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Article by DailyStocks_admin    (01-08-10 12:12 AM)

Mesa Laboratories Inc. CEO EVAN GUILLEMIN bought 20000 shares on 12-30-2009 at $23.1

BUSINESS OVERVIEW

Introduction



Mesa Laboratories, Inc. (hereinafter referred to as the “Company” or “Mesa”) was incorporated as a Colorado corporation on March 26, 1982. The Company designs, manufactures and markets instruments and disposable products utilized in connection with industrial applications and healthcare. For industrial applications, which includes pharmaceutical, food, medical devices, and petrochemical, the Company presently markets the DATATRACE® data logging systems, NUSONICS® Concentration Analyzers, Pipeline Interface Detectors and Flow Meter products and RAVEN Biological Indicators. For healthcare applications, the Company markets Dialysate Meters used in kidney dialysis and RAVEN Biological Indicators, which are used by hospitals and dental offices to assure sterility. The Company is continually performing research and development to expand the application of its technology.



DATATRACE ® Data Loggers



The DATATRACE products are self-contained, wireless, high precision, data loggers that are used in critical manufacturing, quality control, and transportation applications. They are used to measure temperature, humidity and pressure inside a process or inside a product during manufacturing. In addition, the DATATRACE products can be used to validate the proper operation of laboratory or manufacturing equipment, either during its installation or for annual re-certifications. The product line consists of individual data loggers, PC interface software and various accessories. A customer typically purchases a large number of data loggers along with a single PC interface and the software package. Specifically, the customer can purchase either the wireless Micropack III (MPIII) data loggers or the Micropack Radio Frequency (MPRF) transmitting data loggers. Both DataTrace models work with the Data Trace Radio Frequency (DTRF) software package.



In practice, using the PC interface, the user programs the loggers to collect environmental data at a pre-determined interval, places the data loggers in the product or process, and then in the case of the MPIII model retrieves the data loggers and reads the data into a PC after placing them in the interface or with the MPRF models is continuously collecting the data via radio frequency transmissions. After this, the user can prepare tabular and graphical reports using the DTRF software.



The MPIII line is much smaller, has improved hardware compared to previous DataTrace loggers, has embedded software, includes a rapid optical interface, and operates over a wide temperature range. The MPRF models include all the features and performance improvements of the MPIII version and adds the capability to transmit data to a PC in real time through the proprietary DTLinc RF network. The ability to view process or validation data instantly saves valuable time, and it can prevent costly processing mistakes. The DataTrace RF system allows the user to see results immediately and make appropriate decisions as necessary.



While there are a variety of different types of wireless data loggers available on the market, there are only a few that are rated as “intrinsically safe” and can operate at elevated temperatures, like the DATATRACE products. These are important differentiating factors for the DATATRACE products in the marketplace, and consequently, they are used by companies to control their most critical processes. Due to their higher accuracy and precision, along with the importance of the processes they are used to control, an important component of the DATATRACE product line is the calibration service that is provided by Mesa. Typically, each DATATRACE data logger is calibrated by Mesa’s calibration laboratory prior to shipment and then annually, for a re-certification fee, to verify its accuracy. For instance, the MPRF temperature data loggers have an operating range of —80 o C to +400 o C and can be calibrated to an accuracy of +/- 0.1 o C over a portion of this range. This allows the DATATRACE loggers to be used to conduct quality control on critical processes, such as sterilization, one of the most important applications.



RAVEN Biological Indicators



In May 2006, the Company acquired Raven Biological Laboratories, Inc. of Omaha, Nebraska. The RAVEN product line consists of Biological Indicators (BI) and Chemical Indicators (CI) used to assess the effectiveness of sterilization processes, including steam, gas (such as ethylene oxide), and radiation. BI’s consist of resistant spores of certain microorganisms which are applied on a convenient substrate. The spores are well characterized in terms of numbers and resistance to sterilization. In use, the BI is exposed to a sterilization process and then tested to determine the presence of surviving organisms. RAVEN’s line of BI’s includes both spore strips, which require post-processing transfer to a growth media, self-contained products which have the growth media already pre-packaged in crushable ampoules, industrial use BI’s, and culture media. CI’s are similar to BI’s, except that a chemical change (generally determined by color) is used to assess the exposure to sterilization conditions. BI’s and CI’s are often used together to monitor processes. RAVEN products are used to validate equipment and monitor the effectiveness of a process in any industrial or healthcare setting which uses sterilization. Key markets for RAVEN include healthcare such as dental offices and hospitals, and industrial such as medical device and pharmaceutical manufacturing.



In addition to Biological and Chemical Indicators, the Company offers Contract and Testing Services to industrial companies for the development of sterilization processes. These testing services include organism identification, population verification, sterilization process development and custom BI production.



The RAVEN Biological Indicators are distinguished in the marketplace by their high level of quality, consistency and flexibility. A variety of different formats allows the RAVEN BI to be used in many different types of processes and products. For instance, the simple spore strips are used most often in the small table-top steam sterilizers in dental offices, while a more complex self-contained BI such as the ProTest, may be used by a medical device manufacturer to assure the sterility in a complex ethylene oxide sterilization process. In either case, the number of spores contained on the carrier and the resistance of the spores to the sterilization process must be well characterized in order to accurately assess the effectiveness of sterilization. During manufacturing, extensive quality control steps are used to insure that the microorganism spores are well characterized and their resistance is known following placement on the target carrier. The RAVEN products are registered medical devices manufactured under ISO 13485 controlled processes. They are developed and used according to the guidelines developed under the auspices of the Association for the Advancement of Medical Instrumentation (AAMI), which are adopted as the worldwide standard under the International Standards Organization (ISO).

