United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark one)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE ACT OF 1934
For the quarterly period ended December 31June 30, 20172018
or
☐ TRANSITION REPORT PURSUANT TOSECTION 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 | |
| Identification number) | |
12100 West Sixth Avenue | ||
Lakewood, | 80228 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’sRegistrant’s telephone number, including area code: (303) 987-8000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 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 RegulationRegulation S-T (Section 232.405 of this 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 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 ☒
Indicate the number of shares outstanding of each of the Issuer’s classes of common stock, as of the latest practicable date:
There were 3,783,158 3,848,192 shares of the Issuer’s common stock, no par value, outstanding as of January 26,July 27, 2018.
Part I | Part I | Part I | ||||
1. | Financial Statements | 1 | 1 | |||
Condensed Consolidated Balance Sheets | 1 | 1 | ||||
Condensed Consolidated Statements of Operations | 2 | 2 | ||||
Condensed Consolidated Statements of Comprehensive (Loss) Income | 3 | 3 | ||||
Condensed Consolidated Statements of Cash Flows | 4 | 4 | ||||
Notes to Condensed Consolidated Financial Statements | 5 | 5 | ||||
2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 | ||
3. | Quantitative and Qualitative Disclosures About Market Risk | 21 | 17 | |||
4. | Controls and Procedures | 22 | 17 | |||
Part II | Part II | Part II | ||||
1 | Legal Proceedings | 22 | 18 | |||
1A. | Risk Factors | 22 | 18 | |||
2. | Unregistered Sales of Equity Securities and Use of Proceeds | 23 | 18 | |||
6. | Exhibits | 23 | 18 | |||
Signatures | 19 | |||||
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) | |||||
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) | |||||
Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 | |||||
Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 |
Item 1. Financial Statements
Mesa Laboratories, Inc.
Condensed Consolidated Balance Sheets
(Inin thousands, except share amounts)
| December 31, 2017 (Unaudited) | March 31, 2017 | June 30, 2018 (unaudited) | March 31, 2018 | ||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 5,843 | $ | 5,820 | $ | 7,400 | $ | 5,469 | ||||||||
Accounts receivable, less allowances of $201 and $252, respectively | 12,361 | 14,319 | ||||||||||||||
Accounts receivable, less allowances of $140 and $179, respectively | 12,472 | 14,302 | ||||||||||||||
Inventories, net | 10,454 | 13,873 | 8,632 | 9,228 | ||||||||||||
Prepaid income taxes | 2,158 | 587 | -- | 273 | ||||||||||||
Prepaid expenses and other | 1,339 | 1,186 | 2,394 | 782 | ||||||||||||
Assets held for sale | 1,934 | -- | 1,934 | 1,934 | ||||||||||||
Total current assets | 34,089 | 35,785 | 32,832 | 31,988 | ||||||||||||
Property, plant and equipment, net | 23,956 | 26,002 | 23,298 | 23,593 | ||||||||||||
Deferred taxes | 121 | 127 | ||||||||||||||
Intangibles, net | 44,436 | 37,790 | 40,113 | 42,850 | ||||||||||||
Goodwill | 65,296 | 72,156 | 65,094 | 65,543 | ||||||||||||
Total assets | $ | 167,777 | $ | 171,733 | $ | 161,458 | $ | 164,101 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 2,029 | $ | 2,168 | $ | 2,873 | $ | 2,380 | ||||||||
Accrued salaries and payroll taxes | 3,235 | 4,350 | 2,900 | 4,284 | ||||||||||||
Current portion of long-term debt | 1,750 | 1,625 | ||||||||||||||
Unearned revenues | 3,675 | 4,117 | 3,830 | 3,921 | ||||||||||||
Current portion of contingent consideration | 709 | 1,294 | 49 | 709 | ||||||||||||
Income taxes payable | 916 | 1,008 | ||||||||||||||
Other accrued expenses | 3,249 | 2,999 | 3,321 | 3,363 | ||||||||||||
Income taxes payable | -- | 514 | ||||||||||||||
Current portion of long-term debt | 1,500 | 1,125 | ||||||||||||||
Total current liabilities | 14,397 | 16,567 | 15,639 | 17,290 | ||||||||||||
Deferred income taxes | 4,115 | 3,554 | ||||||||||||||
Long-term debt, net of debt issuance costs and current portion | 54,608 | 53,675 | ||||||||||||||
Deferred taxes | 2,522 | 2,621 | ||||||||||||||
Long-term debt, net of debt issuance costs and current portion | 37,662 | 44,635 | ||||||||||||||
Other long-term liabilities | 210 | 116 | 184 | 194 | ||||||||||||
Total liabilities | 73,330 | 73,912 | 56,007 | 64,740 | ||||||||||||
Commitments and Contingencies (Note 9) | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Common stock, no par value; authorized 25,000,000 shares; issued and outstanding, 3,781,806 and 3,727,704 shares, respectively | 29,694 | 25,925 | ||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Common stock, no par value; authorized 25,000,000 shares; issued and outstanding, 3,848,025 and 3,801,439 shares, respectively | 34,298 | 30,516 | ||||||||||||||
Retained earnings | 64,633 | 73,656 | 71,901 | 68,281 | ||||||||||||
Accumulated other comprehensive income (loss) | 120 | (1,760 | ) | |||||||||||||
Total stockholders’ equity | 94,447 | 97,821 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 167,777 | $ | 171,733 | ||||||||||||
Accumulated other comprehensive (loss) income | (748 | ) | 564 | |||||||||||||
Total stockholders’ equity | 105,451 | 99,361 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 161,458 | $ | 164,101 |
See accompanying notes to condensed consolidated financial statements.
Condensed Consolidated Statements of OperationsIncome
(Unaudited)(unaudited)
(Inin thousands, except per share data)
Three Months Ended December 31, | Nine Months Ended December 31, | Three Months Ended June 30, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | |||||||||||||||||||
Revenues | $ | 23,671 | $ | 23,843 | $ | 69,298 | $ | 69,366 | $ | 25,142 | $ | 22,673 | ||||||||||||
Cost of revenues | 10,990 | 10,306 | 30,713 | 30,091 | 10,051 | 10,002 | ||||||||||||||||||
Gross profit | 12,681 | 13,537 | 38,585 | 39,275 | 15,091 | 12,671 | ||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Selling | 1,942 | 2,409 | 6,909 | 7,527 | 1,890 | 2,679 | ||||||||||||||||||
General and administrative | 6,256 | 5,881 | 19,525 | 17,834 | 7,600 | 6,857 | ||||||||||||||||||
Research and development | 752 | 861 | 2,790 | 2,941 | 837 | 1,153 | ||||||||||||||||||
Impairment loss on goodwill | 13,819 | -- | 13,819 | -- | ||||||||||||||||||||
Total operating expenses | 22,769 | 9,151 | 43,043 | 28,302 | 10,327 | 10,689 | ||||||||||||||||||
Operating income | 4,764 | 1,982 | ||||||||||||||||||||||
Other expense, net | 364 | 679 | ||||||||||||||||||||||
Earnings before income taxes | 4,400 | 1,303 | ||||||||||||||||||||||
Income tax expense (benefit) | 170 | (214 | ) | |||||||||||||||||||||
Net income | $ | 4,230 | $ | 1,517 | ||||||||||||||||||||
Operating (loss) income | (10,088 | ) | 4,386 | (4,458 | ) | 10,973 | ||||||||||||||||||
Other expense, net | 438 | 506 | 1,659 | 1,712 | ||||||||||||||||||||
(Loss) earnings before income taxes | (10,526 | ) | 3,880 | (6,117 | ) | 9,261 | ||||||||||||||||||
Income taxes | 560 | 628 | 1,099 | 1,721 | ||||||||||||||||||||
Net (loss) income | $ | (11,086 | ) | $ | 3,252 | $ | (7,216 | ) | $ | 7,540 | ||||||||||||||
Net (loss) income per share: | ||||||||||||||||||||||||
Earnings per share: | ||||||||||||||||||||||||
Basic | $ | (2.93 | ) | $ | 0.88 | $ | (1.92 | ) | $ | 2.06 | $ | 1.11 | $ | 0.41 | ||||||||||
Diluted | (2.93 | ) | 0.84 | (1.92 | ) | 1.97 | 1.06 | 0.39 | ||||||||||||||||
Weighted average common shares outstanding: | ||||||||||||||||||||||||
Weighted-average common shares outstanding: | ||||||||||||||||||||||||
Basic | 3,781 | 3,688 | 3,765 | 3,668 | 3,816 | 3,736 | ||||||||||||||||||
Diluted | 3,781 | 3,868 | 3,765 | 3,835 | 4,006 | 3,923 |
See accompanying notes to condensed consolidated financial statements.
Condensed Consolidated Statements of Comprehensive(Loss) Income
(Unaudited)(unaudited)
(Inin thousands)
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net (loss) income | $ | (11,086 | ) | $ | 3,252 | $ | (7,216 | ) | $ | 7,540 | ||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Foreign currency translation | 181 | (634 | ) | 1,880 | (769 | ) | ||||||||||
Total comprehensive (loss) income | $ | (10,905 | ) | $ | 2,618 | $ | (5,336 | ) | $ | 6,771 |
Three Months Ended June 30, | ||||||||
2018 | 2017 | |||||||
Net income | $ | 4,230 | $ | 1,517 | ||||
Other comprehensive income, net of tax: | ||||||||
Foreign currency translation adjustments | (1,312 | ) | 751 | |||||
Comprehensive income | $ | 2,918 | $ | 2,268 |
See accompanying notes to condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
(Unaudited)(unaudited)
(Inin thousands)
Nine Months Ended December 31, | Three Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net (loss) income | $ | (7,216 | ) | $ | 7,540 | |||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income | $ | 4,230 | $ | 1,517 | ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 6,981 | 6,609 | 2,455 | 2,278 | ||||||||||||
Stock-based compensation | 1,423 | 1,221 | ||||||||||||||
Stock-based compensation | 739 | 540 | ||||||||||||||
Amortization of debt issuance costs | 83 | -- | 27 | 28 | ||||||||||||
Impairment loss on goodwill | 13,819 | -- | ||||||||||||||
Change in inventory reserve | 2,120 | (507 | ) | 67 | 672 | |||||||||||
Deferred income taxes | (1,077 | ) | 418 | |||||||||||||
Deferred taxes | (93 | ) | 90 | |||||||||||||
Foreign currency adjustments | (255 | ) | (17 | ) | (123 | ) | (176 | ) | ||||||||
Gain on disposition of assets | (116 | ) | -- | |||||||||||||
Adjustment to contingent consideration | 300 | -- | (192 | ) | 300 | |||||||||||
Change in assets and liabilities, net of effects of acquisitions | ||||||||||||||||
Cash provided by changes in operating assets and liabilities | ||||||||||||||||
Accounts receivable, net | 2,621 | 2,369 | 1,830 | 1,416 | ||||||||||||
Inventories | 1,414 | 97 | ||||||||||||||
Inventories, net | 529 | (175 | ) | |||||||||||||
Prepaid expenses and other | (1,687 | ) | (1,094 | ) | (1,340 | ) | (1,711 | ) | ||||||||
Accounts payable | (139 | ) | 96 | 494 | 170 | |||||||||||
Accrued liabilities and taxes payable | (1,751 | ) | (4,401 | ) | (1,526 | ) | (1,747 | ) | ||||||||
Unearned revenues | (442 | ) | (484 | ) | (91 | ) | (84 | ) | ||||||||
Contingent consideration | (905 | ) | (5,076 | ) | (463 | ) | (437 | ) | ||||||||
Net cash provided by operating activities | 15,173 | 6,771 | 6,543 | 2,681 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Acquisitions | (15,433 | ) | (6,618 | ) | -- | (62 | ) | |||||||||
Proceeds from sale of assets | 1,133 | -- | ||||||||||||||
Purchases of property, plant and equipment | (2,540 | ) | (9,367 | ) | (300 | ) | (1,505 | ) | ||||||||
Net cash used in investing activities | (16,840 | ) | (15,985 | ) | (300 | ) | (1,567 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from the issuance of debt | 11,000 | 11,500 | ||||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Payments on debt | (9,750 | ) | (3,750 | ) | (6,875 | ) | (4,250 | ) | ||||||||
Dividends | (1,807 | ) | (1,760 | ) | (610 | ) | (601 | ) | ||||||||
Proceeds from the exercise of stock options | 2,346 | 2,815 | 3,043 | 963 | ||||||||||||
Net cash provided by financing activities | 1,789 | 8,805 | ||||||||||||||
Net cash used in financing activities | (4,442 | ) | (3,888 | ) | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (99 | ) | 119 | 130 | (70 | ) | ||||||||||
Net increase (decrease) in cash and cash equivalents | 23 | (290 | ) | 1,931 | (2,844 | ) | ||||||||||
Cash and cash equivalents at beginning of period | 5,820 | 5,695 | 5,469 | 5,820 | ||||||||||||
Cash and cash equivalents at end of period | $ | 5,843 | $ | 5,405 | $ | 7,400 | $ | 2,976 | ||||||||
Cash paid for: | ||||||||||||||||
Income taxes | $ | 4,191 | $ | 4,188 | $ | 284 | $ | 658 | ||||||||
Interest | 1,477 | 913 | ||||||||||||||
Supplemental non-cash activity: | ||||||||||||||||
Contingent consideration as part of an acquisition | -- | 1,822 | ||||||||||||||
Interest | 456 | 561 |
See accompanying notes to condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(dollar amounts in thousands, unless otherwise specified)
Note 1 -. Description of Business and Summary of Significant Accounting Policies
Description of Business
In this quarterly report on Form 10-Q, Mesa Laboratories, Inc. was incorporated under the laws of the State of, a Colorado on March 26, 1982. The termscorporation, together with its subsidiaries is collectively referred to as “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. “Mesa.”
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 wherein which we can establish a strong presence and achieve high gross margins. We are organized into four divisions across teneight physical locations. Our Sterilization and Disinfection Control Division (“SDC” Division) manufactures and sells biological, cleaning, and chemical indicators. Biological, cleaning, and chemical indicators are used to assess the effectiveness of sterilization and disinfection processes in the hospital, dental, medical device, and pharmaceutical industries. The division also provides testing and laboratory services, mainly to the dental industry. 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 Sterilization and Disinfection Control Division (formerly named the Biological Indicators Division) provides testing services, along with the manufacturing and marketing of both biological and cleaning indicators, and the marketing of chemical indicators used to assess the effectiveness of sterilization and disinfection processes in the hospital, dental, medical device and pharmaceutical 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 other laboratory and industrial 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.the customer’s transport of their own products.
Basis of Presentation
The accompanying condensed consolidated balance sheet as of March 31, 2017, has been derived from audited consolidated financial statements. The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as our annual audited consolidated financial statements and in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements.Commission. In the opinion of management, such unaudited information includes all adjustments, (consisting onlyconsisting of normal recurring accruals)adjustments necessary for a fair presentation of this interim information. Operatingour financial position and results and cash flowsof operations. The results of operations for interim periodsthe three months ended June 30, 2018 are not necessarily indicative of results that canmay be expectedachieved for the entire year. The financial statements and related notes do not include all information included in thisand footnotes required by U.S. GAAP for annual reports. This quarterly report should be read in conjunction with our auditedthe consolidated financial statements and notes thereto included in our Annual Reportannual report on Form 10-K10-K for the year ended March 31, 2017.
The summary of our significant accounting policies is incorporated by reference to our Annual Report on Form 10-K for the year ended March 31, 2017.2018.
Recently Issued Accounting Pronouncements
In May 2014, February 2016, the Financial Accounting Standards Board ("FASB"(“FASB”) issued Accounting Standards Update ("ASU"(“ASU”) 2014-09,2016-02, Leases (Topic 842). The pronouncement requires lessees to recognize a liability for lease obligations, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use asset on the balance sheet for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to present financial statement users with the ability 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 expedients, and making necessary changes to our accounting policies, processes, and internal controls over financial reporting. We expect to adopt the requirements of ASU 2016-02 beginning April 1, 2019 using the modified retrospective method. We are still assessing the expected impact of the standard on our consolidated balance sheets but it will not significantly impact our consolidated statements of income and cash flows.
Recently Adopted Accounting Pronouncements
Effective April 1, 2018, we adopted ASU 2014-09 Revenue from Contracts with Customers (Topic 606)606) , which will replace most existing revenue recognition guidance in U.S. GAAP and is intendedall related amendments (referred to improve and converge with international standards the financial reporting requirements for revenue from contracts with customers. The core principle ofcollectively hereinafter as “ASU 606”) on a modified retrospective basis. ASU 2014-09 is that606 requires an entity shouldto recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for thosethe goods orand 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 forThe 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 plan to adopt ASU 2014-09 and its amendments on a modified retrospective basis and are continuing to assess all future impacts of the guidance by reviewing our current contracts with customers to identify potential differences that could result from applying the new guidance. Based on our review, we expect that the adoption of ASU 2014-09 will did not have a material impact on our condensed consolidated financial statements. As we continuebalance sheets, statements of income, or cash flows. The primary impact of adoption was the enhancement of disclosures to provide additional clarity regarding how revenue is earned and recognized, and to show revenues at a more disaggregated level, included in Note 2.
In March 2018, the FASB issued ASU 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendments in this update provide guidance on when to record and disclose provisional amounts for certain income tax effects of the Tax Cuts and Jobs Act ("TCJA"). The amendments also require any provisional amounts or subsequent adjustments to be included in net income from continuing operations. Additionally, this ASU discusses required disclosures that an entity must make with regard to the TCJA. This ASU is effective immediately as new information is available to adjust provisional amounts that were previously recorded. We have adopted this standard and will continue to evaluate indicators that may give rise to a change in our assessment, we are also identifying and preparingtax provision as a result of the TCJA. Refer to implement minor changes to our accounting policies and practices, business processes, systems and controls to supportNote 7 for additional information on the new revenue recognition and disclosure requirements. Our assessment will be completed during the year ending March 31, 2018.TCJA.
Note 2. Revenue Recognition
We design, manufacture, market, sell, and maintain quality control instruments, consumables, and services driven primarily by the regulatory requirements of niche markets. Our consumables, such as biological indicator test strips and packaging materials, are typically used on a standalone basis; however, some, such as calibration solutions, are also critical to the ongoing use of our instruments. Instruments sales, such as medical meters, wireless sensors, and data loggers are generally driven by our acquisition of new customers, growth of existing customers, or customer replacement of existing equipment. We generally generate service revenues from three categories: 1) discrete installation of our hardware, 2) discrete but recurring calibration and maintenance of our hardware or 3) contracted and recurring testing and maintenance services. We evaluate our revenues internally both by product line as well as by timing of revenue generation and nature of goods and services provided. Typically, discrete revenue is recognized at the shipping point or upon completion of the service, while contracted revenue is recognized over a period of time reflective of the performance obligation period in the applicable contract.
Substantially all of our revenues and related receivables are generated from contracts with customers that are 12 months or less in duration. For both discrete and contracted revenue, evidence of an arrangement is typically in the form of a formal contract and/or purchase order. Prices are fixed at the time of the order and no price protections or variables are offered. Collectability is reasonably assured through our customer credit and review process, and payment is typically due within 60 days or less. Revenue is recognized when performance obligations under the terms of the contracts with our customers are satisfied. We elected to use the practical expedient that allows us to expense commission costs as incurred.
Our performance obligations related to the sale of instruments and consumables generally consist of the promise to sell tangible goods to distributors or end users. Ownership of these goods is typically transferred at time of shipment, at which point we have satisfied our performance obligation and we recognize revenue.
Our performance obligations related to services may include testing, installation, and/or maintenance of our products, either on-site at our customers’ facilities or in our own calibration laboratories. Performance obligations arise from the service contracts when discrete services are contracted in advance and performed at a future time, often at the time of the customer’s choosing. In this case, the performance obligation is satisfied, and revenue is recognized, upon the customer’s acceptance of the completion of the specified work. Alternately, service revenue may be recognized for contracted services or maintenance provided continually over a period of time, and our performance obligations are satisfied by completing any service that is contractually required, if applicable, or simply by the passage of time if no services are required or requested. For contracted services, revenue is recognized on a straight-line basis over the life of the service contract, which is a faithful depiction of these annual service contracts, which may or may not be invoked.
The following tables present disaggregated revenues for the three months ended June 30, 2018 and June 30, 2017, respectively:
Three Months Ended June 30, 2018 | ||||||||||||||||||||
Sterilization and Disinfection Control |
Instruments |
Cold Chain Monitoring |
Cold Chain Packaging | Total | ||||||||||||||||
Discrete revenues: | ||||||||||||||||||||
Consumables | $ | 9,570 | $ | 792 | $ | 64 | $ | 1,740 | $ | 12,166 | ||||||||||
Hardware | 204 | 5,540 | 1,340 | -- | 7,084 | |||||||||||||||
Services | 351 | 2,399 | 543 | 100 | 3,393 | |||||||||||||||
Contracted revenues: | ||||||||||||||||||||
Services | 1,223 | -- | 1,276 | -- | 2,499 | |||||||||||||||
Total Revenues | $ | 11,348 | $ | 8,731 | $ | 3,223 | $ | 1,840 | $ | 25,142 |
In January 2017,
Three Months Ended June 30, 2017 | ||||||||||||||||||||
Sterilization and Disinfection Control |
Instruments |
Cold Chain Monitoring |
Cold Chain Packaging | Total | ||||||||||||||||
Discrete revenues: | ||||||||||||||||||||
Consumables | $ | 8,669 | $ | 944 | $ | 31 | $ | 887 | $ | 10,531 | ||||||||||
Hardware | 133 | 5,540 | 1,172 | -- | 6,845 | |||||||||||||||
Services | 209 | 2,119 | 726 | 83 | 3,137 | |||||||||||||||
Contracted revenues: | ||||||||||||||||||||
Services | 1,172 | -- | 988 | -- | 2,160 | |||||||||||||||
Total Revenues | $ | 10,183 | $ | 8,603 | $ | 2,917 | $ | 970 | $ | 22,673 |
Contract Balances
Our contracts have varying payment terms and conditions. Some customers prepay for services, resulting in unearned revenues or customer deposits, called contract liabilities, which are included within other accrued expenses and unearned revenues in the FASB issued ASU 2017-04,Intangibles – Goodwillaccompanying condensed consolidated balance sheets. Contract assets would exist when sales are recorded (i.e. the control of the goods or services has been transferred to the customer), but customer payment is contingent on a future event besides the passage of time (such as satisfaction of additional performance obligations). We do not have any contract assets. Unbilled receivables, which are not classified as contract assets, represent arrangements in which sales have been recorded prior to billing and Other, which eliminates the requirementright to calculate the implied fair valuepayment is unconditional.
A summary of goodwill to measure a goodwill impairment charge. ASU 2017-04contract liabilities is required to be applied prospectively and we elected to early adopt ASU 2017-04 effective April 1, 2017.as follows:
Contract liabilities balance as of March 31, 2018 | $ | 4,147 | ||
Prior year liabilities recognized in revenues during the three months ended June 30, 2018 | (1,765 | ) | ||
Contract liabilities added during the three months ended June 30, 2018, net of revenues recognized | 1,836 | |||
Contract liabilities balance as of June 30, 2018 | $ | 4,218 |
Note 2– Acquisitions
For the nine months ended December 31, 2017, our acquisitions of businesses totaled $15,433,000, of which none were material in nature (see Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations).
Note 3– Impairment Loss on Goodwill
During the nine months ended December 31, 2017, revenues in our Cold Chain Packaging reporting segment decreased significantly as compared to the same period in the prior year primarily due to a significant decrease in revenues from our largest customer and the loss of the business of one of our larger customers. During the three months ended December 31, 2017 we completed a detailed review of the cold chain packaging business and concluded that long and difficult sales-cycles associated with this product set, when coupled with higher than previously contemplated costs for operating and expanding the necessary infrastructure to support revenues growth have resulted in a forecast of lower than expected revenues, gross margin percentages and overall profitability as compared to our original model for this business. Based on these facts, we concluded that we had a triggering event requiring assessment of impairment for certain of our long-lived assets associated with the Cold Chain Packaging reporting segment. As a result, we reviewed the long-lived assets associated with this reporting segment and recorded a $13,819,000 impairment charge related to goodwill, which is included in impairment loss on goodwill on the accompanying condensed consolidated statements of operations for the three and nine months ended December 31, 2017. The impairment loss was measured using a market approach utilizing an EBITA multiple model. The remaining goodwill and intangible assets associated with this segment are $1,434,000 and $4,340,000, respectively as of December 31, 2017.
Note 4 -3. Inventories
Inventories consist of the following (in thousands):following:
December 31, 2017 | March 31, 2017 | June 30, 2018 | March 31, 2018 | |||||||||||||
Raw materials | $ | 9,886 | $ | 10,815 | $ | 8,642 | $ | 9,059 | ||||||||
Work-in-process | 411 | 342 | 479 | 380 | ||||||||||||
Finished goods | 3,165 | 3,604 | 2,940 | 3,152 | ||||||||||||
Less: reserve | (3,008 | ) | (888 | ) | (3,429 | ) | (3,363 | ) | ||||||||
$ | 10,454 | $ | 13,873 | |||||||||||||
Inventories, net | $ | 8,632 | $ | 9,228 |
Note 54 –. Facility Relocation
In August 2016, we announced that we plannedplanned to shut down both our Omaha and Traverse City manufacturing facilities and relocate those operations to the new Bozeman building. The move of those two facilities, along with the current Bozeman operations, began in March 2017 and is estimated to bewas completed by as of June 30, 2018. We estimate that theThe total costscost of the relocation will be $2,100,000was $1,584 (which is comprised primarily of facility moving expenses, retention bonuses for existing personnel and payroll costs for duplicative personnel during the transition period) of which $725,000 was incurred during the year ended March 31, 2017. We incurred $772,000 in relocation costs for the nine months ended December 31, 2017, of which $503,000 and $269,000 are reflected in cost of revenues and general and administrative expense, respectively, in the accompanying condensed consolidated statements of operations. Facility relocation costs, which are associated with our Sterilization and Disinfection reporting segment, are as follows for the nine months ended December 31, 2017:.
|
|
|
|
Facility relocation amountsamounts accrued and paid for the ninethree months ended December 31, 2017 June 30, 2018 are as follows (in thousands):follows:
Balance at March 31, 2017 | $ | 673 | ||||||
Balance at March 31, 2018 | $ | 408 | ||||||
Facility relocation expense | 772 | 17 | ||||||
Cash payments | (1,082 | ) | (425 | ) | ||||
Balance at December 31, 2017 | $ | 363 | ||||||
Balance at June 30, 2018 | $ | -- |
In July 2017, we completed the move from the Omaha facility and subsequently sold that building for $1,116,000 (net of commission costs) which resulted in a gain of $116,000 which is included in other expense, net in the accompanying condensed consolidated statements of operations for the nine months ended December 31, 2017.
In July 2017, we put our old BozemanBozeman facility, part of the SDC Division, up for sale. The assets associated with this facility have a carrying value of $1,934 and are presented on the accompanying condensed consolidated balance sheets as of December 31, 2017 June 30, 2018 as assets held for sale.
Note 65 -. Long-Term Debt
Long-term debt consists of the following (in thousands):following:
December 31, 2017 | March 31, 2017 | June 30, 2018 | March 31, 2018 | |||||||||||||
Line of credit (3.44% at December 31, 2017) | $ | 37,500 | $ | 35,500 | ||||||||||||
Term loan (3.63% at December 31, 2017) | 19,000 | 19,750 | ||||||||||||||
Line of credit (4.00% as of June 30, 2018) | $ | 21,500 | $ | 28,000 | ||||||||||||
Term loan (4.13% as of June 30, 2018) | 18,250 | 18,625 | ||||||||||||||
Less: discount | (392 | ) | (450 | ) | (338 | ) | (365 | ) | ||||||||
Less: current portion | (1,500 | ) | (1,125 | ) | (1,750 | ) | (1,625 | ) | ||||||||
Long-term portion | $ | 54,608 | $ | 53,675 | $ | 37,662 | $ | 44,635 |
On March 1, 2017, we entered into a five-yearfive-year agreement (the “Credit Facility”) for an $80,000,000$80,000 revolving line of credit (“Line of Credit”), a $20,000,000$20,000 term loan (“Term Loan”) and up to $2,500,000$2,500 of letters of credit with a banking syndicate of four banks. In addition, the Credit Facility provides a post-closing accordion feature which allows for the Company to request to increase the Line of Credit or Term Loan up to an additional $100,000,000. Funds from the Credit Facility may be used to pay down the previous credit facility, finance working capital needs and for general corporate purposes in the ordinary course of business (including, without limitation, permitted acquisitions).$100,000.
Line of Credit and Term Loan indebtedness bears interest at either: (1)(1) LIBOR, as defined in the agreement, plus an applicable margin ranging from 1.50% to 2.50%; or (2)(2) the alternate base rate (“ABR”), which is the greater of JPMorgan’s prime rate or the federal funds effective rate or the overnight bank funding rate plus 0.5%. We elect the interest rate with each borrowing under the line of credit. In addition, there is an unused line fee of 0.15% to 0.35%. Letter of credit fees are based on the applicable LIBOR rate.
The Term Loan requires 20 quarterly principal payments (the first due date was March 31, 2017) in the amount of $250,000 (increasing by $125,000 each year up to $750,000 in the fifth year). The remaining balance of principal and accrued interest are due on March 1, 2022.
The Credit Facility is secured by all of our assets and requires us to maintain a ratio of funded debt to our trailing four quarters of EBIDTA (the “Leverage Ratio”), as defined in the agreement, of less than 3.0 to 1.0, provided that, we may once during the 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,$20,000, elect to increase the maximum Leverage Ratio permitted hereunder to (i) 3.50 to 1.00 for a period of four consecutive fiscal quarters commencing with the fiscal quarter in which such Permitted Acquisition occurs (the “Initial Holiday Period”) and (ii) 3.25 to 1.00 for the period of four consecutive fiscal quarters immediately following the Initial Holiday Period. The Credit Facility also requires us to maintain a minimum fixed charge coverage ratio of less than 1.25 to 1.0. We were compliantin compliance with the requiredall debt covenants at December 31, 2017.
We incurred origination and debt issuance costsas of $460,000 which are treated as a debt discount and are netted against amounts outstanding on the condensed consolidated balance sheets.June 30, 2018.
As of December 31, 2017,June 30, 2018, future contractual maturities of debt are as follows (in thousands):follows:
Year Ending March 31, | ||||||||
2018 | $ | 375 | ||||||
2019 | 1,625 | $ | 1,250 | |||||
2020 | 2,125 | 2,125 | ||||||
2021 | 2,625 | 2,625 | ||||||
2022 | 49,750 | 33,750 | ||||||
$ | 56,500 | |||||||
Total | $ | 39,750 |
In JanuaryJuly 2018, we made a $3,500,000$1,000 payment under our Line of Credit.
Note 76 -. Stock-Based Compensation
During the three months ended June 30, 2018, we granted restricted stock units (“RSUs”) on 15,890 shares of our common stock to eligible employees. The weighted average grant date fair value of the RSUs was $151.44 per share. The RSUs generally vest in equal installments on the anniversary of the grant date over a period of five years.
During the three months ended June 30, 2018, we awarded 11,385 performance share units (“PSUs”) that are subject to both service and performance conditions to eligible employees. The PSUs had a grant date fair value of $192.99 per share and vest both based on our achievement of specific performance criteria for the three-year period from April 1, 2018 through March 31, 2021, as well as continued service through June 15, 2021. The quantity of shares that will be issued upon vesting will range from 0 percent to 400 percent of the targeted number of shares; if the defined minimum targets are not met, then no shares will vest.
During the three months ended June 30, 2018, we granted non-qualified stock options (“NQSOs”) on 24,940 shares of common stock to eligible employees. The weighted-average grant date fair value of the NQSOs was $53.56 per share with a weighted average exercise price of $143.36 per share based on the closing price of the common stock on the date of grant. The NQSOs generally vest in equal installments on the anniversary of the grant date over a period of five years.
Amounts recognized in the condensed consolidated financial statements related to stock-based compensation are as follows (in thousands, except per share data):follows:
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Total cost of stock-based compensation charged against (loss) income before income taxes | $ | 438 | $ | 380 | $ | 1,423 | $ | 1,221 | ||||||||
Amount of income tax (expense) benefit recognized in earnings | (99 | ) | 328 | 893 | 1,027 | |||||||||||
Amount charged against net (loss) income | $ | 537 | $ | 52 | $ | 530 | $ | 194 | ||||||||
Impact on net (loss) income per common share: | ||||||||||||||||
Basic | $ | 0.14 | $ | 0.01 | $ | 0.14 | $ | 0.05 | ||||||||
Diluted | 0.14 | 0.01 | $ | 0.14 | 0.05 |
Three Months Ended June 30, | ||||||||
2018 | 2017 | |||||||
Stock-based compensation expense | $ | 739 | $ | 540 | ||||
Amount of income tax (benefit) recognized in earnings | (896 | ) | (631 | ) | ||||
Stock-based compensation (benefit), net of tax | $ | (157 | ) | $ | (91 | ) | ||
Benefit to earnings per share: | ||||||||
Basic | $ | 0.04 | $ | 0.02 | ||||
Diluted | 0.04 | 0.02 |
Stock-based compensation expense is included in cost of revenues, selling, and general and administrative expense in the accompanying condensed consolidated statements of operations.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model (“Black-Scholes”). We use historical data to estimate the expected price volatility, the expected stock option life and expected forfeiture rate. The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of grant for the estimated life of the stock option. The dividend yield is calculated based upon the dividend payments made during the prior four quarters as a percent of the average stock price for that period.income.
The following is a summary of stock option and non-vested stock award activity for the ninethree months ended December 31, 2017:June 30, 2018 (shares in thousands):
Number of | Weighted- Average Exercise Price per Share | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value (000s) | |||||||||||||
Outstanding at March 31, 2017 | 510,361 | $ | 75.78 | 5.0 | $ | 23,956 | ||||||||||
Stock options granted | 95,605 | 123.09 | 5.3 | |||||||||||||
Stock options forfeited | (52,833 | ) | 95.29 | 4.8 | ||||||||||||
Stock options expired | (964 | ) | 79.87 | 3.1 | ||||||||||||
Stock options exercised | (51,496 | ) | 61.27 | -- | ||||||||||||
Outstanding at December 31, 2017 | 500,673 | 84.24 | 4.5 | $ | 20,092 | |||||||||||
Exercisable at December 31, 2017 | 164,475 | 60.13 | 3.8 | $ | 10,554 |
Stock Options | Non-Vested Stock Awards | |||||||||||||||
Number of | Weighted-Average Exercise Price per Share | Number of Shares | Weighted-Average Grant-date Fair Value | |||||||||||||
Outstanding as of March 31, 2018 | 458 | $ | 86.38 | 9 | $ | 125.68 | ||||||||||
Awards granted | 25 | 143.36 | 27 | 168.79 | ||||||||||||
Awards forfeited or expired | (22 | ) | 94.45 | -- | ||||||||||||
Awards exercised / vested | (48 | ) | 69.21 | (1 | ) | 122.98 | ||||||||||
Outstanding as of June 30, 2018 | 413 | 91.40 | 35 | $ | 159.29 | |||||||||||
Exercisable / vested as of June 30, 2018 | 160 | 1 |
The total intrinsicWe issue shares in connection with stock-based compensation pursuant to the Mesa Laboratories, Inc. 2014 Equity Plan (the “2014 Equity Plan”). For the purposes of counting the shares remaining as available under the 2014 Incentive Plan, each share issuable pursuant to outstanding full value of stock options exercised was $4,243,000awards, such as RSUs and $4,701,000 for the nine months ended December 31, 2017 and 2016, respectively.
A summary of the status of our unvestedPSUs, counts as five shares issued, whereas each share underlying a stock option sharescounts as of December 31, 2017, is as follows:
Number of | Weighted- Average | |||||||
Unvested at March 31, 2017 | 373,766 | $ | 22.49 | |||||
Stock options granted | 95,605 | 39.00 | ||||||
Stock options forfeited | (52,833 | ) | 27.42 | |||||
Stock options vested | (80,340 | ) | 20.85 | |||||
Unvested at December 31, 2017 | 336,198 | 28.47 |
As of December 31, 2017, we have issued 8,400one share issued. Under the 2014 Equity Plan, 1,100,000 shares of restrictedcommon stock with vesting periods ranging from five to seven years. Nohave been authorized and reserved for eligible participants, of which 591,969 shares have vested as of December 31, 2017.
As of December 31, 2017, there was $7,513,000 of total unrecognized compensation expense related to unvested stock options and shares of restricted stock. As of December 31, 2017, we have 749,608 shareswere available for future grants.grants as of June 30, 2018.
Note 87 -. Net (Loss) Income Per Share
Basic net (loss) income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted net (loss) income per share is computed similarly to basic net (loss) income per share, except that it includes the potential dilution that could occur if dilutive securities were exercised.
The following table presents a reconciliation of the denominators used in the computation of net (loss) income per share - basic and diluted (in thousands, except per share data):
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net (loss) income available for shareholders | $ | (11,086 | ) | $ | 3,252 | $ | (7,216 | ) | $ | 7,540 | ||||||
Weighted average outstanding shares of common stock | 3,781 | 3,688 | 3,765 | 3,668 | ||||||||||||
Dilutive effect of stock options | -- | 180 | -- | 167 | ||||||||||||
Common stock and equivalents | 3,781 | 3,868 | 3,765 | 3,835 | ||||||||||||
Net (loss) income per share: | ||||||||||||||||
Basic | $ | (2.93 | ) | $ | 0.88 | $ | (1.92 | ) | $ | 2.06 | ||||||
Diluted | (2.93 | ) | 0.84 | (1.92 | ) | 1.97 |
For both the three and nine months ended December 31, 2017, 501,000 outstanding stock options were excluded from the calculation of diluted net (loss) income per share because their inclusion would have been anti-dilutive.
For the three and nine months ended December 31, 2016, 3,000 and 110,000 outstanding stock options, respectively, were excluded from the calculation of diluted net (loss) income per share because their inclusion would have been anti-dilutive.
Note 9-Commitments and Contingencies
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 three months ended June 30, 2017 revenues continued to increase and after revising our forecast for the process challenge device (“PCD”) product revenues through the end of the earn-out period, we recorded an additional $300,000 accrual, which is included in other income, net in the accompanying condensed consolidated statement of operations for the nine months ended December 31, 2017. We paid the remaining contingent consideration due of $450,000 in November 2017.
Note 10– Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in each component of accumulated other comprehensive income (loss) (“AOCI”), net of tax (in thousands):
Foreign Currency Translation |
AOCI | |||||||
Balance at September 30, 2017 | $ | (61 | ) | $ | (61 | ) | ||
Quarter ended December 31, 2017: | ||||||||
Unrealized gain arising during the period | 181 | 181 | ||||||
Balance at December 31, 2017 | $ | 120 | $ | 120 |
Foreign Currency Translation |
AOCI | |||||||
Balance at September 30, 2016 | $ | (1,286 | ) | $ | (1,286 | ) | ||
Quarter ended December 31, 2016: | ||||||||
Unrealized loss arising during the period | (634 | ) | (634 | ) | ||||
Balance at December 31, 2016 | $ | (1,920 | ) | $ | (1,920 | ) |
Foreign Currency Translation |
AOCI | |||||||
Balance at March 31, 2017 | $ | (1,760 | ) | $ | (1,760 | ) | ||
Nine months ended December 31, 2017: | ||||||||
Unrealized gain arising during the period | 1,880 | 1,880 | ||||||
Balance at December 31, 2017 | $ | 120 | $ | 120 |
Foreign Currency Translation |
AOCI | |||||||
Balance at March 31, 2016 | $ | (1,151 | ) | $ | (1,151 | ) | ||
Nine months ended December 31, 2016: | ||||||||
Unrealized loss arising during the period | (769 | ) | (769 | ) | ||||
Balance at December 31, 2016 | $ | (1,920 | ) | $ | (1,920 | ) |
Note 11 -Segment Information
We have four reporting segments: Sterilization and Disinfection Control (formerly named Biological Indicators), Instruments, Cold Chain Monitoring and Cold Chain Packaging. The following tables set forth our segment information (in thousands):
Three Months Ended December 31, 2017 | ||||||||||||||||||||
Sterilization and Disinfection Control |
Instruments |
Cold Chain Monitoring |
Cold Chain Packaging | Total | ||||||||||||||||
Revenues | $ | 10,630 | $ | 8,182 | $ | 3,267 | $ | 1,592 | $ | 23,671 | ||||||||||
Gross profit (loss) | $ | 7,134 | $ | 5,150 | $ | (43 | ) | $ | 440 | 12,681 | ||||||||||
Reconciling items (1) | (23,207 | ) | ||||||||||||||||||
Loss before income taxes | $ | (10,526 | ) |
Three Months Ended December 31, 2016 | ||||||||||||||||||||
Sterilization and Disinfection Control |
Instruments |
Cold Chain Monitoring |
Cold Chain Packaging | Total | ||||||||||||||||
Revenues | $ | 9,248 | $ | 9,013 | $ | 3,102 | $ | 2,480 | $ | 23,843 | ||||||||||
Gross profit | $ | 6,066 | $ | 5,706 | $ | 1,254 | $ | 511 | 13,537 | |||||||||||
Reconciling items (1) | (9,657 | ) | ||||||||||||||||||
Earnings before income taxes | $ | 3,880 |
Nine Months Ended December 31, 2017 | ||||||||||||||||||||
Sterilization and Disinfection Control |
Instruments |
Cold Chain Monitoring |
Cold Chain Packaging | Total | ||||||||||||||||
Revenues | $ | 30,798 | $ | 24,768 | $ | 9,335 | $ | 4,397 | $ | 69,298 | ||||||||||
Gross profit | $ | 20,676 | $ | 15,021 | $ | 2,044 | $ | 844 | 38,585 | |||||||||||
Reconciling items (1) | (44,702 | ) | ||||||||||||||||||
Loss before income taxes | $ | (6,117 | ) |
Nine Months Ended December 31, 2016 | ||||||||||||||||||||
Sterilization and Disinfection Control |
Instruments |
Cold Chain Monitoring |
Cold Chain Packaging | Total | ||||||||||||||||
Revenues | $ | 27,612 | $ | 25,928 | $ | 8,964 | $ | 6,862 | $ | 69,366 | ||||||||||
Gross profit | $ | 17,986 | $ | 15,881 | $ | 3,578 | $ | 1,830 | 39,275 | |||||||||||
Reconciling items (1) | (30,014 | ) | ||||||||||||||||||
Earnings before income taxes | $ | 9,261 |
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December 31, 2017 | March 31, 2017 | |||||||
Total assets (in thousands): | ||||||||
Sterilization and Disinfection Control | $ | 83,101 | $ | 67,233 | ||||
Instruments | 33,819 | 40,805 | ||||||
Cold Chain Monitoring | 31,198 | 35,789 | ||||||
Cold Chain Packaging | 7,381 | 20,313 | ||||||
Corporate and administrative | 12,278 | 7,593 | ||||||
$ | 167,777 | $ | 171,733 |
All long-lived assets are located in the United States except for $5,823,000,$7,484,000 and $16,807,000 which are associated with our French, Canadian and German subsidiaries, respectively.
Revenues from external customers are attributed to individual countries based upon locations to which the product is shipped or exported, as follows (in thousands):
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net revenues from unaffiliated customers: | ||||||||||||||||
United States | $ | 14,221 | $ | 13,844 | $ | 41,664 | $ | 44,758 | ||||||||
Foreign | 9,450 | 9,999 | 27,634 | 24,608 | ||||||||||||
$ | 23,671 | $ | 23,843 | $ | 69,298 | $ | 69,366 |
Noforeign country exceeds 10 percent of total revenues.
Note 12 – Income Taxes
For interim income tax reporting, we estimate our annual effective tax rate and apply this effective tax rate to our year to dateyear-to-date pre-tax(loss) income. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. Additionally, the tax effects of significant unusual or infrequently occurring items are recognized as discrete items in the interim period in which the events occur. The impact of changes in tax laws or rates on deferred tax amounts, impairments of non-deductible goodwill, excess benefits from stock-based compensation, impairments of non-deductible goodwill, and changes in tax reserves resulting from the finalization of tax audits or reviews are examples of significant unusual or infrequently occurring items that are recognized as discrete items in the interim period in which the event occurs. There is a potential for volatility of the effective tax rate due to several factors, including excess benefits from stock-based compensation, changes in the mix of the pre-tax income and the jurisdictions to which it relates, changes in tax laws and foreign tax holidays, settlement with taxing authorities, and foreign currency fluctuations.
On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was enacted in the U.S., making significant changes to U.S. tax law. The TCJA reduces the U.S. federal corporate income tax rate from 34 percent to 21 percent for tax years beginning after December 31, 2017, requires companies to pay a one-timeone-time transition tax on certain un-remitted earnings of foreign subsidiaries that were previously tax deferred, generally eliminates U.S. federal income tax on dividends from foreign subsidiaries, creates new taxes on certain foreign-sourced earnings, repeals the Section 199 deduction, and imposes limitations on the deductibility of executive compensation under Section 162(m)162(m). During the quarter ended December 31, 2017, we revised our estimated annual effective tax rate to reflect the change in the federal statutory rate. The rate change results in the Company using a blended statutory rate for the annual period
Shortly thereafter, the SECSecurities and Exchange Commission staff issued SAB 118, which provides guidance on accounting for the tax effects of the TCJA for which the accounting under ASC 740 is incomplete. To the extent that a company's accounting for certain income tax effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before enactment of the TCJA. The Company is required to complete its tax accounting for the TCJA within a one-year period when it has obtained, prepared, and analyzed the information to complete the income tax accounting.
Accordingly, as of December 31, 2017, June 30, 2018, we have not completed our accounting for the tax effects of the TCJA. However,During our fiscal year ended March 31, 2018, we made a reasonable estimate of the one-timeone-time transition tax and recognized a provisional tax liability of $285,000.$220. We also re-measured the applicable deferred tax assets and liabilities based on the rates at which they are expected to reverse. However, we are still analyzing certain aspects of the TCJA and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the re-measurement of our deferred tax balance was a benefit of $722,000.$279. Overall, the TCJA resulted in a net tax benefit of $437,000.$59. Such amount was recorded as a discrete tax benefit and iswas included as a component of income tax expense in the accompanying condensed consolidated statements of operations for the three and nine months ending Decemberyear ended March 31, 2017.2018.
Our effective income tax rate (benefit) was (5.3)3.9 percent and 16.2(16.4) percent for the three months ended December 31,June 30, 2018 and 2017,and 2016, respectively, and (18.0) percent and 18.6 percent for the nine months ended December 31, 2017 and 2016, respectively. The effective tax rate for the three and nine months ended December 31, 2017 June 30, 2018 differed from the statutory federal raterate of 30.9 percent21 percent primarily due to the impact of the impairment of non-deductible goodwill, the TCJA, share-based payment awards for employees, (which was significant for the nine months ended December 31, 2017), state income taxes, domestic manufacturing deductionsforeign derived intangible income deduction, and the foreign rate differential.
Since we are subject to audit by various taxing authorities, it is reasonably possible that the amount of unrecognized tax benefits will change during the next 12 months. However, we do not expect the change, if any, to have a material effect on our financial condition or results of operations within the next 12 months.
Note 183. - Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share (“diluted EPS”) is computed similarly to basic earnings per share, except that it includes the potential dilution that could occur if dilutive securities were exercised. Potentially dilutive securities include common shares related to stock options and non-vested stock awards (collectively “stock awards”). Stock awards are excluded from the calculation of diluted EPS in the event that they are subject to performance conditions or are antidilutive.
The following table presents a reconciliation of the denominators used in the computation of basic and diluted earnings per share (shares in thousands):
Three Months Ended June 30, | ||||||||
2018 | 2017 | |||||||
Net income available for shareholders | $ | 4,230 | $ | 1,517 | ||||
Weighted average number of outstanding shares of common stock | 3,816 | 3,736 | ||||||
Dilutive effect of stock awards | 190 | 187 | ||||||
Diluted weighted average number of outstanding shares of common stock | 4,006 | 3,923 | ||||||
Earnings per share: | ||||||||
Basic | $ | 1.11 | $ | 0.41 | ||||
Diluted | $ | 1.06 | $ | 0.39 |
The following stock awards were excluded from the calculation of diluted EPS:
Three Months Ended June 30, | ||||||||
2018 | 2017 | |||||||
Stock awards subject to performance conditions | 3 | -- | ||||||
Stock awards that were antidilutive | 27 | 117 | ||||||
Total stock awards excluded from diluted EPS | 30 | 117 |
Note 9.Commitments and Contingencies
In February 2018, Dr. James L. Orrington II filed a purported civil class action in the United States District Court for the Northern District of Illinois, Eastern Division, alleging 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 seeks monetary damages, injunctive relief, and attorneys’ fees. Additionally, in June 2018, Rowan Family Dentistry, Inc. filed a purported class action complaint in the United States District Court for the District of Colorado making substantially the same claims as Dr. James L. Orrington II and seeking substantially the same relief. We intend to vigorously defend both of the aforementioned cases; however, we cannot predict with any degree of certainty the outcome of the lawsuits or determine the extent of any potential liability or damages.
Note 10. Segment Information
We have four reporting segments: Sterilization and Disinfection Control, Instruments, Cold Chain Monitoring, and Cold Chain Packaging. The following tables set forth our segment information:
Three Months Ended June 30, 2018 | ||||||||||||||||||||
Sterilization and Disinfection Control |
Instruments |
Cold Chain Monitoring |
Cold Chain Packaging | Total | ||||||||||||||||
Revenues | $ | 11,348 | $ | 8,731 | $ | 3,223 | $ | 1,840 | $ | 25,142 | ||||||||||
Gross profit | $ | 7,812 | $ | 5,633 | $ | 1,464 | $ | 182 | 15,091 | |||||||||||
Reconciling items (1) | (10,691 | ) | ||||||||||||||||||
Earnings before income taxes | $ | 4,400 |
Three Months Ended June 30, 2017 | ||||||||||||||||||||
Sterilization and Disinfection Control |
Instruments |
Cold Chain Monitoring |
Cold Chain Packaging | Total | ||||||||||||||||
Revenues | $ | 10,183 | $ | 8,603 | $ | 2,917 | $ | 970 | $ | 22,673 | ||||||||||
Gross profit | $ | 6,720 | $ | 4,908 | $ | 894 | $ | 149 | 12,671 | |||||||||||
Reconciling items (1) | (11,368 | ) | ||||||||||||||||||
Earnings before income taxes | $ | 1,303 |
(1) | Reconciling items include selling, general and administrative, research and development, and other expenses |
June 30, 2018 | March 31, 2018 | |||||||
Total assets: | ||||||||
Sterilization and Disinfection Control | $ | 76,578 | $ | 83,452 | ||||
Instruments | 32,859 | 33,479 | ||||||
Cold Chain Monitoring | 32,132 | 30,796 | ||||||
Cold Chain Packaging | 7,382 | 7,091 | ||||||
Corporate and administrative | 12,507 | 9,283 | ||||||
$ | 161,458 | $ | 164,101 |
As of June 30, 2018, all long-lived assets are located in the United States except for $6,408, $6,746 and $15,911 which are associated with our French, Canadian, and German subsidiaries, respectively.
Revenues from external customers are attributed to individual countries based upon locations to which the product is shipped or exported, as follows:
Three Months Ended June 30, | ||||||||
2018 | 2017 | |||||||
United States | $ | 15,548 | $ | 13,011 | ||||
Foreign | 9,594 | 9,662 | ||||||
$ | 25,142 | $ | 22,673 |
No foreign country exceeds 10 percent of total revenues.
Note 11.Subsequent Event
In JanuaryJuly 2018, we announced that our Board of Directors declared a quarterly cash dividend of $0.16$0.16 per share of common stock, payable on March 15,September 17, 2018, to shareholders of record at the close of business on February 28,August 31, 2018.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This report contains information that may constitute "forward-looking statements.” Generally, the words "believe," "will," “estimate,” "expect," "project," "anticipate," "intend," "will" and similar expressions identify forward-looking statements, which generally are not historical in nature. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. All statements that address operating performance, events, or developments that we expect or anticipate will occur in the future — including statements relating to revenues growth and statements expressing general views about future operating results — are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to those described in Part II, "Item 1A. Risk Factors" and elsewhere in this report and in our Annual Report on Form 10-K for the year ended March 31, 20178, and those described from time to time in our subsequent reports filed with the Securities and Exchange Commission.
General Discussion
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 wherein which we can establish a strong presence and achieve high gross margins. We are organized into four divisions across teneight physical locations. Our sterilization and disinfection control division (“SDC” Division) manufactures and sells biological, cleaning, and chemical indicators. Biological, cleaning, and chemical indicators are used to assess the effectiveness of sterilization and disinfection processes in the hospital, dental, medical device, and pharmaceutical industries. The division also provides testing and laboratory services, mainly to the dental industry. 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 Sterilization and Disinfection Control Division (formerly named the Biological Indicators Division) provides testing services, along with the manufacturing and marketing of both biological and cleaning indicators, and the marketing of chemical indicators used to assess the effectiveness of sterilization and disinfection processes in the hospital, dental, medical device and pharmaceutical 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 other laboratory and industrial 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.the customer’s transport of their own products.
Our revenues come from twothree main sources – product saleshardware, consumables, and services. Product sales (hardware and consumables) 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 Controldisinfection control products and many of the packagingmost products ofin 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 systemsproducts and productssystems 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. Labor costs, including non-cash stock-based compensation, 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 Ending March 31, 2018 Acquisitions
During the year ending March 31, 2018, we completed the following three acquisitions (the “2018 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 (the “2017 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.
General Trends and Outlook
Our strategic objectives include growth both organically and through further acquisitions. During the year ending March 31,three months ended June 30, 2018, we continuecontinued to build our infrastructure to prepare for future growth, including completing the relocation of our Omaha, Traverse City andthe old Bozeman manufacturing facilitiesfacility into the new Bozeman building, the addition of key personnel to our operations, sales and marketing, and research and development teams, and the continued rollout of phase three of our ERP implementation project (European operations).
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,Demand for our instruments products and cold chain services and monitoring systems remains solid and we strive to continue to grow revenues going forward. 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.
We are working on several research and development projects that, if completed, may result in new products for both existing customers and new markets. We are hopefulhopeful that we will have new products available for sale in the coming year.year.
Overall revenues declined oneincreased 11 percent, while organic revenues declinedincreased four percent, for the three months ended December 31, 2017,June 30, 2018, resulting from organic decreasesincreases of nine90 percent, 10 percent, and 36one percent from the Instruments and Cold Chain Packaging, Divisions, respectively, partially offset by increases of seven and three percent for the Sterilization and Disinfection Control and Cold Chain Monitoring Divisions, respectively. Overall revenues were flat, while organic revenues declined two percent, for the nine months ended December 31, 2017 resulting from organic decreases of four, four and 36 percent from the Instruments, Cold Chain Monitoring, and Cold Chain PackagingInstruments Divisions, respectively, partially offset by an increaseorganic decrease of ninefour percent for the Sterilization and Disinfection ControlSDC Division.
During the three months ended June 30, 2017, 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 both the three months ended September 30, 2017 and December 31, 2017, 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 three and nine months ended December 31, 2017 was 54 and 56 percent, respectively but would have been 61 and 59 percent, respectively without the impact of these additional inventory reserves.
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 and the loss of the business of one of our larger customers. Due to these two events, we believe that revenues for this segment will now 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 of goodwill on the accompanying condensed consolidated statements of operations for the three and nine months ended December 31, 2017.
We will continue to monitor the operational results of our Cold Chain Packaging Division and if revenues, gross margin percentages and overall profitability fail to meet our revised projections, the remaining long-lived assets (including $1,434,000 of Goodwill and $4,340,000 of intangible assets as of December 31, 2017, respectively) could be subject to further impairment losses.
Results of Operations
(Dollars in thousands)
The following table sets forth, for the periods indicated, condensed consolidated statements of operationsincome data. The table and the discussion below should be read in conjunction with the accompanying condensed consolidated financial statements and the notes thereto appearing elsewhere in this report (in thousands, except percent data):report:
Three Months Ended December 31, | Percent | |||||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
Revenues | $ | 23,671 | $ | 23,843 | $ | (172 | ) | (1 | )% | |||||||
Cost of revenues | 10,990 | 10,306 | 684 | (7 | )% | |||||||||||
Gross profit | $ | 12,681 | $ | 13,537 | $ | (856 | ) | (6 | )% | |||||||
Gross profit margin | 54 | % | 57 | % | (3 | )% | ||||||||||
Operating expenses | ||||||||||||||||
Selling | $ | 1,942 | $ | 2,409 | $ | (467 | ) | (19 | )% | |||||||
General and administrative | 6,256 | 5,881 | 375 | 6 | % | |||||||||||
Research and development | 752 | 861 | (109 | ) | (13 | )% | ||||||||||
Impairment loss on goodwill | 13,819 | -- | 13,819 | -- | % | |||||||||||
$ | 22,769 | $ | 9,151 | $ | 13,618 | 149 | % | |||||||||
Operating (loss) income | $ | (10,088 | ) | $ | 4,386 | $ | (14,474 | ) | (330 | )% | ||||||
Net (loss) income | (11,086 | ) | 3,252 | (14,338 | ) | (441 | )% | |||||||||
Net (loss) income margin | (47 | )% | 14 | % | (61 | )% |
Three Months Ended June 30, | Percent | |||||||||||||||
2018 | 2017 | Change | Change | |||||||||||||
Revenues | $ | 25,142 | $ | 22,673 | $ | 2,469 | 11 | % | ||||||||
Cost of revenues | 10,051 | 10,002 | 49 | -- | % | |||||||||||
Gross profit | $ | 15,091 | $ | 12,671 | $ | 2,420 | 19 | % | ||||||||
Gross profit margin | 60 | % | 56 | % | 4 | % | ||||||||||
Operating expenses | ||||||||||||||||
Selling | $ | 1,890 | $ | 2,679 | $ | (789 | ) | (29 | )% | |||||||
General and administrative | 7,600 | 6,857 | 743 | 11 | % | |||||||||||
Research and development | 837 | 1,153 | (316 | ) | (27 | )% | ||||||||||
$ | 10,327 | $ | 10,689 | $ | (362 | ) | (3 | )% | ||||||||
Operating income | $ | 4,764 | $ | 1,982 | $ | 2,782 | 140 | % | ||||||||
Net income | 4,230 | 1,517 | 2,713 | 179 | % | |||||||||||
Net income margin | 17 | % | 7 | % | 10 | % |
Nine Months Ended December 31, | Percent | |||||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
Revenues | $ | 69,298 | $ | 69,366 | $ | (68 | ) | -- | % | |||||||
Cost of revenues | 30,713 | 30,091 | 622 | 2 | % | |||||||||||
Gross profit | $ | 38,585 | $ | 39,275 | $ | (690 | ) | (2 | )% | |||||||
Gross profit margin | 56 | % | 57 | % | (1 | )% | ||||||||||
Operating expenses | ||||||||||||||||
Selling | $ | 6,909 | $ | 7,527 | $ | (618 | ) | (8 | )% | |||||||
General and administrative | 19,525 | 17,834 | 1,691 | 9 | % | |||||||||||
Research and development | 2,790 | 2,941 | (151 | ) | (5 | )% | ||||||||||
Impairment loss on goodwill | 13,819 | -- | 13,819 | -- | % | |||||||||||
$ | 43,043 | $ | 28,302 | $ | 14,741 | 52 | % | |||||||||
Operating (loss) income | $ | (4,458 | ) | $ | 10,973 | $ | (15,431 | ) | (141 | )% | ||||||
Net (loss) income | (7,216 | ) | 7,540 | (14,756 | ) | (196 | )% | |||||||||
Net (loss) income margin | (10 | )% | 11 | % | (21 | )% |
Revenues
The following table summarizes our revenues by source (in thousands, except percent data):source:
Three Months Ended December 31, | Percent | |||||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
Sterilization and Disinfection Control | $ | 10,630 | $ | 9,248 | $ | 1,382 | 15 | % | ||||||||
Instruments | 8,182 | 9,013 | (831 | ) | (9 | )% | ||||||||||
Cold Chain Monitoring | 3,267 | 3,102 | 165 | 5 | % | |||||||||||
Cold Chain Packaging | 1,592 | 2,480 | (888 | ) | (36 | )% | ||||||||||
Total | $ | 23,671 | $ | 23,843 | $ | (172 | ) | (1 | )% |
Nine Months Ended December 31, | Percent | Three Months Ended June 30, | Percent | |||||||||||||||||||||||||||||
2017 | 2016 | Change | Change | 2018 | 2017 | Change | Change | |||||||||||||||||||||||||
Sterilization and Disinfection Control | $ | 30,798 | $ | 27,612 | $ | 3,186 | 12 | % | $ | 11,348 | $ | 10,183 | $ | 1,165 | 11 | % | ||||||||||||||||
Instruments | 24,768 | 25,928 | (1,160 | ) | (4 | )% | 8,731 | 8,603 | 128 | 1 | % | |||||||||||||||||||||
Cold Chain Monitoring | 9,335 | 8,964 | 371 | 4 | % | |||||||||||||||||||||||||||
Cold Chain Packaging | 4,397 | 6,862 | (2,465 | ) | (36 | )% | ||||||||||||||||||||||||||
Cold Chain Monitoring | 3,223 | 2,917 | 306 | 10 | % | |||||||||||||||||||||||||||
Cold Chain Packaging | 1,840 | 970 | 870 | 90 | % | |||||||||||||||||||||||||||
Total | $ | 69,298 | $ | 69,366 | $ | (68 | ) | -- | % | $ | 25,142 | $ | 22,673 | $ | 2,469 | 11 | % |
Three and ninemonths ended DecemberJune 30, 2018 31, 2017versus DecemberJune 30, 2017 31, 2016
Sterilization and Disinfection Control revenues for the three and nine months ended December 31, 2017June 30, 2018 increased 11 percent primarily due to the acquisitions of BAG Health Care GmbH Hygiene Monitoring, SIMICON GmbH, and Hucker & Hucker GmbH during fiscal year 2018, Acquisitions andpartially offset by an organic growthdecline of seven and nine percent, respectively which was achieved through existing customers, expansion into new markets, price increases andfour percent. This decline is primarily associated with timing of fulfillment of orders related to the continued strengtheningcompletion of the Euro.move into our new Bozeman Facility and we expect to fulfill the majority of the related backlog during the three months ending September 30, 2018.
Instruments revenues for the three and nine months ended December 31, 2017 decreased due to organic decreases of nine and fourJune 30, 2018 increased one percent, respectively. The decrease for both the three and nine months ended December 31, 2017 was primarily due to the slower than expected adoptiontiming of an updated medical product. We realized a normalization of the adoption rate of this product towards the end of the quarterorders and as such we ramped up production to meet anticipated future demand.modest price increases.
