Service demand is driven by our customers’ quality control and regulatory environments, which require periodic
repair and recalibration or certification of our instrument products and cold chain 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 product development, 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
Cold Chain Monitoring Division systems are conducted from our facility in Lakewood, Colorado and primarily involve
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, and Munich, Germany are used for the Sterilization
and Disinfection Control 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 biological indicator 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 cleaning indicator products are manufactured by inoculating a test soil onto a stainless-steel coupon.
The test solid is designed to mimic the challenge of removing blood and tissue from surgical instruments and evaluates the
effectiveness of our customer’s cleaning process. Our Cold 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 we are dependent on a single source for certain items. We believe that in
most cases, 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 source 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
220 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 Sterilization and Disinfection Control Division commercial efforts focus on providing quality test products in a variety of
different formats, which minimize incubation and test result time and provide the highest levels of sterility assurance.
Customers include hospitals, dental offices, contract sterilization providers and various industrial users involved in
pharmaceutical and medical device manufacturing.
Our Instruments Division commercial efforts focus 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 include dialysis clinics, pharmaceutical, medical device and food and beverage manufacturers, contract sterilizing
services, governmental agencies and environmental testing labs.
Our Cold Chain Monitoring Division commercial efforts focus 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 laboratory environments.
PAGE 6
Our Cold Chain Packaging Division commercial efforts focus on providing packaging development consulting services and
thermal packaging products such as coolers, boxes, insulation materials and phase-change products to control temperature
during transport. Customers primarily include pharmaceutical manufacturers and distribution companies.
As of and for the years ended March 31, 2018, 2017 and 2016, 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 sales forces 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, Fortive Corporation, Thermo Fisher Scientific, Inc., Mecmesin, Steinfurth, Met
One Instruments, Inc. and Tisch Environmental. Our Sterilization and Disinfection Control Division products compete with
3M, Crostex, Terragene, and Steris, among others. Our Cold Chain Monitoring Division systems compete with Rees
Scientific Corporation, Amphenol Corporation and Cooper-Atkins/Emmerson, among others. Our Cold Chain Packaging
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 $3,539,000, $4,157,000 and $4,976,000 for the years ended
March 31, 2018, 2017 and 2016, 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 Cold Chain
Monitoring products, were $0, $0 and $1,004,000 for the years ended March 31, 2018, 2017 and 2016, 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 Sterilization and Disinfection Control 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.
Employees
On March 31, 2018, we had 366 employees, of which 173 are employed for manufacturing and quality assurance, 25 for
research and development and engineering, 110 for sales and marketing, and 58 for administration.
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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 these are not the only risks and uncertainties facing us. Our business is also subject to general risks and
uncertainties that affect many other companies, such as market conditions, economic conditions, geopolitical events,
changes in laws, regulations or accounting rules, fluctuations in interest rates, terrorism, wars or conflicts, major health
concerns, natural disasters or other disruptions of expected business conditions. 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 or anticipation of potential changes in government fiscal, tax, trade 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:
•
•
•
•
•
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;
increasing price competition in our served markets;
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 do not 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
results of operations and 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 which 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 levels. 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. Even if we compete effectively, we may be required to reduce prices for our products and services.
The markets for our current and potential products are competitive. Because of the range of products and services 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 greater 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, 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 and high growth markets. In addition, significant shifts in industry
market share can occur in connection with product problems, safety alerts and publications about products, reflecting the
competitive significance of product quality, product efficacy and quality systems in our industries. 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:
•
changes in dialysis reimbursements;
• mergers within the dialysis provider industry, concentrating our medical meter and solutions sales with a few, large
customers;
• mergers within other industries we serve, making us more dependent upon fewer, larger customers for our sales;
•
decreased product demand, driven by changes in our customers’ regulatory environments or standard industry
practices; and
•
price competition for key products.
Our growth depends in part on the timely development and commercialization, and customer acceptance, of new and
enhanced products and services and the efforts of third party distributors.
Our growth depends on the acceptance of our products and services in the marketplace, the penetration achieved by the
companies which we sell to, and rely on, to distribute and represent our products, and our ability to introduce new and
innovative products that meet the needs of the various markets we serve. We can offer no assurance that we will be able to
continue to introduce new and enhanced products, that the products we introduce, or have introduced, will be widely accepted
by the marketplace, or that the companies that we contract with to distribute and represent our products will continue to
successfully penetrate our various markets. Our failure to continue to introduce new and enhanced products or gain
widespread acceptance of our products and services could adversely affect our results of operations. In order to successfully
commercialize our products and services in new markets, we will need to enter into distribution arrangements with companies
that can successfully distribute and represent our products and services into various markets.
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 United States 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. We also rely on our suppliers to adhere to our supplier standards of conduct and
PAGE 9
material violations of such standards of conduct could occur that could have a material effect on our business, reputation and
consolidated financial statements.
Certain of our businesses are subject to extensive regulation by the U.S. Food and Drug Administration (“FDA”) and by
comparable agencies of other countries. Failure to comply with those regulations would likely adversely affect our
reputation and consolidated financial statements
Certain of our products are medical devices and other products that are subject to regulation by the U.S. FDA, by other federal
and state governmental agencies, by comparable agencies of other countries and regions and by regulations governing
radioactive or other hazardous materials. We cannot guarantee that we will be able to obtain regulatory clearance (such as
510(k) clearance) or approvals for our new products or modifications to (or additional indications or uses of) existing products
within our anticipated timeframe or at all, and if we do obtain such clearance or approval it may be time-consuming, costly
and subject to restrictions. Our ability to obtain such regulatory clearances or approvals will depend on many factors and the
process for obtaining such clearances or approvals could change over time and may require the withdrawal of products from
the market until such clearances are obtained. Failure to comply with applicable regulations would likely adversely impact
our results of operations.
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 business and our results of operations:
•
any business, technology, service or product that we acquire could under-perform relative to our expectations and the
price that we paid for it, or not perform in accordance with our anticipated timetable, or we could fail to make such
business profitable;
• we may incur or assume significant debt in connection with our acquisitions;
•
•
•
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;
• we could experience difficulty in integrating personnel, operations, financial and other systems, and in retaining key
employees and customers;
• we may be unable to achieve cost savings or other synergies anticipated in connection with an acquisition;
PAGE 10
• 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;
•
•
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 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,
the liability of the former owners is limited, and certain former owners may be unable to meet their indemnification
responsibilities. We cannot guarantee 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.
Divestitures or other dispositions could negatively impact our business.
We continually assess the strategic fit of our existing businesses and may divest or otherwise dispose of businesses that are
deemed not to fit with our strategic plan or are not achieving the desired return on investment. Transactions such as these pose
risks and challenges that could negatively impact our business and our results of operations. For example, when we decide to
sell or otherwise dispose of a business or assets, we may be unable to do so on satisfactory terms within our anticipated
timeframe or at all, and even after reaching a definitive agreement to sell or dispose a business the sale may be subject to
satisfaction of pre-closing conditions which may not become satisfied. In addition, divestitures or other dispositions may
dilute our earnings per share, have other adverse financial and accounting impacts and distract management, and disputes may
arise with buyers.
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 operations, 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 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
PAGE 11
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 or services could adversely
affect our business, reputation and our results of operations.
Manufacturing or design defects in, unanticipated use of, safety or quality issues (or the perception of such issues) with
respect to, or inadequate disclosure of risks relating to the use of products and services that we make or sell (including items
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.
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 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.
Significant developments stemming from the current U.S. administration or the United Kingdom’s referendum on
membership in the EU could have an adverse effect on us.
Changes, potential changes or uncertainties in U.S. social, political, regulatory and economic conditions or laws and
policies governing the health care system and drug prices, foreign trade, manufacturing, and development and investment
in the territories and countries where we or our customers operate, stemming from the current U.S. administration, could
adversely affect our business and consolidated financial statements. For example, the current U.S. administration has called
for substantial changes to trade agreements, such as the North American Free Trade Agreement (“NAFTA”), has increased
tariffs on certain goods imported into the United States and has raised the possibility of imposing significant, additional
tariff increases. Additionally, on June 23, 2016, the United Kingdom held a referendum and voted in favor of leaving the
EU. This referendum has caused and may continue to cause political and economic uncertainty, including significant
volatility in global stock markets and currency exchange rate fluctuations. Although it is unknown what the full terms of
the United Kingdom’s future relationship with the EU will be, it is possible that there will be greater restrictions on imports
and exports between the United Kingdom and other countries, including the United States, and increased regulatory
complexities. Any of these factors could adversely affect customer demand, our relationships with customers and suppliers
and our business and financial statements.
PAGE 12
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.
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. On December 22, 2017, the Tax Cuts and
Jobs Act (“TCJA”) was enacted. The TCJA significantly revises the U.S. federal corporate income tax law by, among
other things, lowering the corporate income tax rate to 21% (beginning in calendar 2018), implementing a territorial tax
system, and imposing a one-time tax on unremitted cumulative non-U.S. earnings of foreign subsidiaries (“Transition
Tax”). The U.S. Treasury Department and IRS have not yet issued regulations with respect to the TCJA.
Due to the potential for changes to tax laws and regulations or changes to the interpretation thereof (including regulations
and interpretations pertaining to the TCJA), the ambiguity of tax laws and regulations, the subjectivity of factual
interpretations, the complexity of our intercompany arrangements, uncertainties regarding the geographic mix of earnings
in any particular period, and other factors, our estimates of effective tax rate and income tax assets and liabilities may be
incorrect and our consolidated financial statements could be adversely affected. For example, our estimate of the net one-
time charge we have incurred related to the TCJA could differ materially from our actual liability, due to, among other
things, further refinement of our calculations, changes in interpretations and assumptions that we have made, additional
guidance that may be issued by the U.S. Treasury Department and IRS, and actions we may take as a result of the TCJA.
The impact of the factors referenced in the first sentence of this paragraph may be substantially different from period-to-
period.
In addition, the amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and local tax authorities
and by non-U.S. tax authorities. If audits result in payments or assessments different from our reserves, our future results
may include unfavorable adjustments to our tax liabilities and our consolidated financial statements could be adversely
affected. Any further significant changes to the tax system in the United States or in other jurisdictions (including changes
in the taxation of international income as further described below) could adversely affect our consolidated financial
statements.
Changes in tax law relating to multinational corporations could adversely affect our tax position.
The U.S. Congress, government agencies in non-U.S. jurisdictions where we and our affiliates do business, and the
Organisation for Economic Co-operation and Development (“OECD”) have recently focused on issues related to the
taxation of multinational corporations. One example is in the area of “base erosion and profit shifting,” where profits are
claimed to be earned for tax purposes in low-tax jurisdictions, or payments are made between affiliates from a jurisdiction
PAGE 13
with high tax rates to a jurisdiction with lower tax rates. The OECD has released several components of its comprehensive
plan to create an agreed set of international rules for addressing base erosion and profit shifting. As a result, the tax laws in
the United States and other countries in which we do business could change on a prospective or retroactive basis, and any
such changes could adversely affect our business and financial statements.
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, marketing matters, 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 business. Please see
Note 13 of Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary
Data” for additional discussion.
We are utilizing variable rate financing.
As of March 31, 2018, we had $46,625,000 in outstanding indebtedness which bears interest at either: (1) LIBOR, as
defined, plus an applicable margin ranging from 1.5% to 2.50%; or (2) the alternate base rate (“ABR”), which is the greater of
JPMorgan’s prime rate or the federal funds effective rate or the overnight bank funding rate plus 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 March 31, 2018, we had $46,625,000 in outstanding indebtedness and, based on the remaining availability under our
Credit Facility, we have the ability to incur an additional $52,000,000 of indebtedness. Our debt level and related debt service
obligations can have negative consequences, including (1) requiring us to dedicate significant cash flow from operations to the
payment of principal and interest on our debt, which 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.
PAGE 14
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.
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 fully against losses.
Adverse changes in our relationships with, or the financial condition, performance, purchasing patterns or inventory levels
of, key distributors and other channel partners could adversely affect our consolidated financial statements.
