Mesa Laboratories - 10-Q quarterly report FY2012 Q3

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MESA LABORATORIES, INC.

CONDENSED BALANCE SHEETS

(Dollars in Thousands)

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MESA LABORATORIES, INC.

CONDENSED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands except earnings per share)

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MESA LABORATORIES, INC.

CONDENSED STATEMENTS OF INCOME

(Unaudited)

 (Dollars in thousands except earnings per share)

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MESA LABORATORIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited))

(Dollars in Thousands)

Supplemental disclosure of non-cash activity:

In December 2011, we settled the $600 holdback amount from our acquisition of the assets of Apex Laboratories by paying $562 and returning $38 of accounts receivable.

The Company issued employee loans totaling $235 and $394 for the exercise of stock options during the nine month periods ended December 31, 2011 and 2010, respectively. Loans of $301 were retired in the nine month periods ended December 31, 2011.

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Revenues from external customers are attributed to individual countries based upon locations to which the product is shipped or exported, as follows:

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

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Mesa Laboratories, Inc. has two segments — Our Instrument Division manufactures and markets quality control instruments and disposable products utilized in connection with the healthcare, pharmaceutical, food and beverage, medical device, and petrochemical industries.  Our Biological Indicators Division manufactures and markets biological indicators and distributes chemical indicators used to assess the effectiveness of sterilization processes in the hospital, dental, medical device and pharmaceutical industries.  Our Company follows a philosophy of manufacturing a high quality product and providing a high level of on-going service for those products.

Our revenues come from two main sources — products sales, and parts and services.  Product sales are dependent on several factors, including general economic conditions, both domestic and international, customer capital spending trends, competition, introduction of new products, and acquisitions.  Biological indicator products are disposable and are used on a routine basis for quality control, thus product sales are less sensitive to general economic conditions.  Instrumentation products have a longer life, and their purchase by our customers is somewhat discretionary, so sales are more sensitive to general economic conditions.  Parts and service demand is driven by our customers’ quality control and regulatory environments, which require periodic repair and recalibration or certification of our instrumentation products.  We typically evaluate costs and pricing annually.  Our policy is to price our products competitively and, where possible, we try to pass along cost increases in order to maintain our margins, where possible.  As part of the integration of our biological indicator acquisitions we have been adjusting prices to achieve price parity for similar products.

Gross profit is affected by our product mix, manufacturing efficiencies and price competition.  The biological indicator market is more competitive than that for our instrumentation products, thus the gross margin percentages are lower.  Generally, an increase in biological indicator product sales compared to instrumentation product sales would result in a lower overall gross margin.  Cost of revenue and gross profit also include an allocation of the amortization of acquired intangibles, which mostly affect the biological indicator results.

Selling expense is driven primarily by labor costs, including salaries and commissions.  Accordingly, they may vary with sales levels.  Labor costs and amortization of intangible assets drive 70-80% of general and administrative expense.  Research and development expense is predominantly comprised of labor costs.

Discussion of Key Indicators and Trends

Acquisitions in December 2010, April 2010 and December 2009, impacted our current assets and working capital, as we used available cash and incurred debt to complete those transactions.  During the nine months ended December 31, 2010, we were still integrating these acquisitions, which impacted the key indicators.  The results for the nine months ended December 31, 2011, reflect our successful integration of these acquisitions - performance ratios (gross margin, operating margin and net profit margin) are at or near the same levels as 2009 and 2008.  Revenues, gross profit and net income have all increased due to having a full nine months of operations from the acquisitions, successfully integrating the acquisitions, and organic growth.  The decrease in revenues and profit indicators in 2009 was primarily attributable to poor general economic conditions.

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Earnings before income tax, depreciation and amortization should not be considered an alternative to, or more meaningful than, net income, operating income, cash flow from operating activities or any other measure of financial performance presented in accordance with GAAP as measures of operating performance or liquidity.

The following table sets forth our reconciliation of Earnings before income tax, depreciation and amortization, a non-GAAP measure:

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RESULTS OF OPERATIONS

Revenues

The following table summarizes our revenues by source:

Biological indicator product sales increased approximately $917,000 and $3,190,000, respectively, for the three and nine month periods ended December 31, 2011, compared to the prior year.  An asset acquisition in December 2010, contributed approximately $610,000 and $1,780,000, respectively, to the three and nine month revenue growth.  The remaining revenue growth was driven by organic growth.

Instrumentation revenues increased approximately $690,000 and $1,390,000, respectively, for the three and nine month periods ended December 31, 2011, compared to the prior year.  $200,000 of the increase related to sales to a single customer, while the rest of the increase is due to customers upgrading or expanding as economic uncertainties lessened.

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Cost of Revenues / Gross Profit

Gross profit for instrumentation increased approximately $970,000 and $1,890,000, respectively, for the three and nine month periods ended December 31, 2011, compared to the prior year.  These improvements were driven by relatively flat fixed costs with increased sales volumes, coupled with manufacturing efficiencies.  We also integrated manufacturing one product line from a third party to our facility in December 2010, which contributed an additional gross profit of approximately $285,000 and $450,000, respectively, for the three and nine month periods.

Biological indicator gross profit increased approximately $470,000 and $1,780,000, respectively, for the three and nine month periods ended December 31, 2011, compared to the prior year.  This increase was due almost entirely to revenue growth, as gross margin percentage remained relatively consistent between periods.

