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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

For the quarterly period ended December 31, 2011

For the transition period from        to      

Commission File No: 0-11740

MESA LABORATORIES, INC.

(Exact name of registrant as specified in its charter)

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

Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act, during the past 12 months and (2) has been subject to the filing requirements for the past 90 days. Yes o No x

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

State the number of shares outstanding of each of the Issuer’s classes of common stock, as of the latest practicable date:

There were 3,291,093 shares of the Issuer’s common stock, no par value, outstanding as of January 31, 2012.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MESA LABORATORIES, INC.

CONDENSED BALANCE SHEETS

(Dollars in Thousands)

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MESA LABORATORIES, INC.

CONDENSED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands except earnings per share)

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MESA LABORATORIES, INC.

CONDENSED STATEMENTS OF INCOME

(Unaudited)

 (Dollars in thousands except earnings per share)

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MESA LABORATORIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited))

(Dollars in Thousands)

Supplemental disclosure of non-cash activity:

In December 2011, we settled the $600 holdback amount from our acquisition of the assets of Apex Laboratories by paying $562 and returning $38 of accounts receivable.

The Company issued employee loans totaling $235 and $394 for the exercise of stock options during the nine month periods ended December 31, 2011 and 2010, respectively. Loans of $301 were retired in the nine month periods ended December 31, 2011.

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MESA LABORATORIES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS

1.              Summary of Accounting Policies

The summary of the Issuer’s significant accounting policies are incorporated by reference to the Company’s annual report on Form 10-K, at March 31, 2011.

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles for interim financial information and with the instructions to Form 10-Q, and reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations and cash flows.  The results of the interim period are not necessarily indicative of the results for the full year.

Recently Adopted Accounting Pronouncements

In January 2010, the FASB updated the disclosure requirements for fair value measurements, codified in ASC Topic 820, Fair Value Measurements and Disclosure.  The updated guidance requires companies to disclose separately the investments that transfer in and out of Levels 1 and 2 and the reasons for those transfers. Additionally, in the reconciliation for fair value measurement using significant unobservable inputs (Level 3), companies should present separately information about purchases, sales, issuances and settlements.  We adopted the updated guidance on April 1, 2010, except for the disclosures about purchases, sales, issuances and settlements in the Level 3 reconciliation, which became effective for us beginning April 1, 2011.  The adoption of the required guidance did not have an impact on our financial statements.

In July 2010, FASB issued a new pronouncement that requires enhanced disclosures regarding the nature of credit risk inherent in an entity’s portfolio of financing receivables, how that risk is analyzed, and the changes and reasons for those changes in the allowance for credit losses. The new disclosures will require information for both the financing receivables and the related allowance for credit losses at more disaggregated levels. Disclosures related to information as of the end of a reporting period became effective for Mesa in the fourth quarter of Fiscal 2011. Specific disclosures regarding activities that occur during a reporting period, such as the disaggregated roll forward disclosures, became required for Mesa beginning in the first quarter of Fiscal 2012. As these changes only relate to disclosures, they did not have an impact on Mesa’s financial results.

In September 2011, the FASB issued ASC 2011-8 “Intangibles - Goodwill and Other”. The amended guidance will allow companies to first assess qualitative factors to determine if it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, the Company would not be required to determine the fair value of the reporting unit, unless it determines, on a qualitative basis, that it is more likely than not that the fair value of the reporting unit is less than the carrying value. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not anticipate any material impact from the adoption of this amended guidance.

2.              Inventories

3.              Intangibles

On September 30, 2011, the Company entered into a license agreement with Photonic Biosystems, Inc. for certain biological indicator technology.  Under the terms of this agreement, in October 2011 the Company made an initial payment of $150,000 for rights to the technology.  An additional payment of $25,000 was due by the end of January

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2012, and up to $225,000 of additional payments may be made in the future, depending on meeting certain development and performance milestones.  The $150,000, included in intangible assets on the condensed balance sheet at December 31, 2011, is being amortized over ten years.  In addition, sales of products covered by this license agreement will be subject to royalty payments.

4.              Stock-based Compensation

Stock-based compensation costs for award grants to employees and directors are valued at fair value and recognized on a straight line basis over the service periods of each award.  We estimate forfeiture rates for the year based on historical experience.  Amounts recognized in the condensed financial statements related to stock-based compensation are as follows:

Stock-based compensation expense is included in cost of revenues, and general and administrative expense in the condensed statements of income.

The fair value of each 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 option life and expected forfeiture rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the 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. The following summarizes the Black-Scholes assumptions:

The following summarizes option activity:

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The Company issues new shares of common stock upon exercise of stock options.  The total intrinsic value of options exercised was $738,000 and $624,000 during the nine month periods ended December 31, 2011 and 2010, respectively.

A summary of the status of our unvested option shares as of December 31, 2011 is as follows:

As of December 31, 2011, there was approximately $1,260,000 of total unrecognized compensation cost related to unvested stock options granted under our plans, which is expected to be recognized over a weighted-average period of 2.3 years.

5.              Net Income Per Common Share

Basic net income per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share uses the treasury stock method to compute the weighted average common stock outstanding assuming the conversion of potentially dilutive common shares.

