UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
__________________
Date of Report (Date of earliest event reported): November 6, 2015 (November 5, 2015)
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MOCON, INC.
(Exact name of registrant as specified in its charter)
Minnesota |
000-09273 |
41-0903312 |
(State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(I.R.S. Employer Identification Number) |
7500 Mendelssohn Avenue North Minneapolis, MN |
55428 |
(Address of Principal Executive Offices) |
(Zip Code) |
(763) 493-6370
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐ |
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
☐ |
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
☐ |
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
☐ |
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Section 2 – Financial Information
Item 2.02 Results of Operations and Financial Condition.
On November 5, 2015, MOCON, Inc. issued a press release announcing its results of operations and financial condition for its third quarter ended September 30, 2015. A copy of this press release is attached hereto as Exhibit 99.1.
The script of MOCON, Inc.’s Chief Executive Officer, Robert L. Demorest, and Chief Financial Officer, Elissa Lindsoe related to the telephone conference held on November 5, 2015 is furnished with this Form 8-K as Exhibit 99.2.
The information contained in this Item 2.02 and the exhibit to this report shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any filings made by MOCON, Inc. under the Securities Act of 1933, as amended, or the Exchange Act, except as may be expressly set forth by specific reference in such filing.
Section 9 – Financial Statements and Exhibits
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits.
Exhibit No. |
Description | |
99.1 |
Press Release issued November 5, 2015 | |
99.2 |
Script of Robert L. Demorest and Elissa Lindsoe for telephone conference call held November 5, 2015 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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MOCON, INC. |
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Dated: November 6, 2015 |
By: |
/s/ |
Elissa Lindsoe |
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Elissa Lindsoe |
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Chief Financial Officer, Vice President, Treasurer and Secretary (Principal Financial and Accounting Officer) |
MOCON, INC.
CURRENT REPORT ON FORM 8-K
INDEX TO EXHIBITS
Exhibit No. |
Description |
Method of Filing | |
99.1 |
Press Release issued November 5, 2015 |
Furnished herewith | |
99.2 |
Script of Robert L. Demorest, and Elissa Lindsoe of telephone conference call held November 5, 2015 |
Furnished herewith |
4
Exhibit 99.1
FOR IMMEDIATE RELEASE |
For More Information Contact: | |
Elissa Lindsoe, CFO | ||
November 5, 2015 |
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763-493-6370 /
www.mocon.com |
MOCON Reports Third Quarter Results; Announces Corporate Realignment Plan
Highlights:
● |
Overall Revenue increased 5 percent on a Constant Currency basis |
● |
Approximately $1.7 million of pre-tax savings in 2016 from realignment plan |
● |
Double digit growth in Permeation and Package Testing Segments on a Constant Currency basis |
MINNEAPOLIS, MN, November 5, 2015 – MOCON, Inc. (NASDAQ: MOCO), today reported financial results for the third quarter ended September 30, 2015.
Commenting on the Company’s performance, MOCON’s president and CEO, Robert L. Demorest said, “On a Constant Currency basis, our third quarter revenue grew 5 percent. Our Permeation and Package Testing business segments both continue to meet our growth expectations at 18 percent and 10 percent respectively. As experienced in the first half of the year, our Industrial Analyzer and Other segment continues to be challenged by the soft oil and gas market. Our earnings are trending up; on a sequential basis diluted EPS improved by 82 percent as revenue improved while we prudently managed costs and expenses. While the strengthening of the US dollar negatively impacted our revenue as reported for the three and nine-month periods, there is less of an effect to our operating income. A large portion of the costs to support our international businesses are denominated in foreign currencies, which provides a natural hedge therefore mitigating the negative effect of a strengthening dollar to operating profits.
“As part of an ongoing process improvement initiative designed to grow MOCON’s global brand and to provide our customers with enhanced products and services, we recently implemented a realignment plan and as part of that plan, we brought the sales and marketing functions of our Package Testing and Permeation business segments under common leadership. Overall, the realignment resulted in a 5 percent reduction in our U.S. headcount. We expect the realignment plan, which also includes the elimination of several vacant positions within other areas of the Company, will result in approximately $1.7 million of pre-tax savings in 2016. We will record a pre-tax charge of approximately $0.5 million, or $0.09 per diluted share, in the fourth quarter of 2015 related to employee separation costs. We believe the decision to have common leadership over both of these businesses will not only strengthen our market presence, but will also provide a cost-effective approach to achieving our objectives”.