Operating Expenses

Selling expenses increased approximately $50,000 and $295,000, respectively, for the three and nine month periods ended December 31, 2011, compared to the prior year.  Selling expenses for biological indicator products decreased during the three months, due primarily to successfully integrating the SGM Biotech acquisition.  Biological indicator selling expense was higher, however, for the nine month period.  As a percent of sales, biological indicator selling expense decreased for both the three and nine month periods.  Instrumentation selling expense as a percent of sales remained relatively flat, but increased overall for both periods due to higher commissions and adding individuals to the sales force.

General and administrative expense increased approximately $290,000 and $680,000, respectively, for the three and nine month periods ended December 31, 2011, compared to the prior year.  The increase for the three month period relates primarily to a $250,000 contingent liability for estimated state sales taxes, along with increased labor costs.  The increase for the nine month period includes the estimated state sales tax liability, as well as approximately $260,000 in labor costs for additional personnel and salary adjustments.  Amortization of intangible assets increased approximately $66,000 and $300,000, respectively, for the three and nine month periods.  These increases were offset by non-recurring costs associated with acquisitions in the prior year.

Research and development expense decreased approximately $50,000 for the three months, and increased approximately $100,000 for the nine month periods ended December 31, 2011, compared to the prior year.  These changes were primarily due to the timing of work performed by third parties.

Net Income

Net income varied consistently with the growth in revenues and gross profit, as we managed our other expenses and income tax expense increased commensurate with our growth in profitability.

Liquidity and Capital Resources

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

Our Company invests its surplus capital in various interest bearing instruments, including money market funds.  All investments are fixed dollar investments with variable rates in order to minimize the risk of principal loss.

In April 2010, we entered into a $7,000,000 debt agreement to partially finance our acquisition of SGM Biotech.  The $3,000,000 reducing line of credit portion has $1,750,000 outstanding at December 31, 2011, payable in quarterly installments of $250,000, plus interest.  The $4,000,000 revolving line of credit portion was retired in December 2011.

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

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

On November 12, 2003 our Board of Directors instituted a policy of paying regular quarterly dividends.  We paid dividends of approximately $1,200,000 and $1,100,000, respectively, during the nine month periods ended December 31, 2011 and 2010.  Dividends per share paid by quarter were as follows:

On February 8, 2012, the Company’s Board of Directors declared a quarterly cash dividend of $0.13 per share of common stock, payable on March 15, 2012, to shareholders of record at the close of business on February 27, 2012.

Working capital is the amount by which current assets exceed current liabilities.  We had working capital of approximately $12,800,000 and $5,700,000, respectively, at December 31, 2011, and March 31, 2011.  The increase is principally driven by increased revenues and the resulting increase in cash flows from operations, offset by debt payments of $4,750,000 and dividends of approximately $1,200,000.

At December 31, 2011 we had contractual obligations for open purchase orders for routine purchases of supplies and inventory, which would be payable in less than one year.  In September 2011, the Company entered into a license agreement for certain biological indicator technology.  Under the terms of this agreement, in October 2011 the Company made an initial payment of $150,000 for rights to the technology.  An additional payment of $25,000 is due by the end of January 2012, and up to $225,000 of additional payments may be made in the future, depending on meeting certain development and performance milestones.  The initial $150,000 payment is being amortized over ten years.  In addition, sales of products covered by this license agreement will be subject to royalty payments.

Forward Looking Statements

All statements other than statements of historical fact included in this quarterly report regarding our Company’s financial position and operating and strategic initiatives and addressing industry developments are forward-looking statements.  Where, in any forward-looking statement, the Company, or its management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished.  Factors which could cause actual results to differ materially from those anticipated, include but are not limited to general economic, financial and business conditions; competition in the data logging market; competition in the kidney dialysis market; competition in the fluid measurement market; competition in the biological indicator market; competition in the bottlecap torque testing market; the business abilities and judgment of personnel; the impacts of unusual items resulting from ongoing evaluations of business strategies; and changes in business strategy.  We do not intend to update these forward looking statements.  You are advised to review Item 1A. “Risk Factors” provided in our Company’s most recent Form 10-K filing with the SEC for more information about risks that could affect the financial results of Mesa Laboratories, Inc.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to a variety of market risks, currently all investments are in dollar denominated accounts, such as money market funds, with variable interest rates. In the normal course of business, we employ established policies and procedures to manage our exposure to changes in the market value of our investments.

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ITEM 4T.  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 Chief Executive and Chief 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 the design and operation of our disclosure controls and procedures as of the end of the period covered in this quarterly report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of such period to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that material information relating to our company is made known to management, including our Chief Executive Officer and Chief Financial Officer, particularly during the period when our periodic reports are being prepared.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during our third quarter ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

We are affected by risks specific to us as well as factors that affect all businesses operating in a global market.  The significant factors known to us that could materially adversely affect our business, financial condition or operating results are described in our annual report on Form 10-K for the fiscal year ended March 31, 2011 under the heading “Part I — Item 1A. Risk Factors.”  There has been no material change in those risk factors.

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SIGNATURES

MESA LABORATORIES, INC.

DECEMBER 31, 2011

Pursuant to the requirements of the Securities Exchange Act of 1934, the Issuer has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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