Certain of our businesses sell a significant amount of their products to key distributors and other channel partners that have
valuable relationships with customers and end-users. Some of these distributors and other partners also sell our competitors’
products or compete with us directly, and if they favor competing products for any reason they may fail to market our
products effectively. Adverse changes in our relationships with these distributors and other partners, or adverse developments
in their financial condition, performance or purchasing patterns, could adversely affect our business and consolidated financial
statements. The levels of inventory maintained by our distributors and other channel partners, and changes in those levels, can
also negatively impact our results of operations in any given period.
A significant disruption in, or breach in security of, our information technology systems or violation of data privacy laws
could adversely affect our business, reputation and consolidated financial statements.
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. Attacks may also target hardware, software and information installed, stored or
transmitted in our products after such products have been purchased and incorporated into third-party products, facilities or
infrastructure. Security breaches of systems provided or enabled by us, regardless of whether the breach is attributable to a
vulnerability in our products or services, 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 most
multinational corporations, our information technology systems have been subject to computer viruses, malicious codes,
unauthorized access and other cyber-attacks and we expect the sophistication and frequency of such attacks to continue to
increase. Any of the attacks, breaches or other disruptions or damage described above could interrupt our operations or the
operations of our customers and partners, 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.
While we select our third-party vendors carefully (including the provider of our ERP system), we don’t control their actions.
Any problems caused by these third parties, including those resulting from breakdowns or other disruptions in communication
services provided by a vendor, failure of a vendor to handle current or higher volumes or cyber-attacks and security breaches
at a vendor could adversely affect our ability to deliver products and services to our customers and otherwise conduct our
business.
PAGE 15
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, Munich and Markham facilities all have
manufacturing, research and development, marketing and administrative functions. The Berlin, Traverse City, Addison and
Chassieu facilities have marketing and administrative functions.
Location
Lakewood, Colorado
Lakewood, Colorado
Butler, New Jersey
Bozeman, Montana
Berlin, New Jersey
Traverse City, Michigan
Addison, Texas
Chassieu, France
Markham, Canada
Munich, Germany
Operations
Instruments, Cold Chain Monitoring and Corporate Headquarters
Corporate administration
Instruments
Sterilization and Disinfection Control
Cold Chain Monitoring
Sterilization and Disinfection Control
Cold Chain Monitoring
Sterilization and Disinfection Control
Cold Chain Packaging and Sterilization and Disinfection Control
Sterilization and Disinfection Control
Square Feet
44,000 Owned
9,000 Leased
20,000 Leased
129,000 Owned
2,000 Leased
3,800 Leased
2,000 Leased
6,000 Leased
8,000 Leased
5,000 Leased
ITEM 3. LEGAL PROCEEDINGS
In February 2018, we were sued in a putative civil class action in the United States District Court for the Northern District
of Illinois, Eastern Division whereby it was alleged that we sent unsolicited advertisements to telephone facsimile
machines in violation of the Telephone Consumer Protection Act (“TCPA”), as well as analogous state statutes and state
consumer protection laws. The plaintiff in this lawsuit is seeking various forms of relief, including statutory damages of
$500 for each violation of the TCPA or, in the alternative, treble damages of up to $1,500 for each knowing and willful
violation of the TCPA, as well as payment of interest, attorneys’ fees and costs, and certain injunctive relief prohibiting the
further transmission of unsolicited fax advertising in the future. We intend to vigorously defend this case however we
cannot predict with any degree of certainty the outcome of the lawsuit or determine the extent of any potential liability or
damages.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
PAGE 16
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, 2017
September 30, 2017
December 31, 2017
March 31, 2018
Quarter Ended
June 30, 2016
September 30, 2016
December 31, 2016
March 31, 2017
High
$ 166.41
153.66
160.45
152.68
High
$ 130.03
126.48
135.24
126.99
Low
$ 122.10
128.19
124.16
124.62
Low
$ 92.83
102.54
115.02
116.41
Dividends Per Share
$ 0.16
0.16
0.16
0.16
Dividends Per Share
$ 0.16
0.16
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, 2018, there were 101 record holders of our common stock. This amount does not include “street name”
holders or beneficial holders of our common stock, whose holders of record are banks, brokers and other financial institutions.
During the year ended March 31, 2018, we did not sell any equity securities that were not registered under the Securities Act
of 1933, as amended.
We made the following repurchases of our common stock, by month, within the fourth quarter of the year covered by this
report:
Shares
Purchased
Average Price
Paid
January 1 – 31, 2018
February 1 – 28, 2018
March 1 – 31, 2018
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, 2018, we
have issued 8,788 restricted stock awards, 458,358 shares of common stock may be issued upon exercise of outstanding
options, with a weighted-average exercise price of $86.38 and 767,888 shares are available for future issuance under the
plans. Please see notes contained in “Item 8. Financial Statements and Supplementary Data” of this report for additional
details.
PAGE 17
Set forth below is a line graph comparing, for the period March 31, 2013 through March 31, 2018, 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.,
Utah Medical Products, Inc., Cantel Medical Corp., Fortive Corporation, Merit Medical Systems, Inc., Transcat Inc.,
Electro-Sensors Inc., and Rudolph Technologies 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.
$600
$500
$400
$300
$200
$100
$0
3/31/2013
3/31/2014
3/31/2015
3/31/2016
3/31/2017
3/31/2018
Mesa Laboratories, Inc
S&P 500 Index
Peer Group Index
PAGE 18
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 (loss) income
Net income margin
As of and for The Year Ended March 31,
2016
2018
$ 5,469 $ 5,820 $ 5,695 $ 2,034 $ 5,575
$ 16,351
$ 13,215
$ 14,698
$ 19,218
$ 14,965
2015
2014
2017
(3)%
(2)%
(2)%
12%
7%
8%
14%
8%
10%
14%
9%
11%
15%
11%
13%
$ 96,179
$ 93,665
$ 84,659
$ 71,330
$ 52,724
$ 54,619
57%
$ 53,239
57%
$ 51,413
61%
$ 43,392
61%
$ 31,688
60%
$ 2,183
2%
$ (2,962)
(3)%
$ 16,313
17%
$ 11,183
12%
$ 16,323
19%
$ 15,864
22%
$ 11,169 $ 9,583
13%
13%
$ 11,785
22%
$ 9,000
17%
Net (loss) income per diluted share
$ (0.79)
$ 2.91 $ 2.97 $ 2.63 $ 2.49
Adjusted operating income (3)
$ 24,603
$ 24,174
$ 23,437
$ 21,532
$ 15,604
Adjusted operating income per diluted share
Average return on:
Adjusted invested capital (4)
$ 6.53
$ 6.29
$ 6.24 $ 5.90 $ 4.32
17%
17%
20%
24%
22%
(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 operating income is a non-GAAP measure and is defined to exclude the non-cash impact of
amortization of intangible assets, stock-based compensation and impairment of goodwill.
Adjusted invested capital is a non-GAAP measure which substitutes adjusted operating income for net
income in the average return on invested capital calculation (2).
Reconciliation of Non-GAAP Measure
Adjusted operating income (which excludes the non-cash impact of amortization of intangible assets, stock-based
compensation and impairment of goodwill) 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 operating 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 19
The following table sets forth our reconciliation of adjusted operating income, a non-GAAP measure:
(In thousands)
Operating income
Amortization of intangible assets
Stock based compensation
Impairment of goodwill
Adjusted net income
2018
$ 2,183
6,929
1,672
13,819
$ 24,603
Year Ended March 31,
2016
$ 16,323
5,787
1,327
--
$ 23,437
2017
$ 16,313
6,450
1,411
--
$ 24,174
2015
$ 15,864
4,675
993
--
$ 21,532
2014
$ 11,785
2,979
840
--
$ 15,604
PAGE 20
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 where we can establish a strong presence and achieve high gross
margins. We are organized into four divisions across nine physical locations. Our Sterilization and Disinfection Control
Division (formerly named the Biological Indicators Division) provides testing services, along with the manufacturing and
marketing of biological, chemical and cleaning indicators used to assess the effectiveness of sterilization and disinfection
processes in the hospital, dental, medical device and pharmaceutical industries. Our Instruments Division designs,
manufactures and markets quality control instruments and disposable products utilized in the healthcare, pharmaceutical, food
and beverage, medical device, industrial hygiene and environmental air sampling industries. Our Cold Chain 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 laboratory environments. Our
Cold Chain Packaging Division provides packaging development consulting services 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. Sterilization and Disinfection Control products and many of the packaging
products of our Cold Chain Packaging Division are disposable and are used on a routine basis, thus product sales are less
sensitive to general economic conditions. Instrument products and cold chain monitoring systems and 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 cold chain 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 margin percentages for some
products have improved. There are, however, differences in gross margin percentages between 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 and our commercial mix. 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.
Year Ended March 31, 2018 Acquisitions
During the year ended March 31, 2018, we completed the following three acquisitions (the “2018 Acquisitions”):
In November 2017, we completed the BAG Acquisition whereby we acquired substantially all of the assets and certain
liabilities of BAG’s Hygiene Monitoring business which is comprised of the distribution of biological, chemical and
cleaning indicator products;
In October 2017, we completed the Simicon Acquisition whereby we acquired the common stock of Simicon, a company
whose business manufactures both biological and cleaning indicators; and
In May 2017, we completed the Hucker Acquisition whereby we acquired substantially all of the assets (other than cash
and accounts receivable) and certain liabilities of Hucker’s business segment associated with the distribution of our
biological indicator products.
PAGE 21
Year Ended March 31, 2017 Acquisitions
During the year ended March 31, 2017, we completed the following six acquisitions (the “2017 Acquisitions”):
In November 2016, we completed the Mydent Acquisition whereby we acquired substantially all of the assets (other than
cash and accounts receivable) and certain liabilities of Mydent International Corp’s business segment associated with
biological indicator mail-in testing services to the dental market in the United States;
In November 2016, we completed the FreshLoc Acquisition whereby we acquired substantially all of the assets (other than
cash and accounts receivable) and certain liabilities of the cold chain monitoring business of FreshLoc Technologies, Inc.;
In August 2016, we completed the Rapid Aid Acquisition whereby we acquired certain assets (consisting primarily of fixed
assets) and certain liabilities of Rapid Aid’s business segment associated with the manufacture and sale of cold chain
packaging gel products;
In July 2016, we completed the HANSAmed Acquisition whereby we acquired substantially all of the assets (other than
cash and accounts receivable) and certain liabilities of HANSAmed’s business segment associated with the distribution of
our biological indicator products and mail-in testing services to the dental market in Canada;
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; and
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
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);
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.
General Trends and Outlook
Our strategic objectives include growth both organically and through further acquisitions. During the year ended March 31,
2018, we continued to build our infrastructure to prepare for future growth, including the relocation of our Omaha
manufacturing facilities into the new Bozeman building, the addition of key personnel to operations and sales and marketing
functions, and the initiation of phase three of our ERP implementation project (European operations).
PAGE 22
The markets for Sterilization and Disinfection Control products remain strong, as the disposable nature of these products
makes them less sensitive to general economic conditions. The worldwide market for sterilization and disinfection control
products is growing as more countries focus on verifying the effectiveness of sterilization and disinfection processes.
In general, our Instruments products and Cold Chain monitoring systems are more impacted by general economic conditions
than our Sterilization and Disinfection Control 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, and cold chain services and monitoring systems remains solid and we strive
to continue to grow revenues going forward.
Overall revenues increased by $2,514,000, while organic revenues declined one percent, for the year ended March 31, 2018
resulting from organic decreases of one, three and 27 percent from the Instruments, Cold Chain Monitoring and Cold Chain
Packaging Divisions, respectively, partially offset by an increase of six percent for the Sterilization and Disinfection Control
Division.
