10-K 1 mlab20160331_10k.htm FORM 10-K mesa20160331_10k.htm

 

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


  

FORM 10-K

 

(Mark one)

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE ACT OF 1934

 

For the fiscal year ended March 31, 2016

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE ACT OF 1934     

 

For the transition period from ____ to ____

 

Commission File No: 0-11740

 


 

MESA LABORATORIES, INC.

(Exact name of registrant as specified in its charter)

 

 

Colorado

84-0872291

(State or other jurisdiction of

(I.R.S. Employer

Incorporation or organization)

Identification number)

 

12100 West Sixth Avenue

 

Lakewood, Colorado

80228

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (303) 987-8000

 

Securities registered under Section 12(b) of the Act:

 

 

Title of each class

 

Name of each exchange on which registered

Common Stock, no par value

 

NASDAQ

 

 

Securities registered under Section 12(g) of the Act: None

 

 
 

 

  

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES ☐   NO

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

YES ☐   NO

 

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

YES ☒   NO

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of the chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒   NO

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. ☒

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

 

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☐

   

(Do not check if a

smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ☐   NO

 

The aggregate market value as of September 30, 2015 (the last business day of the registrant's most recently completed second fiscal quarter), of the voting and non-voting common equity of Mesa Laboratories Inc. held by non-affiliates (assuming, for this purpose, that all directors, officers and owners of 5% or more of the registrant’s common stock are deemed affiliates) computed by reference to the price at which the common equity was last sold ($111.04 per share) was $240,104,000.

 

 

The number of outstanding shares of the Issuer’s common stock as of May 27, 2016 was 3,638,723.

 



 

 
 

 

  

Table of Contents

 

Forward Looking Statements

 

Part I

   

Item 1.

Business

1

Item 1A.

Risk Factors

8

Item 1B.

Unresolved Staff Comments

14

Item 2.

Properties

14

Item 3.

Legal Proceedings

15

Item 4.

Mine Safety Disclosures

15

Part II

   

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

15

Item 6.

Selected Financial Data

17

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 8.

Financial Statements and Supplementary Data

31

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

62

Item 9A.

Controls and Procedures

62

Item 9B.

Other Information

62

Part III

   

Item 10.

Directors, Executive Officers and Corporate Governance

63

Item 11.

Executive Compensation

68

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

76

Item 13.

Certain Relationships and Related Transactions, and Director Independence

76

Item 14.

Principal Accountant Fees and Services

77

Part IV

   

Item 15.

Exhibits and Financial Statement Schedules

78

 

Signatures

 

 

 
 

 

 

FORWARD-LOOKING STATEMENTS

 

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

 

PART I

 

ITEM 1. BUSINESS

 

Introduction

 

Mesa Laboratories, Inc. was incorporated under the laws of the State of Colorado on March 26, 1982. The terms “we,” “us,” “our,” the “Company” or “Mesa” are used in this report to refer collectively to the parent company and the subsidiaries through which our various businesses are actually conducted. We pursue a strategy of focusing primarily on quality control products and services, which are sold into niche markets that are driven by regulatory requirements. We prefer markets that have limited competition where we can establish a commanding presence and achieve high gross margins. We are organized into four divisions across eight physical locations. Our Instruments Division designs, manufactures and markets quality control instruments and disposable products utilized in connection with the healthcare, pharmaceutical, food and beverage, medical device, industrial hygiene, environmental air sampling and semiconductor industries. Our Biological Indicators Division provides testing services, along with the manufacturing and marketing of biological indicators and distribution of chemical indicators used to assess the effectiveness of sterilization processes, including steam, hydrogen peroxide, ethylene oxide and radiation, in the hospital, dental, medical device and pharmaceutical industries. Our Continuous Monitoring Division designs, develops and markets systems which are used to monitor various environmental parameters such as temperature, humidity and differential pressure to ensure that critical storage and processing conditions are maintained in hospitals, pharmaceutical and medical device manufacturers, blood banks, pharmacies and a number of other laboratory and industrial environments. Our Cold Chain Division provides parameter (primarily temperature) monitoring of products in a cold chain, consulting services such as compliance monitoring, packaging development and validation or mapping of transport and storage containers, and thermal packaging products such as coolers, boxes, insulation materials and phase-change products to control temperature during transport.

 

Our Lakewood, Colorado, and Butler, New Jersey, facilities manufacture our Instruments Division products which include the DataTrace®, DialyGuard®, DryCal®, Torqo®, SureTorque® and BGI brands. Our Omaha, Nebraska, and Bozeman, Montana locations manufacture our Biological Indicators Division products which include the Mesa, PCD® and Apex® brands, while our Lakewood, Colorado, facility also manufactures our Continuous Monitoring Division products which include CheckPoint® and AmegaView brands. Our Markham, Ontario facility manufactures our Mesa brand real time monitoring solutions and outsources the manufacture of our TempTrust® brand of packaging materials.

 

Our philosophy is to manufacture exceptional quality products and provide a high level of on-going service for those products. Our revenues come from two main sources – product sales and services. Our strategic goals involve continuing to grow revenues and profits through three key strategies – a) improving our distribution channels, b) introducing new products to the market, and c) seeking out companies or product lines to acquire.

 

 
PAGE 1

 

 

Acquisitions

 

Subsequent to our year ended March 31, 2016, we completed the following two acquisitions:

 

In April 2016, we completed a business combination (the “ATS Acquisition”) whereby we acquired substantially all the assets (other than cash and certain inventories and fixed assets) and certain liabilities of Autoclave Testing Services, Inc. and Autoclave Testing Supplies, Inc., (collectively, “ATS”). ATS was in the business of supplying products and services for dental sterilizer testing in both the U.S. and Canada.

 

In April 2016, we completed a business combination (the “Pulse Acquisition) whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of Pulse Scientific, Inc.’s (“Pulse”) business segment associated with the distribution of our biological indicator products.

 

Year Ended March 31, 2016 Acquisitions

 

During the year ended March 31, 2016, we completed the following ten acquisitions:

 

In January 2016, we completed two business combinations (the “January 2016 European BI Distributor Acquisitions”) whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of the business segment associated with the distribution of our biological indicator products from CoaChrom Diagnostica GmbH of Austria and bioTRADING Benelux B.V of the Netherlands;

 

In October 2015, we completed six business combinations (the “October 2015 European BI Distributor Acquisitions”) whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of the business segment associated with the distribution of our biological indicator products from BIOLOGIK S.R.L.(Italy), VWR International PBI S.R.L.(Italy), Cruinn Diagnostics Ltd.(Ireland), Mecolab AG (Switzerland), Miclev Medical Products AB (Sweden) and Tiselab S.L.(Spain);

 

In August 2015, we completed a business combination (the “North Bay Acquisition”) whereby we acquired substantially all of the assets (other than certain fixed assets) and certain liabilities of the dental sterilizer testing business of North Bay Bioscience, LLC (“North Bay”); and

 

In July 2015, we completed a business combination (the “Infitrak Acquisition”) whereby we acquired all of the common stock of 2396081 Ontario Inc. and its wholly owned operating subsidiary, Infitrak Inc. (collectively “Infitrak”), a company whose business provides consulting, packaging and measuring solutions for cold chain applications.

 

Year Ended March 31, 2015 Acquisitions

 

During the year ended March 31, 2015, we completed the following six acquisitions:

 

In March 2015, we completed a business combination (the “Früh Acquisition”) whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of Dr. Früh Control GmbH’s (“Fruh”) business segment associated with the distribution of our biological indicator products;

 

In February 2015, we completed a business combination (the “Cherwell Acquisition”) whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of Cherwell Laboratories Limited’s (“Cherwell”) business segment associated with the distribution of our biological indicator products;

 

In October 2014, we completed a business combination (the “ATI Acquisition”) whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of ATI Atlas Limited (“ATI”), a distributor of our biological indicator products;

 

In October 2014, we completed a business combination (the “PCD Acquisition”) with PCD-Process Challenge Devices, LLC (“PCD”) whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of PCD’s business segment associated with the sale of process challenge devices, which are used for quality control purposes in the field of ethylene oxide sterilization of medical devices;

 

 
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In April 2014, we completed a business combination (the “BGI Acquisition”) whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of BGI, Incorporated and BGI Instruments, Inc., (collectively “BGI”), businesses focused on the sale of equipment used primarily for particulate air sampling; and

 

In April 2014, we completed a business combination (the “Amilabo Acquisition”) whereby we acquired all of the common stock of Amilabo SAS (“Amilabo”), a distributor of our biological indicator products.

 

Year Ended March 31, 2014 Acquisitions

 

During the year ended March 31, 2014, we completed the following three acquisitions:

 

In November 2013, we completed a business combination (the “TempSys Acquisition”) whereby we acquired all of the common stock of TempSys, Inc. (“TempSys”), a company in the business of providing continuous monitoring systems to regulated industries;

 

In November 2013, we completed a business combination (the “Amega Acquisition”) whereby we acquired substantially all the assets (other than cash) and certain liabilities of Amega Scientific Corporation’s (“Amega”) business which provides continuous monitoring systems to regulated industries; and

 

In July 2013, we completed a business combination (the “Suretorque Acquisition”) whereby we acquired substantially all of the assets (other than cash) of ST Acquisitions, LLC’s (“ST Acquisitions”) business segment involving the design, manufacture, sale and service of its SureTorque line of bottle cap torque testing instrumentation.

 

Our principal executive offices and corporate headquarters are located at 12100 West Sixth Ave., Lakewood, Colorado 80228, and our telephone number is 303-987-8000. Our website is www.mesalabs.com. The information contained or connected to our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this report.

 

Instruments Division

 

Our Instruments Division designs, manufactures and markets quality control instruments and disposable products utilized in the healthcare, pharmaceutical, food and beverage, medical device, industrial hygiene, environmental air sampling and semiconductor industries. Generally, our instrument products are used for testing, quality control, safety, validation and regulatory compliance. Our Instruments Division products include: 1) Data loggers, which are used in critical manufacturing and quality control processes in the food, pharmaceutical and medical device industries; 2) Medical meters and calibration solutions, which are used for quality control in dialysis clinics and dialysis machine manufacturing operations; 3) Gas flow calibration and air sampling equipment, which are used for industrial hygiene assessments, calibration of gas metering equipment and environmental air monitoring by a variety of organizations, including metrology labs, manufacturing companies and government agencies; and 4) torque testing systems, which are used to measure bottle cap tightness in the beverage and pharmaceutical industries.

 

Data Loggers

 

Our data logger products are self-contained, wireless, high precision instruments that are used in critical manufacturing, quality control and validation applications. They are used to measure temperature, humidity and pressure inside a process or a product during manufacturing. In addition, data loggers can be used to validate the proper operation of laboratory or manufacturing equipment, either during its installation or for annual re-certifications. The products consist of individual data loggers, a personal computer (“PC”) interface, software and various accessories. A customer typically purchases a large number of data loggers along with a single PC interface and the software package. In practice, using the PC interface, the user programs the loggers to collect environmental data at a pre-determined interval, places the data loggers in the product or process, and then collects stored process data from the data logger either through the PC interface or wirelessly via a radio link. The user can then prepare tabular and graphical reports using the software. Unique aspects of our data loggers are their ability to operate at elevated temperatures and in explosive environments – important differentiating factors in the marketplace and, consequently, they are used by companies to control their most critical processes, such as sterilization. Industries utilizing the data loggers include food processors, pharmaceutical and medical device manufacturers, and contract sterilization providers.

