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EX-32.2 - EXHIBIT 32.2 - MESA LABORATORIES INC /COex_115263.htm
EX-32.1 - EXHIBIT 32.1 - MESA LABORATORIES INC /COex_115262.htm
EX-31.2 - EXHIBIT 31.2 - MESA LABORATORIES INC /COex_115261.htm
EX-31.1 - EXHIBIT 31.1 - MESA LABORATORIES INC /COex_115260.htm
EX-23.1 - EXHIBIT 23.1 - MESA LABORATORIES INC /COex_115259.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, 2018

 

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

 

For the transition period from ____ to ____

 

Commission File No: 0-11740

 


 

MESA LABORATORIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Colorado

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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one):

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting

company ☐

Emerging growth

company ☐

   

(Do not check if a

smaller reporting company)

   

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

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

YES ☐   NO

 

The aggregate market value as of September 30, 2017 (the last business day of the registrant's most recently completed second fiscal quarter), of the voting and non-voting common equity of Mesa Laboratories Inc. held by non-affiliates (assuming, for this purpose, that all directors, officers and owners of 5% or more of the registrant’s common stock are deemed affiliates) computed by reference to the price at which the common equity was last sold ($149.32 per share) was $384,259,000.

 

 

The number of outstanding shares of the Issuer’s common stock as of May 31, 2018 was 3,808,436.

 

 

 

 

 

Table of Contents

 

Forward Looking Statements

 

Part I

   

Item 1.

Business

1

Item 1A.

Risk Factors

8

Item 1B.

Unresolved Staff Comments

16

Item 2.

Properties

16

Item 3.

Legal Proceedings

16

Item 4.

Mine Safety Disclosures

16

Part II

   

Item 5.

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

17

Item 6.

Selected Financial Data

19

Item 7.

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

21

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

35

Item 8.

Financial Statements and Supplementary Data

35

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

62

Item 9A.

Controls and Procedures

62

Item 9B.

Other Information

63

Part III

   

Item 10.

Directors, Executive Officers and Corporate Governance

64

Item 11.

Executive Compensation

69

Item 12.

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

77

Item 13.

Certain Relationships and Related Transactions, and Director Independence

78

Item 14.

Principal Accountant Fees and Services

78

Part IV

   

Item 15.

Exhibits and Consolidated Financial Statement Schedules

79

 

Signatures

 

 

 

 

 

 

Forward-Looking Statements

 

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

 

Part I

 

Item 1. Business

 

Introduction

 

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

 

Our Bozeman, Montana and Munich, Germany locations manufacture our Sterilization and Disinfection Control Division products which include the EZTest®, ProSpore®, PCD®, Apex® and Simicon biological and cleaning indicators, while our Bozeman, Montana, facility also provides sterility assurance testing services to dental offices in the United States and Canada.  Our Lakewood, Colorado, and Butler, New Jersey, facilities manufacture our Instruments Division products which include the DataTrace®, DialyGuard®, DryCal®, Torqo®, SureTorque® and BGI brands. Our Lakewood, Colorado, facility also manufactures our Cold Chain Monitoring Division products which include CheckPoint®, AmegaView, ViewPoint® and FreshLoc brands.  Our Markham, Ontario, facility manufactures our Mesa brand real time monitoring solutions and outsources the manufacture of our TempTrust® brand of packaging materials. 

 

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

 

Page 1

 

 

Acquisitions

 

Year Ended March 31, 2018 Acquisitions

 

During the year ended March 31, 2018, we completed the following three acquisitions:

 

In November 2017, we completed a business combination (the “BAG Acquisition”) whereby we acquired substantially all of the assets and certain liabilities of BAG Health Care GmbH’s (“BAG”) Hygiene Monitoring business which is comprised of the distribution of biological, chemical and cleaning indicator products;

 

In October 2017, we completed a business combination (the “Simicon Acquisition”) whereby we acquired the common stock of SIMICON GmbH (“Simicon”), a company whose business manufactures both biological and cleaning indicators; and

 

In May 2017, we completed a business combination (the “Hucker Acquisition”) whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of Hucker & Hucker GmbH’s (“Hucker”) business segment associated with the distribution of our biological indicator products.

 

Year Ended March 31, 2017 Acquisitions

 

During the year ended March 31, 2017, we completed the following six acquisitions:

 

In November 2016, we completed a business combination (the “Mydent Acquisition”) whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of Mydent International Corp’s business segment associated with biological indicator mail-in testing services to the dental market in the United States;

 

In November 2016, we completed a business combination (the “FreshLoc Acquisition”) whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of the cold chain monitoring business of FreshLoc Technologies, Inc.;

 

In August 2016, we completed a business combination (the “Rapid Aid Acquisition”) whereby we acquired certain assets (consisting primarily of fixed assets) and certain liabilities of Rapid Aid Corp’s (“Rapid Aid”) business segment associated with the manufacture and sale of cold chain packaging gel products;

 

In July 2016, we completed a business combination (the “HANSAmed Acquisition”) whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of HANSAmed Limited’s (“HANSAmed”) business segment associated with the distribution of our biological indicator products and mail-in testing services to the dental market in Canada;

 

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

 

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

 

Year Ended March 31, 2016 Acquisitions

 

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

 

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

 

Page 2

 

 

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

 

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

 

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

 

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

 

Sterilization and Disinfection Control Division

 

Our Sterilization and Disinfection Control Division (formerly named the Biological Indicators Division) provides testing services, along with the manufacture and marketing of biological, chemical and cleaning indicators used to assess the effectiveness of sterilization processes, including steam, gas, hydrogen peroxide, ethylene oxide and radiation, in the hospital, dental, medical device and pharmaceutical industries. Our biological indicators are developed and manufactured according to International Standards Organization (“ISO”) 11138 under a quality system that complies with ISO 13485 and 21 CFR 820.

 

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

 

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

 

Chemical indicators use a chemical change (generally determined by color) to assess the exposure to sterilization conditions. Biological indicators and chemical indicators are often used together to monitor processes.

 

Cleaning indicators are used to assess the effectiveness of cleaning processes, including washer-disinfectors and ultrasonic cleaners in healthcare settings. Cleaning is the critical first step performed prior to disinfection and sterilization. Debris left on an instrument may interfere with microbial inactivation and can compromise the disinfection or sterilization process. Cleaning indicators compliment sterilization and disinfection processes within central sterile supply departments in hospitals.

 

Page 3

 

 

Instruments Division

 

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

 

Data Loggers

 

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

 

Medical Meters and Calibration Solutions

 

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

 

Gas Flow Calibration and Air Sampling Equipment

 

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

 

Page 4

 

 

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

 

Torque Testing Systems

 

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

 

Cold Chain Monitoring Division

 

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

 

Among the important competitive differentiators for our cold chain monitoring systems are 1) their high degree of reliability and up-time; 2) a large variety of sensor types to meet the needs of most applications; 3) a skilled, distributed installation and service team; and 4) a full-featured and 21 CFR Part 11 validated software program, providing extensive reporting and alarm capability. An important aspect of our cold chain monitoring business is the ability to provide post-installation service and support. For most systems, annual re-calibration of each sensor is required, and we provide this service through our dedicated service organization.

 

Our Cold Chain Monitoring Division also provides parameter (primarily temperature) monitoring of products during transport in a cold chain and consulting services such as compliance monitoring and validation or mapping of transport and storage containers. Our compliance services help customers validate the effectiveness of their cold chain and our monitoring systems record temperature during shipment and provide alarms in case of temperature excursions throughout a cold chain, from point of manufacture or collection, all the way to point of use.

 

Cold Chain Packaging Division

 

Our Cold Chain Packaging Division provides packaging development consulting services and thermal packaging products such as coolers, boxes, insulation materials and phase-change products to control temperature during transport. We provide a full suite of products and services to help our customers meet the requirements of their Good Distribution Practices (“GDP”) regulations.

 

The competitive advantages of our Cold Chain Packaging Division include 1) our in-depth knowledge of cold chain characteristics and requirements, 2) packaging materials that are very durable and can control temperatures for up to 168 hours during transport, and 3) extensive package development and testing capability to help in the design and validation of custom packaging solutions.

 

Page 5

 

 

Market Factors

 

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

 

Manufacturing

 

We conduct product development, manufacturing and support of our Instruments Division products from our facilities in Lakewood, Colorado and Butler, New Jersey. Our instrument products are manufactured primarily by assembling the products from purchased components and calibrating the final products prior to release. The manufacture and support of our Cold Chain Monitoring Division systems are conducted from our facility in Lakewood, Colorado and primarily involve assembling the systems from purchased components and calibrating the sensors, either at the factory or at the point of installation at the customer’s facility. Facilities in Bozeman, Montana, and Munich, Germany are used for the Sterilization and Disinfection Control Division. Our biological indicator products are manufactured by growing microbiological spores from raw materials, forming the finished products and testing the finished biological indicators using established quality control tests. Our dental sterilizer testing products are assembled into kits containing biological indicator spore strips and our microbiological laboratory tests these kits when they are returned to us to determine the effectiveness of our customer’s sterilization process. Our cleaning indicator products are manufactured by inoculating a test soil onto a stainless-steel coupon. The test solid is designed to mimic the challenge of removing blood and tissue from surgical instruments and evaluates the effectiveness of our customer’s cleaning process. Our Cold Packaging products are manufactured by third party suppliers.

 

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

 

Marketing and Distribution

 

Domestically, we generate sales to end users through our sales and marketing staff and distributors. We use approximately 220 distributors throughout Europe, Africa, Asia, South America, Australia, Canada and Central America for international sales and distribution. Sales promotions include trade shows, direct mail campaigns, internet and other digital forms of advertising.

 

Our Sterilization and Disinfection Control Division commercial efforts focus on providing quality test products in a variety of different formats, which minimize incubation and test result time and provide the highest levels of sterility assurance. Customers include hospitals, dental offices, contract sterilization providers and various industrial users involved in pharmaceutical and medical device manufacturing.