At the beginning of our year ended March 31, 2018, we elected to discontinue for sale certain products in our Instruments,
Cold Chain Monitoring and Sterilization and Disinfection Control Divisions due to the recent introduction of new or modified
products and the consolidation of other product sets. As part of this process, we analyzed the remaining inventories associated
with these products to determine future usability and reserved against what we believed to be excess or obsolete, resulting in
an increase in our inventory reserve of $406,000 (of which $216,000 related to the Cold Chain Monitoring Division). At this
time, we also established a plan to liquidate certain Cold Chain Monitoring raw material components related to the above-
mentioned discontinued products. During the second and third quarters, we subjected additional inventories to our liquidation
program due to the discontinuance or winding-down of additional older product sets resulting from the release of our new
ViewPoint operating platform. During the three months ended December 31, 2017, it became evident that our liquidation
program was ineffective, and we determined that a significant amount of these inventories was not recoverable as previously
planned. As such, we increased our Cold Chain Monitoring inventory reserve by $1,700,000. Company-wide gross margin
percentage for the year ended March 31, 2018 was 57 percent, but would have been 59 percent, without the impact of these
additional inventory reserves. Additional changes to our reserve for inventories were related to normal business operations
(please see Note 3 of Notes to Consolidated Financial Statements contained in “Item. 8. Financial Statements and
Supplementary Data”).
During the nine months ended December 31, 2017, revenues in our Cold Chain Packaging Division decreased significantly as
compared to the same period in the prior year primarily due to a significant decrease in revenues from our largest customer.
Due to this event, we believed that revenues for this segment would be approximately $2,250,000 to $2,750,000 lower for the
year ending March 31, 2018 as compared to the year ended March 31, 2017. During the three months ended December 31,
2017 we completed a detailed review of the cold chain packaging business and concluded that long and difficult sales-cycles
associated with this product set, when coupled with higher than previously contemplated costs for operating and expanding
the necessary infrastructure to support revenues growth, have resulted in a forecast of lower than expected revenues, gross
margin percentages and overall profitability as compared to our original model for this business. Based on these facts, we
concluded that we had a triggering event requiring assessment of impairment for certain of our long-lived assets associated
with the Cold Chain Packaging Division. As a result, we reviewed the long-lived assets associated with this reporting segment
and recorded a $13,819,000 impairment charge related to goodwill, which is included in impairment charge on goodwill on
the accompanying consolidated statements of operations for the year ended March 31, 2018.
We continue to monitor the operational results of our Cold Chain Packaging Division and if revenues, gross margin
percentage and overall profitability fail to meet our revised projections, the remaining long-lived assets (including $1,401,000
of Goodwill and $4,081,000 of intangible assets as of March 31, 2018, respectively) could be subject to further impairment
losses.
While we believe that the revenues from our largest customer will revert back to a normal run rate for our year ending March
31, 2019, we will continue to focus on growing the business in the future through new customer acquisition and implementing
changes to optimize the underlying gross and operating margins. We believe that these steps will help drive the business to a
level of profitability and performance in line with our expectations, however there is no guarantee that we will be successful.
If, in the future, we determine that successfully trending toward our goals for this segment is not likely, we will, at that time,
consider any and all available avenues including a potential disposition of this business segment.
PAGE 23
Results of Operations
The following table sets forth, for the periods indicated, condensed consolidated statements of operations 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,
2018 vs 2017
2017 vs 2016
2018
2017
2016
Change
Percent
Change
Change
Percent
Change
Revenues
Cost of revenues
Gross profit
$ 96,179
$ 93,665
$ 84,659
$ 2,514
41,560
40,426
33,246
1,134
$ 54,619
$ 53,239
$ 51,413
$ 1,380
3%
3%
3%
Gross profit margin
57%
57%
61%
--%
$ 9,006
7,180
$ 1,826
(4)%
Operating Expenses:
Selling
$ 8,823
$ 9,955
$ 7,500
$ (1,132) (11)%
$ 2,455
General and administrative
Research and development
Impairment loss on goodwill
26,255
3,539
13,819
22,814
4,157
--
23,618
3,972
--
3,441
(618)
13,819
15%
(15)%
100%
(804)
185
--
Total operating expenses
$ 52,436
$ 36,926
$ 35,090
$ 15,510
42%
$ 1,836
Operating income
Net (loss) income
$ 2,183
$ 16,313
$ 16,323
$ (14,130) (87)%
$ (10)
$ (2,962)
$ 11,183
$ 11,169
(126)%
$ (14,145)
$ 14
Net (loss) income margin
(3)%
12%
13%
(15)%
(1)%
11%
22%
4%
33%
(3)%
5%
--%
5%
--%
--%
PAGE 24
Revenues
The following table summarizes our revenues by source (in thousands, except percent data):
Year Ended March 31,
2018 vs 2017
2017 vs 2016
2018
2017
2016
Change
Percent
Change
Change
Percent
Change
Sterilization and
Disinfection Control
Product
Service
Instruments
Product
Service
Cold Chain Monitoring
Product
Service
Cold Chain Packaging
Product
Service
$ 36,500
$ 32,195
$ 30,348
$ 4,305
6,760
43,260
24,660
9,444
34,104
5,948
7,030
12,978
5,064
773
5,837
6,440
38,635
25,152
9,253
34,405
6,916
5,668
12,584
6,792
1,249
8,041
3,301
33,649
25,957
9,735
35,692
6,508
5,058
11,566
3,461
291
3,752
320
4,625
(492)
191
(301)
(968)
1,362
394
(1,728)
(476)
(2,204)
$ 2,514
13%
5%
12%
(2)%
2%
(1)%
(14)%
24%
3%
(25)%
(38)%
(27)%
3%
$ 1,847
3,139
4,986
(805)
(482)
(1,287)
408
610
1,018
3,331
958
4,289
$ 9,006
6%
95%
15%
(3)%
(5)%
(4)%
6%
12%
9%
96%
329%
114%
11%
Total
$ 96,179
$ 93,665
$ 84,659
Year ended March 31, 2018 versus March 31, 2017
Sterilization and Disinfection Control revenues increased 12 percent, primarily due to the 2018 Acquisitions and organic
growth of six percent, which was achieved through existing customers, expansion into new markets, price increases and
strengthening of the Euro.
Instruments revenues decreased by one percent, primarily due to the slower than expected adoption of an updated medical
product, although we realized a normalization of the adoption rate of this product towards the end of the year.
Cold Chain Monitoring revenues increased three percent primarily due to the FreshLoc Acquisition, partially offset by
organic decreases of three percent. Revenues in this division fluctuate quarter over quarter due to the timing of customer
acceptance of certain installations and the nature and timing of orders within any given quarter.
Cold Chain Packaging revenues decreased by 27 percent primarily due to a lower order rate based on timing issues with
our largest customer (which accounted for approximately half of division revenues for the year ended March 31, 2017) and
longer than expected sales cycles. We noted that the order rate from our largest customer did begin to normalize during the
three months ending March 31, 2018 and we expect it to continue to do so throughout our next fiscal year. See General
Trends and Outlook above for additional discussion.
Year ended March 31, 2017 versus March 31, 2016
Sterilization and Disinfection Control revenues increased as a result of the North Bay, October 2015 European BI
Distributor, January 2016 European BI Distributor, Pulse, ATS, HANSAmed and Mydent Acquisitions, and organic
growth of seven percent which was achieved through existing customers, expansion into new markets and price increases.
PAGE 25
Instruments revenues decreased by four percent. The decrease was due primarily to the impact of a large one-time order
during the year ended March 31, 2016 that was not replicated during the year ended March 31, 2017 and the timing of
other orders related to the same product being accelerated into the fourth quarter of the year ended March 31, 2016 which
resulted in lower orders for this same product during the first quarter of the year ended March 31, 2017.
Cold Chain Monitoring revenues increased as a result of the FreshLoc Acquisition, partially offset by an organic decrease
of two percent.
Cold Chain packaging revenues increased primarily due to organic growth of 85 percent which was achieved through
existing and new customers.
Gross Profit
The following table summarizes our gross profit by operating segment (in thousands, except percent data):
Year Ended March 31,
2018 vs 2017
2017 vs 2016
2018
2017
2016
Change
Percent
Change
Change
Percent
Change
Sterilization and
Disinfection Control
$ 29,333
$ 25,674
$ 22,205
$ 3,659 14%
$ 3,469
16%
Gross profit margin
68%
66%
66%
2%
--%
Instruments
$ 20,395
$ 21,037
$ 23,223
$ (642)
(3)%
$ (2,186)
(9)%
Gross profit margin
60%
61%
65%
(1)%
(4)%
Cold Chain Monitoring
$ 3,854
$ 4,557
$ 4,201
$ (703) (15)%
$ 356
8%
Gross profit margin
30%
36%
36%
(6)%
--%
Cold Chain Packaging
$ 1,037
$ 1,971
$ 1,784
$ (934) (47)%
$ 187
10%
Gross profit margin
Total gross profit
Gross profit margin
18%
25%
$ 54,619
57%
$ 53,239
57%
48%
$ 51,413
61%
(7)%
$ 1,380
--%
3%
(23)%
$ 1,826
(4)%
4%
Year ended March 31, 2018 versus March 31, 2017
Sterilization and Disinfection Control gross profit margin percentage increased primarily due to volume-based efficiencies
associated with increased revenues and the impact of using internally manufactured biological indicators for our dental
sterilizer testing business as opposed to the prior year where we were contractually committed to purchase a significant
portion of those biological indicators from an outside supplier at a significantly higher price. Included in gross profit
margin percentage are $573,000 and $680,000 of Bozeman relocation costs for the years ended March 31, 2018 and 2017,
respectively (see Liquidity and Capital Resources for additional discussion). Without these costs, gross margin
percentages would have been 69 percent and 68 percent for the years ended March 31, 2018 and 2017, respectively.
Instruments gross margin percentage decreased by one percent, primarily due to product and service mix and the loss of
certain volume-based efficiencies associated with a decrease in revenues and a $163,000 increase in the related inventory
reserve due to the decision to discontinue for sale certain instruments products.
Cold Chain Monitoring gross profit margin percentage decreased primarily due to a $1,916,000 increase in the related
inventory reserve (see General Trends and Outlook above for additional discussion), partially offset by product and service
mix. Excluding the impact of these additional reserves for inventory, gross profit percentage would have been 45 percent
for the year ended March 31, 2018.
Cold Chain Packaging gross profit margin percentage decreased primarily due to lower revenues. A certain portion of the
cost of revenues are personnel and warehousing costs which are primarily fixed and as a result, fluctuations in revenues
PAGE 26
significantly impact the gross profit margin percentage for this division. See General Trends and Outlook above for
additional discussion.
Year ended March 31, 2017 versus March 31, 2016
Sterilization and Disinfection Control gross profit margin percentage was flat as compared to the year ended March 31,
2016. Included in the gross profit margin are $680,000 of relocation costs (see Liquidity and Capital Resources for
additional discussion) that decreased the gross margin percentage by two percentage points. In addition, after the
completion of the North Bay Acquisition, we were contractually committed to purchase from a third party a significant
portion of the BI’s that were used in the acquired North Bay dental sterilizer testing business which negatively impacted
our gross margin percentage. The contractual commitment gradually decreased each quarter after the acquisition and was
completed during the three months ended December 31, 2016. Each quarterly decrease in these purchases allowed for the
additional use of internally produced BI’s which resulted in greater gross margin percentages.
Instruments gross margin percentage decreased as a result of product and services mix and the loss of certain volume-based
efficiencies associated with the decrease in revenues in one product line (see Revenues for additional discussion).
Cold Chain Monitoring gross profit margin percentage was flat as compared to the year ended March 31, 2016. Gross
profit margin percentage increased as a result of the product and service revenues mix along with the impact of the
FreshLoc Acquisition but was offset by a $580,000 expense related to a reserve for slow moving inventory associated with
a specific model of our cold chain monitoring sensors.
Cold Chain Packaging gross profit margin decreased primarily as a result of increased revenues from a large customer
contract with higher than normal discount rates. We expect that our Cold Chain Packaging gross profit margin percentage
will continue to be lower than the historical results of our other segments due to the nature of these products.
Operating Expenses
The following table summarizes the change in our operating expenses (in thousands):
Selling
General and administrative
ERP system implementation
Legal costs and litigation settlement
Amortization
Personnel
Professional services
Employee moving
Banking fees
Depreciation
Property taxes
Investor relations
Medical device excise tax
Acquisition related
Other, net
Research and development
Increase (Decrease)
Year Ended March 31,
2018 vs 2017
$ (1,132)
2017 vs 2016
$ 2,455
--
4
479
1,465
(244)
525
144
116
221
164
--
176
391
3,441
(618)
(515)
(1,718)
663
724
10
--
129
279
--
--
(245)
--
(131)
(804)
185
--
Impairment loss on goodwill
13,819
Operating expenses
$ 15,510
$ 1,836
PAGE 27
Selling
Year ended March 31, 2018 versus March 31, 2017
Selling expense decreased primarily due to reductions of selling personnel, trade show activities and outside commissions.