 

 
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Medical Meters and Calibration Solutions

 

Our medical meters are used to test various parameters of the dialysis fluid (dialysate), and the proper calibration and operation of the dialysis machine. Each measures some combination of temperature, pressure, pH and conductivity to ensure that the dialysate has the proper composition to promote the transfer of waste products from the blood to the dialysate. The meters provide a digital readout that the patient, physician or technician uses to verify that the dialysis machine is working within prescribed limits and delivering properly prepared dialysate. We manufacture two styles of medical meters; those designed for use by dialysis machine manufacturers and biomedical technicians, and those used primarily by dialysis nurses. The meters for technicians are characterized by exceptional accuracy, stability and flexibility, and are used by the industry as the primary standard for the calibration of dialysis machines. The meters designed for use by dialysis nurses are known primarily for their ease of use and incorporate a patented, built-in syringe sampling system. These meters are used as the final quality control check on the dialysate just prior to starting a treatment. In addition to the dialysate meters, we market a line of standard solutions for use in dialysis clinics for calibration of our meters. These standard solutions are regularly consumed by the dialysis clinics; thus, along with calibration services, are less impacted by general economic conditions than instrument sales. Customers that utilize these products include dialysis facilities, medical device manufacturers and biomedical service companies.

 

Gas Flow Calibration and Air Sampling Equipment

 

We manufacture a variety of instruments and equipment for gas flow calibration and environmental air sampling. In the air sampling area, our technology is used primarily for the determination of particulate concentrations in air as a measure of urban or industrial air pollution, and for industrial hygiene assessments. The primary products include air samplers, particle separators and pumps. In the environmental area, our particle samplers were some of the first on the market and they were recognized early-on as “reference samplers” by the U.S. Environmental Protection Agency.

 

We also manufacture gas flow calibration instruments to support the use of our air sampling equipment, and for broader industrial applications. Our gas flow calibration instruments provide the precise standards required by laboratories and industry in the design, development, manufacture, installation and calibration of various gas flow meters and air sampling devices. Our flow calibrators are used in many industries where professionals require the superior accuracy, reliability and ease of operation that they provide, including 1) industrial hygienists, 2) calibration and research laboratories, 3) manufacturers who design, develop and manufacture gas flow metering devices, and 4) industrial engineering and manufacturing companies that utilize gas flow metering devices.

 

Torque Testing Systems

 

Our automated torque testing systems are durable and reliable motorized cap torque analyzers used throughout the packaging industry. The primary advantages of our torque instruments are their high accuracy and long term consistency of measurement. Unlike manual torque testing instruments, our motorized torque systems eliminate the effects on the measurement results of different operators and different cap removal speeds. With a motorized torque testing system, the force applied to a cap is precisely the same in each testing cycle, regardless of who may be operating the machine, or how strong they may be. Our torque systems provide the information that helps the packaging operation track events, and potential problems during the manufacturing process so that corrections can be performed in a timely fashion. Industries utilizing these instruments include food processors, beverage companies, pharmaceutical, and consumer product manufacturers.

 

Biological Indicators Division

 

Our Biological Indicators Division provides testing services, along with the manufacture and marketing of biological indicators and distribution of chemical indicators used to assess the effectiveness of sterilization processes, including steam, hydrogen peroxide, ethylene oxide and radiation, in the hospital, dental, medical device and pharmaceutical industries. Our biological indicators are registered medical devices manufactured under International Standards Organization (“ISO”) 13485 controlled processes. They are developed and used according to the Association for the Advancement of Medical Instrumentation (“AAMI”) guidelines, which are often adopted as the worldwide standard under ISO.

 

 
PAGE 4

 

 

Biological indicators consist of resistant spores of certain microorganisms that are applied on a convenient substrate, such as a small piece of filter paper. The spores are well characterized in terms of numbers and resistance to sterilization. In use, the biological indicator is exposed to a sterilization process and then tested to determine the presence of surviving organisms. Our biological indicators include a) spore strips, which require post-processing transfer to a growth media, b) self-contained products, which have the growth media already pre-packaged in crushable ampoules, c) culture media, and d) process challenge devices (“PCD’s”) which increase the resistance of biological indicators, mimicking the packaging or other unique characteristics of a product being sterilized. Chemical indicators are similar to biological indicators, except that a chemical change (generally determined by color) is used to assess the exposure to sterilization conditions. Biological indicators and chemical indicators are often used together to monitor processes. Biological indicators are used to validate equipment and monitor the effectiveness of a process in any industrial or healthcare setting which uses sterilization. Key markets include healthcare, such as dental offices and hospitals, and industrial, such as medical device and pharmaceutical manufacturers.

 

Our biological indicators are distinguished in the marketplace by their high level of quality, consistency and flexibility. A variety of different formats allows our biological indicators to be used in many different types of processes and products. For example, the simple spore strips are used most often in the small table-top steam sterilizers in dental offices, while a more complex self-contained biological indicator, either with or without a PCD, may be used by a medical device manufacturer to assure the sterility in a complex ethylene oxide sterilization process. In either case, the number of spores contained on the carrier and the resistance of the spores to the sterilization process must be well characterized in order to accurately assess the effectiveness of sterilization. During manufacturing, extensive quality control steps are used to insure that the microorganism spores are well characterized and their resistance is known following placement on the target carrier.

 

Continuous Monitoring Division

 

Our Continuous Monitoring Division designs, develops and markets systems which are used to monitor various environmental parameters such as temperature, humidity and differential pressure to ensure that critical storage and processing conditions are maintained. Continuous monitoring systems are used in controlled environments such as refrigerators, freezers, warehouses, laboratory incubators, clean rooms and a number of other settings. The continuous monitoring systems consist of wireless sensors that are placed in controlled environments, hardware modules to receive the wireless data, and various software programs to collect, store and process the data. Our systems are designed to operate continuously, providing data around the clock, 365 days per year. A critical function of our systems is the ability to provide local alarms and notifications via e-mail, text or telephone, in the case where established environmental conditions are exceeded. Key markets for our continuous monitoring systems are hospitals, pharmaceutical and medical device manufacturers, blood banks, pharmacies and a number of other laboratory and industrial environments.

 

Among the important competitive differentiators for our continuous monitoring systems are 1) their high degree of reliability and up-time; 2) a large variety of sensor types to meet the needs of most applications; 3) a large, distributed installation and service team; and 4) a full-featured and validated software program, providing extensive reporting and alarm capability. An important aspect of our continuous monitoring business is the ability to provide post-installation service and support. For most systems, annual re-calibration of each sensor is required, and we provide this service through our large, dedicated service organization.

 

Cold Chain Division

 

Our Cold Chain Division provides parameter (primarily temperature) monitoring of products in a cold chain, consulting services such as compliance monitoring, packaging development and validation or mapping of transport and storage containers, and thermal packaging products such as coolers, boxes, insulation materials and phase-change products to control temperature during transport. We provide a full suite of products and services to help our customers meet the requirements of their Good Distribution Practices (“GDP”) regulations. Our compliance services help customers validate the effectiveness of their cold chain, high efficiency packaging products are used to control temperature of materials during shipping and our monitoring systems record temperature during shipment and provide alarms in case of temperature excursions.

 

The competitive advantages of our Cold Chain Division include 1) our in-depth knowledge of cold chain characteristics and requirements, 2) packaging materials that are very durable and can control temperatures for up to 168 hours during transport, 3) extensive package development and testing capability to help in the design and validation of custom packaging solutions, and 4) web-based monitoring products that allow for measurement of parameters (primarily temperature) throughout a cold chain, from point of manufacture or collection, all the way to point of use.

 

 
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Market Factors

 

Product sales are dependent on several factors, including general economic conditions, both domestic and international, customer capital spending trends, competition, introduction of new products and acquisitions. Biological indicators and many of the packaging products of our Cold Chain Division are disposable and are used on a routine basis, thus product sales are less sensitive to general economic conditions. Instrument products, continuous monitoring systems, and cold chain monitoring products have a longer life, and their purchase by our customers is somewhat discretionary, so sales are more sensitive to general economic conditions. Service demand is driven by our customers’ quality control and regulatory environments, which require periodic repair and recalibration or certification of our instrument products and continuous monitoring systems. We typically evaluate costs and pricing annually. Our policy is to price our products competitively and, where possible, we pass along cost increases in order to maintain our margins.

 

Manufacturing

 

We conduct research, manufacturing and support of our Instruments Division products from our facilities in Lakewood, Colorado and Butler, New Jersey. Our instrument products are manufactured primarily by assembling the products from purchased components and calibrating the final products prior to release. The manufacture and support of our Continuous Monitoring Division systems are conducted from our facility in Lakewood, Colorado. Our continuous monitoring systems are manufactured primarily by assembling the systems from purchased components and calibrating the sensors, either at the factory or at the point of installation at the customer’s facility. Facilities in Bozeman, Montana, Omaha, Nebraska and Traverse City, Michigan are used for the Biological Indicators Division. Our biological indicator products are manufactured by growing microbiological spores from raw materials, forming the finished products and testing the finished biological indicators using established quality control tests. Our dental sterilizer testing products are assembled into kits containing BI spore strips and our microbiological laboratory tests these kits when they are returned to us to determine the effectiveness of our customer’s sterilization process. Our Cold Chain Division monitoring products are manufactured in our Markham, Canada facility primarily by assembling the systems from purchased components and calibrating the sensors, while the packaging products are manufactured by third party suppliers.

 

Most of the materials and components used in our product lines are available from a number of different suppliers. We generally maintain multiple sources of supply, but are dependent on a single source for certain items. We believe that alternative sources could be developed, if required, for present single supply sources. Although our dependence on these single supply sources may involve a degree of risk, to date we have been able to acquire sufficient stock to meet our production requirements.

 

Marketing and Distribution

 

Domestically, we generate sales to end users through our sales and marketing staff and distributors. We use approximately 266 distributors throughout Europe, Africa, Asia, South America, Australia, Canada and Central America for international sales and distribution. Sales promotions include trade shows, direct mail campaigns, internet and other digital forms of advertising.

 

Our Instruments Division marketing effort is focused on offering quality products to our customers that will aid them in containing cost, improving the quality of their products and services, and helping them meet their regulatory requirements. Customers primarily include manufacturers of foods, beverages, pharmaceutical products, medical devices, contract sterilizing services, governmental agencies, environmental testing labs and dialysis clinics.

 

Our Biological Indicators Division marketing focuses on providing quality test products in a variety of different formats, which minimize incubation and test result time. Customers include companies providing sterility assurance testing to dental offices, hospitals, contract sterilization services and various industrial users involved in pharmaceutical and medical device manufacturing.

 

Our Continuous Monitoring Division marketing focuses on providing quality systems to our customers that monitor various environmental parameters such as temperature, humidity and differential pressure to ensure that critical storage and processing conditions are maintained. Customers include hospitals, pharmaceutical and medical device manufacturers, blood banks, pharmacies and a number of other laboratory and industrial environments.

 

 
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Our Cold Chain Division marketing focuses on being the “one stop shop” for all of our customers’ cold chain requirements. While competitors can provide one or two products or services, our cold chain offering provides all of our customers’ needs, including package design, validation, packaging materials, and complete monitoring solutions. Customers include pharmaceutical manufacturers, distribution companies, retail pharmacies and healthcare clinics.

 

As of and for the years ended March 31, 2016, 2015 and 2014, no individual customer represented more than 10% of our accounts receivable or revenues.

 

Competition

 

Our products compete across several industries with a variety of companies, many of which are well established, with substantially greater capital resources and larger research and development capabilities. Furthermore, many of these companies have established product lines and a significant operating history. Accordingly, we may be at a competitive disadvantage with some competitors due to their respective size and market presence.

 

Companies with which our Instruments Division products compete include the Myron L Company, IBP Medical GmbH, Amphenol Corporation, Ellab, TMI Orion, Danaher, Inc., Thermo Fisher Scientific, Inc., Mecmesin, Steinfurth, Met One Instruments, Inc. and Tisch Environmental. Our Biological Indicators Division products compete with 3M, Terragene, Crosstex and Steris, among others. Our Continuous Monitoring Division systems compete with Rees Scientific Corporation, Amphenol Corporation and Cooper-Atkins, among others. Our Cold Chain Division products compete with Sonoco Thermosafe, Cold Chain Technologies, Inc., Pelican Biothermal LLC and Cryopak.