The following table presents a reconciliation of the denominators used in the computation of net income per common share - basic and diluted:

For the three and nine months ended December 31, 2011 and 2010, no shares and no outstanding stock options were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the average price of the common shares and, therefore, their inclusion would have been anti-dilutive.

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6.              Debt

To help finance the acquisition of Apex Laboratories, Inc., SGM Biotech, Inc., and the related building that houses the SGM Biotech facility, the Company entered into a credit facility consisting of: a) 36 month reducing line of credit for $3,000,000 and maturing at April 27, 2013, requiring quarterly principal payments of $250,000 beginning July 27, 2010. In December 2010, the bank deferred the January 27, 2011 payment of $250,000 until maturity at April 27, 2013, which allowed the Company to complete the acquisition of Apex Laboratories, Inc. without further alteration of its existing credit facility; and b) revolving line of credit for $4,000,000 maturing on December 23, 2011, which was retired in December 2011. Both of these lines of credit are subject to a variable rate of interest and a rate floor, both of which were 3.25% at December 31, 2011.  The remaining line of credit requires monthly interest payments, is subject to restrictive covenants and is secured by most of the assets of the Company.  The Company was in compliance with the restrictive covenants as of December 31, 2011.

Future maturities of debt are as follows (dollars in thousands):

7.              Related Party Transactions

On April 30, 2010, the Company purchased the building housing the facilities of SGM Biotech, Inc. for $2,150,000 from Surreal, LLC.  Surreal, LLC is owned by the former owners of SGM Biotech, Inc., who became employees of the Company when SGM Biotech was acquired on April 27, 2010.

8.              Contingencies

During the third quarter of fiscal 2012, the Company determined that it has a potential liability for state sales taxes.  The ultimate amount due will depend on a number of factors, including the jurisdictional tax rates (ranging from 7.25-9.75%), the amount of sales to customers who already paid the tax or are exempt, and any penalties and interest.  The Company has recorded an estimate of $250,000 as taxes payable on the condensed balance sheet, and general and administrative expense in the condensed statements of income.  This estimate may change as further analysis is completed and sales tax returns are filed.  Management believes that this matter, after consideration of amounts accrued, will not have a material adverse effect on our results of operations, financial position or cash flows.

9.              Subsequent Events

On February 8, 2012, the Company’s Board of Directors declared a quarterly cash dividend of $0.13 per share of common stock, payable on March 15, 2012, to shareholders of record at the close of business on February 27, 2012.

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10.       Segment Data

Our operations are organized into two reporting segments:  Biological Indicators and Instrumentation Products.  The following tables set forth our segment information:

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Revenues from external customers are attributed to individual countries based upon locations to which the product is shipped or exported, as follows:

All long-lived assets are located in the United States.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

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

Our revenues come from two main sources — products sales, and parts and services.  Product sales are dependent on several factors, including general economic conditions, both domestic and international, customer capital spending trends, competition, introduction of new products, and acquisitions.  Biological indicator products are disposable and are used on a routine basis for quality control, thus product sales are less sensitive to general economic conditions.  Instrumentation products have a longer life, and their purchase by our customers is somewhat discretionary, so sales are more sensitive to general economic conditions.  Parts and service demand is driven by our customers’ quality control and regulatory environments, which require periodic repair and recalibration or certification of our instrumentation products.  We typically evaluate costs and pricing annually.  Our policy is to price our products competitively and, where possible, we try to pass along cost increases in order to maintain our margins, where possible.  As part of the integration of our biological indicator acquisitions we have been adjusting prices to achieve price parity for similar products.

Gross profit is affected by our product mix, manufacturing efficiencies and price competition.  The biological indicator market is more competitive than that for our instrumentation products, thus the gross margin percentages are lower.  Generally, an increase in biological indicator product sales compared to instrumentation product sales would result in a lower overall gross margin.  Cost of revenue and gross profit also include an allocation of the amortization of acquired intangibles, which mostly affect the biological indicator results.

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

Discussion of Key Indicators and Trends

Acquisitions in December 2010, April 2010 and December 2009, impacted our current assets and working capital, as we used available cash and incurred debt to complete those transactions.  During the nine months ended December 31, 2010, we were still integrating these acquisitions, which impacted the key indicators.  The results for the nine months ended December 31, 2011, reflect our successful integration of these acquisitions - performance ratios (gross margin, operating margin and net profit margin) are at or near the same levels as 2009 and 2008.  Revenues, gross profit and net income have all increased due to having a full nine months of operations from the acquisitions, successfully integrating the acquisitions, and organic growth.  The decrease in revenues and profit indicators in 2009 was primarily attributable to poor general economic conditions.

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(1)          Days revenues outstanding is based on specific Revenues in that period, not average Revenues for the 9 months.

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

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

Reconciliation of Non-GAAP Measure

Earnings before income tax, depreciation and amortization is used by management as a supplemental performance and liquidity measure, primarily to assess financial performance without regard to historical cost basis, the ability of our assets to generate cash, and the evaluation of potential acquisitions.

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

The following table sets forth our reconciliation of Earnings before income tax, depreciation and amortization, a non-GAAP measure:

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RESULTS OF OPERATIONS