Recently the Company has expanded its product line adding two (2) specialized biological indicator products. One of these products, ProTest BI Test Pack, is a significant addition to RAVEN’s offering for the domestic healthcare (hospital) market. It allows the user to immediately release certain types of sterilized materials saving the user time and money. A second product added in early 2007, ProAMP with Negative Controls, provides industrial (pharmaceutical and medical device) users with a unique and previously unseen option for sterilization monitoring and the effects of steam sterilization on the interpretation of a self-contained biological indicator. Having printed Negative Controls, the user can not only monitor their sterilization processes but also see the effects their process has on BIs themselves.



MEDICAL HEMODIALYSIS PRODUCTS



Patients with kidney failure (known as end stage renal disease, or ESRD) require the removal of toxic waste products and excess water through artificial means. This process is generally performed three times per week and is most often accomplished through the use of hemodialysis.



Hemodialysis requires the treatment to be conducted on a dialysis machine through the use of a disposable cartridge known as a dialyzer. Blood is brought extra corporally to the dialysis machine for control and monitoring and passes through the dialyzer where waste products and excess water are removed. This treatment generally lasts three to four hours. While these hemodialysis procedures can be conducted in home, the bulk of the treatments are conducted in over 4,500 clinics and hospital centers in the U.S. Currently, there are over 300,000 patients in the U.S. undergoing dialysis therapy.



In addition to the reimbursement policies of the United States Government and state agencies, the Company’s revenues from its dialysis products can be expected to be dependent upon the policies of insurance companies and kidney foundations.



Dialysate Meters



Mesa’s Dialysate Meters are instruments that are used to test various parameters of the dialysis fluid (dialysate), and the proper calibration and operation of the dialysis machine. Each measures some combination of temperature, pressure, pH and conductivity to ensure that the dialysate has the proper composition to promote the transfer of waste products from the blood to the dialysate. The meters provide a digital readout that the patient, physician or technician uses to verify that the dialysis machine is working within prescribed limits and delivering the properly prepared dialysate.



The Company manufactures two styles of Dialysate Meters; those designed for use by dialysis machine manufacturers and Biomedical Technicians and those used primarily by dialysis nurses or patient care technicians. The meters for technicians include the Models NEO-2 and the newer 90XL. These meters are characterized by exceptional accuracy, stability, and flexibility and are used by the industry as the primary standard for the calibration of dialysis machines. The newest 90XL meter has four independent measurement channels, allowing the user to easily perform testing and calibration of multiple dialysis machines in a clinic or on the manufacturing floor.



The 90XL meter has been well received by the marketplace and already holds a dominant position in comparison to unit sales of the NEO-2. Mesa anticipates that the marketplace will want to gradually phase out of the NEO-2 meters and further adopt the 90XL.

The dialysis meters designed for use by dialysis nurses are known primarily for their ease of use and include the pHoenix, Hydra, and NEO-STAT+ models. Incorporating a patented, built-in syringe sampling system, these meters are used as the final quality control check on the dialysate just prior to starting a treatment. Their design allows the nurse to quickly and easily draw a small sample of the dialysate into the meter for measurement, and management believes that they have become the most popular meter in the point-of care testing in dialysis clinics. The pHoenix meter is the newest meter Mesa has introduced to the marketplace and is the leading seller by far of the three (3) hand held meter choices.



In addition to the dialysate meters, the Company markets a line of calibration standard solutions for use in dialysis clinics for calibration and testing. These standard solutions are regularly consumed by the dialysis clinics and this, along with calibration services, represents a recurring revenue stream for the Medical product line.



NUSONICS PRODUCTS



The Company’s sonic fluid measurement product line consists of two major components: Sonic Flow Meters and Concentration Monitors. While the total market for flow meters is very large, the NUSONICS® Sonic Flow Meters best serve applications where cleanliness and resistance to corrosives are required. Specific applications where the NUSONICS® products are particularly well suited include water treatment, chemical processing and heating ventilation and air conditioning (HVAC) applications. The Concentration Monitor component of the product line consists of Pipeline Interface Detectors and Concentration Analyzers. The Pipeline Interface Detector serves a smaller market niche while the Concentration Analyzers serve a wider variety of industry application, such as chemical, food, pharmaceutical and polymerization processes.



The NUSONICS products have been subject to strong competition in the marketplace in recent years primarily from larger, well established process control companies. Consequently, sales of NUSONICS products have decreased and currently represent less than 4% of the Company’s total revenue. Today, most sales are made to existing NUSONICS customers who are replacing or adding to their current infrastructure.



Manufacturing



The Company assembles its products at its facilities in Lakewood, Colorado and Omaha, Nebraska. The Company’s electronic products are manufactured primarily by assembling products from purchased components and testing the final products prior to release. The RAVEN products are manufactured by growing microbiological spores from raw materials, assembling the finished products through a series of process steps, and testing the finished Biological Indicators using established quality control tests.