Cold Chain Monitoring revenues for the three months ended December 31, 2017June 30, 2018 increased 10 percent primarily due to organic growth of three percent and the FreshLoc Acquisition. Cold Chain Monitoring revenues for the nine months ended December 31, 2017 increased primarily due to the FreshLoc Acquisition, partially offset by organic decreases of four10 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 organicallyincreased by 3690 percent for both the three and nine months ended December 31, 2017.June 30, 2018. The decreases wereincrease was primarily due to a loweran increased order rate based on timing issues with ourthe division’s largest customer (which accounted for approximately half of division revenues for the year ended March 31, 2017), the loss of a major customer, and longer than expected sales cycles. We anticipate that the order rate from our largest customer will begin to normalize during the three months ending March 31, 2018 and throughout our next fiscal year. See General Trends and Outlookabove for additional discussion.customer.
Gross Profit (Loss)
The following summarizes our gross profit (loss) by segment (in thousands, except percent data):segment:
Three Months Ended December 31, | Percent | |||||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
Sterilization and Disinfection Control | $ | 7,134 | $ | 6,066 | $ | 1,068 | 18 | % | ||||||||
Gross profit margin | 67 | % | 66 | % | 1 | % | ||||||||||
Instruments | 5,150 | 5,706 | (556 | ) | (10 | )% | ||||||||||
Gross profit margin | 63 | % | 63 | % | -- | % | ||||||||||
Cold Chain Monitoring | (43 | ) | 1,254 | (1,297 | ) | (103 | )% | |||||||||
Gross profit margin | (1 | )% | 40 | % | (42 | )% | ||||||||||
Cold Chain Packaging | 440 | 511 | (71 | ) | (14 | )% | ||||||||||
Gross profit margin | 28 | % | 21 | % | 7 | % | ||||||||||
Total gross profit | $ | 12,681 | $ | 13,537 | $ | (856 | ) | (6 | )% | |||||||
Gross profit margin | 54 | % | 57 | % | (3 | )% |
Nine Months Ended December 31, | Percent | Three Months Ended June 30, | Percent | |||||||||||||||||||||||||||||
2017 | 2016 | Change | Change | 2018 | 2017 | Change | Change | |||||||||||||||||||||||||
Sterilization and Disinfection Control | $ | 20,676 | $ | 17,986 | $ | 2,690 | 15 | % | $ | 7,812 | $ | 6,720 | $ | 1,092 | 16 | % | ||||||||||||||||
Gross profit margin | 67 | % | 65 | % | 2 | % | 69 | % | 66 | % | 3 | % | ||||||||||||||||||||
Instruments | 15,021 | 15,881 | (860 | ) | (5 | )% | 5,633 | 4,908 | 725 | 15 | % | |||||||||||||||||||||
Gross profit margin | 61 | % | 61 | % | -- | % | 65 | % | 57 | % | 8 | % | ||||||||||||||||||||
Cold Chain Monitoring | 2,044 | 3,578 | (1,534 | ) | (43 | )% | ||||||||||||||||||||||||||
Cold Chain Monitoring | 1,464 | 894 | 570 | 64 | % | |||||||||||||||||||||||||||
Gross profit margin | 22 | % | 40 | % | (18 | )% | 45 | % | 31 | % | 14 | % | ||||||||||||||||||||
Cold Chain Packaging | 844 | 1,830 | (986 | ) | (54 | )% | ||||||||||||||||||||||||||
Cold Chain Packaging | 182 | 149 | 33 | 22 | % | |||||||||||||||||||||||||||
Gross profit margin | 19 | % | 27 | % | (8 | )% | 10 | % | 15 | % | (5 | )% | ||||||||||||||||||||
Total gross profit | $ | 38,585 | $ | 39,275 | $ | (690 | ) | (2 | )% | $ | 15,091 | $ | 12,671 | $ | 2,420 | 19 | % | |||||||||||||||
Gross profit margin | 56 | % | 57 | % | (1 | )% | 60 | % | 56 | % | 4 | % |
Three and ninemonths ended December 31, 2017June 30, 2018 versus DecemberJune 30, 2017 31, 2016
Sterilization and Disinfection Control gross profit margin percentage increased for the three and nine months ended December 31,June 30, 2018 relative to the three months ended June 30, 2017 primarily dueas a result of a $291 expense in the prior year related to volume based efficiencies associated with increased revenues andmoving costs for the Bozeman facility. Excluding the impact of using internally manufactured biological indicators for our dental sterilizer testing businessthe moving costs in the three months ended June 30, 2017, gross margin percentage was essentially flat as opposedcompared 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.year.
Instruments gross margin percentage was flatincreased for the three months ended December 31, 2017June 30, 2018 primarily due to mix between the component products, and product and service mix, partially offset byas well as due to a $163 increase in inventory reserve in the loss of certain volume-based efficiencies associated with a decrease in revenues. Instruments gross margin percentage was flat for the ninethree months ended December 31,June 30, 2017 primarily due to product and service mix, partially offset by the lossas a result 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 decreasedincreased for the three months ended December 31, 2017 due to a $1,700,000 increase in the related inventory reserve (see General Trends and Outlookabove for additional discussion), partially offset by product and service mix. Cold Chain Monitoring gross profit margin percentage decreased for the nine months ended December 31, 2017June 30, 2018 primarily due to a $1,916,000 increaseefficiency gains. Additionally, in the relatedthree months ended June 30, 2017, we recorded an inventory reserve (see General Trends and Outlookabove for additional discussion), partially offset by product and service mix. Excluding the impactcharge of these additional reserves for inventory, gross profit percentage would have been 51 and 42 percent, respectively for the three and nine months December 31, 2017. $216.
Cold Chain Packaging gross profit margin percentage for the three months ended December 31, 2017decreased primarily as a result of increased primarily due to revenues from a large customer mix.contract with higher than normal discount rates. We expect that our Cold Chain Packaging gross profit margin percentage forwill continue to be substantially lower than the nine months ended December 31, 2017 decreased primarilyhistorical results of our other segments due to lower revenues. A certain portionthe nature of the costthese products.
Operating Expenses
Operating expenses for the three and nine months ended December 31, 2017June 30, 2018 increased in total as compared to the prior year as follows (in thousands):follows:
Increase (Decrease) | ||||||||
Three Months Ended December 31, 2017 | Nine Months Ended December 31, 2017 | |||||||
Selling | $ | (467 | ) | $ | (618 | ) | ||
General and administrative | ||||||||
Personnel | (322 | ) | 217 | |||||
Employee moving | -- | 525 | ||||||
Acquisition related | 290 | 557 | ||||||
Amortization | 219 | 412 | ||||||
Depreciation | (17 | ) | 121 | |||||
Property taxes | 76 | 211 | ||||||
Professional services | (13 | ) | (179 | ) | ||||
Other, net | 142 | (173 | ) | |||||
375 | 1,691 | |||||||
Research and development | (109 | ) | (151 | ) | ||||
Impairment loss on goodwill | 13,819 | 13,819 | ||||||
Operating expenses | $ | 13,618 | $ | 14,741 |
Selling
Three and ninemonths ended DecemberJune 30, 2018 31, 2017versus DecemberJune 30, 2017 31, 2016
Selling expense for the three and nine months ended December 31, 2017June 30, 2018 decreased 29 percent primarily due to reductionstiming in the reduction and replacement of selling personnel, trade show activities and outside commissions. As a percentage of revenues, sellingpersonnel. Selling expense was eight and 10percent of revenues for the three months ended June 30, 2018 as compared to 12 percent for the three and nine months ended December 31, 2017, respectively as comparedJune 30, 2017. We plan to 10strategically reinvest in sales and 11 percent for the three and nine months ended December 31, 2016.
Historically selling expense approximates 10 percentmarketing resources to 12 percent of revenues.further increase organic revenues growth.
General and Administrative
Three and ninemonths ended December31, 2017June 30, 2018 versus DecemberJune 30, 201731, 2016
General and administrative expenses for the three months ended December 31, 2017June 30, 2018 increased primarily due to acquisition relatedby $743. Increases in non-cash stock-based compensation expense and amortization expenses, partially offset by a decrease in personnel expenses.
Generalexpense comprise $477 of the total, and administrative expensesone-time recruiting fees accounted for an additional $112 of the nine months ended December 31, 2017 increased primarily due to increased personnel, employee moving, acquisition relatedincrease. The remaining increase is composed of both recurring and amortization expenses, partially offset by decreases in professional services expenses.non-recurring charges that are individually immaterial.
Research and Development
Three and ninemonths ended December 31, 2017June 30, 2018 versus DecemberJune 30, 201731, 2016
Research and developmentdevelopment expenses for the three and nine months ended December 31, 2017June 30, 2018 decreased 27 percent due to a streamlining of the necessary engineers and materials and supplies required to support existing businesses during the three and nine months ended December 31, 2017.
Impairment Loss on Goodwill
Three and nine months ended December 31, 2017 versus December 31, 2016
Impairment loss on goodwill for the three and nine months ended December 31, 2017 is associated withbusinesses. We plan to make incremental investments in this area to further our Packaging Division. See General Trends and Outlook above for additional discussion.development plans.
Other Expense
Other expense for the three months ended December 31, 2017June 30, 2018 is comprisedcomposed primarily of interest expense associated with our Credit Facility.
Other expense for the nine months ended December 31, 2017 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.
Net Income
Our income tax rate varies based upon many factors but in general, we anticipate that on a go-forward basis, our effective tax rate will be approximately 26 percent, plus or minus the impact of excess tax benefits and deficiencies associated with share-based payment awards to employees (please see Note 12,7. “Income Taxes” within Item 1. Financial Statements for additional discussion). The excess tax benefits and deficiencies associated with share-based payment awards to our employees have caused and, in the future, may cause large fluctuations in our realized effective tax rate based on timing, volume, and nature of stock options exercised under our share-based payment program. Net income for the ninethree months ended December 31, 2017 was also significantly impacted by a $13,819,000 impairment loss on goodwill (see General Trends and Outlook above for additional discussion), $772,000 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. Otherwise, net income for the nine months ended December 31, 2017June 30, 2018 varied with the changes in revenues, gross profit, and operating expenses (which includes $5,062,000$1,860 of non-cash amortization of intangible assets).
Liquidity and Capital Resources
Our sources of liquidity include cash generated from operations, working capital, capacity under our Credit Facility, and potential equity and debt offerings. We believe that cash generated from these sources will be sufficient to meet our short-term and long-term needs. Our more significant uses of resources includehave historically included long-term capital equipment expenditures, payment of debt obligations, quarterly dividends to shareholders, payment of debt obligations, long-term capital equipment expenditures and potential acquisitions.