As a percentage of revenues, selling expense was nine percent as compared to 11 percent in the prior year.
Year ended March 31, 2017 versus March 31, 2016
Selling expense increased primarily due to additional personnel related to the 2017 and 2016 Acquisitions. As a
percentage of revenues, selling expense was 11 percent as compared to nine percent in the prior year.
Included in the increase of selling expenses is $900,000 of U.S. Cold Chain Packaging sales personnel hired during the
year ended March 31, 2017. We are continuing to make an investment to grow this division and are hopeful that increases
in related revenues will continue to be realized during the year ending March 31, 2018.
General and Administrative
Year ended March 31, 2018 versus March 31, 2017
General and administrative expense increased primarily due to increases in personnel (including those associated with the
2017 Acquisitions), amortization and employee moving costs, partially offset by a decrease in professional services expenses.
Year ended March 31, 2017 versus March 31, 2016
General and administrative expenses decreased primarily due to the prior year $1,709,000 charge related to the Amato
Settlement and a decrease in ERP system implementation charges for the year ended March 31, 2017, partially offset by
increases in amortization, personnel and depreciation costs for the year ended March 31, 2017.
Research and Development
Year ended March 31, 2018 versus March 31, 2017
Research and development costs decreased primarily due to a streamlining of the necessary engineers and materials and
supplies required to support existing businesses.
Year ended March 31, 2017 versus March 31, 2016
Research and development expenses were essentially flat.
Impairment Loss on Goodwill
Year ended March 31, 2018 versus March 31, 2017
Impairment loss on goodwill is associated with our Packaging Division. See General Trends and Outlook above for
additional discussion.
Other Expense, net
Other expense, net for the year ended March 31, 2018 is comprised primarily of interest expense associated with our Credit
Facility and $300,000 related to an additional accrual for the PCD earn-out (see Liquidity and Capital Resources for
additional discussion), partially offset by a $116,000 gain from the sale of our Omaha facility. Other expense, net for the
year ended March 31, 2017 is comprised primarily of interest expense associated with our Credit Facility and $450,000
related to an additional accrual for the PCD earn-out (see Liquidity and Capital Resources for additional discussion).
Other expense, net for the year ended March 31, 2016 is comprised primarily of interest expense associated with our Credit
Facility.
PAGE 28
Net Income
Our income tax rate varies based upon many factors (please see Note 11 of Notes to Consolidated Financial Statements
contained in “Item 8. Financial Statements and Supplementary Data”). Net income for the year ended March 31, 2018 was
significantly impacted by a $13,819,000 impairment loss on goodwill (see General Trends and Outlook above for additional
discussion), $842,000 of facility relocation costs (see Liquidity and Capital Resources), $300,000 in PCD earn-out
accruals, $256,000 of employee moving expenses not related to the Bozeman facility relocation and a $2,106,000 expense
related to a reserve for inventory due to operational decisions to end of life certain products and other slow moving
inventory (see General Trends and Outlook above for additional discussion). Net income for the year ended March 31, 2017
was significantly impacted by $725,000 of relocation costs (see liquidity and capital resources), $450,000 in PCD earn-out
accruals and a $580,000 expense related to a reserve for slow moving inventory in our Cold Chain Monitoring Division.
Net income for the year ended March 31, 2016 was significantly impacted by the $1,709,000 Amato Settlement.
Otherwise, net income for the years ended March 31, 2018, 2017 and 2016 varied with the changes in revenues, gross
profit and operating expenses (which includes $6,929,000, $6,450,000 and $5,787,000 of non-cash amortization of
intangible assets, respectively).
Liquidity and Capital Resources
Our sources of liquidity include cash generated from operations, working capital and capacity under our Credit Facility. In
addition, we believe that we have the ability to access the public equity and/or debt markets to raise capital in order to further
fund our acquisition program. If we continue to acquire companies at our recent historical rate, it is possible, if not likely that
at some point in the future we will be required to access the above mentioned public equity and/or debt markets. Our more
significant uses of resources include quarterly dividends to shareholders, payment of debt obligations, long-term capital
equipment expenditures and potential acquisitions. In addition, we are at times also subject to outstanding legal proceedings
which could ultimately require the use of cash (Please see “Item 3. Legal Proceedings” for additional discussion).
Due to continued organic and acquisition related growth, we outgrew the capacity of our current building in Bozeman,
Montana and as a result, we built a new facility in the same general area. Construction began in July 2015 and was completed
in September 2017. We spent $17,650,000 on the development of the building and the related land, which is included in
property, plant and equipment, net on the accompanying condensed consolidated balance sheets.
In August 2016, we announced that we plan to shut down both our Omaha and Traverse City manufacturing facilities and
relocate those operations to the new Bozeman building. The move of these two facilities, along with the current Bozeman
operations, began in March 2017 and is estimated to be completed by June 30, 2018. We estimate that the total costs of the
relocation will be $2,000,000, which is comprised primarily of facility moving expenses, retention bonuses for existing
personnel and payroll costs for duplicative personnel during the transition period. We incurred $842,000 and $725,000 of
these relocation expenses during the years ended March 31, 2018 and 2017, respectively which are reflected in cost of
revenues in the accompanying consolidated statements of operations (other than $269,000 and $45,000, respectively which
are included in general and administrative expenses).
In July 2017, we completed the move from the Omaha facility and subsequently sold that building for $1,116,000 (net of
commission costs). After completing the move of the old Bozeman facility (which is anticipated to be completed by June 30,
2018), we expect to be able to sell that building for approximately $2,000,000.
Working capital is the amount by which current assets exceed current liabilities. We had working capital of $14,698,000 and
$19,218,000, respectively, at March 31, 2018 and 2017.
On March 1, 2017, we entered into a five-year agreement (the “Credit Facility”) for a $80,000,000 revolving line of credit
(“Line of Credit”), a $20,000,000 term loan (“Term Loan”) and up to $2,500,000 of letters of credit with a banking syndicate
comprised of four banks. In addition, the Credit Facility provides a post-closing accordion feature which allows the Company
to request to increase the Line of Credit or Term Loan up to an additional $100,000,000.
Line of Credit and Term Loan indebtedness bears interest at either: (1) LIBOR, as defined, plus an applicable margin ranging
from 1.5% to 2.50%; or (2) the alternate base rate (“ABR”), which is the greater of JPMorgan’s prime rate or the federal funds
effective rate or the overnight bank funding rate plus 0.5%. We elect the interest rate with each borrowing under the line of
credit. In addition, there is an unused line fee of 0.15% to 0.35%. Letter of credit fees are based on the applicable LIBOR
rate.
PAGE 29
The Term Loan requires 20 quarterly principal payments (the first due date was March 31, 2017) in the amount of
$250,000 (increasing by $125,000 each year up to $750,000 in the fifth year). The remaining balance of principal and
accrued interest are due on March 1, 2022.
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 (the “Leverage Ratio”), as defined, of less than 3.0 to 1.0, provided that, we may once during the term
of the Credit Facility, in connection with a Permitted Acquisition for which the aggregate consideration paid or to be paid
in respect thereof equals or exceeds $20,000,000, elect to increase the maximum Leverage Ratio permitted hereunder to
(i) 3.50 to 1.00 for a period of four consecutive fiscal quarters commencing with the fiscal quarter in which such Permitted
Acquisition occurs (the “Initial Holiday Period”) and (ii) 3.25 to 1.00 for the period of four consecutive fiscal quarters
immediately following the Initial Holiday Period. The Credit Facility also requires us to maintain a minimum fixed charge
coverage ratio of less than 1.25 to 1.0.
As of May 31, 2018, we had $43,625,000 in outstanding indebtedness and unused capacity under our Credit Facility of
$55,000,000.
We routinely evaluate opportunities for strategic acquisitions. Future material acquisitions may require that we obtain
additional capital, assume third party debt or incur other long-term obligations. We 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 program, 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, 2018.
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,
2017
$ 0.16
0.16
0.16
0.16
2018
$ 0.16
0.16
0.16
0.16
2016
$ 0.16
0.16
0.16
0.16
In April 2018, our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on June
15, 2018, to shareholders of record at the close of business on May 31, 2018.
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 (used in) provided by financing activities
Year Ended March 31,
2017
$ 7,750
(18,405)
10,708
2018
$ 24,814
(17,184)
(8,119)
2016
$ 16,903
(31,840)
18,620
Net cash provided by operating activities increased for the year ended March 31, 2018 primarily due to a reduction in
inventories of $2,286,000 (net of the impact of increases in the reserve for inventories) and the payment of $9,554,000 of
contingent consideration in the prior year. Net cash provided by operating activities for the year ended March 31, 2017
decreased primarily due to the payment of $9,554,000 in contingent consideration and $3,066,000 in accrued salaries, taxes
and various other accrued expenses, partially offset by increases in collections of accounts receivable of $994,000. Net cash
provided by operating activities for the year ended March 31, 2016 increased primarily due to the efficient management of
working capital.
PAGE 30
Net cash used in investing activities for the year ended March 31, 2018 resulted from $15,518,000 associated with the 2018
Acquisitions and the purchase of $2,799,000 of property, plant and equipment, partially offset by $1,133,000 of proceeds
associated with the sale of the Omaha facility. Net cash used in investing activities for the year ended March 31, 2017
resulted from $6,800,000 associated with the 2017 Acquisitions and the purchase of $11,605,000 of property, plant and
equipment. 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 financing activities for the year ended March 31, 2018 resulted from the repayment of debt of $19,625,000
and the payment of dividends of $2,413,000, partially offset by borrowings under our Credit Facility of $11,000,000 and
proceeds from the exercise of stock options of $2,919,000. Net cash provided by financing activities for the year ended
March 31, 2017 resulted from borrowings under our Credit Facility of $66,550,000 and proceeds from the exercise of stock
options of $3,513,000, partially offset by the repayment of debt of $57,000,000 and the payment of dividends of $2,355,000.
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.
At March 31, 2018, we had contractual obligations for open purchase orders of $439,000 for routine purchases of supplies and
inventory, which are payable in less than one year.
Under the terms of the PCD Agreement, we were required to pay contingent consideration if the cumulative revenues for
our process challenge device business for the three years subsequent to the acquisition met certain levels. The potential
consideration payable ranged from $0 to $1,500,000 and was based upon a sliding scale of three-year cumulative revenues
between $9,900,000 and $12,600,000, with payments made annually. Based upon both historical and projected growth
rates, we initially recorded $300,000 of contingent consideration payable which represented our best estimate of the
amount that would ultimately be paid. We paid $150,000 of the contingent consideration during the year ended March 31,
2016 (based upon the then current run rate projected over the entire three-year contingent consideration period).
Since the initial payment, the revenues for these products significantly increased and as a result, during the year ended
March 31, 2017 we recorded an additional $450,000 accrual (which was paid in our third quarter ending December 31,
2016). During the year ended March 31, 2018, process challenge device (“PCD”) product revenues continued to increase
which resulted in an additional $300,000 accrual, which is included in other income, net in the accompanying consolidated
statement of operations for the year ended March 31, 2018. We paid the remaining contingent consideration due of
$450,000 in November 2017.
Under the terms of the Infitrak Agreement, we were required to pay contingent consideration if the gross profit (as defined
in the Infitrak Earn-Out Agreement) for our cold chain packaging business for the two years subsequent to the acquisition
met certain levels. The potential undiscounted consideration payable ranged from $0 to $15,000,000 CDN and was based
upon a sliding scale of growth in gross profit (as defined in the Infitrak 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 of contingent consideration payable which represented our best estimate of the then current fair value 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.
In July 2016, we made the first Earn-Out payment in the amount of $6,000,000 CDN ($4,594,000). In March 2017, we
agreed to settle the remaining earn-out obligation (which was originally due in the second quarter of our year ending March
31, 2018) early by making a payment of $6,000,000 CDN ($4,558,000).