2015 Revenue and Earnings Summary
Third quarter 2015 results compared to third quarter 2014:
● |
Reported revenue decreased 7 percent as compared to the third quarter 2014. On a Constant Currency basis, revenue increased 5 percent compared to the year ago quarter. |
● |
Revenue (as reported) from foreign customers accounted for 62 percent (40 percent in Europe, 22 percent outside of Europe & the U.S.A.) of total revenue for the third quarter of 2015 compared to 67 percent (41 percent in Europe, 26 percent outside of Europe & the U.S.A.) in the third quarter of 2014. |
● |
Net income was $1.2 million, or $0.20 per diluted share, compared to $1.7 million, or $0.29 per diluted share in the year ago quarter. |
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Adjusted EBITDA for third quarter of 2015 was $2.6 million compared to $3.3 million in the third quarter of 2014. (See reconciliation to non-GAAP information below). |
Nine months ended September 30, 2015 results compared to the year ago nine month period:
● |
Reported revenue decreased 3 percent as compared to the year ago period. On a Constant Currency basis, revenue increased 6 percent compared to the year ago nine month period. |
● |
Revenue (as reported) from foreign customers accounted for 66 percent (38 percent in Europe, 28 percent outside of Europe & the U.S.A.) of total revenue for the nine month period of 2015 compared to 71 percent (42 percent in Europe, 29 percent outside of Europe & the U.S.A.) in the year ago period. |
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Net income was $2.7 million, or $0.46 per diluted share, compared to $3.6 million, or $0.62 per diluted share in the year ago period. |
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Adjusted EBITDA for the nine month period ended September 30, 2015 was $6.5 million compared to $7.7 million in the year ago nine month period. |
Revenue by Segment ($ in thousands)
Three Months Ended September 30, |
||||||||||||||||||||||||||||
As Reported |
Year over Year Growth |
Currency impact on 2015 Growth |
2015 Revenue at Constant |
Year-over-Year Constant Currency |
||||||||||||||||||||||||
2015 |
2014 |
$ |
% |
$ |
Currency |
Growth % |
||||||||||||||||||||||
Package Testing |
$ | 6,454 | $ | 7,342 | $ | (888 | ) | -12 | % | $ | (1,643 | ) | $ | 8,097 | 10 | % | ||||||||||||
Permeation |
6,482 | 5,729 | 753 | 13 | % | (276 | ) | 6,758 | 18 | % | ||||||||||||||||||
Industrial Analyzers and Other |
2,556 | 3,578 | (1,022 | ) | -29 | % | - | 2,556 | -29 | % | ||||||||||||||||||
Total Revenue |
$ | 15,492 | $ | 16,649 | $ | (1,157 | ) | -7 | % | $ | (1,919 | ) | $ | 17,411 | 5 | % |
Nine Months Ended September 30, |
||||||||||||||||||||||||||||
As Reported |
Year over Year Growth |
Currency impact on 2015 Growth |
2015 Revenue at Constant |
Year-over-Year Constant Currency |
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2015 |
2014 |
$ |
% |
$ |
Currency |
Growth % |
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Package Testing |
$ | 19,684 | $ | 21,320 | $ | (1,636 | ) | -8 | % | $ | (3,758 | ) | $ | 23,442 | 10 | % | ||||||||||||
Permeation |
18,550 | 16,622 | 1,928 | 12 | % | (764 | ) | 19,314 | 16 | % | ||||||||||||||||||
Industrial Analyzers and Other |
7,667 | 9,595 | (1,928 | ) | -20 | % | - | 7,667 | -20 | % | ||||||||||||||||||
Total Revenue |
$ | 45,901 | $ | 47,537 | $ | (1,636 | ) | -3 | % | $ | (4,522 | ) | $ | 50,423 | 6 | % |
Revenue from the Package Testing segment for both the three and nine months ended September 30, 2015 increased 10 percent on a Constant Currency basis due to an increase in headspace and mixer products and accessories. As reported, revenue decreased 12 percent and 8 percent, respectively, for the three and nine months ended September 30, 2015.
Revenue growth for the Permeation segment for the three months and nine months ended September 30, 2015 was 18 percent and 16 percent, respectively, on a Constant Currency basis and 13 percent and 12 percent, respectively, as reported. The current year growth is attributable to the continued increase in demand in the USA for the new generation of oxygen and water vapor permeation instrumentation, which was introduced to the marketplace during the second half of 2014.