 

Our Instruments Division commercial efforts focus on offering quality products to our customers that will aid them in containing cost, improving the quality of their products and services, and helping them meet their regulatory requirements. Customers include dialysis clinics, pharmaceutical, medical device and food and beverage manufacturers, contract sterilizing services, governmental agencies and environmental testing labs.

 

Our Cold Chain Monitoring Division commercial efforts focus on providing quality systems to our customers that monitor various environmental parameters such as temperature, humidity and differential pressure to ensure that critical storage and processing conditions are maintained. Customers include hospitals, pharmaceutical and medical device manufacturers, blood banks, pharmacies and laboratory environments.

 

Page 6

 

 

Our Cold Chain Packaging Division commercial efforts focus on providing packaging development consulting services and thermal packaging products such as coolers, boxes, insulation materials and phase-change products to control temperature during transport. Customers primarily include pharmaceutical manufacturers and distribution companies.

 

As of and for the years ended March 31, 2018, 2017 and 2016, no individual customer represented more than 10% of our accounts receivable or revenues.

 

Competition

 

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

 

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

 

Research and Development

 

We are committed to an active research and development program dedicated to innovating new products and improving the quality and performance of our existing products. We spent $3,539,000, $4,157,000 and $4,976,000 for the years ended March 31, 2018, 2017 and 2016, respectively, on research and development activities, including amounts capitalized as intangible assets and construction-in-progress. Amounts capitalized, which relate primarily to the development of Cold Chain Monitoring products, were $0, $0 and $1,004,000 for the years ended March 31, 2018, 2017 and 2016, respectively.

 

Government Regulation

 

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

 

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

 

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

 

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

 

Employees

 

On March 31, 2018, we had 366 employees, of which 173 are employed for manufacturing and quality assurance, 25 for research and development and engineering, 110 for sales and marketing, and 58 for administration.

 

Page 7

 

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this Annual Report on Form 10-K and other documents we filed with the SEC, you should carefully consider the following factors, which could materially affect our business, financial condition or results of operations in future periods. The risks and uncertainties described below are those that we have identified as material, but these are not the only risks and uncertainties facing us. Our business is also subject to general risks and uncertainties that affect many other companies, such as market conditions, economic conditions, geopolitical events, changes in laws, regulations or accounting rules, fluctuations in interest rates, terrorism, wars or conflicts, major health concerns, natural disasters or other disruptions of expected business conditions. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our business, including our results of operations, liquidity and financial condition.

 

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

 

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

 

 

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

 

 

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

 

 

increasing price competition in our served markets;

 

 

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

 

 

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

 

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

 

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

 

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

 

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We face competition and if we are unable to compete effectively, we may experience decreased demand and decreased market share. Even if we compete effectively, we may be required to reduce prices for our products and services.

 

The markets for our current and potential products are competitive. Because of the range of products and services we sell and the variety of markets we serve, we encounter a wide variety of competitors, including several that possess both larger sales forces and greater capital resources. In order to compete effectively, we must maintain longstanding relationships with major customers, continue to grow our business by establishing relationships with new customers, develop new products and services to maintain and expand our brand recognition and leadership position in various product and service categories, and penetrate new markets, including in developing countries and high growth markets. In addition, significant shifts in industry market share can occur in connection with product problems, safety alerts and publications about products, reflecting the competitive significance of product quality, product efficacy and quality systems in our industries. Our failure to compete effectively and/or pricing pressures resulting from competition may adversely impact our results of operations, and our expansion into new markets may result in greater-than-expected risks, liabilities and expenses.

 

Changing industry trends may affect our results of operations.

 

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

 

 

changes in dialysis reimbursements;

     
 

mergers within the dialysis provider industry, concentrating our medical meter and solutions sales with a few, large customers;

     
 

mergers within other industries we serve, making us more dependent upon fewer, larger customers for our sales;

     
 

decreased product demand, driven by changes in our customers’ regulatory environments or standard industry practices; and

     
 

price competition for key products.

 

Our growth depends in part on the timely development and commercialization, and customer acceptance, of new and enhanced products and services and the efforts of third party distributors.

 

Our growth depends on the acceptance of our products and services in the marketplace, the penetration achieved by the companies which we sell to, and rely on, to distribute and represent our products, and our ability to introduce new and innovative products that meet the needs of the various markets we serve. We can offer no assurance that we will be able to continue to introduce new and enhanced products, that the products we introduce, or have introduced, will be widely accepted by the marketplace, or that the companies that we contract with to distribute and represent our products will continue to successfully penetrate our various markets. Our failure to continue to introduce new and enhanced products or gain widespread acceptance of our products and services could adversely affect our results of operations. In order to successfully commercialize our products and services in new markets, we will need to enter into distribution arrangements with companies that can successfully distribute and represent our products and services into various markets.

 

Our reputation, ability to do business and consolidated financial statements may be impaired by improper conduct by any of our employees, agents or business partners.

 

We cannot provide assurance that our internal controls and compliance systems will always protect us from acts committed by employees, agents or business partners of ours (or of businesses we acquire or partner with) that would violate U.S. and/or non-U.S. laws, including the laws governing payments to government officials, bribery, fraud, kickbacks and false claims, pricing, sales and marketing practices, conflicts of interest, competition, export and import compliance, money laundering and data privacy. In particular, the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Any such improper actions or allegations of such acts could damage our reputation and subject us to civil or criminal investigations in the United States and in other jurisdictions and related shareholder lawsuits, could lead to substantial civil and criminal, monetary and non-monetary penalties and could cause us to incur significant legal and investigatory fees. We also rely on our suppliers to adhere to our supplier standards of conduct and material violations of such standards of conduct could occur that could have a material effect on our business, reputation and consolidated financial statements.

 

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Certain of our businesses are subject to extensive regulation by the U.S. Food and Drug Administration (“FDA”) and by comparable agencies of other countries. Failure to comply with those regulations would likely adversely affect our reputation and consolidated financial statements

 

Certain of our products are medical devices and other products that are subject to regulation by the U.S. FDA, by other federal and state governmental agencies, by comparable agencies of other countries and regions and by regulations governing radioactive or other hazardous materials. We cannot guarantee that we will be able to obtain regulatory clearance (such as 510(k) clearance) or approvals for our new products or modifications to (or additional indications or uses of) existing products within our anticipated timeframe or at all, and if we do obtain such clearance or approval it may be time-consuming, costly and subject to restrictions. Our ability to obtain such regulatory clearances or approvals will depend on many factors and the process for obtaining such clearances or approvals could change over time and may require the withdrawal of products from the market until such clearances are obtained. Failure to comply with applicable regulations would likely adversely impact our results of operations.

 

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

 

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

 

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

 

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

 

 

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

 

 

we may incur or assume significant debt in connection with our acquisitions;

 

 

acquisitions could cause our results of operations to differ from our own or the investment community’s expectations in any given period, or over the long-term;

 

 

pre-closing and post-closing acquisition-related earnings charges could adversely impact our results of operations in any given period, and the impact may be substantially different from period to period;

 

 

acquisitions could create demands on our management, operational resources and financial and internal control systems that we are unable to effectively address, or for which we may incur additional costs;

 

 

we could experience difficulty in integrating personnel, operations, financial and other systems, and in retaining key employees and customers;

 

 

we may be unable to achieve cost savings or other synergies anticipated in connection with an acquisition;

 

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we may assume by acquisition unknown liabilities, known contingent liabilities that become realized, known liabilities that prove greater than anticipated, internal control deficiencies or exposure to regulatory sanctions resulting from the acquired company’s activities. The realization of any of these liabilities or deficiencies may increase our expenses, adversely affect our financial position or cause us to fail to meet our public financial reporting obligations;

 

 

in connection with acquisitions, we often enter into post-closing financial arrangements such as purchase price adjustments, earn-out obligations and indemnification obligations, which may have unpredictable financial results; and

 

 

as a result of our acquisitions, we have recorded significant goodwill and intangible assets on our consolidated balance sheet. If we are not able to realize the value of these assets, we may be required to incur charges relating to the impairment of these assets, which could materially impact our results of operations.

 

The indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and as a result we may face unexpected liabilities.

 

Certain of the acquisition agreements by which we have acquired companies require the former owners to indemnify us against certain liabilities related to the operation of the company before we acquired it.  In most of these agreements, however, the liability of the former owners is limited, and certain former owners may be unable to meet their indemnification responsibilities.  We cannot guarantee that these indemnification provisions will protect us fully or at all, and as a result we may face unexpected liabilities that could adversely impact our results of operations.

 

Divestitures or other dispositions could negatively impact our business.

 

We continually assess the strategic fit of our existing businesses and may divest or otherwise dispose of businesses that are deemed not to fit with our strategic plan or are not achieving the desired return on investment. Transactions such as these pose risks and challenges that could negatively impact our business and our results of operations. For example, when we decide to sell or otherwise dispose of a business or assets, we may be unable to do so on satisfactory terms within our anticipated timeframe or at all, and even after reaching a definitive agreement to sell or dispose a business the sale may be subject to satisfaction of pre-closing conditions which may not become satisfied. In addition, divestitures or other dispositions may dilute our earnings per share, have other adverse financial and accounting impacts and distract management, and disputes may arise with buyers.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Catastrophic events or environmental conditions may disrupt our business. 

 

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

 

Significant developments stemming from the current U.S. administration or the United Kingdom’s referendum on membership in the EU could have an adverse effect on us.

 

Changes, potential changes or uncertainties in U.S. social, political, regulatory and economic conditions or laws and policies governing the health care system and drug prices, foreign trade, manufacturing, and development and investment in the territories and countries where we or our customers operate, stemming from the current U.S. administration, could adversely affect our business and consolidated financial statements. For example, the current U.S. administration has called for substantial changes to trade agreements, such as the North American Free Trade Agreement (“NAFTA”), has increased tariffs on certain goods imported into the United States and has raised the possibility of imposing significant, additional tariff increases. Additionally, on June 23, 2016, the United Kingdom held a referendum and voted in favor of leaving the EU. This referendum has caused and may continue to cause political and economic uncertainty, including significant volatility in global stock markets and currency exchange rate fluctuations. Although it is unknown what the full terms of the United Kingdom’s future relationship with the EU will be, it is possible that there will be greater restrictions on imports and exports between the United Kingdom and other countries, including the United States, and increased regulatory complexities. Any of these factors could adversely affect customer demand, our relationships with customers and suppliers and our business and financial statements.