PAGE 31
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.
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.
Throughout the year, we perform various physical cycle count procedures on our inventories and 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 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 recorded an impairment charge related to goodwill associated with the Cold Chain Packaging Division during the year
ended March 31, 2018 (for additional discussion, please see Note 5 of Notes to Consolidated Financial Statements contained in
“Item 8. Financial Statements and Supplementary Data”).
We did not record any impairment charges for the years ended March 31, 2017 or 2016. 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.
PAGE 32
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 certain
acquisitions, we also record a liability for contingent consideration based on estimated future business performance. 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 – Stock Options
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.
Income Taxes
Income tax expense includes U.S., state, local and international income taxes, plus a provision for U.S. taxes on
undistributed earnings of foreign subsidiaries and other prescribed foreign entities not deemed to be indefinitely reinvested.
Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial
reporting basis and the tax basis of existing assets and liabilities. The tax rate used to determine the deferred tax assets and
liabilities is the enacted tax rate for the year and manner in which the differences are expected to reverse. Valuation
allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.
We are involved in various tax matters, with respect to some of which the outcome is uncertain. We establish reserves to
remove some or all of the tax benefit of any of our tax positions at the time we determine that it becomes uncertain based
upon one of the following conditions: (1) the tax position is not "more likely than not" to be sustained, (2) the tax position
is "more likely than not" to be sustained, but for a lesser amount, or (3) the tax position is "more likely than not" to be
sustained, but not in the financial period in which the tax position was originally taken. For purposes of evaluating whether
or not a tax position is uncertain, (1) we presume the tax position will be examined by the relevant taxing authority that has
full knowledge of all relevant information; (2) the technical merits of a tax position are derived from authorities such as
legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and
circumstances of the tax position; and (3) each tax position is evaluated without consideration of the possibility of offset or
aggregation with other tax positions taken. A number of years may elapse before a particular uncertain tax position is
audited and finally resolved or when a tax assessment is raised. The number of years subject to tax assessments varies
depending on the tax jurisdiction. The tax benefit that has been previously reserved because of a failure to meet the "more
likely than not" recognition threshold would be recognized in income tax expense in the first interim period when the
uncertainty disappears under any one of the following conditions: (1) the tax position is "more likely than not" to be
sustained, (2) the tax position, amount, and/or timing is ultimately settled through negotiation or litigation, or (3) the statute
of limitations for the tax position has expired. Please see Note 11 of Notes to Consolidated Financial Statements contained
in “Item 8. Financial Statements and Supplementary Data” for additional discussion.
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.
PAGE 33
Recent Accounting Standards and Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09,
Revenue from Contracts with Customers (Topic 606), which will replace most existing revenue recognition guidance in U.S.
GAAP and is intended to improve and converge with international standards the financial reporting requirements for revenue
from contracts with customers. The core principle of ASU 2014-09 is that an entity should recognize revenue for the transfer
of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASU 2014-09 also
requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer
contracts, including significant judgments and changes in judgments. ASU 2014-09 allows for adoption either on a full
retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of
initially applying the new guidance recognized at the date of initial application, which will be effective for the Company
beginning April 1, 2018.
We will adopt ASU 2014-09 and its amendments on a modified retrospective basis effective April 1, 2018. We have
identified and implemented minor necessary changes to our accounting policies and practices, business processes, and systems
and controls as well as designed and implemented specific controls over our evaluation of the impact of the new guidance on
the Company, including the cumulative effect calculation, disclosure requirements and the collection of relevant data into the
reporting process. We are substantially complete with the process of finalizing changes to our business processes and systems
and controls to support recognition and new required disclosures under the new revenue standard. While we expect the impact
of the new standard on the amount and timing of revenue recognized in the year ending March 31, 2019 to be insignificant,
our assessment will be finalized during the first quarter of our year ending March 31, 2019.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize right-of-use assets,
representing their right to use the underlying asset for the lease term, and lease liabilities on the consolidated balance sheet
for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures
designed to assess the amount, timing and uncertainty of cash flows arising from leases. We have initiated our plan for the
adoption and implementation of this new accounting standard, including assessing our lease arrangements, evaluating
practical expedient and accounting policy elections. The standard requires the use of a modified retrospective transition
approach, which includes a number of optional practical expedients that entities may elect to apply. ASU 2016-02 is
effective for the Company beginning April 1, 2019. We anticipate that the adoption of this new standard will not result in a
significant increase in lease-related assets and liabilities on our consolidated balance sheets or significantly impact our
consolidated statements of operations and cash flows.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other, which eliminates the requirement to
calculate the implied fair value of goodwill to measure a goodwill impairment charge. ASU 2017-04 is required to be
applied prospectively and we elected to early adopt ASU 2017-04 effective April 1, 2017.
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, 2018, we have no obligations or interests which qualify as off-balance sheet arrangements.
PAGE 34
Contractual Obligations
As of March 31, 2018, our contractual obligations, including payments due by period, are as follows (in thousands):
Purchase Commitments
Line of Credit
Term loan
Other
Total
Total
$ 439
28,000
18,625
794
$ 47,858
2019
$ 439
--
1,625
555
$ 2,619
Payments Due For Years Ending March 31,
2020-2021
2022-2023
Thereafter
$ --
--
4,750
239
$ 4,989
$ --
28,000
12,250
--
$ 40,250
$ --
--
--
--
$ --
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 commodity market risks. Approximately 15 percent of our
revenues are exposed to foreign currency risk, of which all is within stable markets, minimizing our exposure to foreign
currency fluctuations.
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, 2018, a one percentage point increase in
interest rates would have increased interest expense by $527,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
36
38
39
40
41
42
43
PAGE 35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Mesa Laboratories, Inc.
Lakewood, Colorado
OPINIONS ON THE CONSOLIDATED FINANCIAL STATEMENTS AND INTERNAL CONTROL OVER
FINANCIAL REPORTING
We have audited the accompanying consolidated balance sheets of Mesa Laboratories, Inc. (the "Company") as of March 31,
2018 and 2017, and the related consolidated statements of operations, comprehensive (loss) income, stockholders' equity, and
cash flows, for each year in the three-year period ended March 31, 2018, and the related notes and schedules (collectively
referred to as the " consolidated financial statements"). We have also audited the Company's internal control over financial
reporting as of March 31, 2018, based on the criteria established in Internal Control - Integrated Framework: (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of March 31, 2018 and 2017, and the results of its operations and its cash flows for each year in the
three-year period ended March 31, 2018, in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of March 31, 2018, based on criteria established in Internal Control - Integrated Framework: (2013) issued by
COSO.
BASIS FOR OPINIONS
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 the Company's consolidated financial statements and an opinion on the Company's internal control
over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether
due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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 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.
PAGE 36
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded acquired
entities from its assessment of internal control over financial reporting as of March 31, 2018 because they were acquired by
the Company in purchase business combinations during 2018. We have also excluded these entities from our audit of internal
control over financial reporting. The acquired entities represent 12% and 3% of consolidated total assets and revenues,
respectively, for the year ended March 31, 2018.
DEFINITION AND LIMITATIONS OF INTERNAL CONTROL OVER FINANCIAL REPORTING
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 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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of 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 (iii) 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 financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
EKS&H LLLP
Denver, Colorado
June 5, 2018
We have served as the Company's auditor since 1986.
PAGE 37
Mesa Laboratories, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, less allowances of $179 and $252, respectively
Inventories, net
Prepaid income taxes
Prepaid expenses and other
Assets held for sale
Total current assets
Deferred income taxes
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, net of debt issuance costs and current portion
Other long-term liabilities
Total liabilities
Commitments and Contingencies (Note 13)
Stockholders’ equity:
Common stock, no par value; authorized 25,000,000 shares;
issued and outstanding, 3,801,439 shares (March 31,
2018) and 3,734,704 shares (March 31, 2017)
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
March 31,
2018
2017
$ 5,469
14,302
9,228
273
782
1,934
31,988
127
23,593
42,850
65,543
$ 164,101
$ 2,380
4,284
3,921
709
3,363
1,008
1,625
17,290
2,621
44,635
194
64,740
$ 5,820
14,319
13,873
587
1,186
--
35,785
--
26,002
37,790
72,156
$ 171,733
$ 2,168
4,350
4,117
1,294
2,999
514
1,125
16,567
3,554
53,675
116
73,912
30,516
68,281
564
99,361
$ 164,101
25,925
73,656
(1,760)
97,821
$ 171,733
See accompanying notes to consolidated financial statements.
PAGE 38
Mesa Laboratories, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Revenues
Product
Service
Total revenues
Cost of revenues
Cost of products
Cost of services
Total cost of revenues
Gross profit
Operating expenses
Selling
General and administrative
Research and development
Impairment loss on goodwill
Total operating expenses
Operating income
Other expense, net
Earnings before income taxes
Income taxes
Net (loss) income
Net (loss) income per share:
Basic
Diluted
2018
Year Ended March 31,
2017
2016
$ 72,172
24,007
96,179
$ 71,055
22,610
93,665
$ 66,274
18,385
84,659
28,608
12,952
41,560
54,619
8,823
26,255
3,539
13,819
52,436
2,183
1,882
301
26,548
13,878
40,426
53,239
9,955
22,814
4,157
--
36,926
16,313
2,017
14,296
26,957
6,289
33,246
51,413
7,500
23,618
3,972
--
35,090
16,323
768
15,555
3,263
$ (2,962)
3,113
$ 11,183
4,386
$ 11,169
$ (0.79)
$ 3.04
(0.79)
2.91
$ 3.10
2.97
Weighted average common shares outstanding:
Basic
Diluted
3,770
3,770
3,679
3,844
3,605
3,757
See accompanying notes to consolidated financial statements.
PAGE 39
Mesa Laboratories, Inc.
Consolidated Statements of Comprehensive (Loss) Income
(In thousands except per share data)
2018
Year Ended March 31,
2017
2016
Net (loss) income
$ (2,962)
$ 11,183
$ 11,169
Other comprehensive income (loss), net of tax:
Foreign currency translation
2,324
(609)
(917)
Total comprehensive (loss) income
$ (638)
$ 10,574
$ 10,252
See accompanying notes to consolidated financial statements.
PAGE 40
Mesa Laboratories, Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands, except share amounts)
Common Stock
Number of
Shares
3,561,540
Amount
$ 17,751
Retained
Earnings
$ 55,962
Accumulated
Other
Comprehensive
Income (Loss)
$ (234)
Total
$ 73,479
75,733
--
--
--
--
3,637,273
97,431
--
--
--
--
3,734,704
1,923
--
1,327
--
--
21,001
3,513
--
1,411
--
--
25,925
--
(2,303)
--
--
11,169
64,828
--
(2,355)
--
--
11,183
73,656
66,735
--
--
--
--
3,801,439
2,919
--
1,672
--
--
$ 30,516
--
(2,413)
--
--
(2,962)
$ 68,281
--
--
--
(917)
--
(1,151)
--
--
--
(609)
--
(1,760)
--
--
--
2,324
--
$ 564
1,923
(2,303)
1,327
(917)
11,169
84,678
3,513
(2,355)
1,411
(609)
11,183
97,821
2,919
(2,413)
1,672
2,324
(2,962)
$ 99,361
See accompanying notes to consolidated financial statements.