 

Research and Development

 

We are committed to an active research and development program dedicated to innovating new products and improving the quality and performance of our existing products. We spent $4,976,000, $3,800,000 and $2,320,000 for the years ended March 31, 2016, 2015 and 2014, respectively, on research and development activities, including amounts capitalized as intangible assets and construction-in-progress. Amounts capitalized, which relate primarily to the development of Continuous Monitoring product were $1,044,000, $506,000 and $0 for the years ended March 31, 2016, 2015 and 2014, respectively.

 

Government Regulation

 

While our quality system and manufacturing processes are generally the same throughout the Instruments Division, specific products are compliant under ISO 13485, ISO 17025, ISO 9001 and certain U.S. Federal regulations. Compliance requires us to obtain third party certification for certain products.

 

Several products in both the Instruments and Biological Indicators Divisions are medical devices subject to the provisions of the Federal Food, Drug and Cosmetic Act, as amended by the Medical Device Amendments of 1976 (hereinafter referred to as the "Act"). The Act requires any company proposing to market a medical device to notify the Food and Drug Administration (“FDA”) of its intention at least ninety days before doing so and in such notification must advise the FDA as to whether the device is substantially equivalent to a device marketed prior to May 28, 1976. We have received permission from the FDA to market all of our products requiring such permission.

 

Some of our facilities are subject to FDA regulations and inspections, which may be time-consuming and costly. This includes on-going compliance with the FDA's current Good Manufacturing Practices regulations that require, among other things, the systematic control of manufacture, packaging and storage of products intended for human use. Failure to comply with these practices renders the product adulterated and could subject us to an interruption of manufacturing and selling these products, and possible regulatory action by the FDA.

 

The manufacture and sale of medical devices is also regulated by some states. Although there is substantial overlap between state regulations and the regulations of the FDA, some state laws may apply. We do not anticipate that complying with state regulations, however, will create any significant problems. Foreign countries also have laws regulating medical devices sold in those countries, which may cause us to expend additional resources on compliance.

 

 
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Employees

 

On March 31, 2016, we had 367 employees, of which 205 are employed for manufacturing and quality assurance, 33 for research and development and engineering, 74 for sales and marketing, and 55 for administration.

 

ITEM 1A. RISK FACTORS 

 

In addition to the other information set forth in this Annual Report on Form 10-K and other documents we filed with the SEC, you should carefully consider the following factors, which could materially affect our business, financial condition or results of operations in future periods. The risks and uncertainties described below are those that we have identified as material, but are not the only risks and uncertainties facing us. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our business, including our results of operations, liquidity and financial condition.

 

Conditions in the global economy, the markets we serve and the financial markets may adversely affect our business and results of operations.

 

Our business is sensitive to general economic conditions. Slower global economic growth, actual or anticipated default on sovereign debt, volatility in the currency and credit markets, high levels of unemployment or underemployment, reduced levels of capital expenditures, changes in government fiscal and monetary policies, changes in capital requirements for financial institutions, government deficit reduction and budget negotiation dynamics, sequestration, austerity measures and other challenges that affect the global economy adversely could affect us and our distributors, customers and suppliers, including having the effect of:

 

 

reducing demand for our products and services, limiting the financing available to our customers and suppliers, increasing order cancellations and resulting in longer sales cycles;

 

 

increasing the difficulty in collecting accounts receivable and the risk of excess and obsolete inventories;

 

 

supply interruptions, which could disrupt our ability to produce our products; and

 

 

increasing the risk that counterparties to our contractual arrangements will become insolvent or otherwise unable to fulfill their contractual obligations, which could increase the risks identified above.

 

If growth in the global economy or in any of the markets we serve slows for a significant period, if there is significant deterioration in the global economy or such markets or if improvements in the global economy don’t benefit the markets we serve, our business and results of operations could be adversely affected.

 

Our growth could suffer if the markets into which we sell our products and services decline, do not grow as anticipated or experience cyclicality.

 

Our growth depends in part on the growth of the markets which we serve, and visibility into our markets is limited (particularly for markets into which we sell through distributors). Our quarterly results of operations depend substantially on the volume and timing of orders received during the quarter, which are difficult to forecast. Any decline or lower than expected growth in our served markets could diminish demand for our products and services, which could adversely affect our consolidated financial statements. Certain of our businesses operate in industries that may experience periodic, cyclical downturns. In addition, in certain of our businesses, demand depends on customers’ capital spending budgets as well as government funding policies, and matters of public policy and government budget dynamics, as well as product and economic cycles can affect the spending decisions of these entities. Demand for our products and services is also sensitive to changes in customer order patterns, which may be affected by announced price changes, new product introductions, competition and customer inventory. Any of these factors could adversely affect our growth and results of operations in any given period.

 

 
PAGE 8

 

 

We face competition and if we are unable to compete effectively, we may experience decreased demand and decreased market share.

 

The markets for some of our current and potential products are competitive. Because of the range of products we sell and the variety of markets we serve, we encounter a wide variety of competitors, including several that possess both larger sales forces and more capital resources. In order to compete effectively, we must maintain longstanding relationships with major customers, continue to grow our business by establishing relationships with new customers, continually develop new products and services to maintain and expand our brand recognition and leadership position in various product and service categories, and penetrate new markets, including in developing countries. Our failure to compete effectively and/or pricing pressures resulting from competition may adversely impact our results of operations, and our expansion into new markets may result in greater-than-expected risks, liabilities and expenses.

 

Changing industry trends may affect our results of operations.

 

Various changes within the industries we serve may limit future demand for our products and may include the following:

 

 

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 U.S. and in other jurisdictions and related shareholder lawsuits, could lead to substantial civil and criminal, monetary and non-monetary penalties and could cause us to incur significant legal and investigatory fees.

 

 
PAGE 9

 

 

Any inability to consummate acquisitions at our historical rate and at appropriate prices could negatively impact our growth rate and stock price.

 

Our ability to grow revenues, earnings and cash flows at or above our historic rates depends in part upon our ability to identify and successfully acquire and integrate businesses at appropriate prices and realize anticipated synergies. We may not be able to consummate acquisitions at rates similar to the past, which could adversely impact our growth rate and our stock price. Promising acquisitions are difficult to identify and complete for a number of reasons, including high valuations, competition among prospective buyers, the availability of affordable funding in the capital markets and the need to satisfy applicable closing conditions. In addition, competition for acquisitions may result in higher purchase prices. Changes in accounting or regulatory requirements, or instability in the credit markets, could also adversely impact our ability to consummate acquisitions.

 

Our acquisition of businesses could negatively impact our results of operations.

 

As an important part of our business strategy, we acquire businesses, some of which may be material. Please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional details. These acquisitions involve a number of financial, accounting, managerial, operational, legal, compliance and other risks and challenges, including the following, any of which could adversely affect our results of operations:

 

 

any acquired business, technology, service or product could under-perform relative to our expectations and the price that we paid for it, or not perform in accordance with our anticipated timetable;

 

 

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;

 

 

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 other intangible assets on our consolidated balance sheet. If we are not able to realize the value of these assets, we may be required to incur charges relating to the impairment of these assets, which could materially impact our results of operations.

 

 
PAGE 10

 

 

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 assure you that these indemnification provisions will protect us fully or at all, and as a result we may face unexpected liabilities that could adversely impact our results of operations.

 

The contingent consideration associated with certain of our acquisitions may negatively impact our available cash and results from operations.

 

As part of certain of our acquisitions, we are required to make contingent consideration payments based on defined growth metrics over a specified earn-out period. The ultimate amount we pay may differ significantly from the liability we recorded at the time of the acquisition. If we are required to pay more than the amount initially recorded, the difference is recorded as expense in our consolidated statements of income, which could materially impact our results of operations.

 

If we do not or cannot adequately protect our intellectual property, or if third parties infringe our intellectual property rights, we may suffer competitive injury or expend significant resources enforcing our rights.

 

We own numerous patents, trademarks, copyrights, trade secrets and other intellectual property and licenses to intellectual property owned by others, which in the aggregate are important to our business. The intellectual property rights that we obtain, however, may not be sufficiently broad or otherwise may not provide us a significant competitive advantage, and patents may not be issued for pending or future patent applications owned by or licensed to us. In addition, the steps that we and our licensors have taken to maintain and protect our intellectual property may not prevent it from being challenged, invalidated, circumvented or designed-around, particularly in countries where intellectual property rights are not highly developed or protected. In some circumstances, enforcement may not be available to us because an infringer has a dominant intellectual property position or for other business reasons, or countries may require compulsory licensing of our intellectual property. We also rely on nondisclosure and noncompetition agreements with employees, consultants and other parties to protect, in part, trade secrets and other proprietary rights. There can be no assurance that these agreements will adequately protect our trade secrets and other proprietary rights and will not be breached, that we will have adequate remedies for any breach, that others will not independently develop substantially equivalent proprietary information or that third parties will not otherwise gain access to our trade secrets or other proprietary rights. Our failure to obtain or maintain intellectual property rights that convey competitive advantage, adequately protect our intellectual property, detect or prevent circumvention or unauthorized use of such property, and the cost of enforcing our intellectual property rights, could adversely impact our competitive position and results of operations.

 

Several of our products are extensively regulated, which could delay product introduction or halt sales.

 

The process of obtaining and maintaining required regulatory approvals is lengthy, expensive and uncertain. Although we have not experienced any substantial regulatory delays to date, we can offer no assurance that delays will not occur in the future, which could have a significant adverse effect on our ability to introduce new products on a timely basis. Regulatory agencies periodically inspect our manufacturing facilities to ascertain compliance with “good manufacturing practices” and can subject approved products to additional testing and surveillance programs. Failure to comply with applicable regulatory requirements can, among other things, result in fines, suspension of regulatory approvals, product recalls, operating restrictions and criminal penalties. While we believe that we are currently in compliance, if we fail to comply with regulatory requirements it could have an adverse effect on our results of operations and financial condition.

 

Product defects and unanticipated use or inadequate disclosure with respect to our products could adversely affect our business, reputation and our results of operations.

 

Manufacturing or design defects in, unanticipated use of, safety or quality issues with respect to, or inadequate disclosure of risks relating to the use of products that we make or sell (including in products or components that we source from third parties) can lead to personal injury, property damage or other liability. These events could lead to recalls or safety alerts, result in the removal of a product or service from the market and result in product liability or similar claims being brought against us. Recalls, removals and product liability and similar claims (regardless of their validity or ultimate outcome) can results in significant costs, as well as negative publicity and damage to our reputation that could reduce demand for our products and services.

 

 
PAGE 11

 

 

Catastrophic events or environmental conditions may disrupt our business. 

 

A disruption or failure of our systems or operations because of a major weather event, cyber-attack, terrorist attack, or other catastrophic event could cause delays in completing sales, providing services or performing other mission-critical functions. A catastrophic event that results in the destruction or disruption of any of our critical business or IT systems could harm our ability to conduct normal business operations. Abrupt political change, terrorist activity, and armed conflict pose a risk of general economic disruption in affected countries, which may increase our operating costs or adversely affect our revenues. These conditions also may add uncertainty to the timing and budget for purchase/investment decisions by our customers, and may result in supply chain disruptions for hardware manufacturers, either of which may adversely affect our revenues. The long-term effects of climate change on the global economy in general or the Industrial Instruments industry in particular are unclear. Environmental regulations or changes in the supply, demand or available sources of energy may affect the availability or cost of goods and services, including natural resources, necessary to run our business. Changes in weather where we operate may increase the costs of powering and maintaining the equipment we need to produce our product lines.