Representing the smallest portion of MOCON’s reported revenue, currently 16 percent and only 22 percent at its peak, our Industrial Analyzer and Other segment declined 29 percent and 20 percent year-over-year for the three and nine months ended September 30, 2015. This was attributable to a 70 percent and 75 percent decline, respectively, in revenue from the oil and gas market. This decline is offset in part by increases in other markets including sales of environmental monitoring products and the sale of sensors into OEM partners.
Gross Profit, Operating Expenses and Other Income Commentary
Gross profit was 54 percent of revenue for each of the three and nine month periods ended September 30, 2015, respectively, compared to 57 percent and 56 percent of revenue for the same periods in 2014, respectively. The decrease in the gross margin rate is driven primarily by reduced revenue volume in Industrial Analyzer and Other segment which provides a lower basis to absorb semi-variable and fixed production costs, production ramp up costs associated with the recently introduced next generation Permeation products, and increased cost for products produced in the USA that are sold in euros. The overall decline was partially offset by increased production and efficiencies for products produced internationally.
Selling, general and administrative expenses were slightly lower during the third quarter and first nine months of 2015 compared to the same periods in 2014 due primarily to favorable foreign exchange rates partially offset by the cost of the Company’s legal entity realignment initiative of $190,000 and $318,000 in each of the quarter and year-to-date periods ending September 2015. Research and development expenses remained consistent at 6-8% of revenue for all periods.
Balance Sheet and Cash Flow Summary
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Cash and cash equivalents increased slightly to $6.4 million at September 30, 2015 compared to $6.3 million at December 31, 2014. |
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Net cash provided by operations was $4.4 million compared to $6.4 million in the first nine months of 2014 primarily driven by the change in net income and a $2.3 million decline in accounts payable and accrued compensation offset by a $1.5 million reduction in inventory. |
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Days sales outstanding were 51 days, a 6 day improvement from 57 in the third quarter of 2014 driven by an increased focus on collections. |
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Total debt was $3.7 million at September 30, 2015, a $0.9 million reduction when compared to $4.6 million at December 31, 2014. |
About MOCON
MOCON is a leading provider of detectors, instruments, systems and consulting services to research laboratories, production facilities, and quality control and safety departments in the medical, pharmaceutical, food and beverage, packaging, environmental, oil and gas and other industries worldwide. See www.mocon.com for more information.
Use of Non-GAAP Financial Measures
MOCON’s management evaluates its financial results on a constant currency basis which is calculated by adjusting the current period reported revenue to the comparative period’s currency translation rate (“Constant Currency”) and believes that investors may want to consider this impact on the Company’s performance. In addition, MOCON supplements its financial statements to provide investors with earnings before interest, taxes, depreciation and amortization (“EBITDA”) and EBITDA plus share-based compensation, legal entity realignment expenses and foreign currency transactional losses (“Adjusted EBITDA”), which are not calculated in accordance with general accepted accounting principles (“GAAP”) in the United States of America.
MOCON believes that these non-GAAP measures provide useful information to the Company’s Board of Directors, management and investors regarding certain trends relating to its financial condition and operating performance. MOCON’s management uses these non-GAAP measures to compare the Company's performance to that of prior periods for trend analyses and planning purposes. In addition, revenue on a Constant Currency basis is used to assess the revenue growth component of MOCON’s Incentive Pay Plan.
The method MOCON uses to produce non-GAAP results is not computed according to GAAP, is likely to differ from the methods used by other companies and should not be regarded as a replacement for corresponding GAAP measures. MOCON urges investors to review the reconciliation of its non-GAAP financial measures to the comparable GAAP financial measures that are included in this press release.
Safe Harbor
This press release contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements that can be identified by words such as “will,” “may,” “expect,” “believe,” “anticipate,” “estimate,” “continue,” “planned”, or other similar expressions. All forward-looking statements speak only as of the date of this press release. MOCON undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. In addition to the risks and uncertainties of ordinary business operations and conditions in the general economy and the markets in which the Company competes, there are important factors that could cause actual results to differ materially from those anticipated by the forward-looking statements made in this press release. These factors include, but are not limited to, the performance of Dansensor, worldwide economic conditions and fluctuations in foreign currency exchange rates, the terms of our credit agreement including financial covenants included therein, dependence on certain key industries, pricing and lack of availability of raw materials, crude oil pricing impact on oil exploration activities, and other factors set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 and other documents MOCON files with or furnishes to the Securities and Exchange Commission.