 

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

 

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

 

Changes in accounting standards could affect our reported financial results.

 

New accounting standards or pronouncements that may become applicable to our Company from time to time, or changes in the interpretation of existing standards and pronouncements, could have a significant effect on our reported results of operations for the affected periods. 

 

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

 

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

 

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

 

We are subject to income taxes in the U.S. and in various non-U.S. jurisdictions.  On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted.  The TCJA significantly revises the U.S. federal corporate income tax law by, among other things, lowering the corporate income tax rate to 21% (beginning in calendar 2018), implementing a territorial tax system, and imposing a one-time tax on unremitted cumulative non-U.S. earnings of foreign subsidiaries (“Transition Tax”).  The U.S. Treasury Department and IRS have not yet issued regulations with respect to the TCJA.

 

Due to the potential for changes to tax laws and regulations or changes to the interpretation thereof (including regulations and interpretations pertaining to the TCJA), the ambiguity of tax laws and regulations, the subjectivity of factual interpretations, the complexity of our intercompany arrangements, uncertainties regarding the geographic mix of earnings in any particular period, and other factors, our estimates of effective tax rate and income tax assets and liabilities may be incorrect and our consolidated financial statements could be adversely affected. For example, our estimate of the net one-time charge we have incurred related to the TCJA could differ materially from our actual liability, due to, among other things, further refinement of our calculations, changes in interpretations and assumptions that we have made, additional guidance that may be issued by the U.S. Treasury Department and IRS, and actions we may take as a result of the TCJA. The impact of the factors referenced in the first sentence of this paragraph may be substantially different from period-to-period. 

 

In addition, the amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. tax authorities.  If audits result in payments or assessments different from our reserves, our future results may include unfavorable adjustments to our tax liabilities and our consolidated financial statements could be adversely affected.  Any further significant changes to the tax system in the United States or in other jurisdictions (including changes in the taxation of international income as further described below) could adversely affect our consolidated financial statements.

 

Changes in tax law relating to multinational corporations could adversely affect our tax position.

 

The U.S. Congress, government agencies in non-U.S. jurisdictions where we and our affiliates do business, and the Organisation for Economic Co-operation and Development (“OECD”) have recently focused on issues related to the taxation of multinational corporations. One example is in the area of “base erosion and profit shifting,” where profits are claimed to be earned for tax purposes in low-tax jurisdictions, or payments are made between affiliates from a jurisdiction with high tax rates to a jurisdiction with lower tax rates. The OECD has released several components of its comprehensive plan to create an agreed set of international rules for addressing base erosion and profit shifting. As a result, the tax laws in the United States and other countries in which we do business could change on a prospective or retroactive basis, and any such changes could adversely affect our business and financial statements.

 

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Our business is subject to sales tax in numerous states.

 

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

 

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

 

We are subject to the possibility of a variety of litigation and other legal and regulatory proceedings incidental to our business, including claims for damages arising out of the use of products or services and claims relating to intellectual property matters, employment matters, tax matters, commercial disputes, marketing matters, competition and sales and trading practices, environmental matters, personal injury, insurance coverage and acquisition or divestiture-related matters, as well as regulatory investigations or enforcement. We may also become subject to lawsuits as a result of past or future acquisitions or as a result of liabilities retained from, or representations, warranties or indemnities provided in connection with, divested businesses. Any of these lawsuits may include claims for compensatory damages, punitive and consequential damages and/or injunctive relief. The defense of these lawsuits may divert our management’s attention, we may incur significant expenses in defending these lawsuits, and we may be required to pay damage awards or settlements or become subject to equitable remedies that could adversely affect our operations and consolidated financial statements. Moreover, any insurance or indemnification rights that we may have may be insufficient or unavailable to protect us against such losses. In addition, developments in proceedings in any given period may require us to adjust the loss contingency estimates that we have recorded in our consolidated financial statements, record estimates for liabilities or assets previously not susceptible of reasonable estimates or pay cash settlements or judgments. Any of these developments could adversely affect our consolidated financial statements in any given period. We cannot make assurances that our liabilities in connection with litigation and other legal regulatory proceedings will not exceed our estimates or adversely affect our consolidated financial statements and business. Please see Note 13 of Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” for additional discussion.

 

We are utilizing variable rate financing.

 

As of March 31, 2018, we had $46,625,000 in outstanding indebtedness which bears interest at either: (1) LIBOR, as defined, plus an applicable margin ranging from 1.5% to 2.50%; or (2) the alternate base rate (“ABR”), which is the greater of JPMorgan’s prime rate or the federal funds effective rate or the overnight bank funding rate plus 0.5%. A change in interest rate market conditions could increase our interest costs in the future and may have an adverse effect on our results of operations.   

 

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

 

As of March 31, 2018, we had $46,625,000 in outstanding indebtedness and, based on the remaining availability under our Credit Facility, we have the ability to incur an additional $52,000,000 of indebtedness. Our debt level and related debt service obligations can have negative consequences, including (1) requiring us to dedicate significant cash flow from operations to the payment of principal and interest on our debt, which would reduce the funds we would have available for other purposes such as acquisitions and capital investment; (2) reducing our flexibility in planning for or reacting to changes in our business and market conditions; and (3) exposing us to interest rate risk since our debt obligations are at variable rates. We may incur significantly more debt in the future, particularly to finance acquisitions.

 

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

 

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

 

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

 

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

 

Adverse changes in our relationships with, or the financial condition, performance, purchasing patterns or inventory levels of, key distributors and other channel partners could adversely affect our consolidated financial statements.

 

Certain of our businesses sell a significant amount of their products to key distributors and other channel partners that have valuable relationships with customers and end-users. Some of these distributors and other partners also sell our competitors’ products or compete with us directly, and if they favor competing products for any reason they may fail to market our products effectively. Adverse changes in our relationships with these distributors and other partners, or adverse developments in their financial condition, performance or purchasing patterns, could adversely affect our business and consolidated financial statements. The levels of inventory maintained by our distributors and other channel partners, and changes in those levels, can also negatively impact our results of operations in any given period.

 

A significant disruption in, or breach in security of, our information technology systems or violation of data privacy laws could adversely affect our business, reputation and consolidated financial statements.

 

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

 

While we select our third-party vendors carefully (including the provider of our ERP system), we don’t control their actions. Any problems caused by these third parties, including those resulting from breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes or cyber-attacks and security breaches at a vendor could adversely affect our ability to deliver products and services to our customers and otherwise conduct our business.

 

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

 

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

 

Item 1B. Unresolved Staff Comments

 

None

 

Item 2. Properties

 

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

 

Location

Operations

Square Feet

   

Lakewood, Colorado

Instruments, Cold Chain Monitoring and Corporate Headquarters

44,000

 

Owned

Lakewood, Colorado

Corporate administration

9,000

 

Leased

Butler, New Jersey

Instruments

20,000

 

Leased

Bozeman, Montana

Sterilization and Disinfection Control

129,000

 

Owned

Berlin, New Jersey

Cold Chain Monitoring

2,000

 

Leased

Traverse City, Michigan

Sterilization and Disinfection Control

3,800

 

Leased

Addison, Texas

Cold Chain Monitoring

2,000

 

Leased

Chassieu, France

Sterilization and Disinfection Control

6,000

 

Leased

Markham, Canada

Cold Chain Packaging and Sterilization and Disinfection Control

8,000

 

Leased

Munich, Germany

Sterilization and Disinfection Control

5,000

 

Leased

 

Item 3. Legal Proceedings

 

In February 2018, we were sued in a putative civil class action in the United States District Court for the Northern District of Illinois, Eastern Division whereby it was alleged that we sent unsolicited advertisements to telephone facsimile machines in violation of the Telephone Consumer Protection Act (“TCPA”), as well as analogous state statutes and state consumer protection laws. The plaintiff in this lawsuit is seeking various forms of relief, including statutory damages of $500 for each violation of the TCPA or, in the alternative, treble damages of up to $1,500 for each knowing and willful violation of the TCPA, as well as payment of interest, attorneys’ fees and costs, and certain injunctive relief prohibiting the further transmission of unsolicited fax advertising in the future. We intend to vigorously defend this case however we cannot predict with any degree of certainty the outcome of the lawsuit or determine the extent of any potential liability or damages.

 

Item 4. Mine Safety Disclosures

 

Not applicable

 

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Part II

 

Item 5. Market for Registrants 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, 2017

  $ 166.41     $ 122.10     $ 0.16  

September 30, 2017

    153.66       128.19       0.16  

December 31, 2017

    160.45       124.16       0.16  

March 31, 2018

    152.68       124.62       0.16  

 

Quarter Ended

 

High

   

Low

   

Dividends Per Share

 

June 30, 2016

  $ 130.03     $ 92.83     $ 0.16  

September 30, 2016

    126.48       102.54       0.16  

December 31, 2016

    135.24       115.02       0.16  

March 31, 2017

    126.99       116.41       0.16  

 

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

 

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

 

As of March 31, 2018, there were 101 record holders of our common stock. This amount does not include “street name” holders or beneficial holders of our common stock, whose holders of record are banks, brokers and other financial institutions.

 

During the year ended March 31, 2018, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.

 

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

 

   

Shares

Purchased

   

Average

Price Paid

   

Total Shares

Purchased as

Part of Publicly

Announced Plan

   

Remaining Shares Able to Purchase Under Plan

 

January 1 – 31, 2018

    --       --       162,486       137,514  

February 1 – 28, 2018

    --       --       162,486       137,514  

March 1 – 31, 2018

    --       --       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, 2018, we have issued 8,788 restricted stock awards, 458,358 shares of common stock may be issued upon exercise of outstanding options, with a weighted-average exercise price of $86.38 and 767,888 shares are available for future issuance under the plans. Please see notes contained in “Item 8. Financial Statements and Supplementary Data” of this report for additional details.