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
Common stock issued for conversion
of stock options net of 13,964 shares
returned as payment
Dividends paid
Stock-based compensation
Foreign currency translation
Net income
March 31, 2017
Common stock issued for conversion
of stock options net of 8,562 shares
returned as payment
Dividends paid
Stock-based compensation
Foreign currency translation
Net loss
March 31, 2018
PAGE 41
Mesa Laboratories, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net (loss) income
Depreciation and amortization
Gain on sale of assets
Deferred income taxes
Stock-based compensation
Foreign currency adjustments
Amortization of debt issuance costs
Change in inventory reserve
Impairment loss on goodwill
Adjustment to contingent consideration
Change in assets and liabilities, net of effects of acquisitions
and dispositions
Accounts receivable, net
Inventories, net
Prepaid expenses and other
Accounts payable
Accrued liabilities and taxes payable
Unearned revenues
Contingent consideration
Net cash provided by operating activities
Cash flows from investing activities:
Acquisitions
Proceeds from sale of assets
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
Net cash (used in) provided by financing activities
Year Ended March 31,
2018
2017
2016
$ (2,962)
9,471
(116)
(2,704)
1,672
(490)
110
2,474
13,819
300
$ 11,183
8,737
--
(630)
1,411
93
--
194
--
--
$ 11,169
7,174
--
(807)
1,327
53
--
305
--
--
680
2,286
755
212
408
(196)
(905)
24,814
(15,518)
1,133
(2,799)
(17,184)
11,000
(19,625)
(2,413)
2,919
(8,119)
994
101
(830)
(655)
(3,066)
(228)
(9,554)
7,750
(6,800)
(11,605)
(18,405)
66,550
(57,000)
(2,355)
3,513
10,708
(1,958)
(1,507)
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)
Effect of exchange rate changes on cash and cash equivalents
138
72
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(351)
5,820
$ 5,469
125
5,695
$ 5,820
3,661
2,034
$ 5,695
Cash paid during the year for:
Income taxes
Interest
$ 4,551
1,956
$ 5,605
1,384
$ 3,951
848
Supplemental non-cash activity:
Contingent consideration as part of an acquisition
--
1,822
9,271
See accompanying notes to consolidated financial statements.
PAGE 42
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 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 where we can
establish a strong presence and achieve high gross margins. We are organized into four divisions across nine physical
locations. Our Sterilization and Disinfection Control Division (formerly named the Biological Indicators Division) provides
testing services, along with the manufacturing and marketing of biological, chemical and cleaning indicators used to assess the
effectiveness of sterilization and disinfection processes in the hospital, dental, medical device and pharmaceutical industries.
Our Instruments Division designs, manufactures and markets quality control instruments and disposable products utilized in
the healthcare, pharmaceutical, food and beverage, medical device, industrial hygiene and environmental air sampling
industries. Our Cold Chain 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
laboratory environments. Our Cold Chain Packaging Division provides packaging development consulting services 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
operations, 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 43
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, generally one year.
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, 2018, 2017 and 2016, no individual customer represented more than 10 percent of our revenues or more than
10 percent of our accounts receivable balance. Approximately 59 percent and 41 percent of our sales for the year ended March
31, 2018 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.
Throughout the year, we perform various physical cycle count procedures on our inventories and we estimate and maintain an
inventory reserve, as needed, for such matters as obsolete inventory, shrink and scrap.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Repair and maintenance costs that do not improve service potential or extend
the economic life are expensed as incurred. Depreciation is recorded using the straight-line method over the estimated useful
lives of our assets, which are reviewed periodically and generally have the following ranges: buildings: 40 years or less;
manufacturing equipment: seven years or less; and computer equipment: three years or less. Land is not depreciated and
construction in progress is not depreciated until placed in service.
Goodwill and Intangible Assets
We classify intangible assets into three categories: (1) intangible assets with definite lives subject to amortization, (2) intangible
assets with indefinite lives not subject to amortization and (3) goodwill. We determine the useful lives of our identifiable
intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors we consider
when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of
the asset, our long-term strategy for using the asset, any laws or other local regulations which could impact the useful life of the
PAGE 44
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 expected to result from the use of the asset group and its eventual disposition. 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, rather than
completing the impairment test. 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, Sterilization and Disinfection Control, Cold Chain Monitoring and Cold Chain
Packaging. These operating segments are consistent with the way management runs and analyzes 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.
In order to test for goodwill impairment, we compare the fair value of a reporting unit to its carrying value, including goodwill.
If the fair value of the reporting unit is lower than its carrying amount, goodwill is written down for the amount by which the
carrying amount exceeds the fair value. However, the loss recognized cannot exceed the carrying amount of the 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 a hypothetical marketplace participant would use. We have the option to perform a
qualitative assessment of goodwill in order 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 testing discussed above. 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.
Although rare, 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 operations.
PAGE 45
Stock-based Compensation
We sponsor equity plans that provide for the grant of awards including stock options and restricted stock. The fair value of our
stock option grants is estimated on the date of grant, based on the closing stock price at grant date, using a Black-Scholes
option-pricing model. The fair value of our restricted stock awards (“RSA’s”) is the quoted market value of our stock on the
grant date. 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 operations.
Income Taxes
Income tax expense includes U.S., state, local and international income taxes, plus a provision for U.S. taxes on
undistributed earnings of foreign subsidiaries and other prescribed foreign entities not deemed to be indefinitely reinvested.
Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial
reporting basis and the tax basis of existing assets and liabilities. The tax rate used to determine the deferred tax assets and
liabilities is the enacted tax rate for the year and manner in which the differences are expected to reverse. Valuation
allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.
We are involved in various tax matters, with respect to some of which the outcome is uncertain. We establish reserves to
remove some or all of the tax benefit of any of our tax positions at the time we determine that it becomes uncertain based
upon one of the following conditions: (1) the tax position is not "more likely than not" to be sustained, (2) the tax position
is "more likely than not" to be sustained, but for a lesser amount, or (3) the tax position is "more likely than not" to be
sustained, but not in the financial period in which the tax position was originally taken. For purposes of evaluating whether
or not a tax position is uncertain, (1) we presume the tax position will be examined by the relevant taxing authority that has
full knowledge of all relevant information; (2) the technical merits of a tax position are derived from authorities such as
legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and
circumstances of the tax position; and (3) each tax position is evaluated without consideration of the possibility of offset or
aggregation with other tax positions taken. A number of years may elapse before a particular uncertain tax position is
audited and finally resolved or when a tax assessment is raised. The number of years subject to tax assessments varies
depending on the tax jurisdiction. The tax benefit that has been previously reserved because of a failure to meet the "more
likely than not" recognition threshold would be recognized in income tax expense in the first interim period when the
uncertainty disappears under any one of the following conditions: (1) the tax position is "more likely than not" to be
sustained, (2) the tax position, amount, and/or timing is ultimately settled through negotiation or litigation, or (3) the statute
of limitations for the tax position has expired (See Note 11).
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 is
based upon our estimated credit adjusted risk free rate or current market conditions which includes an estimate for risk
premiums. Changes in the fair value of the acquisition related contingent consideration is included in other expense, net on the
accompanying consolidated statements of operations.
Legal Contingencies
We are involved in various legal proceedings. Due to their nature, such legal proceedings involve inherent uncertainties
including, but not limited to, court rulings and negotiations between affected parties. We assess the probability of loss for such
contingencies and accrue a liability and/or disclose the relevant circumstances, as appropriate. (See Note 13).
PAGE 46
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 May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09,
Revenue from Contracts with Customers (Topic 606), which will replace most existing revenue recognition guidance in U.S.
GAAP and is intended to improve and converge with international standards the financial reporting requirements for revenue
from contracts with customers. The core principle of ASU 2014-09 is that an entity should recognize revenue for the transfer
of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASU 2014-09 also
requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer
contracts, including significant judgments and changes in judgments. ASU 2014-09 allows for adoption either on a full
retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of
initially applying the new guidance recognized at the date of initial application, which will be effective for the Company
beginning April 1, 2018.
We will adopt ASU 2014-09 and its amendments on a modified retrospective basis effective April 1, 2018. We have
identified and implemented minor necessary changes to our accounting policies and practices, business processes, and systems
and controls as well as designed and implemented specific controls over our evaluation of the impact of the new guidance on
the Company, including the cumulative effect calculation, disclosure requirements and the collection of relevant data into the
reporting process. We are substantially complete with the process of finalizing changes to our business processes and systems
and controls to support recognition and new required disclosures under the new revenue standard. While we expect the impact
of the new standard on the amount and timing of revenue recognized in the year ending March 31, 2019 to be insignificant,
our assessment will be finalized during the first quarter of our year ending March 31, 2019.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize right-of-use assets,
representing their right to use the underlying asset for the lease term, and lease liabilities on the consolidated balance sheet
for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures
designed to assess the amount, timing and uncertainty of cash flows arising from leases. We have initiated our plan for the
adoption and implementation of this new accounting standard, including assessing our lease arrangements, evaluating
practical expedient and accounting policy elections. The standard requires the use of a modified retrospective transition
approach, which includes a number of optional practical expedients that entities may elect to apply. ASU 2016-02 is
effective for the Company beginning April 1, 2019. We anticipate that the adoption of this new standard will not result in a
significant increase in lease-related assets and liabilities on our consolidated balance sheets or significantly impact our
consolidated statements of operations and cash flows.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other, which eliminates the requirement to
calculate the implied fair value of goodwill to measure a goodwill impairment charge. ASU 2017-04 is required to be
applied prospectively and we elected to early adopt ASU 2017-04 effective April 1, 2017.
Note 2. Acquisitions and Dispositions
Acquisitions
For the years ended March 31, 2018 and 2017, our acquisitions of businesses (net of cash acquired) totaled $15,518,000
and $8,622,000, respectively, of which none were individually material in nature (see Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations).
PAGE 47
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 were required to pay contingent consideration if the gross profit (as defined
in the Infitrak Earn-Out Agreement) for our cold chain packaging business for the two years subsequent to the acquisition
met certain levels. The potential undiscounted consideration payable ranged from $0 to $15,000,000 CDN and was based
upon a sliding scale of growth in gross profit (as defined in the Infitrak 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 of contingent consideration payable which represented our best estimate of the then current fair value 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.
In July 2016, we made the first Earn-Out payment in the amount of $6,000,000 CDN ($4,594,000). In March 2017, we
agreed to settle the remaining earn-out obligation (which was originally due in the second quarter of our year ending March
31, 2018) early by making a payment of $6,000,000 CDN ($4,558,000).
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 Packaging segment.
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 reflected
our 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 operations 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):
PAGE 48
Revenues
Net income
Net Income per common share:
Basic
Diluted
North Bay
Year Ended March 31,
2016
$ 86,499
11,471
2015
$ 74,379
9,944
$ 3.18
3.05
$ 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”) included 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.
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 operations 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
PAGE 49
Note 3. Inventories
Inventories consist of the following (in thousands):
Raw materials
Work-in-process
Finished goods
Less reserve
March 31,
2018
$ 9,059
380
3,152
(3,363)
$ 9,228
2017
$ 10,815
342
3,604
(888)
$ 13,873
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,
2018
$ 889
18,543
9,156
3,459
60
1,221
33,328
(9,735)
$ 23,593
2017
$ 1,614
4,726
8,861
4,143
15,882
1,220
36,446
(10,444)
$ 26,002
Depreciation expense for the years ended March 31, 2018, 2017 and 2016 was $2,542,000, $2,287,000 and $1,387,000,
respectively.
Note 5. Goodwill and Intangible Assets
During the year ended March 31, 2018, revenues in our Cold Chain Packaging reporting segment decreased significantly as
compared to the prior year primarily due to a significant decrease in revenues from our largest customer. During the three
months ended December 31, 2017 we completed a detailed review of the cold chain packaging business and concluded that
long and difficult sales-cycles associated with this product set, when coupled with higher than previously contemplated costs
for operating and expanding the necessary infrastructure to support revenues growth have resulted in a forecast of lower than
expected revenues, gross margin percentages and overall profitability as compared to our original model for this business.
Based on these facts, we concluded that we had a triggering event requiring assessment of impairment for certain of our long-
lived assets associated with the Cold Chain Packaging reporting segment. As a result, we reviewed the long-lived assets
associated with this reporting segment and recorded a $13,819,000 impairment charge related to goodwill, which is included
in impairment loss on goodwill on the accompanying consolidated statements of operations for the year ended March 31,
2018. The impairment loss was measured using a market approach utilizing an EBITA multiple model. The remaining
goodwill and intangible assets associated with this segment are $1,401,000 and $4,081,000, respectively as of March 31,
2018.