MOCON's shares are traded on the NASDAQ Global Market System under the symbol MOCO.
MOCON is a registered trademark of MOCON, Inc.; other trademarks are those of their respective holders.
MOCON, INC.
SUMMARY CONSOLIDATED FINANCIAL DATA
(in Thousands, Except Per Share Data)
STATEMENT OF OPERATIONS DATA: (unaudited)
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2015 |
2014 |
2015 |
2014 |
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Revenue |
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Products |
$ | 12,241 | $ | 13,110 | $ | 36,442 | $ | 37,384 | ||||||||
Services |
2,496 | 2,745 | 7,338 | 7,983 | ||||||||||||
Consulting |
755 | 794 | 2,121 | 2,170 | ||||||||||||
Total revenue |
15,492 | 16,649 | 45,901 | 47,537 | ||||||||||||
Cost of revenue |
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Products |
5,707 | 5,648 | 16,490 | 16,318 | ||||||||||||
Services |
1,010 | 992 | 3,074 | 3,133 | ||||||||||||
Consulting |
457 | 447 | 1,515 | 1,412 | ||||||||||||
Total cost of revenue |
7,174 | 7,087 | 21,079 | 20,863 | ||||||||||||
Gross profit |
8,318 | 9,562 | 24,822 | 26,674 | ||||||||||||
Selling, general and administrative expenses |
5,808 | 6,125 | 17,914 | 18,216 | ||||||||||||
Research and development expenses |
886 | 950 | 3,081 | 3,064 | ||||||||||||
Operating income |
1,624 | 2,487 | 3,827 | 5,394 | ||||||||||||
Other income (expense), net |
(48 | ) | (117 | ) | 90 | (267 | ) | |||||||||
Income before income taxes |
1,576 | 2,370 | 3,917 | 5,127 | ||||||||||||
Income tax expense |
424 | 696 | 1,211 | 1,558 | ||||||||||||
Net income |
$ | 1,152 | $ | 1,674 | $ | 2,706 | $ | 3,569 | ||||||||
Net income per common share: |
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Basic |
$ | 0.20 | $ | 0.30 | $ | 0.47 | $ | 0.63 | ||||||||
Diluted |
$ | 0.20 | $ | 0.29 | $ | 0.46 | $ | 0.62 | ||||||||
Weighted average common shares outstanding: |
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Basic |
5,753 | 5,668 | 5,748 | 5,655 | ||||||||||||
Diluted |
5,808 | 5,776 | 5,826 | 5,768 |
CONDENSED BALANCE SHEET DATA: (unaudited)
September 30, 2015 |
December 31, 2014 |
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Assets: |
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Cash and cash equivalents |
$ | 6,413 | $ | 6,332 | ||||
Accounts receivable, net |
8,710 | 9,877 | ||||||
Inventories |
8,390 | 8,705 | ||||||
Other current assets |
2,829 | 2,587 | ||||||
Total current assets |
26,342 | 27,501 | ||||||
Property, plant and equipment, net |
6,028 | 5,562 | ||||||
Goodwill, intangibles and other assets |
17,172 | 19,446 | ||||||
Total assets |
$ | 49,542 | $ | 52,509 | ||||
Liabilities and Shareholders’ Equity: |
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Revolving lines of credit |
$ | --- | $ | 3,300 | ||||
Notes payable, current |
64 | 983 | ||||||
Other current liabilities |
9,973 | 11,166 | ||||||
Total noncurrent liabilities |
5,708 | 2,587 | ||||||
Shareholders’ equity |
33,797 | 34,473 | ||||||
Total liabilities and shareholders’ equity |
$ | 49,542 | $ | 52,509 |
CONDENSED CASH FLOW DATA: (unaudited) |
September 30, 2015 |
September 30, 2014 |
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Net cash provided by operations |
$ | 4,417 | $ | 6,430 | ||||
Net cash used in investing activities |
(1,144 | ) | (1,113 | ) | ||||
Net cash used in financing activities |
(2,816 | ) | (2,965 | ) | ||||
Effect of exchange rate changes |
(376 | ) | (344 | ) | ||||
Net increase in cash |
81 | 2,008 | ||||||
Cash beginning of period |
6,332 | 4,133 | ||||||
Cash end of period |
$ | 6,413 | $ | 6,141 |
MOCON, INC.