 

Page 17

 

 

Set forth below is a line graph comparing, for the period March 31, 2013 through March 31, 2018, the cumulative total shareholder return on our common stock against the cumulative total return of (a) the S&P Composite Stock Index and (b) a self-selected peer group, comprised of the following companies: Danaher Corp., ARCA Biopharma, Inc., Steris Corp., Utah Medical Products, Inc., Cantel Medical Corp., Fortive Corporation, Merit Medical Systems, Inc., Transcat Inc., Electro-Sensors Inc., and Rudolph Technologies Inc. The graph shows the value at March 31 of each year, assuming an original investment of $100 in each and reinvestment of cash dividends.

 

 

 

 

Page 18

 

 

Item 6. Selected Financial Data

 

The following selected financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and financial statements and notes thereto contained in “Item 8. Financial Statements and Supplementary Data” of this report.

 

 

(In thousands, except per share data)

 

As of and for The Year Ended March 31,

 
   

2018

   

2017

   

2016

   

2015

   

2014

 

Cash and cash equivalents

  $ 5,469     $ 5,820     $ 5,695     $ 2,034     $ 5,575  

Working capital

  $ 14,698     $ 19,218     $ 13,215     $ 14,965     $ 16,351  
                                         

Average return on:

                                       

Stockholder investment (1)

    (3 )%     12 %     14 %     14 %     15 %

Assets

    (2 )%     7 %     8 %     9 %     11 %

Invested capital (2)

    (2 )%     8 %     10 %     11 %     13 %
                                         

Revenues

  $ 96,179     $ 93,665     $ 84,659     $ 71,330     $ 52,724  
                                         

Gross profit

  $ 54,619     $ 53,239     $ 51,413     $ 43,392     $ 31,688  

Gross profit margin

    57 %     57 %     61 %     61 %     60 %
                                         

Operating income

  $ 2,183     $ 16,313     $ 16,323     $ 15,864     $ 11,785  

Operating income margin

    2 %     17 %     19 %     22 %     22 %

Net (loss) income

  $ (2,962 )   $ 11,183     $ 11,169     $ 9,583     $ 9,000  

Net income margin

    (3 )%     12 %     13 %     13 %     17 %
                                         

Net (loss) income per diluted share

  $ (0.79 )   $ 2.91     $ 2.97     $ 2.63     $ 2.49  
                                         

Adjusted operating income (3)

  $ 24,603     $ 24,174     $ 23,437     $ 21,532     $ 15,604  
                                         

Adjusted operating income per diluted share

  $ 6.53     $ 6.29     $ 6.24     $ 5.90     $ 4.32  
                                         

Average return on:

                                       

Adjusted invested capital (4)

    17 %     17 %     20 %     24 %     22 %

 

 

(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 operating income is a non-GAAP measure and is defined to exclude the non-cash impact of amortization of intangible assets, stock-based compensation and impairment of goodwill.

 

(4)

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

 

Reconciliation of Non-GAAP Measure

 

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

 

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

 

Page 19

 

 

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

 

(In thousands)

  Year Ended March 31,  
   

2018

   

2017

   

2016

   

2015

   

2014

 

Operating income

  $ 2,183     $ 16,313     $ 16,323     $ 15,864     $ 11,785  

Amortization of intangible assets

    6,929       6,450       5,787       4,675       2,979  

Stock based compensation

    1,672       1,411       1,327       993       840  

Impairment of goodwill

    13,819       --       --       --       --  

Adjusted net income

  $ 24,603     $ 24,174     $ 23,437     $ 21,532     $ 15,604  

 

Page 20

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

We pursue a strategy of focusing primarily on quality control products and services, which are sold into niche markets that are driven by regulatory requirements. We prefer markets where we can establish a strong presence and achieve high gross margins. We are organized into four divisions across nine physical locations. Our Sterilization and Disinfection Control Division (formerly named the Biological Indicators Division) provides testing services, along with the manufacturing and marketing of biological, chemical and cleaning indicators used to assess the effectiveness of sterilization and disinfection processes in the hospital, dental, medical device and pharmaceutical industries. Our Instruments Division designs, manufactures and markets quality control instruments and disposable products utilized in the healthcare, pharmaceutical, food and beverage, medical device, industrial hygiene and environmental air sampling industries. Our Cold Chain Monitoring Division designs, develops and markets systems which are used to monitor various environmental parameters such as temperature, humidity and differential pressure to ensure that critical storage and processing conditions are maintained in hospitals, pharmaceutical and medical device manufacturers, blood banks, pharmacies and laboratory environments. Our Cold Chain Packaging Division provides packaging development consulting services and thermal packaging products such as coolers, boxes, insulation materials and phase-change products to control temperature during transport.

 

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

 

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

 

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

 

Year Ended March 31, 2018 Acquisitions

 

During the year ended March 31, 2018, we completed the following three acquisitions (the “2018 Acquisitions”):

 

In November 2017, we completed the BAG Acquisition whereby we acquired substantially all of the assets and certain liabilities of BAG’s Hygiene Monitoring business which is comprised of the distribution of biological, chemical and cleaning indicator products;

 

In October 2017, we completed the Simicon Acquisition whereby we acquired the common stock of Simicon, a company whose business manufactures both biological and cleaning indicators; and

 

In May 2017, we completed the Hucker Acquisition whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of Hucker’s business segment associated with the distribution of our biological indicator products.

 

Page 21

 

 

Year Ended March 31, 2017 Acquisitions

 

During the year ended March 31, 2017, we completed the following six acquisitions (the “2017 Acquisitions”):

 

In November 2016, we completed the Mydent Acquisition whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of Mydent International Corp’s business segment associated with biological indicator mail-in testing services to the dental market in the United States;

 

In November 2016, we completed the FreshLoc Acquisition whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of the cold chain monitoring business of FreshLoc Technologies, Inc.;

 

In August 2016, we completed the Rapid Aid Acquisition whereby we acquired certain assets (consisting primarily of fixed assets) and certain liabilities of Rapid Aid’s business segment associated with the manufacture and sale of cold chain packaging gel products;

 

In July 2016, we completed the HANSAmed Acquisition whereby we acquired substantially all of the assets (other than cash and accounts receivable) and certain liabilities of HANSAmed’s business segment associated with the distribution of our biological indicator products and mail-in testing services to the dental market in Canada;

 

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

 

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

 

Year Ended March 31, 2016 Acquisitions

 

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

 

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

 

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

 

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

 

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

 

General Trends and Outlook

 

Our strategic objectives include growth both organically and through further acquisitions. During the year ended March 31, 2018, we continued to build our infrastructure to prepare for future growth, including the relocation of our Omaha manufacturing facilities into the new Bozeman building, the addition of key personnel to operations and sales and marketing functions, and the initiation of phase three of our ERP implementation project (European operations).

 

Page 22

 

 

The markets for Sterilization and Disinfection Control products remain strong, as the disposable nature of these products makes them less sensitive to general economic conditions. The worldwide market for sterilization and disinfection control products is growing as more countries focus on verifying the effectiveness of sterilization and disinfection processes.

 

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

 

Overall revenues increased by $2,514,000, while organic revenues declined one percent, for the year ended March 31, 2018 resulting from organic decreases of one, three and 27 percent from the Instruments, Cold Chain Monitoring and Cold Chain Packaging Divisions, respectively, partially offset by an increase of six percent for the Sterilization and Disinfection Control Division.

 

At the beginning of our year ended March 31, 2018, we elected to discontinue for sale certain products in our Instruments, Cold Chain Monitoring and Sterilization and Disinfection Control Divisions due to the recent introduction of new or modified products and the consolidation of other product sets.  As part of this process, we analyzed the remaining inventories associated with these products to determine future usability and reserved against what we believed to be excess or obsolete, resulting in an increase in our inventory reserve of $406,000 (of which $216,000 related to the Cold Chain Monitoring Division).  At this time, we also established a plan to liquidate certain Cold Chain Monitoring raw material components related to the above-mentioned discontinued products.  During the second and third quarters, we subjected additional inventories to our liquidation program due to the discontinuance or winding-down of additional older product sets resulting from the release of our new ViewPoint operating platform. During the three months ended December 31, 2017, it became evident that our liquidation program was ineffective, and we determined that a significant amount of these inventories was not recoverable as previously planned. As such, we increased our Cold Chain Monitoring inventory reserve by $1,700,000.  Company-wide gross margin percentage for the year ended March 31, 2018 was 57 percent, but would have been 59 percent, without the impact of these additional inventory reserves. Additional changes to our reserve for inventories were related to normal business operations (please see Note 3 of Notes to Consolidated Financial Statements contained in “Item. 8. Financial Statements and Supplementary Data”).

 

During the nine months ended December 31, 2017, revenues in our Cold Chain Packaging Division decreased significantly as compared to the same period in the prior year primarily due to a significant decrease in revenues from our largest customer.  Due to this event, we believed that revenues for this segment would be approximately $2,250,000 to $2,750,000 lower for the year ending March 31, 2018 as compared to the year ended March 31, 2017.  During the three months ended December 31, 2017 we completed a detailed review of the cold chain packaging business and concluded that long and difficult sales-cycles associated with this product set, when coupled with higher than previously contemplated costs for operating and expanding the necessary infrastructure to support revenues growth, have resulted in a forecast of lower than expected revenues, gross margin percentages and overall profitability as compared to our original model for this business.  Based on these facts, we concluded that we had a triggering event requiring assessment of impairment for certain of our long-lived assets associated with the Cold Chain Packaging Division. As a result, we reviewed the long-lived assets associated with this reporting segment and recorded a $13,819,000 impairment charge related to goodwill, which is included in impairment charge on goodwill on the accompanying consolidated statements of operations for the year ended March 31, 2018.