Most of the materials and components used in the Company’s product lines are available from a number of different suppliers. Mesa generally maintains multiple sources of suppliers for most items but is dependent on a single source for certain items. Mesa believes that alternative sources could be developed, if required, for present single supply sources. Although the Company’s dependence on these single supply sources may involve a degree of risk, to date, Mesa has been able to acquire sufficient stock to meet its production requirements.



Marketing and Distribution



The Company’s domestic sales of its MEDICAL and DATATRACE products are generated by its direct sales and marketing staff, while outside the U.S., a number of distributors are utilized. The Company’s RAVEN products are distributed both directly, through a sales and marketing staff to end users and through a series of distributors both domestically and outside the U.S. International sales for all products are conducted through over 100 distributors. During the fiscal year ended March 31, 2009, approximately 72% of sales have been domestic and 28% have been international to countries throughout Europe, Africa, Australia, Asia and South America, as well as Canada and Mexico.

Sales promotions include attendance by Mesa representatives at trade shows, direct mail campaigns, internet advertising and other digital forms of advertising.



Customers of Mesa’s MEDICAL products primarily include dialysis centers and dialysis equipment manufacturers. The primary emphasis of the Company’s marketing effort is to offer quality products to the healthcare market which will aid in cost containment and improved patient well-being.



DATATRACE® customers include numerous industrial users in the food, pharmaceutical and medical device markets who utilize the products within a variety of manufacturing, quality control and validation applications. The emphasis of the Company’s marketing effort is to offer a quality product that provides a unique and flexible solution to monitoring temperature, pressure or humidity without interfering with the processing of the product.



RAVEN customers include various companies providing sterility assurance testing to the dental office market, hospitals, contract sterilizing services and various industrial users involved in pharmaceutical and medical device manufacturing. The Company’s marketing focuses on providing high quality test products in a variety of different formats, which minimize incubation and test result time.



NUSONICS® customers include various industries such as water treatment, manufacturing, HVAC and petroleum product transportation. The Company’s marketing efforts are focused on offering flow measurement and concentration monitoring in difficult environments where noninvasive monitoring techniques are required.



During the fiscal year ended March 31, 2009, one customer represented approximately 14% of the Company’s revenues and approximately 12% of the Company’s accounts receivable balance. During the fiscal year ended March 31, 2008, one customer represented approximately 13% of the Company’s revenues and approximately 12% of the Company’s accounts receivable balance.



Competition



Mesa competes with major medical and instrumentation companies as well as a number of smaller companies, many of which are well established, with substantially greater capital resources and larger research and development capabilities. Furthermore, many of these companies have an established product line and a significant operating history. Accordingly, the Company may be at a competitive disadvantage due to such factors as its limited resources and limited marketing and distribution network.



Companies with which Mesa’s dialysis products compete include Myron L Company and IBP Medical GmbH. Companies with which Mesa’s DATATRACE® data logger products compete include GE Kaye, Ellab and TMI Orion. Companies with which RAVEN’s biological indicator products compete include 3M, SGM and Steris. Companies with which Mesa’s NUSONICS® products compete include Controlotron, Badger Meter, Rosemount, and GE Panametrics.



Government Regulation



Medical devices marketed by Mesa are subject to the provisions of the Federal Food, Drug and Cosmetic Act, as amended by the Medical Device Amendments of 1976 (hereinafter referred to as the “Act”). A medical device which was not marketed prior to May 28, 1976, or is not substantially equivalent to a device marketed prior to that date, may not be marketed until certain data is filed with the FDA and the FDA has affirmatively determined that such data justifies marketing under conditions specified by the FDA. A medical device is defined by the Act as an instrument which (1) is intended for use in the diagnosis or the treatment of disease, or is intended to affect the structure of any function of the human body; (2) does not achieve its intended purpose through chemical action; and (3) is not dependent upon being metabolized for the achievement of its principal intended purpose. The Act requires any company proposing to market a medical device to notify the FDA of its intention at least ninety days before doing so, and in such notification must advise the FDA as to whether the device is substantially equivalent to a device marketed prior to May 28, 1976. As of the date hereof, the Company has received permission from the FDA to market all of its products requiring such permission.



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



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



Employees



On March 31, 2009, the Company had a total of 111 employees, of which 108 were full-time employees. Currently, 24 persons are employed for marketing and sales, six for research and development, 70 for manufacturing and quality assurance and 11 for administration.



Additional Information



For the fiscal years ended March 31, 2009 and 2008, Mesa spent $636,000 and $532,000, respectively, on Company-sponsored research and development activities.



Compliance with federal, state and local provisions which have been enacted regarding the discharge of materials into the environment or otherwise relating to the protection of the environment has not had, and is not expected to have, any adverse effect upon capital expenditures, earnings or the competitive position of the Company. Mesa is not presently a party to any litigation or administrative proceedings with respect to its compliance with such environmental standards. In addition, the Company does not anticipate being required to expend any significant capital funds in the near future for environmental protection in connection with its operations.



The Company has been issued patents for its DATATRACE® temperature recording devices, its NUSONICS® sonic flow measurement and sonic concentration monitoring products and its pHoenix, Hydra and NeoStat+ dialysis meters and its RAVEN biological indicators. Several of these patents have now expired. Failure to obtain patent protection on the Company’s remaining products may have a substantially adverse effect upon the Company since there can be no assurance that other companies will not develop functionally similar products, placing the Company at a competitive disadvantage. Further, there can be no assurance that patent protection will afford protection against competitors with similar inventions, nor can there be any assurance that the patents will not be infringed or designed around by others. Moreover, it may be costly to pursue and to prosecute patent infringement actions against others, and such actions could interfere with the business of the Company.