 

We may be required to recognize impairment charges that could materially affect our results of operations.

 

We assess our goodwill and other intangible assets, and our other long-lived assets as and when required by accounting principles generally accepted in the United States (“GAAP”) to determine whether they are impaired. If they are impaired, we would record appropriate impairment charges. It is possible that we may be required to record significant impairment charges in the future and, if we do so, our results of operations could be materially adversely affected.

 

Changes in accounting standards could affect our reported financial results.

 

New accounting standards or pronouncements that may become applicable to our Company from time to time, or changes in the interpretation of existing standards and pronouncements, could have a significant effect on our reported results of operations for the affected periods. For the year ended March 31, 2016, we adopted Financial Accounting Standards Board Accounting Standards Update No. 2016-09, Compensation—Stock Compensation (Topic 718). The adoption of this ASU reduced our income tax expense by $860,000, for the year ended March 31, 2016. For additional discussion, please see Note 1 of Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data”).

 

Foreign currency exchange rates may adversely affect our consolidated financial statements.

 

Sales and purchases in currencies other than the U.S. dollar expose us to fluctuations in the exchange rates of foreign currencies relative to the U.S. dollar and may adversely affect our consolidated financial statements. Increased strength of the U.S. dollar increases the effective price of our products sold in U.S. dollars into other countries, which may require us to lower our prices or adversely affect sales to the extent we do not increase local currency prices. Decreased strength of the U.S. dollar could adversely affect the cost of materials, products and services we purchase overseas. Revenues and expenses of our non-U.S. businesses are also translated into U.S. dollars for reporting purposes and the strengthening or weakening of the U.S. dollar could result in unfavorable translation effects. In addition, we face exchange rate risk from our investment in subsidiaries owned and operated in foreign countries.

 

Changes in our tax rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods.

 

We are subject to income taxes in the U.S. and in various non-U.S. jurisdictions. The impact of these factors may be substantially different from period to period. In addition, the amount of income taxes we pay is subject to ongoing audits by the U.S. federal, state and local tax authorities and by non-U.S. tax authorities. Due to the potential for changes to tax laws (or changes to the interpretation thereof) and the ambiguity of tax laws, the subjectivity of factual interpretations, the complexity of our intercompany arrangements and other factors, our estimates of income tax liabilities may differ from actual payments or assessments. If an audit results in payments or assessments greater than our reserves, our future results may include unfavorable adjustments to our tax liabilities and our consolidated financial statements could be adversely affected. If we determine to repatriate earnings from foreign jurisdictions that have been considered permanently re-invested under existing accounting standards, it could also increase our tax rate. In addition, any significant change to the tax system in the U.S. or in other jurisdictions, including changes in the taxation of international income, could adversely affect our consolidated financial statements.

 

 
PAGE 12

 

 

Our business is subject to sales tax in numerous states.

 

The application of indirect taxes, such as sales tax, is a complex and evolving issue. A company is required to collect and remit state sales tax from certain of its customers if that company is determined to have “nexus” in a particular state. The determination of nexus varies by state and often requires knowledge of each jurisdiction’s tax case law. The application and implementation of existing, new or future laws could change the states in which we are required to collect and remit sales taxes. If any jurisdiction determines that we have “nexus” in additional locations that we have not contemplated, it could have an adverse effect on our results of operations and financial condition.

 

We are subject to the possibility of a variety of litigation and other legal and regulatory proceedings in the course of our business that could adversely affect our consolidated financial statements.

 

We are subject to the possibility of a variety of litigation and other legal and regulatory proceedings incidental to our business, including claims for damages arising out of the use of products or services and claims relating to intellectual property matters, employment matters, tax matters, commercial disputes, competition and sales and trading practices, environmental matters, personal injury, insurance coverage and acquisition or divestiture-related matters, as well as regulatory investigations or enforcement. We may also become subject to lawsuits as a result of past or future acquisitions or as a result of liabilities retained from, or representations, warranties or indemnities provided in connection with, divested businesses. Any of these lawsuits may include claims for compensatory damages, punitive and consequential damages and/or injunctive relief. The defense of these lawsuits may divert our management’s attention, we may incur significant expenses in defending these lawsuits, and we may be required to pay damage awards or settlements or become subject to equitable remedies that could adversely affect our operations and consolidated financial statements. Moreover, any insurance or indemnification rights that we may have may be insufficient or unavailable to protect us against such losses. In addition, developments in proceedings in any given period may require us to adjust the loss contingency estimates that we have recorded in our consolidated financial statements, record estimates for liabilities or assets previously not susceptible of reasonable estimates or pay cash settlements or judgments. Any of these developments could adversely affect our consolidated financial statements in any given period. We cannot make assurances that our liabilities in connection with litigation and other legal regulatory proceedings will not exceed our estimates or adversely affect our consolidated financial statements and/or reputation.

 

We are utilizing variable rate financing.

 

As of May 31, 2016 we had $44,500,000 in outstanding indebtedness which bears interest at either: (1) LIBOR, as defined, plus an applicable margin ranging from 1.5% to 2.25%; or (2) the bank’s commercial bank floating rate (“CBFR”), which is the bank’s prime rate adjusted down by 0.5%. A change in interest rate market conditions could increase our interest costs in the future and may have an adverse effect on our results of operations.   

 

Our indebtedness may limit our operations and our use of our cash flow, and any failure to comply with the covenants that apply to our indebtedness could adversely affect our liquidity and consolidated financial statements.

 

As of May 31, 2016, we had $44,500,000 in outstanding indebtedness and, based on the remaining availability under our Credit Facility, we have the ability to incur an additional $22,500,000 of indebtedness. Our debt level and related debt service obligations can have negative consequences, including (1) requiring us to dedicate significant cash flow from operations to the payment of principal and interest on our debt, which would reduce the funds we would have available for other purposes such as acquisitions and capital investment; (2) reducing our flexibility in planning for or reacting to changes in our business and market conditions; and (3) exposing us to interest rate risk since our debt obligations are at variable rates. We may incur significantly more debt in the future, particularly to finance acquisitions.

 

If global credit market conditions deteriorate, our financial performance could be adversely affected.

 

The cost and availability of credit are subject to changes in the global economic environment. If conditions in major credit markets deteriorate, our ability to obtain debt financing or the terms associated with that debt financing may be negatively affected, which could affect our results of operations.

 

 
PAGE 13

 

 

If we suffer loss to our facilities, supply chains, distribution systems or information technology systems due to catastrophe or other events, our operations could be seriously harmed.

 

Our facilities, supply chains, distribution systems and information technology systems are subject to catastrophic loss due to fire, flood, earthquake, hurricane, public health crisis, war, terrorism or other natural or man-made disasters. If any of these facilities, supply chains or systems were to experience catastrophic loss, it could disrupt our operations, delay production and shipments, result in defective products or services, damage customer relationships and our reputation and result in legal exposure and large repair or replacement expenses. The third-party insurance coverage that we maintain will vary from time to time in both type and amount depending on cost, availability and our decisions regarding risk retention, and may be unavailable or insufficient to protect us against losses.

 

A significant disruption in, or breach in security of, our information technology systems could adversely affect our business.

 

We rely on information technology systems, some of which are managed by third parties, to process, transmit and store electronic information (including sensitive data such as confidential business information and personally identifiable data relating to employees, customers and other business partners), and to manage or support a variety of critical business processes and activities. These systems may be damaged, disrupted or shut down due to attacks by computer hackers, computer viruses, employee error or malfeasance, power outages, hardware failures, telecommunication or utility failures, catastrophes or other unforeseen events, and in any such circumstances our system redundancy and other disaster recovery planning may be ineffective or inadequate. In addition, security breaches of our systems (or the systems of our customers, suppliers or other business partners) could result in the misappropriation, destruction or unauthorized disclosure of confidential information or personal data belonging to us or to our employees, partners, customers or suppliers. Like many multinational corporations, our information technology systems have been subject to computer viruses, malicious codes, unauthorized access and other cyber-attacks and we expect to be subject to similar attacks in the future as such attacks become more sophisticated and frequent. Any of the attacks, breaches or other disruptions or damage described above could interrupt our operations, delay production and shipments, result in theft of our and our customers’ intellectual property and trade secrets, damage customer and business partner relationships and our reputation or result in defective products or services, legal claims and proceedings, liability and penalties under privacy laws and increased costs for security and remediation, each of which could adversely affect our business and consolidated financial statements.

 

We may face continuing challenges in complying with certain sections of the Sarbanes-Oxley Act.

 

Like many public companies, we face challenges in complying with the internal control requirements of the Sarbanes-Oxley Act (Section 404). Under current frameworks, compliance in areas such as separation of duties, information system controls, etc. may prove problematic for a smaller company with limited human resources. We may also be forced to incur on-going expense in order to comply with the law under current control frameworks or if the framework changes. These expenses may have a material adverse effect on our results of operations.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None

 

ITEM 2. PROPERTIES

 

Set forth below is a listing of our facilities. The Lakewood, Butler, Bozeman, Traverse City, Markham and Omaha facilities all have manufacturing, research and development, marketing and administrative functions. The Berlin and Chassieu facilities have marketing and administrative functions.

 

Location

Operations

Square Feet

 

Lakewood, Colorado

Instruments, Continuous Monitoring and corporate headquarters

40,000

Owned

Lakewood, Colorado

Corporate administration

7,000

Leased

Butler, New Jersey

Instruments

20,000

Leased

Bozeman, Montana

Biological Indicators

22,000

Owned

Omaha, Nebraska

Biological Indicators

23,000

Owned

Berlin, New Jersey

Continuous Monitoring

2,000

Leased

Traverse City, Michigan

Biological Indicators

10,000

Leased

Chassieu, France

Biological Indicators

3,000

Leased

Markham, Canada

Cold Chain and Biological Indicators

8,000

Leased

 

 
PAGE 14

 

 

ITEM 3. LEGAL PROCEEDINGS

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is traded on the Nasdaq Global Market (“NASDAQ”) under the symbol "MLAB.”

 

The following table sets forth the high and low market prices per share for our common stock, as reported by NASDAQ, and dividend per share information:

 

Quarter Ended

 

High

   

Low

   

Dividends Per Share

 

June 30, 2015

  $ 92.80     $ 67.70     $ 0.16  

September 30, 2015

    126.05       86.55       0.16  

December 31, 2015

    119.54       89.71       0.16  

March 31, 2016

    106.00       77.00       0.16  

 

Quarter Ended

 

High

   

Low

   

Dividends Per Share

 

June 30, 2014

  $ 89.59     $ 74.38     $ 0.15  

September 30, 2014

    84.66       54.89       0.15  

December 31, 2014

    83.92       57.38       0.16  

March 31, 2015

    79.88       69.72       0.16  

 

While we have paid dividends to holders of our common stock on a quarterly basis since 2003, the declaration and payment of future dividends will depend on many factors, including, but not limited to, our earnings, financial condition, business development needs and regulatory considerations, and is at the sole discretion of our Board of Directors.

 

The NASDAQ Global Market quotations set forth herein reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 

As of March 31, 2016, there were 142 record holders of our common stock. This amount does not include “street name” holders or beneficial holders of our common stock, whose holder of record are banks, brokers and other financial institutions.

 

During the year ended March 31, 2016, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.

 

 
PAGE 15

 

 

We made the following repurchases of our common stock, by month, within the fourth quarter of the year covered by this report:

 

   

Shares

Purchased

   

Average Price

Paid

   

Total Shares

Purchased as

Part of Publicly

Announced Plan

   

Remaining

Shares Able to

Purchase Under

Plan

 

January 1 – 31, 2016

    --       --       162,486       137,514  

February 1 – 29, 2016

    --       --       162,486       137,514  

March 1 – 31, 2016

    --       --       162,486       137,514  

Total

    --       --                  

 

On November 7, 2005, our Board of Directors adopted a share repurchase plan which allows for the repurchase of up to 300,000 of our common shares. This plan will continue until the maximum is reached or the plan is terminated by further action of the Board of Directors.

 

We have certain equity compensation plans, all of which were approved by our shareholders. As of March 31, 2016, 515,720 shares of common stock may be issued upon exercise of outstanding options, with a weighted-average exercise price of $64.32 and 913,630 shares are available for future issuance under the plans. Please see notes contained in “Item 8. Financial Statements and Supplementary Data” of this report for additional details.

 

Set forth below is a line graph comparing, for the period March 31, 2011 through March 31, 2016, the cumulative total shareholder return on our common stock against the cumulative total return of (a) the S&P Composite Stock Index and (b) a self-selected peer group, comprised of the following companies: Danaher Corp., ARCA Biopharma, Inc., Steris Corp., MOCON Inc., Utah Medical Products, Inc., Cantel Medical Corp., Merit Medical Systems, Inc., Transcat Inc., Electro-Sensors Inc., Rudolph Technologies Inc., and Measurement Specialties Inc. The graph shows the value at March 31 of each year, assuming an original investment of $100 in each and reinvestment of cash dividends.

 

 

 
PAGE 16

 

 

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)

 

As of and for The Year Ended March 31,

 
   

2016

   

2015

   

2014

   

2013

   

2012

 

Cash and cash equivalents

  $ 5,695     $ 2,034     $ 5,575     $ 4,006     $ 7,191  

Working capital

  $ 13,215     $ 14,965     $ 16,351     $ 14,793     $ 14,899  
                                         

Average return on:

                                       

Stockholder investment (1)

    14 %     14 %     15 %     17 %     20 %

Assets

    8 %     9 %     11 %     14 %     16 %

Invested capital (2)

    10 %     11 %     13 %     18 %     21 %
                                         

Revenues

  $ 84,659     $ 71,330     $ 52,724     $ 46,435     $ 39,616  
                                         

Gross profit

  $ 51,413     $ 43,392     $ 31,688     $ 28,862     $ 23,511  

Gross profit margin

    61 %     61 %     60 %     62 %     59 %
                                         

Operating income

  $ 16,323     $ 15,864     $ 11,785     $ 13,104     $ 12,477  

Operating income margin

    19 %     22 %     22 %     28 %     31 %

Net income

  $ 11,169     $ 9,583     $ 9,000     $ 8,450     $ 7,919  

Net income margin

    13 %     13 %     17 %     18 %     20 %
                                         

Net income per diluted share

  $ 2.97     $ 2.63     $ 2.49     $ 2.35     $ 2.29  
                                         

Adjusted net income (3)

  $ 15,324     $ 12,502     $ 11,046     $ 10,144     $ 8,876  
                                         

Adjusted net income per diluted share

  $ 4.08     $ 3.43     $ 3.06     $ 2.82     $ 2.56  
                                         

Average return on:

                                       

Adjusted invested capital (4)

    13 %     14 %     16 %     21 %     23 %

 

 

(1)

Average return on stockholder investment is calculated by dividing total net income by the average of end and beginning of year total stockholders’ equity.

 

(2)

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.

 

(3)

Adjusted net income is defined to exclude the non-cash impact of amortization of intangible assets, net of tax. The tax effect is calculated using the average corporate rate for that year multiplied by the amortization.

 

(4)

Adjusted invested capital is a non-GAAP measure which substitutes adjusted net income for net income in the average return on invested capital calculation (2).

 

Reconciliation of Non-GAAP Measure

 

Adjusted net income (which excludes the non-cash impact of amortization of intangible assets, net of tax) is used by management as a supplemental performance and liquidity measure, primarily to exclude the impact of acquisition-related intangible assets in order to compare current financial performance to historical performance, assess the ability of our assets to generate cash and the evaluation of potential acquisitions.

 

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

 

 
PAGE 17

 

 

The following table sets forth our reconciliation of adjusted net income, a non-GAAP measure:

 

(In thousands)

 

Year Ended March 31,

 
   

2016

   

2015

   

2014

   

2013

   

2012

 

Net income

  $ 11,169     $ 9,583     $ 9,000     $ 8,450     $ 7,919  

Amortization of intangible assets, net of tax

    4,155       2,919       2,046       1,694       957  

Adjusted net income

  $ 15,324     $ 12,502     $ 11,046     $ 10,144     $ 8,876  

 

 
PAGE 18

 

 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

We pursue a strategy of focusing primarily on quality control products and services, which are sold into niche markets that are driven by regulatory requirements. We prefer markets that have limited competition where we can establish a commanding presence and achieve high gross margins. We are organized into four divisions across eight physical locations. Our Instruments Division designs, manufactures and markets quality control instruments and disposable products utilized in connection with the healthcare, pharmaceutical, food and beverage, medical device, industrial hygiene, environmental air sampling and semiconductor industries. Our Biological Indicators Division provides testing services, along with the manufacturing and marketing of biological indicators and distribution of chemical indicators used to assess the effectiveness of sterilization processes, including steam, hydrogen peroxide, ethylene oxide and radiation, in the hospital, dental, medical device and pharmaceutical industries. Our Continuous Monitoring Division designs, develops and markets systems which are used to monitor various environmental parameters such as temperature, humidity and differential pressure to ensure that critical storage and processing conditions are maintained in hospitals, pharmaceutical and medical device manufacturers, blood banks, pharmacies and a number of other laboratory and industrial environments. Our Cold Chain Division provides parameter (primarily temperature) monitoring of products in a cold chain, consulting services such as compliance monitoring, packaging development and validation or mapping of transport and storage containers, and thermal packaging products such as coolers, boxes, insulation materials and phase-change products to control temperature during transport.

 

Our revenues come from two main sources – product sales and services. Product sales are dependent on several factors, including general economic conditions, both domestic and international, customer capital spending trends, competition, introduction of new products and acquisitions. Biological indicators and many of the packaging products of our Cold Chain Division are disposable and are used on a routine basis, thus product sales are less sensitive to general economic conditions. Instrument products, continuous monitoring systems, and cold chain monitoring products have a longer life, and their purchase by our customers is somewhat discretionary, so sales are more sensitive to general economic conditions. Service demand is driven by our customers’ quality control and regulatory environments, which require periodic repair and recalibration or certification of our instrument products and continuous monitoring systems. We typically evaluate costs and pricing annually. Our policy is to price our products competitively and, where possible, we pass along cost increases in order to maintain our margins.

 

Gross profit is affected by our product mix, manufacturing efficiencies and price competition. Historically, as we have integrated our acquisitions and taken advantage of manufacturing efficiencies, our gross margins for some of the products have improved. There are, however, differences in gross margins between different product lines, and ultimately the mix of sales will continue to impact our overall gross margin.

 

Selling expense is driven primarily by labor costs, including salaries and commissions. Accordingly, it may vary with sales levels. Labor costs and amortization of intangible assets drive the substantial majority of general and administrative expense. Research and development expense is predominantly comprised of labor costs and third party consultants.

 

Subsequent to our year ended March 31, 2016, we completed the following two acquisitions:

 

In April 2016, we completed the ATS Acquisition whereby we acquired substantially all the assets (other than cash and certain inventories and fixed assets) and certain liabilities of ATS. ATS was in the business of supplying products and services for dental sterilizer testing in both the U.S. and Canada.

 

In April 2016, we completed the Pulse Acquisition whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of Pulse’s business segment associated with the distribution of our biological indicator products.

 

Year Ended March 31, 2016 Acquisitions

 

During the year ended March 31, 2016, we completed the following ten acquisitions (the “2016 Acquisitions”):

 

In January 2016, we completed the January 2016 European BI Distributor Acquisitions whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of the business segment associated with the distribution of our biological indicator products from CoaChrom Diagnostica GmbH of Austria and bioTRADING Benelux B.V of the Netherlands;

 

 
PAGE 19

 

 

In October 2015, we completed the October 2015 European BI Distributor Acquisitions whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of the business segment associated with the distribution of our biological indicator products from BIOLOGIK S.R.L.(Italy), VWR International PBI S.R.L.(Italy), Cruinn Diagnostics Ltd.(Ireland), Mecolab AG (Switzerland), Miclev Medical Products AB (Sweden) and Tiselab S.L.(Spain)’s;

 

In August 2015, we completed the North Bay Acquisition whereby we acquired substantially all of the assets (other than certain fixed assets) and certain liabilities of the dental sterilizer testing business of North Bay; and

 

In July 2015, we completed the Infitrak Acquisition whereby we acquired all of the common stock of Infitrak, a company whose business provides consulting, packaging and measuring solutions for cold chain applications.

 

Year Ended March 31, 2015 Acquisitions

 

During the year ended March 31, 2015, we completed the following six acquisitions (the “2015 Acquisitions”):

 

In March 2015, we completed the Früh Acquisition whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of Früh’s business segment associated with the distribution of our biological indicator products;

 

In February 2015, we completed the Cherwell Acquisition whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of Cherwell’s business segment associated with the distribution of our biological indicator products;

 

In October 2014, we completed the ATI Acquisition whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of ATI, a distributor of our biological indicator products;

 

In October 2014, we completed the PCD Acquisition whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of PCD’s business segment associated with the sale of PCD’s which are used for quality control purposes in the field of ethylene oxide sterilization of medical devices;

 

In April 2014, we completed the BGI Acquisition whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of BGI’s business which is focused on the sale of equipment used primarily for particulate air sampling; and

 

In April 2014, we completed the Amilabo Acquisition whereby we acquired all of the common stock of Amilabo, a distributor of our biological indicator products.

 

Year Ended March 31, 2014 Acquisitions

 

During the year ended March 31, 2014, we completed the following three acquisitions (the “2014 Acquisitions”):

 

In November 2013, we completed the TempSys Acquisition whereby we acquired all of the common stock of TempSys, a company in the business of providing continuous monitoring systems to regulated industries;

 

In November 2013, we completed the Amega Acquisition whereby we acquired substantially all of the assets (other than cash) and certain liabilities of Amega, a company in the business of providing continuous monitoring services to regulated industries; and

 

In July 2013, we completed the Suretorque Acquisition whereby we acquired substantially all the assets (other than cash) of ST Acquisition’s business segment involving the design, manufacture, sale and service of its SureTorque line of bottle cap torque testing instrumentation.

 

 
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General Trends and Outlook

 

Our strategic objectives include growth both organically and through further acquisitions. During the year ended March 31, 2016, we continued to build our infrastructure to prepare for future growth, including the addition of key personnel to our operations, sales and marketing, research and development, and finance teams. In addition, on October 1, 2015 we converted from our legacy enterprise resource planning (“ERP”) system to our new cloud based system. This represented a significant upgrade and we will continue to make smaller modifications in future periods.

 

The markets for our biological indicators and cold chain packaging products remain strong, as the disposable nature of these products makes them less sensitive to general economic conditions. The worldwide market for biological indicators is growing as more countries focus on verifying the effectiveness of sterilization processes.

 

In general, our instruments products, cold chain services and our continuous monitoring systems are impacted more by general economic conditions than our biological indicator and cold chain packaging products. As a result, uncertainty about global economic conditions may cause businesses to postpone spending in response to tighter credit, unemployment, negative financial news and/or declines in income or asset values. Worldwide and regional economic conditions could also reduce the demand for our products and services, as our customers reduce or delay capital equipment and other types of purchases. However, demand for our instruments products, cold chain services and continuous monitoring systems remains strong and we strive to continue to grow revenues going forward.

 

We are working on several research and development projects that, if completed, may result in new products for both existing customers and new markets. We are hopeful that all of our divisions will have new products available for sale in the coming year.

 

Results of Operations

 

The following table sets forth, for the periods indicated, condensed consolidated statements of income data. The table and the discussion below should be read in conjunction with the accompanying consolidated financial statements and the notes thereto appearing elsewhere in “Item 8. Financial Statements and Supplementary Data” (in thousands, except percent data):

 

   

Year Ended March 31,

   

2016 vs 2015

   

2015 vs 2014

 
   

2016

   

2015

   

2014

   

Change

   

Percent

 Change

   

Change

   

Percent

Change

 

Revenues

  $ 84,659     $ 71,330     $ 52,724     $ 13,329       19 %   $ 18,606       35 %

Cost of revenues

    33,246       27,938       21,036       5,308       19 %     6,902       33 %

Gross profit

  $ 51,413     $ 43,392     $ 31,688     $ 8,021       18 %   $ 11,704       37 %
                                                         

Gross profit margin

    61 %     61 %     60 %     -- %             1 %        
                                                         

Operating Expenses:

                                                       

Selling

  $ 7,500     $ 7,176     $ 6,119     $ 324       5 %   $ 1,057       17 %

General and administrative

    23,618       17,058       11,464       6,560       38 %     5,594       49 %

Research and development

    3,972       3,294       2,320       678       21 %     974       42 %
    $ 35,090     $ 27,528     $ 19,903     $ 7,562       27 %   $ 7,625       38 %
                                                         

Operating income

  $ 16,323     $ 15,864     $ 11,785     $ 459       3 %   $ 4,079       35 %

Net income

  $ 11,169     $ 9,583     $ 9,000     $ 1,586       17 %   $ 583       6 %

Net income margin

    13 %     13 %     17 %     -- %             (4% )        

 

 
PAGE 21

 

 

Revenues

 

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

 

   

Year Ended March 31,

   

2016 vs 2015

   

2015 vs 2014

 
   

2016

   

2015

   

2014

   

Change

   

Percent

Change

   

Change

 

Percent

Change

 

Biological Indicators

                                                       

Product

  $ 30,348     $ 26,330     $ 22,111     $ 4,018       15 %   $ 4,219       19 %

Service

    3,301       1,060       881       2,241       211 %     179       20 %
      33,649       27,390       22,992       6,529       23 %     4,398       19 %

Instruments

                                                       

Product

    25,957       26,789       20,858       (832 )     (3 )%     5,931       28 %

Service

    9,735       6,265       5,531       3,470       55 %     734       13 %
      35,692       33,054       26,389       2,638       8 %     6,665       25 %

Continuous Monitoring

                                                       

Product

    5,901       5,791       1,570       110       2 %     4,221       269 %

Service

    4,891       5,095       1,773       (204 )     (4 )%     3,322       187 %
      10,792       10,886       3,343       (94 )     (1 )%     7,543       226 %

Cold Chain

                                                       

Product

    3,879       --       --       3,879       100 %     --       -- %

Service

    647       --       --       647       100 %     --       -- %
      4,526       --       --       4,526       100 %     --       -- %

Total

  $ 84,659     $ 71,330     $ 52,724     $ 13,329       19 %   $ 18,606       35 %

 

Year ended March 31, 2016 versus March 31, 2015

 

Biological Indicators revenues increased as a result of the ATI, PCD, Früh, Cherwell, North Bay, October 2015 European BI Distributor and the January 2016 European BI Distributor Acquisitions and organic growth of two percent which was achieved through existing customers, expansion into new markets and price increases. This growth was partially offset by the impact to revenues generated from our wholly owned subsidiary in France due to the decrease in the value of the Euro as compared to the U.S. dollar during our year ended March 31, 2016.

 

Instruments revenues increased as a result of the timing of the BGI Acquisition and organic growth of eight percent in our existing product lines which was achieved primarily through existing and new customers.

 

Continuous Monitoring revenues were essentially flat. On a go forward basis, we anticipate the run rate for our Continuous Monitoring segment to approximate $2,500,000 - $3,000,000 per quarter over the next few quarters.

 

Cold Chain revenues were $4,526,000 for the year ended March 31, 2016. We anticipate that revenues for the next few quarters to grow organically at a rate greater than ten percent.

 

Year ended March 31, 2015 versus March 31, 2014

 

Biological Indicators revenues increased as a result of the Amilabo, ATI, PCD, Früh and Cherwell Acquisitions and organic growth of four percent which was achieved through existing customers, expansion into new markets and price increases.

 

 
PAGE 22

 

 

Instruments revenues increased as a result of the BGI Acquisition and organic growth of six percent in our existing product lines and the timing of the prior year acquisition of the SureTorque product line, partially offset by the disposal of the Nusonics product.

 

Continuous Monitoring revenues increased as a result of organic growth of 52 percent and the timing of the prior year acquisition of TempSys and Amega.

 

Gross Profit

 

The following table summarizes our gross profit by operating segment (in thousands, except percent data):

 

   

Year Ended March 31,

   

2016 vs 2015

   

2015 vs 2014

 
   

2016

   

2015

   

2014

   

Change

   

Percent

Change

   

Change

   

Percent

Change

 

Biological Indicators

  $ 22,205     $ 17,142     $ 13,187     $ 5,063       30 %   $ 3,955       30 %

Gross profit margin

    66 %     63 %     57 %     3 %             6 %        
                                                         

Instruments

  $ 23,223     $ 20,763     $ 16,904     $ 2,460       12 %   $ 3,859       23 %

Gross profit margin

    65 %     63 %     64 %     2 %             (1 )%        
                                                         

Continuous Monitoring

  $ 4,154     $ 5,487     $ 1,597     $ (1,333 )     (24 )%   $ 3,890       244 %

Gross profit margin

    38 %     50 %     48 %     (12 )%             2 %        
                                                         

Cold Chain

  $ 1,831     $ --     $ --     $ 1,831       100 %   $ --       -- %

Gross profit margin

    40 %     -- %     -- %     -- %             -- %        

Total gross profit

  $ 51,413     $ 43,392     $ 31,688     $ 8,021       18 %   $ 11,704       37 %
                                                         

Gross profit margin

    61 %     61 %     60 %     -- %             1 %        

 

Year ended March 31, 2016 versus March 31, 2015

 

Biological Indicators gross profit margin percentage increased as a result of the ATI, PCD, Früh, Cherwell, North Bay, October 2015 European BI Distributor and the January 2016 European BI Distributor Acquisitions, price increases and volume-based efficiencies associated with revenues growth.

 

Instruments gross profit margin percentage increased primarily as a result of changes in product and service mix and volume-based efficiencies associated with revenues growth.

 

Continuous Monitoring gross profit margin percentage decreased primarily as a result of changes in product and service mix. In addition, the prior year gross margin percentage was positively impacted by the timing of revenue recognition on several larger installations that were one-time in nature. We have made substantial progress on our integration activities associated with this segment and we are now focused on cost reduction initiatives to streamline the operations and increase profitability. One of the critical components of our integration activities was to introduce a new system (consisting of both new software and hardware) which we believe will give us a competitive advantage in the marketplace. In addition to significant new features and functionality, we believe that the new system will reduce our costs (both from an installation and on-going maintenance perspective) which will lead to higher gross and operating margins. This system was originally planned to be rolled out during our year ended March 31, 2015. The software component of the system was completed in February 2016 but the remaining hardware component will not be ready until the end of our second quarter ending September 30, 2016. We are hopeful to meet the newly stated release dates and that this new system will improve both our gross and operating income margins, however it is unclear as to how significant those improvements will be.

 

 
PAGE 23

 

 

We expect that our Cold Chain gross profit margin percentage will continue to be lower than the historical results of our other segments due to the nature of our cold chain products. This lower gross profit percentage, however, is offset by lower operating expenses (as a percentage of revenues) and as a result, we expect that operating income margins for our Cold Chain segment to be similar to those of our other segments.

 

Year ended March 31, 2015 versus March 31, 2014

 

Biological Indicators gross profit margin percentage increased as a result of the Amilabo, ATI, PCD, Früh and Cherwell Acquisitions, price increases and volume-based efficiencies associated with revenues growth. In addition, the year ended March 31, 2014 was negatively impacted by the requirement to replace three product batches that had longer than expected incubation times.

 

Instruments gross profit margin percentage decreased as a result of integration activities associated with the BGI Acquisition and a change in our product/service mix, partially offset by the impact of six percent organic revenues growth and the application of purchase accounting associated with the Suretorque Acquisition in the prior year.

 

Continuous Monitoring gross profit margin percentage was negatively impacted by integration activities that commenced soon after the acquisitions were completed. These integration activities have been decreasing over the year and are now substantially complete. As a result, we believe that the Continuous Monitoring gross profit margin percentages on a go forward basis will be impacted more by total revenues available to cover fixed costs and product mix as opposed to ongoing integration activities. We are hopeful that we will continue to improve these gross profit margin percentages in the future but it is unclear as to how much improvement we will be able to obtain.

 

Operating Expenses 

 

The following table summarizes the change in our operating expenses (in thousands):

 

   

Increase (Decrease)

 
   

Year Ended March 31,

 
   

2016 vs 2015

   

2015 vs 2014

 

Selling

  $ 324     $ 1,057  
                 

General and administrative

               

ERP system implementation

    748       673  

Recurring software related costs

    197       320  

Amortization

    1,121       1,696  

Personnel costs

    1,594       2,835  

Acquisition costs

    40       354  

Litigation settlement

    1,709       --  

Administrative costs related to acquired entities

    815       459  

Sales tax accrual

    (549 )     (948 )

Other, net

    885       205  
      6,560       5,594  
                 

Research and development

    678       974  
                 

Operating expenses

  $ 7,562     $ 7,625  

 

Selling 

 

Year ended March 31, 2016 versus March 31, 2015

 

Selling expense increased primarily due to additional personnel related to the 2016 and 2015 Acquisitions. As a percentage of revenues, selling expense decreased to nine percent as compared to 10 percent in the prior year.

 

 
PAGE 24

 

 

Year ended March 31, 2015 versus March 31, 2014

 

Selling expense increased primarily due to the 2015 and 2014 Acquisitions, along with negligible increases from other product lines. As a percentage of revenues, selling expense decreased to 10 percent as compared to 12 percent in the prior period. The decrease was due primarily to streamlining sales processes associated with acquisitions along with corresponding increases in revenues.

 

General and Administrative

 

Year ended March 31, 2016 versus March 31, 2015

 

General and administrative expenses increased primarily due to increased amortization, personnel and other administrative costs resulting from the 2016 and 2015 Acquisitions, increased spending on our ERP system implementation and a litigation settlement, partially offset by a decrease in sales tax accruals.

 

Year ended March 31, 2015 versus March 31, 2014

 

General and administrative expenses increased primarily due to increased amortization, personnel and ERP system implementation costs and acquisition costs resulting from the 2015 and 2014 Acquisitions, partially offset by a decrease in accruals for sales tax liabilities associated with not properly collecting and remitting sales tax in states in which we likely had established nexus during prior periods.

 

Research and Development

 

Year ended March 31, 2016 versus March 31, 2015

 

Research and development expenses increased as a result of the addition of several new engineers to support existing and acquired businesses.

 

Year ended March 31, 2015 versus March 31, 2014

 

Research and development expenses increased as a result of the Amega, TempSys and BGI Acquisitions and standard increases in personnel costs, partially offset by timing of external research and development consulting projects.

 

Other (Expense) Income

 

Other (expense) income, net for the year ended March 31, 2016 is comprised primarily of interest expense associated with our Credit Facility. Other expense (income), net for the year ended March 31, 2015 is comprised primarily of interest expense associated with our Credit Facility, partially offset by a $125,000 gain associated with the termination of a joint development project. Other (expense) income, net for the year ended March 31, 2014 is comprised of a $1,020,000 gain associated with the revision of our estimate on the amount that will ultimately be paid associated with contingent consideration related to the Bios Agreement and the $468,000 gain on the disposal of our Nusonics product line. Please see “Item 8. Financial Statements and Supplementary Data” for additional discussion.

 

Net Income

 

Our income tax rate varies based upon many factors but in general, we anticipate that on a go forward basis, our effective tax rate will approximate 33 to 36 percent, plus or minus the impact of excess tax benefits and deficiencies associated with share-based payment awards to employees (which may vary significantly from year to year). Net income for the year ended March 31, 2016 was significantly impacted by the $1,709,000 Amato Settlement, partially offset by $860,000, associated with the adoption of Financial Accounting Standards Board Accounting Standards Update No. 2016-09, Compensation—Stock Compensation (Topic 718) (please see Notes 12 and 1 of Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data, respectively.)” Otherwise, net income for the years ended March 31, 2016, 2015 and 2014 varied with the changes in revenue, gross profit and operating expenses (which includes $5,787,000, $4,675,000 and $2,979,000 of non-cash amortization of intangible assets, respectively).

 

 
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Liquidity and Capital Resources

 

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

 

Due to continued organic and acquisition related growth, we have outgrown the capacity of our current building in Bozeman, Montana and as a result, we are building a new facility in the same general area. Construction began in July 2015 and we are hopeful that the building will be completed no later than December 31, 2016. During our year ended March 31, 2015 we acquired the related land for $741,000 and have spent $5,970,000 during our year ended March 31, 2016, which is included in property, plant and equipment, net on the accompanying consolidated balance sheets. We anticipate that the total cost of the new facility will be approximately $14,750,000. Following the relocation from our current Bozeman building into the new facility, we expect to be able to sell the current facility for $2,000,000 - $3,000,000 to partially offset the cost of the new building.

 

We implemented a new ERP system which required a significant amount of cash. We incurred approximately $2,100,000 of expense associated with this project of which approximately $1,400,000 was incurred during the year ended March 31, 2016. On a go forward basis, we expect our annual operating costs for our ERP system to approximate $450,000 plus any costs necessary for additional projects and enhancements.

 

Working capital is the amount by which current assets exceed current liabilities. We had working capital of $13,215,000 and $14,965,000, respectively, at March 31, 2016 and 2015.

 

In February 2012, we entered into a three year agreement (the “Credit Facility”) for a $20,000,000 revolving line of credit (“Line of Credit”) and up to $1,000,000 of letters of credit. Funds from the Credit Facility were used for general working capital and corporate needs, retiring existing debt, or to support acquisitions and capital expenditures.

 

In April 2014, the Credit Facility was amended to include a $15,000,000 term loan (the “Initial Term Loan”) and to extend the maturity date of the Credit Facility to June 30, 2017.

 

On July 1, 2015, we further amended our Credit Facility to extend the maturity date to June 30, 2020, increase the Line of Credit to $50,000,000 and establish a new $20,000,000 term loan (the “Term Loan”). The majority of the proceeds from the Term Loan were used to pay down the remaining $12,000,000 balance of the Initial Term Loan.

 

Under the Line of Credit, indebtedness bears interest at either: (1) LIBOR, as defined, plus an applicable margin ranging from 1.5% to 2.25%; or (2) the bank’s commercial bank floating rate (“CBFR”), which is the bank’s prime rate adjusted down by 0.5%.

 

The Term Loan bears interest at LIBOR, as defined, plus an applicable margin ranging from 1.5% to 2.25% and requires 20 quarterly principal payments (the first due date was July 15, 2015) in the amount of $750,000 with the remaining balance of principal and accrued interest due on June 30, 2020.

 

The Credit Facility is secured by all of our assets and requires us to maintain a ratio of funded debt to our trailing four quarters of EBIDTA, as defined, of 3.25 to 1.0 through March 31, 2016 and 3.0 to 1.0 thereafter, and a minimum fixed charge coverage ratio of 1.35 to 1.0. We were in compliance with the required covenants at March 31, 2016.

 

As of May 31, 2016, we had $44,500,000 in outstanding indebtedness and unused capacity under our Credit Facility of $22,500,000.

 

In April 2015, the SEC declared effective our Universal Shelf Registration Statement which allows us to sell, in one or more public offerings, common stock or warrants, or any combination of such securities for proceeds in an aggregate amount of up to $130,000,000. The terms of any offering, including the type of securities involved, would be established at the time of sale.

 

 
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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 believe that we have the option to utilize both equity and debt instruments as vehicles for the long-term financing of our investment activities and acquisitions.

 

On November 7, 2005, our Board of Directors authorized a program to repurchase up to 300,000 shares of our outstanding common stock. Under the plan, the shares may be purchased from time to time in the open market at prevailing prices or in negotiated transactions off the market. Shares purchased are canceled and repurchases are made with existing cash reserves. We do not maintain a set policy or schedule for our buyback program. We have purchased 162,486 shares of common stock under this program from inception through March 31, 2016.

 

We have paid regular quarterly dividends since 2003. Dividends per share paid by quarter were as follows:

 

   

Year Ended March 31,

 
   

2016

   

2015

   

2014

 

First quarter

  $ 0.16     $ 0.15     $ 0.14  

Second quarter

    0.16       0.15       0.14  

Third quarter

    0.16       0.16       0.15  

Fourth quarter

    0.16       0.16       0.15  

 

In April 2016, our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on June 15, 2016, to shareholders of record at the close of business on May 31, 2016.

 

Cash Flow – Operating, investing and financing activities were as follows (in thousands):

 

   

Year Ended March 31,

 
   

2016

   

2015

   

2014

 

Net cash provided by operating activities

  $ 16,903     $ 10,816     $ 12,373  

Net cash used in investing activities

    (31,840 )     (23,371 )     (23,138 )

Net cash provided by financing activities

    18,620       9,072       12,334  

 

Net cash provided by operating activities for the year ended March 31, 2016 increased primarily due to the efficient management of working capital. Net cash provided by operating activities for the year ended March 31, 2015 decreased primarily due to increases in accounts receivable and inventories resulting from the 2014 and 2015 Acquisitions, decreases in unearned revenues and the payment of accrued liabilities and taxes payable, partially offset by decreases in payments of accounts payable and increases in net income and depreciation and amortization. Net cash provided by operating activities for the year ended March 31, 2014 increased primarily due to positive results from our efforts to collect long-outstanding receivables, partially offset by significant increases in inventory purchases associated with the Amega and TempSys Acquisitions.

 

Net cash used in investing activities for the year ended March 31, 2016 resulted from $24,111,000 associated with the 2016 Acquisitions and the purchase of $7,729,000 of property, plant and equipment. Net cash used in investing activities for the year ended March 31, 2015 resulted from $20,543,000 associated with the 2015 Acquisitions and the purchase of $2,828,000 of property, plant and equipment. Net cash used in investing activities for the year ended March 31, 2014 resulted from $22,758,000 associated with the 2014 Acquisitions and the purchase of $1,041,000 of property, plant and equipment, partially offset by the proceeds from the disposal of the NuSonics product line of $661,000.

 

Net cash provided by financing activities for the year ended March 31, 2016 resulted from borrowings under our Credit Facility of $25,000,000 and proceeds from the exercise of stock options of $1,923,000, partially offset by the repayment of debt of $6,000,000 and the payment of dividends of $2,303,000. Net cash provided by financing activities for the year ended March 31, 2015 resulted from borrowings under our Credit Facility of $23,000,000 and proceeds from the exercise of stock options of $1,504,000, partially offset by the repayment of debt of $13,250,000 and the payment of dividends of $2,182,000. Net cash provided by financing activities for the year ended March 31, 2014 resulted from borrowings under our Line of Credit of $21,000,000 and proceeds from the exercise of stock options of $1,845,000, partially offset by the repayment of debt of $8,500,000 and the payment of dividends of $1,989,000.

 

 
PAGE 27

 

 

At March 31, 2016, we had contractual obligations for open purchase orders of approximately $3,120,000 for routine purchases of supplies and inventory, which are payable in less than one year.

 

Under the terms of the Infitrak Agreement, we are required to pay contingent consideration if the gross profit (as defined in the Earn-Out Agreement) for the packaging component of our cold chain business for the two years subsequent to the acquisition meets certain levels. The potential undiscounted consideration payable ranges from $0 to $15,000,000 CDN (approximately $0 to $11,500,000 as of March 31, 2016) and is based upon a sliding scale of growth in gross profit (as defined in the Earn-Out Agreement) for year one and year two of 30 to 70 percent and 15 to 75 percent, respectively. Based upon both historical and projected growth rates, we recorded $9,271,000 (valued at $9,037,000 as of March 31, 2016 based on the then current fair market value and exchange rate) of contingent consideration payable which represented our best estimate of the then current fair market value of the amount that will ultimately be paid. Any changes to the contingent consideration ultimately paid will result in additional income or expense in our consolidated statements of income. We will continue to monitor the results of the packaging component of our cold chain business and we will adjust the contingent liability on a go forward basis, based on then current information. The contingent consideration is payable in two annual installments beginning in the second quarter of our year ending March 31, 2017.

 

Under the terms of the PCD Agreement, we are required to pay contingent consideration if the cumulative revenues for our process challenge device business for the three years subsequent to the acquisition meet certain levels. The potential consideration payable ranges from $0 to $1,500,000 and is based upon a sliding scale of three-year cumulative revenues between $9,900,000 and $12,600,000. Based upon both historical and projected growth rates, we recorded $300,000 of contingent consideration payable which represented our best estimate of the amount that will ultimately be paid. We paid $150,000 of the contingent consideration during the year ended March 31, 2016 (based upon the current run rate projected over the entire three-year contingent consideration period). This amount is subject to modification at the end of the second and third years of the earn-out period based upon the actual revenues earned over the contingent consideration period. Any changes to the contingent consideration ultimately paid will result in additional income or expense in our consolidated statements of income. We will continue to monitor the results of our process challenge device business and we will adjust the contingent liability on a go forward basis, based on then current information.

 

In October 2015, we entered into the Amato Settlement (for additional discussion, please see Note 12 of Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data”) whereby we paid Amato $3,165,000. In exchange, Amato agreed to dismiss the complaint, release Mesa of any and all claims by Amega and Amato, and relieve us of any future payment obligation under the Amega Earn-Out. Insurance covered $415,000 of the settlement payment and we had $1,041,000 accrued on our consolidated balance sheet remaining from the original hold back and contingent consideration payable. The remaining $1,709,000 was recorded as general and administrative expense in the accompanying consolidated statements of income for the year ended March 31, 2016.

 

Critical Accounting Policies and Estimates

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require management to make estimates, judgments, and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We believe that the following are the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations. Management has discussed the development, selection, and disclosure of critical accounting policies and estimates with the Audit Committee of our Board of Directors. While our estimates and assumptions are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. For a discussion of our significant accounting policies, please see Note 1 of Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data.”

 

Accounts Receivable

 

We estimate an allowance for doubtful accounts based on overall historic write-offs, the age of our receivable balances, and the payment history and creditworthiness of the customer. If actual results are not consistent with our assumptions and judgments or our assumptions and estimates change due to new information, we may experience material changes in our allowance for doubtful accounts and bad debt expense.

 

 
PAGE 28

 

 

Inventories

 

Inventories are stated at the lower of cost or market, using the weighted average method to determine cost. We evaluate labor and overhead costs annually, unless specific circumstances necessitate a mid-year evaluation for specific items. Our work in process and finished goods inventory includes raw materials, labor and overhead, which are estimated based on trailing twelve months of expense and standard labor hours for each product. Our biological indicator inventory is tracked by lot number, thus labor is generally based on actual hours.

 

We monitor inventory cost compared to selling price in order to determine if a lower of cost or market reserve is necessary. At year end we perform a complete physical inventory observation. Throughout the year, we estimate and maintain an inventory reserve, as needed, for such matters as obsolete inventory, shrink and scrap. This reserve may fluctuate as our assumptions change due to new information, discrete events, or changes in our business, such as entering new markets or discontinuing a specific product.