 

We continue to monitor the operational results of our Cold Chain Packaging Division and if revenues, gross margin percentage and overall profitability fail to meet our revised projections, the remaining long-lived assets (including $1,401,000 of Goodwill and $4,081,000 of intangible assets as of March 31, 2018, respectively) could be subject to further impairment losses.

 

While we believe that the revenues from our largest customer will revert back to a normal run rate for our year ending March 31, 2019, we will continue to focus on growing the business in the future through new customer acquisition and implementing changes to optimize the underlying gross and operating margins.  We believe that these steps will help drive the business to a level of profitability and performance in line with our expectations, however there is no guarantee that we will be successful.  If, in the future, we determine that successfully trending toward our goals for this segment is not likely, we will, at that time, consider any and all available avenues including a potential disposition of this business segment. 

 

Page 23

 

 

Results of Operations

 

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

 

   

Year Ended March 31,

   

2018 vs 2017

   

2017 vs 2016

 
   

2018

   

2017

   

2016

   

Change

   

Percent

Change

   

Change

   

Percent

Change

 

Revenues

  $ 96,179     $ 93,665     $ 84,659     $ 2,514       3 %   $ 9,006       11 %

Cost of revenues

    41,560       40,426       33,246       1,134       3 %     7,180       22 %

Gross profit

  $ 54,619     $ 53,239     $ 51,413     $ 1,380       3 %   $ 1,826       4 %
                                                         

Gross profit margin

    57 %     57 %     61 %     -- %             (4 )%        
                                                         

Operating Expenses:

                                                       

Selling

  $ 8,823     $ 9,955     $ 7,500     $ (1,132 )     (11 )%   $ 2,455       33 %

General and administrative

    26,255       22,814       23,618       3,441       15 %     (804 )     (3 )%

Research and development

    3,539       4,157       3,972       (618 )     (15 )%     185       5 %

Impairment loss on goodwill

    13,819       --       --       13,819       100 %     --       -- %

Total operating expenses

  $ 52,436     $ 36,926     $ 35,090     $ 15,510       42 %   $ 1,836       5 %
                                                         

Operating income

  $ 2,183     $ 16,313     $ 16,323     $ (14,130 )     (87 )%   $ (10 )     -- %

Net (loss) income

  $ (2,962 )   $ 11,183     $ 11,169     $ (14,145 )     (126 )%   $ 14       -- %

Net (loss) income margin

    (3 )%     12 %     13 %     (15 )%             (1 )%        

 

Page 24

 

 

Revenues

 

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

 

   

Year Ended March 31,

   

2018 vs 2017

   

2017 vs 2016

 
   

2018

   

2017

   

2016

   

Change

   

Percent

Change

   

Change

   

Percent

Change

 

Sterilization and Disinfection Control

                                                       

Product

  $ 36,500     $ 32,195     $ 30,348     $ 4,305       13 %   $ 1,847       6 %

Service

    6,760       6,440       3,301       320       5 %     3,139       95 %
      43,260       38,635       33,649       4,625       12 %     4,986       15 %

Instruments

                                                       

Product

    24,660       25,152       25,957       (492 )     (2 )%     (805 )     (3 )%

Service

    9,444       9,253       9,735       191       2 %     (482 )     (5 )%
      34,104       34,405       35,692       (301 )     (1 )%     (1,287 )     (4 )%

Cold Chain Monitoring

                                                       

Product

    5,948       6,916       6,508       (968 )     (14 )%     408       6 %

Service

    7,030       5,668       5,058       1,362       24 %     610       12 %
      12,978       12,584       11,566       394       3 %     1,018       9 %

Cold Chain Packaging

                                                       

Product

    5,064       6,792       3,461       (1,728 )     (25 )%     3,331       96 %

Service

    773       1,249       291       (476 )     (38 )%     958       329 %
      5,837       8,041       3,752       (2,204 )     (27 )%     4,289       114 %

Total

  $ 96,179     $ 93,665     $ 84,659     $ 2,514       3 %   $ 9,006       11 %

 

Year ended March 31, 2018 versus March 31, 2017

 

Sterilization and Disinfection Control revenues increased 12 percent, primarily due to the 2018 Acquisitions and organic growth of six percent, which was achieved through existing customers, expansion into new markets, price increases and strengthening of the Euro.

 

Instruments revenues decreased by one percent, primarily due to the slower than expected adoption of an updated medical product, although we realized a normalization of the adoption rate of this product towards the end of the year.

 

Cold Chain Monitoring revenues increased three percent primarily due to the FreshLoc Acquisition, partially offset by organic decreases of three percent. Revenues in this division fluctuate quarter over quarter due to the timing of customer acceptance of certain installations and the nature and timing of orders within any given quarter.

 

Cold Chain Packaging revenues decreased by 27 percent primarily due to a lower order rate based on timing issues with our largest customer (which accounted for approximately half of division revenues for the year ended March 31, 2017) and longer than expected sales cycles. We noted that the order rate from our largest customer did begin to normalize during the three months ending March 31, 2018 and we expect it to continue to do so throughout our next fiscal year. See General Trends and Outlook above for additional discussion.

 

Year ended March 31, 2017 versus March 31, 2016

 

Sterilization and Disinfection Control revenues increased as a result of the North Bay, October 2015 European BI Distributor, January 2016 European BI Distributor, Pulse, ATS, HANSAmed and Mydent Acquisitions, and organic growth of seven percent which was achieved through existing customers, expansion into new markets and price increases.

 

Page 25

 

 

Instruments revenues decreased by four percent. The decrease was due primarily to the impact of a large one-time order during the year ended March 31, 2016 that was not replicated during the year ended March 31, 2017 and the timing of other orders related to the same product being accelerated into the fourth quarter of the year ended March 31, 2016 which resulted in lower orders for this same product during the first quarter of the year ended March 31, 2017.

 

Cold Chain Monitoring revenues increased as a result of the FreshLoc Acquisition, partially offset by an organic decrease of two percent.

 

Cold Chain packaging revenues increased primarily due to organic growth of 85 percent which was achieved through existing and new customers.

 

Gross Profit

 

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

 

   

Year Ended March 31,

   

2018 vs 2017

   

2017 vs 2016

 
   

2018

   

2017

   

2016

   

 

Change

   

Percent

Change

   

Change

   

Percent

Change

 

Sterilization and Disinfection Control

  $ 29,333     $ 25,674     $ 22,205     $ 3,659       14 %   $ 3,469       16 %

Gross profit margin

    68 %     66 %     66 %     2 %             -- %        
                                                         

Instruments

  $ 20,395     $ 21,037     $ 23,223     $ (642 )     (3 )%   $ (2,186 )     (9 )%

Gross profit margin

    60 %     61 %     65 %     (1 )%             (4 )%        
                                                         

Cold Chain Monitoring

  $ 3,854     $ 4,557     $ 4,201     $ (703 )     (15 )%   $ 356       8 %

Gross profit margin

    30 %     36 %     36 %     (6 )%             -- %        
                                                         

Cold Chain Packaging

  $ 1,037     $ 1,971     $ 1,784     $ (934 )     (47 )%   $ 187       10 %

Gross profit margin

    18 %     25 %     48 %     (7 )%             (23 )%        

Total gross profit

  $ 54,619     $ 53,239     $ 51,413     $ 1,380       3 %   $ 1,826       4 %

Gross profit margin

    57 %     57 %     61 %     -- %             (4 )%        

 

Year ended March 31, 2018 versus March 31, 2017

 

Sterilization and Disinfection Control gross profit margin percentage increased primarily due to volume-based efficiencies associated with increased revenues and the impact of using internally manufactured biological indicators for our dental sterilizer testing business as opposed to the prior year where we were contractually committed to purchase a significant portion of those biological indicators from an outside supplier at a significantly higher price. Included in gross profit margin percentage are $573,000 and $680,000 of Bozeman relocation costs for the years ended March 31, 2018 and 2017, respectively (see Liquidity and Capital Resources for additional discussion). Without these costs, gross margin percentages would have been 69 percent and 68 percent for the years ended March 31, 2018 and 2017, respectively.

 

Instruments gross margin percentage decreased by one percent, primarily due to product and service mix and the loss of certain volume-based efficiencies associated with a decrease in revenues and a $163,000 increase in the related inventory reserve due to the decision to discontinue for sale certain instruments products.

 

Cold Chain Monitoring gross profit margin percentage decreased primarily due to a $1,916,000 increase in the related inventory reserve (see General Trends and Outlook above for additional discussion), partially offset by product and service mix. Excluding the impact of these additional reserves for inventory, gross profit percentage would have been 45 percent for the year ended March 31, 2018.

 

Cold Chain Packaging gross profit margin percentage decreased primarily due to lower revenues. A certain portion of the cost of revenues are personnel and warehousing costs which are primarily fixed and as a result, fluctuations in revenues significantly impact the gross profit margin percentage for this division. See General Trends and Outlook above for additional discussion.

 

Page 26

 

 

Year ended March 31, 2017 versus March 31, 2016

 

Sterilization and Disinfection Control gross profit margin percentage was flat as compared to the year ended March 31, 2016. Included in the gross profit margin are $680,000 of relocation costs (see Liquidity and Capital Resources for additional discussion) that decreased the gross margin percentage by two percentage points. In addition, after the completion of the North Bay Acquisition, we were contractually committed to purchase from a third party a significant portion of the BI’s that were used in the acquired North Bay dental sterilizer testing business which negatively impacted our gross margin percentage. The contractual commitment gradually decreased each quarter after the acquisition and was completed during the three months ended December 31, 2016. Each quarterly decrease in these purchases allowed for the additional use of internally produced BI’s which resulted in greater gross margin percentages.

 

Instruments gross margin percentage decreased as a result of product and services mix and the loss of certain volume-based efficiencies associated with the decrease in revenues in one product line (see Revenues for additional discussion).