NON-GAAP RECONCILIATION
(in Thousands)
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2015 |
2014 |
2015 |
2014 |
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Net income |
$ | 1,152 | $ | 1,674 | $ | 2,706 | $ | 3,569 | ||||||||
Interest expense, net |
31 | 45 | 97 | 147 | ||||||||||||
Income tax expense |
424 | 696 | 1,211 | 1,557 | ||||||||||||
Depreciation and amortization |
614 | 656 | 1,834 | 1,924 | ||||||||||||
EBITDA |
2,221 | 3,071 | 5,848 | 7,197 | ||||||||||||
Share-based compensation |
167 | 129 | 488 | 413 | ||||||||||||
Legal entity realignment expenses |
190 | --- | 318 | --- | ||||||||||||
Foreign currency transaction loss (gain) |
17 | 72 | (186 | ) | 120 | |||||||||||
Adjusted EBITDA |
$ | 2,595 | $ | 3,272 | $ | 6,468 | $ | 7,730 |
Exhibit 99.2
MOCON, Inc.
Third Quarter 2015 Conference Call Script
November 5, 2015
Delivered by: Robert Demorest - MOCO
Elissa Lindsoe– MOCO
Phillip Kupper – Three Part Advisors
Operator (if necessary):
Good day, everyone, and welcome to MOCON’s Third Quarter 2015 Earnings Conference Call. Today's conference is being recorded. I would now like to turn the call over to Phillip Kupper, MOCON’s investor relations representative. Please go ahead Phillip.
Phillip Kupper:
Thank you for joining us today to discuss our third quarter 2015 financial results. With me on the call today are Robert Demorest, Chief Executive Officer, and Elissa Lindsoe, Chief Financial Officer and Don DeMorett, Chief Operating Officer who will be helping with the Q&A session that we will open up to the audience after we complete our prepared remarks. Please note that we are also webcasting this call. Both the earnings press release that was issued earlier and the webcast link can be accessed on our Investor Relations website at mocon.com. Before I turn the call over to management, I'd like to remind everyone that during today’s call, including the Q&A session, we may make forward-looking statements regarding expected revenue, earnings, future plans, opportunities, and other expectations of the Company. These estimates and plans and other forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied on the call. These risks include those that are detailed in our most recent Annual Report on Form 10-K and in today’s earnings press release and may be amended or supplemented by subsequent quarterly reports on Form 10-Q, or other reports filed with the Securities and Exchange Commission. The statements made during this conference call are based upon information known to MOCON as of the date and time of this call. We assume no obligation to update the information presented in today’s call.
During today’s call we will also discuss non-GAAP financial measures, including Constant Currency, EBITDA and Adjusted EBITDA. These measures, when used in combination with GAAP results, provide us with useful information to better understand our business and we believe investors may want to consider this impact on our performance as well. A reconciliation of GAAP to non-GAAP measures can be found in today’s earning’s release.
With that, I’d like to turn the call over to Robert Demorest, MOCON’s President and Chief Executive Officer.
Robert Demorest
Thanks Phillip; and thanks to all of you on the line for participating in our earnings call and we appreciate your time and your continued interest in MOCON.
On a Constant Currency basis, our third quarter revenue grew 5 percent. Our Permeation and Package Testing business segments both continue to meet our growth expectations at 18 percent and 10 percent respectively. As experienced in the first half of the year, our Industrial Analyzer and Other segment continues to be challenged by the soft oil and gas market. Our earnings are trending up; on a sequential basis diluted EPS improved by 82 percent as revenue improved while we prudently managed costs and expenses. While the strengthening of the US dollar negatively impacted our revenue as reported for the three and nine-month periods, there is less of an effect to our operating income. A large portion of the costs to support our international businesses are denominated in foreign currencies, which provides a natural hedge, therefore mitigating the negative effect of a strengthening dollar to operating profits.
As part of an ongoing process improvement initiative designed to grow MOCON’s global brand, and to provide our customers with enhanced products and services, we have recently implemented a major corporate realignment plan. As part of that plan, we brought the sales and marketing functions of our Package Testing and Permeation business segments under common leadership by promoting Mr. