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MLAB > SEC Filings for MLAB > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for MESA LABORATORIES INC /CO | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for MESA LABORATORIES INC /CO


13-Nov-2012

Quarterly Report


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

Forward Looking Statements

This report contains information that may constitute "forward-looking statements." Generally, the words "believe," "expect," "intend," "estimate," "anticipate," "project," "will" and similar expressions identify forward-looking statements, which generally are not historical in nature. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future - including statements relating to revenue growth and statements expressing general views about future operating results - are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part II, "Item 1A. Risk Factors" and elsewhere in this report and in our Annual Report on Form 10-K for the year ended March 31, 2012, and those described from time to time in our subsequent reports filed with the Securities and Exchange Commission.

General Discussion

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

Our revenues come from two main sources - products sales, and parts and services. Product sales are dependent on several factors, including general economic conditions, both domestic and international, customer capital spending trends, competition, introduction of new products and acquisitions. Biological indicator products are disposable and are used on a routine basis for quality control, thus product sales are less sensitive to general economic conditions. Instrument products have a longer life, and their purchase by our customers is somewhat discretionary, so sales are more sensitive to general economic conditions. Parts and service demand is driven by our customers' quality control and regulatory environments, which require periodic repair and recalibration or certification of our instrument products. We typically evaluate costs and pricing annually. Our policy is to price our products competitively and, where possible, we try to pass along cost increases in order to maintain our margins. As part of the integration of our previous 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. Historically, as we have integrated our acquisitions and taken advantage of manufacturing efficiencies, our gross margins for some of the products have improved. There are, however differences in gross margins between different product lines, and ultimately the mix of sales between different segments may continue to impact our overall gross margin.

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

In May 2012, we completed the Bios Acquisition by acquiring specific assets and assuming certain liabilities of Bios, a New Jersey corporation. The purchase price for the acquired net assets was $16,660,000 and potential contingent consideration based on revenue growth over a three year earn-out period. The contingent consideration arrangement requires us to pay Bios if cumulative revenues related to the acquisition for the three years subsequent to the acquisition exceed $22,127,000. The potential undiscounted future payment that we could be required to make ranges from $0 to $6,710,000. We borrowed $11,000,000 under our Line of Credit to finance the acquisition, with the balance being paid from available cash.

Our New Jersey operations were not significantly impacted by Hurricane Sandy.


Table of Contents

Results of Operations

The following table sets forth, for the periods indicated, condensed statements of income data. The table and the discussion below should be read in conjunction with the accompanying condensed financial statements and the notes thereto appearing elsewhere in this report (in thousands, except percent data):

                        Three months ended September 30,                  Percent
                            2012                  2011         Change     Change
Revenues             $           11,706     $          9,701   $ 2,005         21 %
Cost of revenues                  4,458                3,927       531         14 %
Gross profit                      7,248                5,774     1,474         26 %
Gross margin                         62 %                 60 %       2 %

Operating expenses                3,760                2,488     1,272         51 %

Net income                        2,248                2,053       195          9 %
Net profit margin                    19 %                 21 %      (2 )%




                           Six months ended September 30,               Percent
(Dollars in thousands)        2012               2011         Change    Change
Revenues                 $        22,266    $        18,998   $ 3,268        17 %
Cost of revenues                   8,562              7,836       726         9 %
Gross profit                      13,704             11,162     2,542        23 %
Gross margin                          62 %               59 %       3 %

Operating expenses                 6,996              5,183     1,813        35 %

Net income                         4,348              3,733       615        16 %
Net profit margin                     20 %               20 %       0 %

Revenues



The following table summarizes our revenues by source (in thousands, except
percent data):



                                    Three months ended
                                      September 30,                   Percent
                                     2012         2011      Change    Change
Biological Indicators - Product   $     5,320    $ 5,190   $    130         3 %
Instruments:
Product                                 4,474      2,780      1,694        61 %
Parts and disposables                     736        804        (68 )      (8 )%
Service                                 1,176        927        249        27 %
Total Instruments                       6,386      4,511      1,875        42 %
                                  $    11,706    $ 9,701      2,005        21 %




                                    Six months ended
                                     September 30,                  Percent
                                    2012        2011      Change    Change
Biological Indicators - Product   $  10,438   $  9,859   $    579         6 %
Instruments:
Product                               8,083      5,778      2,305        40 %
Parts and disposables                 1,492      1,502        (10 )      (1 )%
Service                               2,253      1,859        394        21 %
Total Instruments                    11,828      9,139      2,689        29 %
                                  $  22,266   $ 18,998      3,268        17 %


Table of Contents

Instruments revenues increased for the three and six months ended September 30, 2012 primarily due to the Bios Acquisition in May 2012. Biological indicator product sales and other Instruments revenues showed modest growth due to continued organic growth, achieved through existing customers and expansion into new markets.

Cost of Revenues / Gross Profit

Biological indicator gross profit increased approximately $150,000 and $740,000, respectively, for the three and six months ended September 30, 2012, compared to the prior year, due to improved manufacturing efficiencies and higher sales.

Gross profit for Instruments increased approximately $1,320,000 and $1,800,000, respectively, for the three and six months ended September 30, 2012, compared to the prior year, primarily due to the Bios Acquisition. Gross profit for other Instruments product lines was relatively unchanged.