 

Cold Chain Monitoring gross profit margin percentage was flat as compared to the year ended March 31, 2016. Gross profit margin percentage increased as a result of the product and service revenues mix along with the impact of the FreshLoc Acquisition but was offset by a $580,000 expense related to a reserve for slow moving inventory associated with a specific model of our cold chain monitoring sensors.

 

Cold Chain Packaging gross profit margin decreased primarily as a result of increased revenues from a large customer contract with higher than normal discount rates. We expect that our Cold Chain Packaging gross profit margin percentage will continue to be lower than the historical results of our other segments due to the nature of these products.

 

Operating Expenses 

 

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

 

   

Increase (Decrease)

 
   

Year Ended March 31,

 
   

2018 vs 2017

   

2017 vs 2016

 

Selling

  $ (1,132 )   $ 2,455  
                 

General and administrative

               

ERP system implementation

    --       (515 )

Legal costs and litigation settlement

    4       (1,718 )

Amortization

    479       663  

Personnel

    1,465       724  

Professional services

    (244 )     10  

Employee moving

    525       --  

Banking fees

    144       129  

Depreciation

    116       279  

Property taxes

    221       --  

Investor relations

    164       --  

Medical device excise tax

    --       (245 )

Acquisition related

    176       --  

Other, net

    391       (131 )
      3,441       (804 )
                 

Research and development

    (618 )     185  
                 

Impairment loss on goodwill

    13,819       --  
                 

Operating expenses

  $ 15,510     $ 1,836  

 

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Selling 

 

Year ended March 31, 2018 versus March 31, 2017

 

Selling expense decreased primarily due to reductions of selling personnel, trade show activities and outside commissions. As a percentage of revenues, selling expense was nine percent as compared to 11 percent in the prior year.

 

Year ended March 31, 2017 versus March 31, 2016

 

Selling expense increased primarily due to additional personnel related to the 2017 and 2016 Acquisitions. As a percentage of revenues, selling expense was 11 percent as compared to nine percent in the prior year.

 

Included in the increase of selling expenses is $900,000 of U.S. Cold Chain Packaging sales personnel hired during the year ended March 31, 2017. We are continuing to make an investment to grow this division and are hopeful that increases in related revenues will continue to be realized during the year ending March 31, 2018.

 

General and Administrative

 

Year ended March 31, 2018 versus March 31, 2017

 

General and administrative expense increased primarily due to increases in personnel (including those associated with the 2017 Acquisitions), amortization and employee moving costs, partially offset by a decrease in professional services expenses.

 

Year ended March 31, 2017 versus March 31, 2016

 

General and administrative expenses decreased primarily due to the prior year $1,709,000 charge related to the Amato Settlement and a decrease in ERP system implementation charges for the year ended March 31, 2017, partially offset by increases in amortization, personnel and depreciation costs for the year ended March 31, 2017.

 

Research and Development

 

Year ended March 31, 2018 versus March 31, 2017

 

Research and development costs decreased primarily due to a streamlining of the necessary engineers and materials and supplies required to support existing businesses.

 

Year ended March 31, 2017 versus March 31, 2016

 

Research and development expenses were essentially flat.

 

Impairment Loss on Goodwill

 

Year ended March 31, 2018 versus March 31, 2017

 

Impairment loss on goodwill is associated with our Packaging Division. See General Trends and Outlook above for additional discussion.

 

Other Expense, net

 

Other expense, net for the year ended March 31, 2018 is comprised primarily of interest expense associated with our Credit Facility and $300,000 related to an additional accrual for the PCD earn-out (see Liquidity and Capital Resources for additional discussion), partially offset by a $116,000 gain from the sale of our Omaha facility. Other expense, net for the year ended March 31, 2017 is comprised primarily of interest expense associated with our Credit Facility and $450,000 related to an additional accrual for the PCD earn-out (see Liquidity and Capital Resources for additional discussion). Other expense, net for the year ended March 31, 2016 is comprised primarily of interest expense associated with our Credit Facility.

 

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Net Income

 

Our income tax rate varies based upon many factors (please see Note 11 of Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data”). Net income for the year ended March 31, 2018 was significantly impacted by a $13,819,000 impairment loss on goodwill (see General Trends and Outlook above for additional discussion), $842,000 of facility relocation costs (see Liquidity and Capital Resources), $300,000 in PCD earn-out accruals, $256,000 of employee moving expenses not related to the Bozeman facility relocation and a $2,106,000 expense related to a reserve for inventory due to operational decisions to end of life certain products and other slow moving inventory (see General Trends and Outlook above for additional discussion). Net income for the year ended March 31, 2017 was significantly impacted by $725,000 of relocation costs (see liquidity and capital resources), $450,000 in PCD earn-out accruals and a $580,000 expense related to a reserve for slow moving inventory in our Cold Chain Monitoring Division. Net income for the year ended March 31, 2016 was significantly impacted by the $1,709,000 Amato Settlement. Otherwise, net income for the years ended March 31, 2018, 2017 and 2016 varied with the changes in revenues, gross profit and operating expenses (which includes $6,929,000, $6,450,000 and $5,787,000 of non-cash amortization of intangible assets, respectively).

 

Liquidity and Capital Resources

 

Our sources of liquidity include cash generated from operations, working capital and capacity under our Credit Facility. In addition, we believe that we have the ability to access the public equity and/or debt markets to raise capital in order to further fund our acquisition program. If we continue to acquire companies at our recent historical rate, it is possible, if not likely that at some point in the future we will be required to access the above mentioned public equity and/or debt markets. Our more significant uses of resources include quarterly dividends to shareholders, payment of debt obligations, long-term capital equipment expenditures and potential acquisitions. In addition, we are at times also subject to outstanding legal proceedings which could ultimately require the use of cash (Please see “Item 3. Legal Proceedings” for additional discussion).

 

Due to continued organic and acquisition related growth, we outgrew the capacity of our current building in Bozeman, Montana and as a result, we built a new facility in the same general area. Construction began in July 2015 and was completed in September 2017. We spent $17,650,000 on the development of the building and the related land, which is included in property, plant and equipment, net on the accompanying condensed consolidated balance sheets.

 

In August 2016, we announced that we plan to shut down both our Omaha and Traverse City manufacturing facilities and relocate those operations to the new Bozeman building. The move of these two facilities, along with the current Bozeman operations, began in March 2017 and is estimated to be completed by June 30, 2018. We estimate that the total costs of the relocation will be $2,000,000, which is comprised primarily of facility moving expenses, retention bonuses for existing personnel and payroll costs for duplicative personnel during the transition period. We incurred $842,000 and $725,000 of these relocation expenses during the years ended March 31, 2018 and 2017, respectively which are reflected in cost of revenues in the accompanying consolidated statements of operations (other than $269,000 and $45,000, respectively which are included in general and administrative expenses).

 

In July 2017, we completed the move from the Omaha facility and subsequently sold that building for $1,116,000 (net of commission costs). After completing the move of the old Bozeman facility (which is anticipated to be completed by June 30, 2018), we expect to be able to sell that building for approximately $2,000,000.

 

Working capital is the amount by which current assets exceed current liabilities. We had working capital of $14,698,000 and $19,218,000, respectively, at March 31, 2018 and 2017.

 

On March 1, 2017, we entered into a five-year agreement (the “Credit Facility”) for a $80,000,000 revolving line of credit (“Line of Credit”), a $20,000,000 term loan (“Term Loan”) and up to $2,500,000 of letters of credit with a banking syndicate comprised of four banks. In addition, the Credit Facility provides a post-closing accordion feature which allows the Company to request to increase the Line of Credit or Term Loan up to an additional $100,000,000.

 

Line of Credit and Term Loan indebtedness bears interest at either: (1) LIBOR, as defined, plus an applicable margin ranging from 1.5% to 2.50%; or (2) the alternate base rate (“ABR”), which is the greater of JPMorgan’s prime rate or the federal funds effective rate or the overnight bank funding rate plus 0.5%. We elect the interest rate with each borrowing under the line of credit. In addition, there is an unused line fee of 0.15% to 0.35%. Letter of credit fees are based on the applicable LIBOR rate.

 

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The Term Loan requires 20 quarterly principal payments (the first due date was March 31, 2017) in the amount of $250,000 (increasing by $125,000 each year up to $750,000 in the fifth year). The remaining balance of principal and accrued interest are due on March 1, 2022.

 

The Credit Facility is secured by all of our assets and requires us to maintain a ratio of funded debt to our trailing four quarters of EBIDTA (the “Leverage Ratio”), as defined, of less than 3.0 to 1.0, provided that, we may once during the term of the Credit Facility, in connection with a Permitted Acquisition for which the aggregate consideration paid or to be paid in respect thereof equals or exceeds $20,000,000, elect to increase the maximum Leverage Ratio permitted hereunder to (i) 3.50 to 1.00 for a period of four consecutive fiscal quarters commencing with the fiscal quarter in which such Permitted Acquisition occurs (the “Initial Holiday Period”) and (ii) 3.25 to 1.00 for the period of four consecutive fiscal quarters immediately following the Initial Holiday Period. The Credit Facility also requires us to maintain a minimum fixed charge coverage ratio of less than 1.25 to 1.0.

 

As of May 31, 2018, we had $43,625,000 in outstanding indebtedness and unused capacity under our Credit Facility of $55,000,000.

 

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

 

On November 7, 2005, our Board of Directors authorized a program to repurchase up to 300,000 shares of our outstanding common stock. Under the program, the shares may be purchased from time to time in the open market at prevailing prices or in negotiated transactions off the market. Shares purchased are canceled and repurchases are made with existing cash reserves. We do not maintain a set policy or schedule for our buyback program. We have purchased 162,486 shares of common stock under this program from inception through March 31, 2018.

 

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

 

   

Year Ended March 31,

 
   

2018

   

2017

   

2016

 

First quarter

  $ 0.16     $ 0.16     $ 0.16  

Second quarter

    0.16       0.16       0.16  

Third quarter

    0.16       0.16       0.16  

Fourth quarter

    0.16       0.16       0.16  

 

In April 2018, our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on June 15, 2018, to shareholders of record at the close of business on May 31, 2018.