CEO BACKGROUND

Nominees for Election as Directors


Name and Address


Age



Office


Term Expires(1)


Luke R. Schmieder


66



Chairman of the


2009

12100 West Sixth Avenue


Board of Directors



Lakewood, Colorado



John J. Sullivan, Ph.D.


56

Chief Executive Officer,


2009

12100 West Sixth Avenue

President and Director

Lakewood, Colorado

Paul D. Duke


67
Director (2)(3)(4)


2009

12100 West Sixth Avenue

Lakewood, Colorado


H. Stuart Campbell



79


Director (2)(3)(4)


2009

12100 West Sixth Avenue

Lakewood, Colorado

MANAGEMENT DISCUSSION FROM LATEST 10K

Mesa Laboratories, Inc. manufactures and distributes electronic measurement systems and disposable products for various niche applications, including renal treatment, food processing, medical sterilization, pharmaceutical processing and other industrial applications. Our Company follows a philosophy of manufacturing a high quality product and providing a high level of on-going service for those products. In order to optimize the performance of our Company and to build the value of the Company for its shareholders, we continually follow the trend of various key financial indicators. A sample of some of the most important of these indicators is presented in the following table.

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

(2) Average return on invested capital (invested capital = total assets — current liabilities — cash and short-term investments) is calculated by dividing total net income by the average of end of year and beginning of year invested capital.



While we continually try to optimize the overall performance and trends, the table above does highlight various exceptions. Most of the indicators above are improving in the most recent fiscal year. Exceptions to the improving trends are days sales outstanding, the average return calculations, and net profit margin. Longer times to payment for our foreign customers have increased the total days sales outstanding average for the total Company in fiscal 2009. A small decrease in net profit margin combined with increasing balance sheet levels during fiscal 2009 caused the average return calculations to decrease slightly in the current fiscal year. Our company saw a small decrease in net profit margin in fiscal 2009 due to a small decrease in gross profit margins and decreased interest income on invested cash due to lower interest rates.



Results of Operations



Net Sales



Net sales for fiscal 2009 increased 10 percent from fiscal 2008, and net sales for fiscal 2008 increased 13 percent from fiscal 2007. In dollars, net sales of $21,536,000 in fiscal 2009 increased $1,978,000 from $19,558,000 in 2008, and net sales of $19,558,000 in fiscal 2008 increased $2,316,000 from $17,242,000 in 2007.



Our revenues come from two main sources, which include product revenues and parts and service revenues. Parts and service revenues are derived from on-going repair and recalibration or certification of our products. The certification or recalibration of product is usually a key component of the customer’s own quality system and many of our customers operate in regulated industries, such as food processing or medical and pharmaceutical processing. For this reason, these revenues tend to be fairly stable and grow slowly over time. During fiscal years 2009, 2008 and 2007 our Company had parts and service revenue of $3,642,000, $3,499,000 and $3,333,000. As a percentage of total revenue, parts and service revenues were 17% in 2009, 18% in 2008 and 19% in 2007.



The performance of new product sales is dependent on several factors, including general economic conditions in the United States and abroad, capital spending trends and the introduction of new products. Until the current fiscal year, general economic conditions had been improving, and more specifically, capital spending had been improving, but these trends have reversed during fiscal 2009. New products released to the market over the past five fiscal years include the Datatrace Micropack III temperature loggers during the middle of fiscal 2003, the Datatrace Micropack III humidity and pressure loggers at the end of fiscal 2004, the 90XL Dialysate Meter for kidney dialysis was introduced late in fiscal 2006, and the Datatrace RF System was introduced in early fiscal 2009. For fiscal years 2009, 2008 and 2007 product sales for our company were $17,894,000, $16,059,000 and $13,909,000.



During fiscal 2009, sales of the Company’s medical products and services increased 16% for the fiscal year compared to the prior year period. For the year, Medical saw increased sales of meter products, disposables and service, which were partially off-set by lower sales of the discontinued dialyzer reprocessor. Sales of our new 90XL Meter continued to progress well during fiscal 2009. In addition, we continue to maintain strong relationships with our major customers in this market.



During fiscal 2009, sales of Datatrace data logger products preformed at the same level as the prior year. For the year, DataTrace products did not experience an increase in sales due to existing economic trends which influenced some industrial customers to delay their capital equipment purchases. Sales for the twelve month period saw small declines though the various categories of Micropack III products which were off-set by sales of the new Micropack RF products. We are optimistic and look forward to improving trends in both new product shipments and service sales in both the domestic and international markets for the later part of fiscal 2010. Introduction of the new Micropack RF products, with their real-time reporting capabilities, is expected to further add to Datatrace product line sales in the new fiscal year.



Fiscal 2009 sales of Raven biological indicator products increased 15 percent compared to the prior year period. In fiscal 2009, Raven experienced an increase in biological indicator and chemical indicator sales. Sales

during fiscal 2009 benefited from increased production capabilities and automation, which is allowing our company to better penetrate the market with additional product size configurations and increased production of key products.



