Colorado success stories: Mesa Laboratories

(Editor’s note: This is one of a series of Colorado company success stories as told by CEOs and business owners.)

Mesa Laboratories  designs, manufactures and sells electronic instrumentation and disposable products for quality control applications in healthcare, industrial, pharmaceutical, and food processing markets. The company is headquartered in Lakewood and was established in 1982, founded by Luke Schmieder, who is company Chairman. John Sullivan, CEO, joined the company in 2004 and has spearheaded its growth strategy.

Despite operating in highly competitive markets with larger companies, Mesa has found a way to thrive through highly selective acquisitions and organic growth. Mesa is an extremely profitable company with 60-65  percent gross margins, 30-35  percent Operating income and approximately 20  percent net income.  Revenue growth rate (CAGR) has been 20  percent over the past six years. The company has grown from about 45 to more than 200 employees during this time.

Mead: How do you compete?

John Sullivan: We look for small markets and niches where we can enjoy a strong market position and good growth but have limited competition because of a relatively small market size. We have four major product areas: DataTrace Data Loggers (for tracking temperature mainly), Medical Meters (for dialysis QC), Biological Indicators (for sterilization QC), and Bios Flow Meters (for gas flow QC).

Mead: What have been your biggest challenges?

Sullivan: When I joined in 2004, the company, while very profitable, had seen little growth in recent years. We had to adjust the culture to become more growth –oriented. We improved our distribution, moved from manufacturer reps to a direct sales model, invested in new product development, and added some new talent. We also improved our marketing and invested in our website and electronic lead generation.

The other big challenge was to find the right acquisitions. We have made five acquisitions in the last six years. About half of our growth over the past five years has come from acquisitions. We only acquire companies that can be accretive to our earnings per share in the first year. That means only looking at companies where we can achieve 25  percent or more in operating income. We also look for companies that have a leading or dominant position in a small niche market.

Mead: Your approach to M&A is easier said than done? Is that like looking for the needle in the haystack?

Sullivan: I spend a considerable amount of my time looking for acquisition candidates, screening companies that we identify through trade shows and company lists. We then contact the company to see if they are interested in selling. Since many business owners are approaching retirement, many of them are open to the discussion. We also look at small product lines within large companies that may not be large enough to warrant their attention. We are patient when it comes to acquisitions, believing that it is far more important to make the right acquisition that fits rather than being more impulsive.

Mead: Has the path always been smooth?

Sullivan: Remarkably it has been fairly smooth – other than in the 2009-10 recession. Some of our products, such as the data loggers (DataTrace) range from $20K to $100K so they are capital expenditures. Our customers, feeling the economic pinch, cut back on CapEx and the DataTrace line was impacted. However, the Biological Indicators product line was fine and continued to grow right through the recession.  Overall our company revenue was flat over six quarters, and we had to take some action to reduce expenses, but overall, Mesa weathered the recession relatively well.

Mead: Mesa has been a public company since 1984. What are the challenges being a small public company?

Sullivan: First, we have to be cognizant of EPS (earnings per share) growth and adjust our strategy to meet that growth expectation. Sometimes that may cause us to focus a little more short-term. It’s also expensive. Now that our market cap is at around $160 Million, we are subject to a SOX (Sarbanes-Oxley) audit and we have had to invest quite a lot in recent years to ensure SOX compliance. But there are also positives in that being public provides stock options for employees and stock can be used for acquisitions.

Mead:  How do global factors influence your growth?

Sullivan: Increasing regulation in the U.S. and the world is a positive for Mesa’s products, since our products are focused on quality control applications in regulated markets. Since between 35-40  percent of our sales are outside the U.S., the health of the global economy is also a continuous concern.

Mead: What are the keys to your growth over the next few years?

Sullivan: We need to continue to focus on our organic and acquisition growth strategies. On the organic side, that means to continue to focus on growing markets, improving distribution through growing the direct sales force and the distributor base, and focusing on electronic marketing. We also need to continue to invest in R&D. Our acquisition growth strategy has to continue to be selective, investing in companies in niche, growing, regulation-driven markets like healthcare with high tech, high value, high margin products. Additionally, we need to be certain that we position Mesa to be successful at a greater size. That means having the right people, policies, and infrastructure in place to support our growth.