Due to continued organic and acquisition related growth, we 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 $2,100,000 (which is comprised primarily of facility moving expenses, retention bonuses for existing personnel and payroll costs for duplicative personnel during the transition period) of which $725,000 was incurred during the year ended March 31, 2017 and $772,000 was incurred during the nine months ended December 31, 2017, which is reflected in cost of revenues in the accompanying condensed consolidated statements of operations (other than $269,000 which is included in general and administrative).
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, we expect to be able to sell that building for approximately $2,500,000.
Working capital is the amount by which current assets exceed current liabilities. We had working capital of $19,692,000$17,193 and $19,218,000 respectively,$14,698 at December 31, 2017June 30, 2018 and March 31, 2017.2018, respectively.
On March 1, 2017, we entered into a five-year agreement (the “Credit Facility”) for a $80,000,000 revolvingGiven our cash flow projections and unused capacity on our line of credit (“Linethat is available until March 1, 2022, our liquidity is strong and is expected to meet our ongoing cash and debt service requirements for our general business needs. Interest-bearing debt of Credit”), a $20,000,000 term loan (“Term Loan”)$39,750 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$46,625 was outstanding at June 30, 2018 and Term Loan indebtedness bears interest at either: (1) LIBOR, as defined in the agreement, 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.
March 31, 2018, respectively. The Term Loan requires 20 quarterly principal payments, (the first due date waswhich began on March 31, 2017)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. We were in compliance with all loan agreements at June 30, 2018 and for all prior years presented, and have met all debt payment obligations.
The Credit Facility is secured by allWe completed the previously-announced move of our assetsOmaha, Traverse City, and requires us to maintain a ratio of funded debtold Bozeman manufacturing facilities to our trailing four quarters of EBIDTA (the “Leverage Ratio”), as definednew facility in the agreement, of less than 3.0Bozeman, Montana. We are currently holding our old Bozeman facility for sale, and we expect to 1.0, providedbe able to sell that building for approximately $2,300 (less broker commissions).
We routinely evaluate opportunities for strategic acquisitions. Future material acquisitions may require that we may once duringobtain additional capital, assume third party debt or incur other long-term obligations. We believe that we have the term of the Credit Facility, in connection with a Permitted Acquisition for which the aggregate consideration paid oroption 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”)utilize both equity and (ii) 3.25 to 1.00debt instruments as vehicles for the periodlong-term financing 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 January 31,our investment activities and acquisitions. At June 30, 2018,, we had $53,000,000 in outstanding indebtedness and$58,500 on unused capacity under our Credit Facility of $46,000,000 (subjectcredit facility, subject to covenant restrictions).
restrictions. In April 2015,addition, in June 2018, the SEC declared effective our Universal Shelf Registration Statement which allows us to sell, in one or more public offerings, common stock or warrants, or any combination of such securities for proceeds in an aggregate amount of up to $130,000,000.$300,000. The terms of any offering, including the type of securities involved, would be established at the time of sale.
We have Year Ending March 31, 2018 2017 First quarter Second quarter Third quarter Fourth quarter In Cash Flows Our cash flows from Nine Months Ended December 31, 2017 2016 Net cash provided by operating activities Net cash used in investing activities Net cash provided by financing activities Three Months Ended June 30, 2018 2017 Net cash provided by operating activities Net cash used in investing activities Net cash used in financing activities At Critical Accounting Estimates Item 3. Quantitative and Qualitative Disclosures about Market Risk We have no derivative instruments and minimal exposure to commodity market risks. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our internal control over financial reporting as of Changes in Internal Control Over Financial Reporting There were no Part II. Other Information See Note We are affected by risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition, or operating results are described in our Annual Report on Form 10-K for the year ended March 31, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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 Purchased Average Price Paid Total Shares Purchased as Part of Publicly Announced Plan Remaining Shares to Purchase Under Plan October 2017 November 2017 December 2017 Total Exhibit No. 3.1 Articles of Incorporation and Amendments to Articles of Incorporation 10.1 10.2.1 * 10.2.2 * 10.3.1 * 10.3.2 * 10.3.3 * 10.3.4 * 10.4 * Form of Confidentiality, Non-Compete and Non-Solicitation Agreement 10.5 *α 21.1 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101 The following financial information from the quarterly report on Form 10-Q of Mesa Laboratories, Inc. for the quarter ended * Indicates a management contract or compensatory plan, contract or arrangement. α Mesa Laboratories, Inc. has entered into an Executive Employment Agreement with each of Gary M. Owens and John V. Sakys. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MESA LABORATORIES, INC. (Registrant) Page 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 financingOn November 7, 2005, our Board of Directors authorized a program to repurchase up to 300,000 shares of our outstanding common stock. Under the plan, the shares may be purchased from time to time in the open market at prevailing prices or in negotiated transactions off the market. Shares purchased will be canceled and repurchases will be made with existing cash reserves. We do not maintain a set policy or schedule for our buyback program. We have purchased 162,486 shares of common stock under this program from inception through December 31, 2017.Dividendsbeen payingpaid regular quarterly dividends since 2003. DividendsWe declared and paid dividends of $0.16 per share paid byfor the three months ended June 30, 2018 as well as each quarter were as follows:for the year ending March 31, 2018. $ 0.16 $ 0.16 0.16 0.16 0.16 0.16 - 0.16 JanuaryJuly 2018, we announced that our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on March 15,September 17, 2018, to shareholders of record at the close of business on February 28,August 31, 2018.Page 20operating,operating, investing, and financing activities were as follows (in thousands): $ 15,173 $ 6,771 (16,840 ) (15,985 ) 1,789 8,805 Net cash provided by operating activities for the nine months ended December 31, 2017 increased primarily due to a $1,414,000 decrease of inventories (net of the impact of increases in the reserve for inventory) and, in the previous period, the payment of $5,076,000 of contingent consideration and an increase of $4,401,000 in accrued liabilities and taxes payable, partially offset by an increase in prepaid expenses and other.Net cash used in investing activities for the nine months ended December 31, 2017 resulted from $15,433,000 associated with the 2018 Acquisitions and the purchase of $2,540,000 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 nine months ended December 31, 2016 resulted from $6,618,000 associated with the 2017 Acquisitions and the purchase of $9,367,000 of property, plant and equipment.Net cash provided by financing activities for the nine months ended December 31, 2017 resulted from borrowings under our Credit Facility of $11,000,000 and proceeds from the exercise of stock options of $2,346,000, partially offset by the repayment of debt of $9,750,000 and the payment of dividends of $1,807,000. Net cash provided by financing activities for the nine months ended December 31, 2017 resulted from borrowings under our Credit Facility of $11,500,000 and proceeds from the exercise of stock options of $2,815,000, partially offset by the repayment of debt of $3,750,000 and the payment of dividends of $1,760,000. $ 6,543 $ 2,681 (300 ) (1,567 ) (4,442 ) (3,888 ) December 31, 2017,June 30, 2018, we had contractual obligations for open purchase orders of approximately $3,200,000$3,194 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 three months ended June 30, 2017 revenues continued to increase and after revising our forecast for the process challenge device (“PCD”) product revenues through the end of the earn-out period, we recorded an additional $300,000 accrual, which is included in other income, net in the accompanying condensed consolidated statement of operations for the nine months ended December 31, 2017. We paid the remaining contingent consideration due of $450,000 in November 2017.Our condensed consolidated financial statementsCritical accounting estimates are those that we believe are both significant and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires managementrequire us to make estimates,difficult, subjective, or complex judgments, and assumptions that affect reported amountsoften because we need to estimate the effect of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates used to prepare the condensed consolidated financial statements. Theinherently uncertain matters. These estimates are based on historical experience and assumptions believedvarious other factors that we believe to be reasonableappropriate under current facts and circumstances.the circumstance. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for the year ended March 31, 20172018 in the Critical Accounting Policies and Estimates section of “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.”Approximately 15 percent of our revenues are exposed to foreign currency risk, of which all is within stable markets, minimizing ourWe have exposure to foreign currency fluctuations.risk; however, we minimize our exposure, because all our subsidiaries transact and operate using stable currencies. Our subsidiaries account for approximately 23 percent of our revenues.Page 21amended)amended (the “Exchange Act”) that are designed to reasonably ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended,reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of December 31, 2017. Based on that evaluation, our management concluded that our disclosure controls and procedures were effective at December 31, 2017.Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. Management evaluated the effectiveness of our internal control over financial reporting based on the framework in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013.December 31, 2017.June 30, 2018 based on the framework in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. Based on that evaluation, our management concluded that our internal control over financial reporting was effective at December 31, 2017.June 30, 2018.significant changes in our internal control over financial reporting that occurred during the ninethree months ended December 31, 2017,June 30, 2018 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. 9 – 9. “Commitments and Contingencies of the Notes to Condensed Consolidated ” within Item 1. “Financial Statements (Part I, Item 1 of this Form 10-Q)Statements.” for information regarding any legal proceedings in which we may be involved.2017,2018, under the heading “Part I – Item 1A. Risk Factors.” There have been no material changes to those risk factors other than the following:factors.Changes in applicable tax regulations could negatively affect our financial results.We are subject to taxation in the United States as well as a number of foreign jurisdictions. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“TCJA”). The changes included in the TCJA are both broad and complex. The final transitional impacts of the TCJA may differ from the estimates provided elsewhere in this report, due to, among other things, changes in interpretations of the TCJA, any legislative action to address questions that arise because of the TCJA, any changes in accounting standards for income taxes or related interpretations in response to the TCJA, or any updates or changes to estimates the company has utilized to calculate the transitional impacts, including impacts related to changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries.Page 22As these and other tax laws and related regulations change, our financial results could be materially impacted. Given the unpredictability of these possible changes and their potential interdependency, it is very difficult to assess whether the overall effect of such potential tax changes would be cumulatively positive or negative for our earnings and cash flow, but such changes could adversely impact our financial resultsA 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. In addition, security breaches of our systems (or the systems of our customers, suppliers or other business partners) could result in the misappropriation, destruction or unauthorized disclosure of confidential information or personal data belonging to us or to our employees, partners, customers or suppliers. Like 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, 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.shares.shares, of which 162,486 have been purchased to date. This plan will continue until the maximum is reached or the plan is terminated by further action of the Board of Directors. We have made the followingno repurchases of our common stock including settlementin any of loans to employees for the exercise of stock options:last three fiscal years. -- $ -- 162,486 137,514 -- -- 162,486 137,514 -- -- 162,486 137,514 -- -- December 31, 2017,June 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations,Income, (ii) Condensed Consolidated Balance Sheets, (iii) Condensed Consolidated Statements of Comprehensive (Loss) Income, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to the Condensed Consolidated Financial Statements.DATED:DATED: February 6July 31, 2018BY: /s/ Gary M. Owens. Gary M. Owens Chief Executive Officer DATED: February 6July 31, 2018BY: /s/ John V. Sakys John V. Sakys Chief Financial Officer 2419