During fiscal 2009, sales of the Nusonics line of ultrasonic fluid measurement systems increased by three percent. Sales of these products remain stable, but Nusonics products currently contribute less than four percent of the Company’s total sales and are not expected to grow in the future.



During fiscal 2008, sales of the Company’s medical products and services increased five percent for the fiscal year compared to the prior year period. For the year, Medical saw increased sales of meter products, disposables and service, which were partially off-set by lower sales of the discontinued dialyzer reprocessor line and lower repair part sales. Sales of our new 90XL Meter continued to progress well during fiscal 2008. In addition, we continued to maintain strong relationships with our major customers in this market.



During fiscal 2008, sales of Datatrace data logger products increased 13% compared to the prior year. For the year, DataTrace products continued to see improving trends in both new product shipments and service sales in both the domestic and international markets. Introduction of the new Micropack RF products, with their real-time reporting capabilities, was expected to further add to Datatrace product line sales in the fiscal 2009.



Fiscal 2008 sales of Raven biological indicator products increased 29 percent compared to the prior year period. The Raven biological indicator products were acquired on May 4, 2006. For this reason, sales of the company’s Raven biological indicator products benefited from an extra five weeks of sales for the full year when compared to the prior year period.



During fiscal 2008, sales of the Nusonics line of ultrasonic fluid measurement systems decreased by three percent. Sales of these products remain stable, but Nusonics products currently contribute less than four percent of the Company’s total sales and are not expected to grow in the future.



Cost of Sales



Cost of sales as a percent of net sales in fiscal 2009 increased 1.5 percent from fiscal 2008 to 35.8 percent, and in fiscal 2008 decreased 2.5 percent from fiscal 2007 to 34.3 percent from 36.8 percent. Most of our products enjoy gross margins in excess of 50 percent. Due to the fact that the dialysis products have sales concentrated with several companies that maintain large chains of treatment centers, the products that are sold to the renal market tend to be slightly more price sensitive than the data logging products. Also, due to the nature of the market for biological indicators, the RAVEN products produce gross margins lower than DATATRACE and MEDICAL. Therefore, shifts in product mix toward higher sales of DATATRACE and MEDICAL products will tend to produce lower cost of goods sold expense and higher gross margins while shifts toward higher sales of RAVEN products will normally produce the opposite effect on cost of goods sold expense and gross margins.



During fiscal 2009, our Company saw increases in costs of sales due to flat DATATRACE sales as result of the economic down turn, and increases in RAVEN and MEDICAL products with a resulting increase in cost of sales. The Company continues to monitor and implement cost reduction programs, price increases and improvements in freight cost recovery.



During fiscal 2008, our Company saw reductions in costs of sales year over year with the exception of the DATATRACE line which saw a small increase of one half of one percent as a percent of DATATRACE sales. Most of the decline in costs of sales percent in the current fiscal year was attributable to an improvement in the Medical line, where cost reduction programs, price increases and improvements in freight cost recovery all contributed to the gain.

Selling, General and Administrative



General and administrative expenses tend to be fairly fixed and stable from year-to-year. To the greatest extent possible, we work at containing and minimizing these costs. Total administrative costs were $2,522,000 in fiscal 2009, $2,420,000 in fiscal 2008 and $2,075,000 in fiscal 2007, which represents a $102,000 increase from fiscal 2008 to fiscal 2009 and a $345,000 increase from fiscal 2007 to fiscal 2008. The increase in general and administrative costs for 2009 can be attributed to general increases in operating costs and the addition of the Controller position. Fiscal 2008 general and administrative costs increased due to five additional weeks of RAVEN related costs compared to the prior year along with higher accounting and consulting costs, which mostly can be attributed to the Company’s efforts to comply with the demands of Section 404 of the Sarbanes-Oxley Act of 2002.



Our selling and marketing costs tend to be far more variable in relation to sales, although there are various exceptions. Some of these exceptions include the introduction of new products and the mix of international sales to domestic sales. For a product line experiencing introduction of a new product, costs will tend to be higher as a percent of sales due to higher advertising development and sales training programs. Our Company’s international sales are usually discounted and recorded at the net discounted price, so that a change in mix between international and domestic sales may influence sales and marketing costs. One other major influence on sales and marketing costs is the mix of domestic dialysis product sales to all other domestic sales. Domestic dialysis product sales are made by direct telemarketing representatives, which gives us a lower cost structure, when compared to the field salesman and independent representative sales channels utilized by our other products. Through fiscal 2009 and fiscal 2008 the Company continued to focus additional resources on its sales and marketing efforts. In June of fiscal 2006, the company began a transition from independent manufacturer’s representatives to direct sales personnel for domestic sales of its Datatrace products. This change to our sales channels increased our selling costs in recent years, but our domestic sales levels have been rising to compensate for these cost increases. The past year’s continuing transition to direct selling was focused on overall sales management and telemarketing resources for both the DATATRACE and RAVEN lines.



In dollars, selling costs were $3,051,000 in fiscal 2009, $2,845,000 in fiscal 2008 and $2,769,000 in fiscal 2007. As a percent of sales, selling cost were 14.2 percent in fiscal 2009, 14.5 percent in fiscal 2008 and 16.1 percent in fiscal 2007. During both fiscal 2009 and 2008, sales and marketing costs as a percent of sales declined. In real dollars, the DATATRACE and RAVEN costs increased during fiscal 2009 due to the expansion of our selling staff and additional sales and marketing expenses to increase the Company’s customer base, and during fiscal 2008, we experienced an additional five weeks of costs for RAVEN products when compared with fiscal 2007.