 

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

 

   

Year Ended March 31,

 
   

2018

   

2017

   

2016

 

Net cash provided by operating activities

  $ 24,814     $ 7,750     $ 16,903  

Net cash used in investing activities

    (17,184 )     (18,405 )     (31,840 )

Net cash (used in) provided by financing activities

    (8,119 )     10,708       18,620  

 

Net cash provided by operating activities increased for the year ended March 31, 2018 primarily due to a reduction in inventories of $2,286,000 (net of the impact of increases in the reserve for inventories) and the payment of $9,554,000 of contingent consideration in the prior year. Net cash provided by operating activities for the year ended March 31, 2017 decreased primarily due to the payment of $9,554,000 in contingent consideration and $3,066,000 in accrued salaries, taxes and various other accrued expenses, partially offset by increases in collections of accounts receivable of $994,000. Net cash provided by operating activities for the year ended March 31, 2016 increased primarily due to the efficient management of working capital.

 

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Net cash used in investing activities for the year ended March 31, 2018 resulted from $15,518,000 associated with the 2018 Acquisitions and the purchase of $2,799,000 of property, plant and equipment, partially offset by $1,133,000 of proceeds associated with the sale of the Omaha facility. Net cash used in investing activities for the year ended March 31, 2017 resulted from $6,800,000 associated with the 2017 Acquisitions and the purchase of $11,605,000 of property, plant and equipment. Net cash used in investing activities for the year ended March 31, 2016 resulted from $24,111,000 associated with the 2016 Acquisitions and the purchase of $7,729,000 of property, plant and equipment.

 

Net cash used in financing activities for the year ended March 31, 2018 resulted from the repayment of debt of $19,625,000 and the payment of dividends of $2,413,000, partially offset by borrowings under our Credit Facility of $11,000,000 and proceeds from the exercise of stock options of $2,919,000. Net cash provided by financing activities for the year ended March 31, 2017 resulted from borrowings under our Credit Facility of $66,550,000 and proceeds from the exercise of stock options of $3,513,000, partially offset by the repayment of debt of $57,000,000 and the payment of dividends of $2,355,000. Net cash provided by financing activities for the year ended March 31, 2016 resulted from borrowings under our Credit Facility of $25,000,000 and proceeds from the exercise of stock options of $1,923,000, partially offset by the repayment of debt of $6,000,000 and the payment of dividends of $2,303,000.

 

At March 31, 2018, we had contractual obligations for open purchase orders of $439,000 for routine purchases of supplies and inventory, which are payable in less than one year.

 

Under the terms of the PCD Agreement, we were required to pay contingent consideration if the cumulative revenues for our process challenge device business for the three years subsequent to the acquisition met certain levels. The potential consideration payable ranged from $0 to $1,500,000 and was based upon a sliding scale of three-year cumulative revenues between $9,900,000 and $12,600,000, with payments made annually. Based upon both historical and projected growth rates, we initially recorded $300,000 of contingent consideration payable which represented our best estimate of the amount that would ultimately be paid. We paid $150,000 of the contingent consideration during the year ended March 31, 2016 (based upon the then current run rate projected over the entire three-year contingent consideration period).

 

Since the initial payment, the revenues for these products significantly increased and as a result, during the year ended March 31, 2017 we recorded an additional $450,000 accrual (which was paid in our third quarter ending December 31, 2016). During the year ended March 31, 2018, process challenge device (“PCD”) product revenues continued to increase which resulted in an additional $300,000 accrual, which is included in other income, net in the accompanying consolidated statement of operations for the year ended March 31, 2018. We paid the remaining contingent consideration due of $450,000 in November 2017.

 

Under the terms of the Infitrak Agreement, we were required to pay contingent consideration if the gross profit (as defined in the Infitrak Earn-Out Agreement) for our cold chain packaging business for the two years subsequent to the acquisition met certain levels. The potential undiscounted consideration payable ranged from $0 to $15,000,000 CDN and was based upon a sliding scale of growth in gross profit (as defined in the Infitrak Earn-Out Agreement) for year one and year two of 30 to 70 percent and 15 to 75 percent, respectively. Based upon both historical and projected growth rates, we recorded $9,271,000 of contingent consideration payable which represented our best estimate of the then current fair value of the amount that would ultimately be paid. Any changes to the contingent consideration ultimately paid would have resulted in additional income or expense in our consolidated statements of income.

 

In July 2016, we made the first Earn-Out payment in the amount of $6,000,000 CDN ($4,594,000). In March 2017, we agreed to settle the remaining earn-out obligation (which was originally due in the second quarter of our year ending March 31, 2018) early by making a payment of $6,000,000 CDN ($4,558,000).

 

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Critical Accounting Policies and Estimates

 

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

 

Accounts Receivable

 

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

 

Inventories

 

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

 

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

 

Recoverability of Long-lived Assets

 

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

 

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

 

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

 

We recorded an impairment charge related to goodwill associated with the Cold Chain Packaging Division during the year ended March 31, 2018 (for additional discussion, please see Note 5 of Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data”).

 

We did not record any impairment charges for the years ended March 31, 2017 or 2016. If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future.

 

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Purchase Accounting for Acquisitions

 

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

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

 

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

 

Stock-based Compensation Stock Options

 

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

 

Income Taxes

 

Income tax expense includes U.S., state, local and international income taxes, plus a provision for U.S. taxes on undistributed earnings of foreign subsidiaries and other prescribed foreign entities not deemed to be indefinitely reinvested. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial reporting basis and the tax basis of existing assets and liabilities. The tax rate used to determine the deferred tax assets and liabilities is the enacted tax rate for the year and manner in which the differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.

 

We are involved in various tax matters, with respect to some of which the outcome is uncertain. We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that it becomes uncertain based upon one of the following conditions: (1) the tax position is not "more likely than not" to be sustained, (2) the tax position is "more likely than not" to be sustained, but for a lesser amount, or (3) the tax position is "more likely than not" to be sustained, but not in the financial period in which the tax position was originally taken. For purposes of evaluating whether or not a tax position is uncertain, (1) we presume the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information; (2) the technical merits of a tax position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position; and (3) each tax position is evaluated without consideration of the possibility of offset or aggregation with other tax positions taken. A number of years may elapse before a particular uncertain tax position is audited and finally resolved or when a tax assessment is raised. The number of years subject to tax assessments varies depending on the tax jurisdiction. The tax benefit that has been previously reserved because of a failure to meet the "more likely than not" recognition threshold would be recognized in income tax expense in the first interim period when the uncertainty disappears under any one of the following conditions: (1) the tax position is "more likely than not" to be sustained, (2) the tax position, amount, and/or timing is ultimately settled through negotiation or litigation, or (3) the statute of limitations for the tax position has expired. Please see Note 11 of Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” for additional discussion.

 

Contingent Liabilities

 

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

 

Page 33

 

 

Recent Accounting Standards and Pronouncements

 

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), which will replace most existing revenue recognition guidance in U.S. GAAP and is intended to improve and converge with international standards the financial reporting requirements for revenue from contracts with customers. The core principle of ASU 2014-09 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASU 2014-09 also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09 allows for adoption either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application, which will be effective for the Company beginning April 1, 2018.

 

We will adopt ASU 2014-09 and its amendments on a modified retrospective basis effective April 1, 2018.  We have identified and implemented minor necessary changes to our accounting policies and practices, business processes, and systems and controls as well as designed and implemented specific controls over our evaluation of the impact of the new guidance on the Company, including the cumulative effect calculation, disclosure requirements and the collection of relevant data into the reporting process. We are substantially complete with the process of finalizing changes to our business processes and systems and controls to support recognition and new required disclosures under the new revenue standard. While we expect the impact of the new standard on the amount and timing of revenue recognized in the year ending March 31, 2019 to be insignificant, our assessment will be finalized during the first quarter of our year ending March 31, 2019.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize right-of-use assets, representing their right to use the underlying asset for the lease term, and lease liabilities on the consolidated balance sheet for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases. We have initiated our plan for the adoption and implementation of this new accounting standard, including assessing our lease arrangements, evaluating practical expedient and accounting policy elections. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. ASU 2016-02 is effective for the Company beginning April 1, 2019. We anticipate that the adoption of this new standard will not result in a significant increase in lease-related assets and liabilities on our consolidated balance sheets or significantly impact our consolidated statements of operations and cash flows.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other, which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. ASU 2017-04 is required to be applied prospectively and we elected to early adopt ASU 2017-04 effective April 1, 2017.

 

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

 

Off-Balance Sheet Arrangements

 

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

 

 

any obligation under certain guarantee contracts;

 

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

 

any obligation under certain derivative instruments; and

 

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

 

As of March 31, 2018, we have no obligations or interests which qualify as off-balance sheet arrangements.

 

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Contractual Obligations

 

As of March 31, 2018, our contractual obligations, including payments due by period, are as follows (in thousands):

 

           

Payments Due For Years Ending March 31,

 
   

Total

   

2019

      2020-2021       2022-2023    

Thereafter

 

Purchase Commitments

  $ 439     $ 439     $ --     $ --     $ --  

Line of Credit

    28,000       --       --       28,000       --  

Term loan

    18,625       1,625       4,750       12,250       --  

Other

    794       555       239       --       --  

Total

  $ 47,858     $ 2,619     $ 4,989     $ 40,250     $ --  

 

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

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

We have no derivative instruments and minimal exposure to commodity market risks. Approximately 15 percent of our revenues are exposed to foreign currency risk, of which all is within stable markets, minimizing our exposure to foreign currency fluctuations.

 

We are subject to interest rate volatility with regard to existing and future issuances of debt, as our current credit facility is variable-rate. Based on annualized variable-rate debt for the year ended March 31, 2018, a one percentage point increase in interest rates would have increased interest expense by $527,000.

 

Item 8. Financial Statements and Supplementary Data

 

Report of Independent Registered Public Accounting Firm

36

Consolidated Balance Sheets

38

Consolidated Statements of Operations

39

Consolidated Statements of Comprehensive (Loss) Income

40

Consolidated Statements of Stockholders’ Equity

41

Consolidated Statements of Cash Flows

42

Notes to Consolidated Financial Statements

43

 

Page 35

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

Stockholders and Board of Directors

Mesa Laboratories, Inc.

Lakewood, Colorado

 

OPINIONS ON THE CONSOLIDATED FINANCIAL STATEMENTS AND INTERNAL CONTROL OVER FINANCIAL REPORTING

 

We have audited the accompanying consolidated balance sheets of Mesa Laboratories, Inc. (the "Company") as of March 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive (loss) income, stockholders' equity, and cash flows, for each year in the three‑year period ended March 31, 2018, and the related notes and schedules (collectively referred to as the " consolidated financial statements"). We have also audited the Company's internal control over financial reporting as of March 31, 2018, based on the criteria established in Internal Control ‑ Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2018 and 2017, and the results of its operations and its cash flows for each year in the three‑year period ended March 31, 2018, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2018, based on criteria established in Internal Control ‑ Integrated Framework: (2013) issued by COSO.

 

BASIS FOR OPINIONS

 

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

 

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

Page 36

 

 

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded acquired entities from its assessment of internal control over financial reporting as of March 31, 2018 because they were acquired by the Company in purchase business combinations during 2018. We have also excluded these entities from our audit of internal control over financial reporting. The acquired entities represent 12% and 3% of consolidated total assets and revenues, respectively, for the year ended March 31, 2018.

 

DEFINITION AND LIMITATIONS OF INTERNAL CONTROL OVER FINANCIAL REPORTING

 

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

 

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

 

 

/s/ EKS&H LLLP

 

 

Denver, Colorado

June 5, 2018

 

We have served as the Company's auditor since 1986.

 

Page 37

 

 

 

Mesa Laboratories, Inc.

Consolidated Balance Sheets

(In thousands, except share amounts)

 

   

March 31,

 

 

 

2018

   

2017

 
ASSETS                

Current assets:

               

Cash and cash equivalents

  $ 5,469     $ 5,820  

Accounts receivable, less allowances of $179 and $252, respectively

    14,302       14,319  

Inventories, net

    9,228       13,873  

Prepaid income taxes

    273       587  

Prepaid expenses and other

    782       1,186  

Assets held for sale

    1,934       --  

Total current assets

    31,988       35,785  
                 

Deferred income taxes

    127       --  

Property, plant and equipment, net

    23,593       26,002  

Intangibles, net

    42,850       37,790  

Goodwill

    65,543       72,156  

Total assets

  $ 164,101     $ 171,733  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Accounts payable

  $ 2,380     $ 2,168  

Accrued salaries and payroll taxes

    4,284       4,350  

Unearned revenues

    3,921       4,117  

Current portion of contingent consideration

    709       1,294  

Other accrued expenses

    3,363       2,999  

Income taxes payable

    1,008       514  

Current portion of long-term debt

    1,625       1,125  

Total current liabilities

    17,290       16,567  
                 

Deferred income taxes

    2,621       3,554  

Long-term debt, net of debt issuance costs and current portion

    44,635       53,675  

Other long-term liabilities

    194       116  

Total liabilities

    64,740       73,912  
                 

Commitments and Contingencies (Note 13)

               
                 

Stockholders’ equity:

               

Common stock, no par value; authorized 25,000,000 shares; issued and outstanding, 3,801,439 shares (March 31, 2018) and 3,734,704 shares (March 31, 2017)

    30,516       25,925  

Retained earnings

    68,281       73,656  

Accumulated other comprehensive income (loss)

    564       (1,760 )

Total stockholders’ equity

    99,361       97,821  

Total liabilities and stockholders’ equity

  $ 164,101     $ 171,733  

 

See accompanying notes to consolidated financial statements.

 

Page 38

 

 

 

Mesa Laboratories, Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

 

   

Year Ended March 31,

 
   

2018

   

2017

   

2016

 

Revenues

                       

Product

  $ 72,172     $ 71,055     $ 66,274  

Service

    24,007       22,610       18,385  

Total revenues

    96,179       93,665       84,659  
                         

Cost of revenues

                       

Cost of products

    28,608       26,548       26,957  

Cost of services

    12,952       13,878       6,289  

Total cost of revenues

    41,560       40,426       33,246  

Gross profit

    54,619       53,239       51,413  
                         

Operating expenses

                       

Selling

    8,823       9,955       7,500  

General and administrative

    26,255       22,814       23,618  

Research and development

    3,539       4,157       3,972  

Impairment loss on goodwill

    13,819       --       --  

Total operating expenses

    52,436       36,926       35,090  
                         

Operating income

    2,183       16,313       16,323  

Other expense, net

    1,882       2,017       768  
                         

Earnings before income taxes

    301       14,296       15,555  
                         

Income taxes

    3,263       3,113       4,386  

Net (loss) income

  $ (2,962 )   $ 11,183     $ 11,169  
                         

Net (loss) income per share:

                       

Basic

  $ (0.79 )   $ 3.04     $ 3.10  

Diluted

    (0.79 )     2.91       2.97  
                         

Weighted average common shares outstanding:

                       

Basic

    3,770       3,679       3,605  

Diluted

    3,770       3,844       3,757  

 

See accompanying notes to consolidated financial statements.

 

Page 39

 

 

 

Mesa Laboratories, Inc.

Consolidated Statements of Comprehensive (Loss) Income

 (In thousands except per share data)

 

   

Year Ended March 31,

 
   

2018

   

2017

   

2016

 
                         

Net (loss) income

  $ (2,962 )   $ 11,183     $ 11,169  
                         

Other comprehensive income (loss), net of tax:

                       

Foreign currency translation

    2,324       (609 )     (917 )
                         

Total comprehensive (loss) income

  $ (638 )   $ 10,574     $ 10,252  

 

See accompanying notes to consolidated financial statements.

 

Page 40

 

 

 

Mesa Laboratories, Inc.

Consolidated Statements of Stockholders’ Equity

(In thousands, except share amounts)

 

   

Common Stock

                         
   

Number of

Shares

   

Amount

   

Retained

Earnings

   

Accumulated Other Comprehensive Income (Loss)

   

Total

 

March 31, 2015

    3,561,540     $ 17,751     $ 55,962     $ (234 )   $ 73,479  
                                         

Common stock issued for conversion of stock options net of 13,491 shares returned as payment

    75,733       1,923       --       --       1,923  

Dividends paid

    --       --       (2,303 )     --       (2,303 )
Stock-based compensation     --       1,327       --       --       1,327  

Foreign currency translation

    --       --       --       (917 )     (917 )

Net income

    --       --       11,169       --       11,169  

March 31, 2016

    3,637,273       21,001       64,828       (1,151 )     84,678  
                                         

Common stock issued for conversion of stock options net of 13,964 shares returned as payment

    97,431       3,513       --       --       3,513  

Dividends paid

    --       --       (2,355 )     --       (2,355 )

Stock-based compensation

    --       1,411       --       --       1,411  

Foreign currency translation

    --       --       --       (609 )     (609 )

Net income

    --       --       11,183       --       11,183  

March 31, 2017

    3,734,704       25,925       73,656       (1,760 )     97,821  
                                         

Common stock issued for conversion of stock options net of 8,562 shares returned as payment

    66,735       2,919       --       --       2,919  

Dividends paid

    --       --       (2,413 )     --       (2,413 )

Stock-based compensation

    --       1,672       --       --       1,672  

Foreign currency translation

    --       --       --       2,324       2,324  

Net loss

    --       --       (2,962 )     --       (2,962 )

March 31, 2018

    3,801,439     $ 30,516     $ 68,281     $ 564     $ 99,361  

 

See accompanying notes to consolidated financial statements.

 

Page 41

 

 

 

Mesa Laboratories, Inc.

Consolidated Statements of Cash Flows

(In thousands)

 

   

Year Ended March 31,

 
   

2018

   

2017

   

2016

 

Cash flows from operating activities:

                       

Net (loss) income

  $ (2,962 )   $ 11,183     $ 11,169  

Depreciation and amortization

    9,471       8,737       7,174  

Gain on sale of assets

    (116 )     --       --  

Deferred income taxes

    (2,704 )     (630 )     (807 )

Stock-based compensation

    1,672       1,411       1,327  

Foreign currency adjustments

    (490 )     93       53  

Amortization of debt issuance costs

    110       --       --  

Change in inventory reserve

    2,474       194       305  

Impairment loss on goodwill

    13,819       --       --  

Adjustment to contingent consideration

    300       --       --  

Change in assets and liabilities, net of effects of acquisitions and dispositions

                       

Accounts receivable, net

    680       994       (1,958 )

Inventories, net

    2,286       101       (1,507 )

Prepaid expenses and other

    755       (830 )     391  

Accounts payable

    212       (655 )     (150 )

Accrued liabilities and taxes payable

    408       (3,066 )     2,865  

Unearned revenues

    (196 )     (228 )     99  

Contingent consideration

    (905 )     (9,554 )     (2,058 )

Net cash provided by operating activities

    24,814       7,750       16,903  
                         

Cash flows from investing activities:

                       

Acquisitions

    (15,518 )     (6,800 )     (24,111 )

Proceeds from sale of assets

    1,133                  

Purchases of property, plant and equipment

    (2,799 )     (11,605 )     (7,729 )

Net cash used in investing activities

    (17,184 )     (18,405 )     (31,840 )
                         

Cash flow from financing activities:

                       

Proceeds from the issuance of debt

    11,000       66,550       25,000  

Payments on debt

    (19,625 )     (57,000 )     (6,000 )

Dividends

    (2,413 )     (2,355 )     (2,303 )

Proceeds from the exercise of stock options

    2,919       3,513       1,923  

Net cash (used in) provided by financing activities

    (8,119 )     10,708       18,620  
                         

Effect of exchange rate changes on cash and cash equivalents

    138       72