 

Recoverability of Long-lived Assets

 

For property, plant and equipment, and intangible assets subject to amortization, recoverability and/or impairment tests are required only when conditions exist that indicate the carrying value may not be recoverable. We monitor the same conditions for our goodwill, but an annual evaluation is also required.

 

Monitoring these conditions requires significant management judgment, including evaluating general economic conditions, industry and market considerations, changes in production costs, cash flow trends, and other relevant entity-specific events such as changes in management, key personnel, strategy or customers.

 

If conditions exist that indicate the carrying value may not be recoverable, we would be required to estimate the fair value of the asset, asset group, or reporting unit. We determine fair value using widely accepted valuation techniques, primarily discounted cash flow and market multiple analyses. These techniques are also used when initially allocating the purchase price to acquired assets and liabilities. These types of analyses require us to make assumptions and estimates regarding industry and economic factors, the profitability of future business strategies, and cash flow.

 

We did not record any impairment charges for the years ended March 31, 2016, 2015 or 2014. If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future.

 

Purchase Accounting for Acquisitions

 

We apply the acquisition method of accounting for a business combination. In general, this methodology requires companies to record assets acquired and liabilities assumed at their respective fair values at the date of acquisition. Any amount of the purchase price paid that is in excess of the estimated fair value of the net assets acquired is recorded as goodwill. For the Infitrak, PCD and Amega Acquisitions, we also recorded a liability for contingent consideration based on estimated future revenues. We monitor our assumptions surrounding these estimated future cash flows and, if there is a significant change, would record an adjustment to the contingent consideration liability and a corresponding adjustment to either income or expense.

 

We determine fair value using widely accepted valuation techniques, primarily discounted cash flow and market multiple analyses. These types of analyses require us to make assumptions and estimates regarding industry and economic factors, the profitability of future business strategies, discount rates and cash flow.

 

If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future. If the contingent consideration paid for any of our acquisitions differs from the amount initially recorded, we would record either income or expense.

 

Stock-based Compensation

 

We estimate the fair value of option grants using the Black-Scholes model, which requires us to estimate the volatility and forfeiture rate. Under our current stock-based compensation plan, we recognize the expense on a straight-line basis over the service period.

 

 
PAGE 29

 

 

Contingent Liabilities

 

We accrue a loss for contingencies if it is probable that an asset has been impaired or a liability has been incurred, and when the amount of loss can be reasonably estimable. When no accrual is made because one or both of these conditions does not exist, we disclose the contingency if there is at least a reasonable possibility that a loss may be incurred. We estimate contingent liabilities based on the best information available at the time. If there is a range of possible outcomes, we accrue the low end of the range.

 

Recent Accounting Standards and Pronouncements

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation—Stock Compensation (Topic 718), as part of its simplification initiative, which affects all entities that issue share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. The ASU was effective for our fiscal year ending March 31, 2018 using either the prospective, retrospective or modified retrospective transition method, depending on the area covered in this update. As permitted within the amendment, we elected to early adopt and prospectively apply the provisions of this amendment as of April 1, 2015.

 

In December 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). ASU 2015-17 simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The standard is effective for our fiscal year (and interim periods within that year) ending March 31, 2018. We do not expect this guidance to have a material impact on our results of operations or financial position.

 

In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (Topic 805), which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. The new guidance requires that the cumulative impact of a measurement-period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified which eliminates the requirement to restate prior period financial statements. The ASU requires disclosure of the nature and amount of measurement-period adjustments as well as information with respect to the portion of the adjustments recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustments to provisional amounts had been recognized as of the acquisition date. Due to the historical nature and volume of our acquisitions, we elected to early adopt this ASU and there was no impact to our consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which impacts virtually all aspects of an entity’s revenue recognition. The core principle of the new standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Companies can transition to the standard either retrospectively or as a cumulative effective adjustment as of the date of adoption. The new standard is effective for our fiscal year (and interim periods within that year) ending March 31, 2019. We are currently evaluating when to adopt the new standard, the impacts of adoption and the implementation approach to be used.

 

 
PAGE 30

 

 

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

 

Off-Balance Sheet Arrangements

 

In accordance with the definition under SEC rules, the following qualify as off-balance sheet arrangements:

 

 

any obligation under certain guarantee contracts;

 

a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets;

 

any obligation under certain derivative instruments; and

 

any obligation arising out of a material variable interest held by the registrant in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the registrant, or engages in leasing, hedging or research and development services with the registrant.

 

As of March 31, 2016, we have no obligations or interests which qualify as off-balance sheet arrangements.

 

Contractual Obligations

 

As of March 31, 2016, our contractual obligations, including payments due by period, are as follows (in thousands):

 

           

Payments Due For Years Ending March 31,

 
   

Total

   

2017

      2018-2019       2020-2021    

Thereafter

 

Purchase Commitments

  $ 3,120     $ 2,808     $ 312     $ --     $ --  

Line of Credit

    27,500       --       --       27,500       --  

Term loan

    17,750       3,000       6,000       8,750       --  

Other

    483       274       209       --       --  

Total

  $ 48,853     $ 6,082     $ 6,521     $ 36,250     $ --  

 

Our purchase commitments consist primarily of open purchase orders, which we have established to take advantage of volume discounts for materials and to ensure a reliable supply of critical parts.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We have no derivative instruments and minimal exposure to foreign currency and commodity market risks.

 

We are subject to interest rate volatility with regard to existing and future issuances of debt, as our current credit facility is variable-rate. Based on annualized variable-rate debt for the year ended March 31, 2016, a one percentage point increase in interest rates would have increased interest expense by $380,000.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Report of Independent Registered Public Accounting Firm

32

Consolidated Balance Sheets

34

Consolidated Statements of Income

35

Consolidated Statements of Comprehensive Income

36

Consolidated Statements of Stockholders’ Equity

37

Consolidated Statements of Cash Flows

38

Notes to Consolidated Financial Statements

39

 

 
PAGE 31

 

  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

Board of Directors and Stockholders

Mesa Laboratories, Inc.

Lakewood, Colorado

 

 

We have audited the accompanying consolidated balance sheets of Mesa Laboratories, Inc. and subsidiaries (the “Company”) as of March 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 2016. We have also audited the Company’s internal control over financial reporting as of March 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Infitrak, (“Infitrak Acquisition”), which was acquired on July 6, 2015, and North Bay (“North Bay Acquisition”), which was acquired on August 6, 2015. Financial statements of the Acquisitions constitute approximately 10% and 9% of consolidated total assets and total revenues, respectively, of the consolidated financial statements amounts as of and for the year ended March 31, 2016. Accordingly, our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of the Acquisitions. The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and the effectiveness of the Company’s internal control over financial reporting based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control over financial reporting based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.

 

 
PAGE 32

 

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mesa Laboratories, Inc. and subsidiaries as of March 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2016 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for share-based compensation in fiscal 2016, due to the adoption of Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic 718) Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

 

 

 

 

/s/ EKS&H LLLP

 

June 6, 2016

Denver, Colorado

 

 
PAGE 33

 

  

Mesa Laboratories, Inc.

Consolidated Balance Sheets

(In thousands, except share amounts)

 

   

March 31,

 

 

 

2016

   

2015

 
ASSETS                

Current assets:

               

Cash and cash equivalents

  $ 5,695     $ 2,034  

Accounts receivable, less allowances of $375 and $700, respectively

    15,313       12,145  

Inventories, net

    14,017       12,420  

Prepaid expenses and other

    943       1,334  

Deferred income taxes

    1,218       1,689  

Total current assets

    37,186       29,622  
                 

Property, plant and equipment, net

    16,628       9,598  

Intangibles, net

    40,797       33,231  

Goodwill

    66,137       44,869  

Total assets

  $ 160,748     $ 117,320  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Accounts payable

  $ 2,823     $ 2,503  

Accrued salaries and payroll taxes

    5,040       4,105  

Unearned revenues

    3,026       1,314  

Current portion of contingent consideration

    4,757       1,220  

Other accrued expenses

    3,085       1,307  

Income taxes payable

    2,240       1,208  

Current portion of long-term debt

    3,000       3,000  

Total current liabilities

    23,971       14,657  
                 

Deferred income taxes

    5,419       5,122  

Long-term debt

    42,250       23,250  

Contingent consideration

    4,430       812  

Total liabilities

    76,070       43,841  
                 

Commitments and Contingencies (Note 12)

    --       --  
                 

Stockholders’ equity:

               

Common stock, no par value; authorized 25,000,000 shares; issued and outstanding, 3,637,273 shares (March 31, 2016) and 3,561,540 shares (March 31, 2015)

    21,001       17,751  

Retained earnings

    64,828       55,962  

Accumulated other comprehensive loss

    (1,151 )     (234 )

Total stockholders’ equity

    84,678       73,479  

Total liabilities and stockholders’ equity

  $ 160,748     $ 117,320  

 

See accompanying notes to consolidated financial statements.

 

 
PAGE 34

 

 

Mesa Laboratories, Inc.

Consolidated Statements of Income

(In thousands, except per share data)

 

   

Year Ended March 31,

 
   

2016

   

2015

   

2014

 
                         

Revenues

                       

Product

  $ 66,085     $ 58,910     $ 44,539  

Service

    18,574       12,420       8,185  

Total revenues

    84,659       71,330       52,724  
                         

Cost of revenues

                       

Cost of products

    26,957       23,128       16,062  

Cost of services

    6,289       4,810       4,974  

Total cost of revenues

    33,246       27,938       21,036  

Gross profit

    51,413       43,392       31,688  
                         

Operating expenses

                       

Selling

    7,500       7,176       6,119  

General and administrative

    23,618       17,058       11,464  

Research and development

    3,972       3,294       2,320  

Total operating expenses

    35,090       27,528       19,903  
                         

Operating income

    16,323       15,864       11,785  

Other (expense) income, net

    (768 )     (517 )     1,318  
                         

Earnings before income taxes

    15,555       15,347       13,103  
                         

Income taxes

    4,386       5,764       4,103  

Net income

  $ 11,169     $ 9,583     $ 9,000  
                         

Net income per share:

                       

Basic

  $ 3.10     $ 2.72     $ 2.61  

Diluted

    2.97       2.63       2.49  
                         

Weighted average common shares outstanding:

                 

Basic

    3,605       3,521       3,445  

Diluted

    3,757       3,650       3,611  

 

See accompanying notes to consolidated financial statements.

 

 
PAGE 35

 

  

Mesa Laboratories, Inc.

Consolidated Statements of Comprehensive Income

 (In thousands except per share data)

 

   

Year Ended March 31,

 
   

2016

   

2015

   

2014

 
                         

Net Income

  $ 11,169     $ 9,583     $ 9,000  
                         

Other comprehensive loss, net of tax:

                       

Foreign currency translation

    (917 )     (234 )     --  
                         

Total comprehensive income

  $ 10,252     $ 9,349     $ 9,000  

 

See accompanying notes to consolidated financial statements.

 

 
PAGE 36

 

 

Mesa Laboratories, Inc.

Consolidated Statements of Stockholders’ Equity

(In thousands, except share amounts)

 

   

Common Stock

                                 
   

Number of

Shares

   

Amount

   

Employee

Loans

   

Retained

Earnings

   

Accumulated

Other

Comprehensive

Loss

   

Total

 

March 31, 2013

    3,388,548     $ 11,352     $ (149 )   $ 41,550     $ --     $ 52,753  
                                                 

Common stock issued for conversion of stock options net of 13,021 shares returned as payment

    104,864       1,845       --       --       --       1,845  

Purchase and retirement of common stock

    (2,784 )     (147 )     125       --       --       (22