PAGE 50
The change in the carrying amount of goodwill was as follows (in thousands):
March 31, 2016
Effect of foreign currency translation
Acquisitions
March 31, 2017
Effect of foreign currency translation
Acquisitions
Impairment
March 31, 2018
Other intangible assets are as follows:
Sterilization and
Disinfection Control
$ 20,898
(97)
3,218
24,019
536
5,948
--
$ 30,503
Instruments
$ 18,235
--
--
18,235
--
--
--
$ 18,235
Cold Chain
Monitoring
$ 13,647
--
1,757
15,404
--
--
$ 15,404
Cold Chain
Packaging
$ 13,357
(374)
1,515
14,498
722
--
(13,819)
$ 1,401
Total
$ 66,137
(471)
6,490
72,156
1,258
5,948
(13,819)
$ 65,543
(In thousands)
March 31, 2018
Intellectual property
Trade names
Customer relationships
Non-compete agreements
Intellectual property
Trade names
Customer relationships
Non-compete agreements
Carrying
Amount
$ 7,210
3,675
64,363
1,865
$ 77,113
Accumulated
Amortization
$ (4,554)
(2,154)
(26,128)
(1,427)
$ (34,263)
Useful Life
Net
$ 2,656
1,521
38,235
438
$ 42,850
(Years)
10-16
3-10
7-10
3-10
Carrying
Amount
$ 7,210
3,663
52,134
1,845
$ 64,852
March 31, 2017
Accumulated
Amortization
$ (3,824)
(1,727)
(20,260)
(1,251)
$ (27,062)
Useful Life
Net
$ 3,386
1,936
31,874
594
$ 37,790
(Years)
10-16
3-10
7-10
3-10
The following is estimated amortization expense for the years ending March 31:
(In thousands)
2019
2020
2021
2022
2023
$ 7,249
6,915
5,870
5,869
5,235
Amortization expense for the years ended March 31, 2018, 2017 and 2016 was $6,929,000, $6,450,000 and $5,787,000,
respectively.
PAGE 51
Note 6. Facility Relocation
In August 2016, we announced that we plan to shut down both our Omaha and Traverse City manufacturing facilities and
relocate those operations to the new Bozeman building. The move of these two facilities, along with the current Bozeman
operations, began in March 2017 and is estimated to be completed by June 30, 2018. We estimate that the total costs of the
relocation will be $2,000,000, which is comprised primarily of facility moving expenses, retention bonuses for existing
personnel and payroll costs for duplicative personnel during the transition period. We incurred $842,000 and $725,000 of
these relocation expenses during the years ended March 31, 2018 and 2017, respectively which are reflected in cost of
revenues in the accompanying consolidated statements of operations (other than $269,000 and $45,000, respectively which
are included in general and administrative expenses). Facility relocation costs, which are associated with our Sterilization and
Disinfection Control segment, are as follows for the year ended March 31, 2018:
• Retention bonuses for existing personnel of $350,000
• Duplicative employment costs of $122,000
• Moving costs of $370,000
Facility relocation amounts accrued and paid for the year ended March 31, 2018 are as follows (in thousands):
Beginning balance at March 31, 2017
Facility relocation expense
Cash payments
Ending balance at March 31, 2018
Note 7. Long-term Debt
March 31,
2018
$ 673
842
(1,107)
$ 408
Long-term debt consists of the following (in thousands):
Line of credit (3.75% at March 31, 2018)
Term loan (3.69% at March 31, 2018)
Less: discount
Less: current portion
Long-term portion
March 31,
2018
$ 28,000
18,625
(365)
(1,625)
$ 44,635
March 31,
2017
$ 35,500
19,750
(450)
(1,125)
$ 53,675
On March 1, 2017, we entered into a five-year agreement (the “Credit Facility”) for an $80,000,000 revolving line of credit
(“Line of Credit”), a $20,000,000 term loan (“Term Loan”) and up to $2,500,000 of letters of credit with a banking syndicate
of four banks. In addition, the Credit Facility provides a post-closing accordion feature which allows for the Company to
request to increase the Line of Credit or Term Loan up to an additional $100,000,000. Funds from the Credit Facility may be
used to pay down its previous credit facility, finance working capital needs and for general corporate purposes in the ordinary
course of business (including, without limitation, permitted acquisitions).
Line of Credit and Term Loan indebtedness bears interest at either: (1) LIBOR, as defined, plus an applicable margin ranging
from 1.5% to 2.50%; or (2) the alternate base rate (“ABR”), which is the greater of JPMorgan’s prime rate or the federal funds
effective rate or the overnight bank funding rate plus 0.5%. We elect the interest rate with each borrowing under the line of
credit. In addition, there is an unused line fee of 0.15% to 0.35%. Letter of credit fees are based on the applicable LIBOR
rate.
The Term Loan requires 20 quarterly principal payments (the first due date was March 31, 2017) in the amount of $250,000
(increasing by $125,000 each year up to $750,000 in the fifth year). The remaining balance of principal and accrued interest
are due on March 1, 2022.
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 (the “Leverage Ratio”), as defined in the agreement, of less than 3.0 to 1.0, provided that, we may once during the
PAGE 52
term of the Credit Facility, in connection with a Permitted Acquisition for which the aggregate consideration paid or to be paid
in respect thereof equals or exceeds $20,000,000, elect to increase the maximum Leverage Ratio permitted hereunder to
(i) 3.50 to 1.00 for a period of four consecutive fiscal quarters commencing with the fiscal quarter in which such Permitted
Acquisition occurs (the “Initial Holiday Period”) and (ii) 3.25 to 1.00 for the period of four consecutive fiscal quarters
immediately following the Initial Holiday Period. The Credit Facility also requires us to maintain a minimum fixed charge
coverage ratio of less than 1.25 to 1.0. We were in compliance with the required covenants at March 31, 2018.
We incurred origination and debt issuance costs of $460,000 which are treated as a debt discount and are netted against
amounts outstanding on the consolidated balance sheets.
Future contractual maturities of debt as of March 31, 2018 are as follows (in thousands):
Year ending March 31,
2019
2020
2021
2022
$ 1,625,000
2,125,000
2,625,000
40,250,000
$ 46,625,000
Subsequent to March 31, 2018, we made $3,000,000 in payments under the Line of Credit.
Note 8. 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. There were no repurchases of our shares of common stock under
this plan during the years ended March 31, 2018, 2017 and 2016. As of March 31, 2018, 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 9. Employee Benefit Plans
2018
$ 0.16
0.16
0.16
0.16
Year Ended March 31,
2017
$ 0.16
0.16
0.16
0.16
2016
$ 0.16
0.16
0.16
0.16
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 100 percent of the employee’s
contributions up to four percent of the employee’s salary and those contributions are vested immediately. Prior to January 1,
2017, we matched 50 percent of the employee’s contribution up to six percent of the employee’s salary and those contributions
were vested immediately. We contributed $680,000, $501,000 and $387,000, respectively, to the plan for the years ended
March 31, 2018, 2017 and 2016.
PAGE 53
Note 10. Stock-Based Compensation
We adopted equity award plans, which are used to grant stock options and/or RSA’s 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. RSA’s vest ratably over terms of approximately five to seven years. All of our equity award
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, 2018, we
have 289,225 stock options outstanding and have issued 8,788 RSA’s 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, 2018, we have 169,133 stock options outstanding under the 2006 Plan. On February 27, 2013, we filed a
Registration Statement on Form S-8 whereby we registered the additional 400,000 shares of common stock underlying stock
options issuable under the 2006 Plan.
Amounts recognized in the consolidated financial statements related to stock-based compensation are as follows (in
thousands, except per share data):
Total cost of stock-based compensation
charged against earnings before income taxes
Amount of income tax benefit recognized in earnings
Amount charged (added) against (to) net (loss) income
Impact on net (loss) income per common share:
Basic
Diluted
Year Ended March 31,
2017
2018
2016
$ 1,672
1,194
$ 478
$ 1,411
1,737
$ (326)
$ 1,327
794
$ 533
$ 0.13
0.13
$ (0.09)
(0.08)
$ 0.15
0.14
Stock-based compensation expense is included in cost of revenues, selling and general and administrative expense in the
accompanying consolidated statements of operations.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model (“Black-
Scholes”) that uses assumptions noted in the following table. We use historical data to estimate the expected price volatility, the
expected stock option life and expected forfeiture rate. The risk-free rate is based on the United States Treasury yield curve in
effect at the time of grant for the estimated life of the stock option. The dividend yield is calculated based upon the dividend
payments made during the prior four quarters as a percent of the average stock price for that period.
Volatility
Risk-free interest rate
Expected option life (years)
Dividend yield
2018
32.85%-35.44%
1.77%
6
. 57%
Year Ended March 31,
2017
32.05%-33.76%
1.22%
5
.55%
2016
27.1%-30.2%
1.09%
8
.70%
PAGE 54
A summary of the option activity as of and for the years ended March 31, 2018, 2017 and 2016 is as follows:
Outstanding at March 31, 2015
Granted
Forfeited
Expired
Exercised
Outstanding at March 31, 2016
Granted
Forfeited
Expired
Exercised
Outstanding at March 31, 2017
Granted
Forfeited
Expired
Exercised
Outstanding at March 31, 2018
Exercisable at March 31,
2018
2017
2016
Number of
Shares
437,248
184,030
(16,334)
--
(89,224)
515,720
134,955
(35,015)
(904)
(104,395)
510,361
96,330
(72,166)
(1,024)
(75,143)
458,358
143,836
136,595
157,457
Weighted-
Average
Exercise
Price
$ 55.81
72.89
75.16
--
38.28
64.32
102.52
87.5
41.51
50.12
75.78
123.13
90.07
82.24
57.99
86.38
Weighted-
Average
Remaining
Contractual
Term
4.9
6.7
6.5
--
--
5.2
5.5
4.5
--
--
5.0
5.0
4.2
--
--
4.5
$ 62.96
50.61
42.49
4.0
3.9
3.6
Aggregate
Intrinsic
Value
(000s)
$ 9,445
--
--
--
--
16,561
--
--
--
--
23,956
--
--
--
--
28,445
$ 12,295
9,847
8,481
A summary of the status of our unvested option shares as of and for the years ended March 31, 2018, 2017 and 2016 is as
follows:
Unvested at March 31, 2015
Options granted
Options forfeited
Options vested
Unvested at March 31, 2016
Options granted
Options forfeited
Options vested
Unvested at March 31, 2017
Options granted
Options forfeited
Options vested
Unvested at March 31, 2018
Unvested Shares
274,038
184,030
(16,334)
(83,471)
358,263
134,955
(35,015)
(84,437)
373,766
96,330
(72,166)
(83,408)
314,522
Weighted-average
Grant-Date Fair Value
$ 18.42
18.78
19.07
14.65
19.46
31.27
22.64
16.96
22.49
39.06
28.43
21.84
29.01
The total intrinsic value of options exercised was $6,309,000, $7,574,000 and $5,260,000 for the years ended March 31, 2018,
2017 and 2016, respectively. As of March 31, 2018, there was $5,958,000 and $963,000 of total unrecognized compensation
expense related to unvested options and RSA’s, respectively. As of March 31, 2018, we have 767,888 shares available for
future option or RSA grants.