Operating Expenses

Selling expenses increased approximately $34,000 and $97,000, respectively, for the three and six months ended September 30, 2012, compared to the prior year. The Bios Acquisition resulted in an increase of our selling costs which was primarily offset with cost savings elsewhere. As a percent of revenues, selling expense remained relatively flat.

General and administrative expense increased approximately $1,025,000 and $1,531,000, respectively, for the three and six months ended September 30, 2012, compared to the prior year. The increases relate primarily to a) additional amortization of approximately $290,000 and $490,000, respectively, from the Bios Acquisition and the amortization of trademarks, which started in the fourth quarter of our year ending March 31, 2012; b) general administrative expenses from the Bios Acquisition; c) increased labor costs for additional personnel and salary adjustments, d) professional fees of approximately $80,000 and $150,000, respectively, associated with the Bios Acquisition; and e) consulting fees of approximately $110,000 and $140,000, respectively, related to upgrading our ERP system and implementing system-oriented controls as part of our Sarbanes-Oxley compliance efforts.

Research and development expense increased approximately $213,000 and $185,000, respectively, for the three and six months ended September 30, 2012, compared to the prior year. The increases are due to additional internal personnel added as a result of the Bios Acquisition and external R&D consulting. We continue our commitment to research and development, however, the cost of intangible assets that are purchased from others for use in research and development activities and have alternative future uses are capitalized and amortized over their expected useful life. During the year ended March 31, 2012, we funded certain Biological Indicator research which was capitalized as an intangible asset as it had alternative future uses. That project is ongoing during our year ending March 31, 2013.

Net Income

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


Table of Contents

Liquidity and Capital Resources

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

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

Working capital is the amount by which current assets exceed current liabilities. We had working capital of approximately $13,371,000 and $14,899,000, respectively, at September 30 and March 31, 2012. The decrease in working capital is due to the use of cash for the Bios Acquisition and repayment of long-term debt, partially offset by higher revenues and net income which generated increased cash flow.

In February 2012, we entered into the Credit Facility, which is comprised of a three year agreement for a $20,000,000 revolving line of credit and up to $1,000,000 of letters of credit. Funds from the Credit Facility may be used for general working capital and corporate needs, retiring existing debt, or to support acquisitions and capital expenditures. In February 2012, we also extinguished our obligations under our previous debt agreement. In May 2012, we borrowed $11,000,000 against the Line of Credit to partially finance the Bios Acquisition. At September 30, 2012, we had unused capacity under our Line of Credit of $12,000,000. In October 2012 we made an additional principal payment of $1,500,000.

On October 1, 2012, we amended our articles of incorporation to increase the number of authorized shares of common stock from 8 million to 25 million.

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

On November 7, 2005, our Board of Directors authorized a program to repurchase up to 300,000 shares of our outstanding common stock. Under the plan, the shares may be purchased from time to time in the open market at prevailing prices or in negotiated transactions off the market. Shares purchased 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. We have purchased 156,412 shares of common stock under this program from inception through September 30, 2012.

On November 12, 2003, our Board of Directors instituted a policy of paying regular quarterly dividends. Dividends per share paid by quarter were as follows:

Year ending March 31,

                    2013           2012
First quarter    $      0.13    $      0.12
Second quarter          0.13           0.12
Third quarter              -           0.13
Fourth quarter             -           0.13

In November, 2012, our Board of Directors declared a quarterly cash dividend of $0.14 per share of common stock, payable on December 14, 2012, to shareholders of record at the close of business on November 30, 2012.


Table of Contents

Cash Flows



Our cash flows from operating, investing and financing activities were as
follows (in thousands):



                                               Six months ended September 30,
                                                  2012                 2011
Net cash provided by operating
activities                                  $          4,926     $          4,605
Net cash used in investing activities                (17,030 )               (343 )
Net cash provided by (used in) financing
activities                                             7,685               (2,856 )

Net cash provided by operating activities changed primarily due to increased revenues and improved net income, as well as management of working capital.

Net cash used in investing activities was driven by a $16,660,000 acquisition in May 2012. Purchases of property, plant and equipment were $370,000 and $343,000, respectively, for the six months ended September 30, 2012 and 2011.

Financing activity for the six months ended September 30, 2012, included borrowing under our Line of Credit of $11,000,000, proceeds from the exercise of stock options of $613,000, partially offset by payments on long-term debt of $3,000,000 and the payment of dividends of $871,000. Activity for the six months ended September 30, 2011, included repayment of debt of $2,500,000, payment of dividends of $788,000, partially offset by proceeds from the exercise of stock options of $512,000.

At September 30, 2012, 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, we entered into a license agreement for certain biological indicator technology and up to $225,000 of additional payments may be made in the future, depending on meeting certain development and performance milestones. As part of our Bios Acquisition, the Bios Agreement includes a provision for contingent consideration based on revenue growth over a three year earn-out period. The contingent consideration arrangement requires us to pay Bios if cumulative revenues from the acquisition for the three years subsequent to the acquisition exceed $22,127,000. The potential undiscounted future payment that we could be required to make ranges from $0 to $6,710,000.

Critical Accounting Estimates

Our condensed financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates used to prepare the condensed financial statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for the year ended March 31, 2012 in the Critical Accounting Policies and Estimates section of Management's Discussion and Analysis of Financial Condition and Results of Operations.

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