Research and Development



Company sponsored research and development cost was $636,000 in fiscal 2009, $532,000 in fiscal 2008 and $392,000 in fiscal 2007. We are currently executing a strategy of increasing the flow of internally developed products. Late in the first quarter of fiscal 2009, the Datatrace Micropack RF product was introduced, and on-going research to introduce this technology into the environmental monitoring segment of the market continued during the remainder of the fiscal year. Most of our work during fiscal 2008 and 2007 was focused on the development of the new Micropack RF products as part of our Datatrace line.



Net Income



Net income increased to $4,790,000 or $1.48 per share on a diluted basis in fiscal 2009 from $4,610,000 or $1.41 per share on a diluted basis in fiscal 2008 and $3,958,000 or $1.22 per share on a diluted basis in fiscal 2007. For the fiscal year 2009, Mesa experienced net income growth of four percent, which was behind the sales growth rate of 10 percent for the fiscal year. The slower profitability growth was a result of static DATATRACE sales, and an increase in cost of sales

In 2008 the acceleration of profitability for the fiscal year can be attributed to a gain in gross profits as a percent of net sales, but was partially off-set by an increase in the income tax rate as a percent of earnings before income tax.



Liquidity and Capital Resources



On March 31, 2009, we had cash and cash equivalents of $9,111,000. In addition, we had other current assets totaling $9,482,000 and total current assets of $18,593,000. Current liabilities of our Company were $1,484,000 which resulted in a current ratio of 13:1. For comparison purposes at March 31, 2008, we had cash and short term investments of $5,770,000, other current assets of $8,641,000, total current assets of $14,411,000, current liabilities of $1,587,000 and a current ratio of 9:1.



Our Company has made capital acquisitions of $676,000 in fiscal 2009, and $207,000 in fiscal 2008. Fiscal 2009 included approximately $444,000 expended on equipment to automate certain manufacturing processes for our Raven products.



We have instituted 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 for our buyback program. Most of our stock buybacks have occurred during periods when the price to earnings multiple has been near historical low points, or during times when selling activity in the stock is out of balance with buying demand. On February 27, 2007, the Company entered into an agreement to purchase 30,000 shares of Mesa Laboratories, Inc. common stock from one of its current Board of Directors members, Mr. Paul D. Duke. Under the terms of the agreement, Mesa Laboratories, Inc. would purchase 3,000 shares of Mesa Laboratories, Inc. common stock from Mr. Duke each month beginning in March 2007 through December 2007 at a per share price equal to the volume weighted average price (VWAP) of the common stock for the previous calendar month. While Mr. Duke’s commitment to sell was binding through the entire term of the buyback period, the company and its Board retained the right to rescind the agreement at anytime during the period depending upon the circumstances existing at the time.



During fiscal 2009 the Company paid regular quarterly dividends of $.10 per share of common stock. For fiscal year 2009, dividends totaled $.40 per common share of stock. During the first half of fiscal 2008, the Company maintained the regular quarterly dividend of $.08 per share of common stock and raised the quarterly dividend to $.10 per common share of stock during the second half of the fiscal year. For fiscal year 2008, dividends totaled $.36 per common share of stock.



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



The Company does not currently maintain a line of credit or any other form of debt. Nor does the Company guarantee the debt of any other entity. The Company has maintained a long history of surplus cash flow from operations. This surplus cash flow has been used in the past to fund acquisitions and stock buybacks and has been partially utilized to fund past special dividends. We are actively investigating opportunities to acquire new product lines or companies, for which we may utilize cash in the future.



Contractual Obligations



At March 31, 2009 we had routine contractual obligations for open purchase orders for purchases of supplies and inventory, which would be payable in less than one year.



Forward Looking Statements



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



Critical Accounting Policies and Estimates



The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ materially from those estimates.



We believe that there are several accounting policies that are critical to understanding the Company’s historical and future performance, as these policies affect the reported amounts of revenue and the more significant areas involving management’s judgments and estimates. These significant accounting policies relate to revenue recognition, research and development costs, valuation of inventory, valuation of long-lived assets and stock based compensation. These policies, and the Company’s procedures related to these policies, are described in detail below.



Revenue Recognition



We sell our products directly through our sales force and through distributors. Revenue from direct sales of our product is recognized upon shipment to the customer. Revenue from ongoing product service and repair is fully recognized upon completion and shipment of serviced product.



Accounts Receivable



At the time the accounts are originated, the Company considers a reserve for doubtful accounts based on the creditworthiness of the customer. The provision for uncollectible amounts is continually reviewed and adjusted to maintain the allowance at a level considered adequate to cover future losses. The allowance is management’s best estimate of uncollectible amounts and is determined based on historical performance that is tracked by the Company on an ongoing basis. The losses ultimately incurred could differ materially in the near term from the amounts estimated in determining the allowance.



Research & Development Costs



Research and development activities consist primarily of new product development and continuing engineering on existing products. Costs related to research and development efforts on existing or potential products are expensed as incurred.



Valuation of Inventories



Inventories are stated at the lower of cost or market, using the first-in, first-out method (FIFO) to determine cost. The Company’s policy is to periodically evaluate the market value of the inventory and the stage of product life cycle, and record a reserve for any inventory considered slow moving or obsolete. As of March 31, 2009 and 2008 the Company had recorded a reserve of $175,000 each year.

MANAGEMENT DISCUSSION FOR LATEST QUARTER


Overview



Mesa Laboratories, Inc. manufactures and distributes electronic measurement systems and disposables for various niche applications, including renal treatment, food processing, medical sterilization, pharmaceutical processing and other industrial applications. Our Company follows a philosophy of manufacturing a high quality product and providing a high level of on-going service for those products. In order to optimize the performance of our Company and to build the value of the Company for its shareholders, we continually follow the trend of various key financial indicators. A sample of some of the most important of these indicators is presented in the following table.

(1) Average return on stockholder investment is calculated by dividing total annualized net income by the average of end of period and beginning of year total stockholder’s equity.



(2) Average return on invested capital (invested capital = total assets - current liabilities - cash and short-term investments) is calculated by dividing total annualized net income by the average of end of period and beginning of year invested capital.



While we continually try to optimize the overall performance and trends, the table above does highlight various exceptions. These exceptions are usually influenced by a more important need. Most of the indicators above for the period ended June 30, 2009 are showing variation from the trends of the past years. Our balance sheet trends are improving due to cost reductions and only a small decline in sales. Our return trends are showing some decline due to the growth of assets. Factors currently impacting profitability include higher sales of Raven products, lower sales of Datatrace products, lower interest income on the Company’s invested surplus cash, and a higher anticipated income tax rate for fiscal 2010.



Results of Operations



Net Sales



Net sales for the first quarter of fiscal 2010 decreased two percent from fiscal 2009. In real dollars, net sales of $4,977,000 in fiscal 2010 decreased $77,000 from $5,054,000 in 2009.



Our revenues come from two main sources, which include product revenues and parts and service revenues. Parts and service revenues are derived from on-going repair and recalibration or certification of our products. The certification or recalibration of product is usually a key component of the customer’s own quality system and many of our customers operate in regulated industries, such as food processing or medical and pharmaceutical manufacturing. For this reason, these revenues tend to be fairly stable and grow slowly over time. Also, it is important to note that the Raven products are disposables and thus do not contribute to the Company’s parts and service revenues. During the first quarter of fiscal years 2010 and 2009 our Company had parts and service revenue of $889,000 and $932,000, respectively. As a percentage of total revenue, parts and service revenues were 18% in 2010 and 18% in 2009.



The performance of new product sales is dependent on several factors, including general economic conditions in the United States and abroad, capital spending trends and the introduction of new products. Over the past three quarters, both general economic conditions and capital spending patterns have been declining. Although overall economic conditions have softened this year we have seen little impact in our sales performance in total so far. We attribute this to the industries we serve which include various medical related markets, food processing and pharmaceuticals. While the medical markets have continued to improve, we have seen a decline in sales to our food and pharmaceutical markets. For fiscal first quarter 2010 and 2009, product sales for our company were $4,088,000 and $4,122,000, respectively.

Over the fiscal first quarter, our medical revenues increased 12 percent compared to the prior period. This increase was due to higher sales of dialysis meters, calibration solutions and dialysis meter service.



During the fiscal first quarter, sales of the Datatrace brand of products decreased 26 percent from the prior year. The decrease in DataTrace sales during the quarter is the result of declining economic and capital spending trends which influenced some industrial customers to delay their capital equipment purchases. The first fiscal quarter saw declines through the various categories of Micropack III products which were only partially off-set by sales of the new Micropack RF products. We are cautiously optimistic and look forward to improving Datatrace sales trends in both new product shipments and service sales in both the domestic and international markets for the later part of fiscal 2010.



Raven sales for the first quarter increased 16 percent compared to the first quarter of the prior year. The Raven biological indicator products saw sales gains in its core biological indicator strip business. Sales of Prospore and Protest products continue to increase, and we have expanded our manufacturing capacity for these products during the past fiscal year to allow the company to pursue additional opportunities for growth of these products. We also saw a substantial increase in sales of our chemical indicator products during the first quarter.



Cost of Sales



Cost of sales as a percent of net sales during the first fiscal quarter increased 3.5 percent from fiscal 2009 to 40.1 percent. Over the past two years we have made significant strides in lowering the cost to manufacture our medical products and currently both Medical and Datatrace products enjoy margins higher than the Raven products. Therefore, shifts in product mix toward higher sales of Medical and Datatrace products will tend to produce lower cost of goods sold expense and higher gross margins while shifts toward higher sales of Raven products will normally produce the opposite effect on cost of goods sold expense and gross margins.



Higher Raven sales this quarter are a contributing factor to the lower gross margins. The Company continues to monitor and implement cost reduction programs, price increases and improvements in freight cost recovery to improve gross margins.



Selling, General and Administrative



General and administrative expenses tend to be fairly fixed and stable from year-to-year. To the greatest extent possible, we work at containing and minimizing these costs. In the first fiscal quarter of 2010, we have not incurred additional costs to address the regulatory requirements of the Sarbanes — Oxley Act, although we do expect additional costs over the remainder of the year. For the fiscal first quarter, total administrative costs were $617,000 in the current quarter compared to $738,000 for the same quarter last year.



Our selling and marketing costs tend to be far more variable in relation to sales, although there are various exceptions. Some of these exceptions include the introduction of new products and the mix of international sales to domestic sales. For a product line experiencing introduction of a new product, costs will tend to be higher as a percent of sales due to higher advertising costs and sales training programs. Our Company’s international sales are usually discounted and recorded at the net discounted price, so that a change in mix between international and domestic sales may influence sales and marketing costs. In dollars, selling costs were $606,000 in the first fiscal quarter of 2010 and $757,000 in the same prior year quarter. As a percent of sales, selling cost was 12.2% in the current quarter and 15.0% in the prior year quarter.



Research and Development



Company sponsored research and development cost was $152,000 during the first fiscal quarter and $173,000 during the previous year period. We are currently executing a strategy of increasing the flow of internally developed products. Late in the first quarter of the previous fiscal year we introduced our new Datatrace Micropack RF product. Unlike previous versions of the Micropack line, this product allows real time radio transmission of data in addition to logging of data as the instrument moves through a process. Currently, we continue to experience some on-going development cost for the Micropack RF and are continuing work that expands this radio frequency technology into new markets.



Net Income



Net income remained stable at $1,026,000 or $.31 per share on a diluted basis during the quarter compared to $1,016,000 or $.31 per share on a diluted basis in the previous year period. As previously discussed, margins decreased during the quarter. Other factors impacting net income during the quarter included the decreases in general and administrative costs, sales and marketing costs, and research and development costs which we also discussed earlier in this report. A final factor impacting net income this quarter is lower interest income on the Company’s surplus cash due to a softening of interest rates over the past three quarters, and an increase in the estimate of income tax expense as a percent of earnings before income tax.



Liquidity and Capital Resources



On June 30, 2009, we had cash and short term investments of $10,759,000. In addition, we had other current assets totaling $8,719,000 and total current assets of $19,478,000. Current liabilities of our Company were $1,473,000 which resulted in a current ratio of 13:1.



Our Company has made capital acquisitions during the first fiscal quarter of $29,000.



We have instituted 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.



On November 12, 2003 our Board of Directors instituted a policy of paying regular quarterly dividends. On June 15, 2009, a quarterly dividend of $.10 per common share was paid to shareholders of record on June 2, 2009.



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

The Company does not currently maintain a line of credit or any other form of debt. Nor does the Company guarantee the debt of any other entity. The Company has maintained a long history of surplus cash flow from operations. This surplus cash flow has been used in the past to fund acquisitions and stock buybacks and is currently being partially utilized to fund our on-going dividend. If interesting candidates come to our attention, we may choose to pursue new acquisitions.



Contractual Obligations



At June 30, 2009 we had contractual obligations for open purchase orders for routine purchases of supplies and inventory, which would be payable in less than one year. Additionally, the Company has committed to purchase approximately $140,000 of bottling equipment to automate the bottling of its dialysis solutions products, which is currently done by an outside vendor.



Forward Looking Statements



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



Critical Accounting Policies and Estimates



The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ materially from those estimates.



We believe that there are several accounting policies that are critical to understanding the Company’s historical and future performance, as these policies affect the reported amounts of revenue and the more significant areas involving management’s judgments and estimates. These significant accounting policies relate to revenue recognition, research and development costs, valuation of inventory, and valuation of long-lived assets. These policies, and the Company’s procedures related to these policies, are described in detail below.

Revenue Recognition



We sell our products directly through our sales force and through distributors. Revenue from direct sales of our product is recognized upon shipment to the customer. Revenue from ongoing product service and repair is fully recognized upon completion and shipment of serviced product.


Accounts Receivable


At the time the accounts are originated, the Company considers a reserve for doubtful accounts based on the creditworthiness of the customer. The provision for uncollectible amounts is continually reviewed and adjusted to maintain the allowance at a level considered adequate to cover future losses. The allowance is management’s best estimate of uncollectible amounts and is determined based on historical performance that is tracked by the Company on an ongoing basis. The losses ultimately incurred could differ materially in the near term from the amounts estimated in determining the allowance.


Research & Development Costs



Research and development activities consist primarily of new product development and continuing engineering on existing products. Costs related to research and development efforts on existing or potential products are expensed as incurred.



Valuation of Inventories



Inventories are stated at the lower of cost or market, using the first-in, first-out method (FIFO) to determine cost. The Company’s policy is to periodically evaluate the market value of the inventory and the stage of product life cycle, and record a reserve for any inventory considered slow moving or obsolete.



Valuation of Long-Lived Assets, Goodwill and Intangibles



The Company assesses the realizable value of long-lived assets, goodwill and intangibles for potential impairment at least annually or when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated fair value is less than its carrying value. In assessing the recoverability of our long-lived assets, goodwill and intangibles, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. In addition, we must make assumptions regarding the useful lives of these assets.



Stock Based Compensation



The Company implemented the provisions of SFAS 123(R) effective April 1, 2006 using the modified prospective method. Under this transition method, stock based compensation expense for the year ended March 31, 2007 includes compensation expense for all stock based compensation awards granted subsequent to April 1, 2006 and previously granted awards not vested as of April 1, 2006. The Company uses the Black-Scholes valuation model to value option grants. We use historical data to estimate the expected price volatility, expected option life and expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield in effect at the time of the grant for the estimated life of the option. The dividend yield is estimated using the dividend payments made during the prior four quarters as a percent of average stock price for that period.


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