PAGE 55
Note 11. Income Taxes
Earnings before income taxes are as follows (in thousands):
Domestic
Foreign
Total earnings before income taxes
2018
$ 12,708
(12,407)
$ 301
Year Ended March 31,
2017
$ 12,913
1,383
$ 14,296
2016
$ 14,427
1,128
$ 15,555
The components of our provision for income taxes are as follows (in thousands):
Current tax provision
Federal
State
Foreign
Total current tax expense
Deferred tax provision:
Federal
State
Foreign
Total deferred tax expense
Total income tax expense
Year Ended March 31,
2017
2018
2016
$ 3,732
715
1,299
5,746
(1,589)
(216)
(678)
(2,483)
$ 3,263
$ 2,282
510
849
3,641
(126)
(32)
(370)
(528)
$ 3,113
$ 3,666
627
658
4,951
(189)
(138)
(238)
(565)
$ 4,386
The components of net deferred tax assets and liabilities are as follows (in thousands):
March 31,
2018
2017
Current deferred tax assets:
Accrued employee-related expenses
Allowances and reserves
Stock compensation deductible differences
Inventories
Currency translation adjustment
Net operating loss
Foreign tax credit
Other
Total current deferred tax assets
$ 277
101
779
1,388
51
90
100
--
2,786
Long-term deferred tax liabilities:
Property, plant and equipment
Goodwill and intangible assets
Currency translation adjustment
Other
Total long-term deferred tax liabilities
Valuation allowance
(1,236)
(3,940)
--
(4)
(5,180)
(100)
$ 242
132
898
691
--
--
--
9
1,972
(1,635)
(3,807)
(3)
(81)
(5,526)
--
Net deferred tax liability
$ (2,494)
$ (3,554)
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
Tax Cuts and Jobs Act
Impairment of non-deductible goodwill
Other
Total income tax expense
2018
$ 93
328
(1,087)
(381)
(162)
(59)
4,257
274
$ 3,263
Year Ended March 31,
2017
$ 4,861
302
(1,576)
(304)
(385)
--
--
215
$ 3,113
2016
$ 5,445
293
(751)
(440)
(345)
--
--
184
$ 4,386
On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was enacted in the U.S., making significant changes to U.S.
tax law. The TCJA reduces the U.S. federal corporate income tax rate from 34 percent to 21 percent, requires companies to
pay a one-time transition tax on certain un-remitted earnings of foreign subsidiaries that were previously tax deferred,
generally eliminates U.S. federal income tax on dividends from foreign subsidiaries, creates new taxes on certain foreign-
sourced earnings, repeals the Section 199 deduction and imposes limitations on executive compensation under
Section 162(m). During the year ended March 31, 2018, we revised our estimated annual effective tax rate to reflect the
change in the federal statutory rate. The rate change results in the Company using a blended statutory rate for the annual
period of 30.8 percent.
Shortly thereafter, the SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the TCJA
for which the accounting under ASC 740 is incomplete. To the extent that a company's accounting for certain income tax
effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in
the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it
should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before
enactment of the TCJA.
Accordingly, as of March 31, 2018, we have not completed our accounting for the tax effects of the TCJA. However, we
made a reasonable estimate of the one-time transition tax and recognized a provisional tax liability of $220,000. We also
re-measured the applicable deferred tax assets and liabilities based on the rates at which they are expected to reverse.
However, we are still analyzing certain aspects of the TCJA and refining our calculations, which could potentially affect
the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded
related to the re-measurement of our deferred tax balance was a benefit of $279,000. Overall, the TCJA resulted in a net
tax benefit of $59,000. Such amount was recorded as a tax benefit and is included as a component of income tax expense in
the accompanying condensed consolidated statements of operations for the year ending March 31, 2018.
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 2014, state tax returns after 2013 and foreign tax returns after 2013 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, 2018, the gross amount of unrecognized tax benefits was $827,000. There would have been no material impact
on our effective tax rate for the year ended March 31, 2018 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 $24,000, $17,000 and $3,000 as of March 31, 2018, 2017 and
2016, respectively.
PAGE 57
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,
2017
$ 221
110
$ 331
2018
$ 331
496
$ 827
2016
$ --
221
$ 221
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 operations or consolidated balance sheets. At this time,
we expect resolution of the uncertain tax position within 12 months.
As of March 31, 2018, undistributed earnings of our foreign subsidiaries amounted to $3,724,450. Those earnings are
considered 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, 2018, we had $272,000 of net operating losses for foreign tax purposes. The foreign net operating losses do
not expire. In addition, we had $100,000 of foreign tax credit carryovers which will expire in the tax year 2028.
Note 12. Net (Loss) Income Per Share
Basic net (loss) income per share is computed by dividing net income by the weighted-average number of common shares
outstanding during the reporting period. Diluted net (loss) income per share is computed similarly to basic net (loss) income per
share, except that it includes the potential dilution that could occur if dilutive securities were exercised.
The following table presents a reconciliation of the denominators used in the computation of net (loss) income per share -
basic and diluted (in thousands, except share data):
Net (loss) income available for shareholders
Weighted average outstanding shares of common stock
Dilutive effect of stock options
Common stock and equivalents
Net (loss) income per share:
Basic
Diluted
2018
$ (2,962)
Year Ended March 31,
2017
$ 11,183
2016
$ 11,169
3,770
--
3,770
$ (0.79)
(0.79)
3,679
165
3,844
$ 3.04
2.91
3,605
152
3,757
$ 3.10
2.97
For the years ended March 31, 2018, 2017 and 2016, 106,000, 110,000 and 137,000 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.
Additionally, as a result of generating a net loss for the year ended March 31, 2018, 352,358 additional outstanding stock
options were excluded from the calculation of diluted earnings per share.
PAGE 58
Note 13. Commitments and Contingencies
In February 2018, we were sued in a putative civil class action in the United States District Court for the Northern District
of Illinois, Eastern Division whereby it was alleged that we sent unsolicited advertisements to telephone facsimile
machines in violation of the Telephone Consumer Protection Act (“TCPA”), as well as analogous state statutes and state
consumer protection laws. The plaintiff in this lawsuit is seeking various forms of relief, including statutory damages of
$500 for each violation of the TCPA or, in the alternative, treble damages of up to $1,500 for each knowing and willful
violation of the TCPA, as well as payment of interest, attorneys’ fees and costs, and certain injunctive relief prohibiting the
further transmission of unsolicited fax advertising in the future. We intend to vigorously defend this case however we
cannot predict with any degree of certainty the outcome of the lawsuit or determine the extent of any potential liability or
damages.
Under the terms of the PCD Agreement, we were required to pay contingent consideration if the cumulative revenues for
our process challenge device business for the three years subsequent to the acquisition met certain levels. The potential
consideration payable ranged from $0 to $1,500,000 and was based upon a sliding scale of three-year cumulative revenues
between $9,900,000 and $12,600,000, with payments made annually. Based upon both historical and projected growth
rates, we initially recorded $300,000 of contingent consideration payable which represented our best estimate of the
amount that would ultimately be paid. We paid $150,000 of the contingent consideration during the year ended March 31,
2016 (based upon the then current run rate projected over the entire three-year contingent consideration period).
Since the initial payment, the revenues for these products significantly increased and as a result, during the year ended
March 31, 2017 we recorded an additional $450,000 accrual (which was paid in our third quarter ending December 31,
2016). During the year ended March 31, 2018, process challenge device (“PCD”) product revenues continued to increase
which resulted in an additional $300,000 accrual, which is included in other income, net in the accompanying consolidated
statement of operations for the year ended March 31, 2018. We paid the remaining contingent consideration due of
$450,000 in November 2017.
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. Under the terms of the Acquisition Agreement (the “Amega
Agreement”), we were required to pay contingent consideration (the “Amega Earn-Out”) if the cumulative revenues for our
Cold Chain 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
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 operations for the year ended March 31, 2016.
PAGE 59
Note 14. Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in each component of accumulated other comprehensive income (loss) (“AOCI”),
net of tax (in thousands):
Balance at March 31, 2016
Unrealized losses arising during the year
Balance at March 31, 2017
Unrealized gains arising during the year
Balance at March 31, 2018
Note 15. Segment Data
Foreign
Currency
Translation
$ (1,151)
(609)
(1,760)
2,324
$ 564
AOCI
$ (1,151)
(609)
(1,760)
2,324
$ 564
We have four operating segments: Sterilization and Disinfection Control (formerly named Biological Indicators),
Instruments, Cold Chain Monitoring and Cold Chain Packaging. The following tables set forth our segment information
(in thousands):
Year Ended March 31, 2018
Sterilization
and
Disinfection
Control
$ 43,260
Instruments
$ 34,104
Cold Chain
Monitoring
$ 12,978
Cold Chain
Packaging
Total
$ 5,837
$ 96,179
$ 29,333
$ 20,395
$ 3,854
$ 1,037
54,619
(54,318)
$ 301
Year Ended March 31, 2017
Sterilization
and
Disinfection
Control
$ 38,635
Instruments
$ 34,405
Cold Chain
Monitoring
$ 12,584
Cold Chain
Packaging
Total
$ 8,041
$ 93,665
$ 25,674
$ 21,037
$ 4,557
$ 1,971
53,239
(38,943)
$ 14,296
Revenues
Gross profit
Reconciling items (1)
Earnings before income taxes
Revenues
Gross profit
Reconciling items (1)
Earnings before income taxes
PAGE 60
Sterilization
and
Disinfection
Control
$ 33,649
Revenues
Instruments
$ 35,692
Cold Chain
Monitoring
$ 11,566
Cold Chain
Packaging
Total
$ 3,752
$ 84,659
Year Ended March 31, 2016
$ 22,205
Gross profit
Reconciling items (1)
Earnings before income taxes
(1) Reconciling items include selling, general and administrative, research and development, impairment of goodwill and other
expenses.
$ 4,201
$ 1,784
$ 23,223
51,413
(35,858)
$ 15,555
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,
2017
2018
2016
$ 56,998
39,181
$ 96,179
$ 52,989
40,676
$ 93,665
$ 53,094
31,565
$ 84,659
Total assets
Sterilization and Disinfection Control
Instruments
Cold Chain Monitoring
Cold Chain Packaging
Corporate and administrative
March 31,
2018
2017
$ 83,452 $ 67,233
33,479
30,796
7,091
9,283
$ 164,101
40,805
35,789
20,313
7,593
$ 171,733
All long-lived assets are located in the United States except for $6,765,000, $7,079,000 and $17,068,000 which are associated
with our French, Canadian and German subsidiaries, respectively.
Note 16. Quarterly Results (unaudited)
Quarterly financial information for the years ended March 31, 2017, 2016 and 2015 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):
2018
Revenues
Gross profit
Net income (loss)
Net income (loss) per share – basic
Net income (loss) per share – diluted
First
Quarter
Second
Quarter
$ 22,673
12,671
1,517
$ 0.41
0.39
$ 22,954
13,233
2,353
$ 0.63
0.60
Third
Quarter
$ 23,671
12,681
(11,086)
$ (2.93)
(2.93)
Fourth
Quarter
$ 26,881
16,034
4,254
$ 1.12
1.08
PAGE 61
2017
Revenues
Gross profit
Net income
Net income per share – basic
Net income per share – diluted
2016
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
$ 21,114
12,014
1,930
$ 0.53
0.51
$ 24,409
13,724
2,358
$ 0.64
0.62
$ 23,843
13,537
3,252
$ 0.88
0.84
Fourth
Quarter
$ 24,299
13,964
3,643
$ 0.98
0.94
First
Quarter
Second
Quarter
Third
Quarter
Fourth
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
$ 24,812
14,996
3,991
$ 1.10
1.06
In April 2018, our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on June
15, 2018, to shareholders of record at the close of business on May 31, 2018.
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, 2018. Based on that evaluation, our
management concluded that our disclosure controls and procedures were effective at March 31, 2018.
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, 2018. Based on that evaluation, our
management concluded that our internal control over financial reporting was effective at March 31, 2018. As allowed, this
evaluation excludes the operations of acquired entities during the year ended March 31, 2018 due to the timing of the
acquisitions. Revenues related to these acquisitions were three percent of total revenues for the year ended March 31,
2018.
PAGE 62
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
consolidated financial statements of Mesa Laboratories, Inc. and our internal control over financial reporting as of March
31, 2018. The attestation report of our registered public accounting firm is 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, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PAGE 63
Mesa Laboratories, Inc.
Gary M. Owens
Chief Executive Officer,
President and Director
John V. Sakys
Chief Financial Officer
Corporate Offices
12100 West Sixth Avenue
Lakewood, CO 80228
(303) 987-8000
Butler Operations
10 Park Place
Butler, NJ 07405
Bozeman Operations
625 Zoot Way
Bozeman, MT 59718
Traverse City Operations
13606 S. West Bay Shore Dr.
Traverse City, MI 49684
Mesa France
2 rue Augustin Fresnel
69684 CHASSIEU Cedex
France
Mesa Canada
3075 14th Ave. Suite #1
Markham, Ontario
L3R 0G9 Canada
Mesa Germany
Sigmund-Riefler-Bogen 19
81829 Munich, Germany
Directors
John J. Sullivan, Ph.D.
Chairman of the Board
H. Stuart Campbell
Chairman, Nominating and
Governance Committee and
Lead Independent Director
Gary M. Owens
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
www.mesalabs.com
shares traded on the NASDAQ under the symbol MLAB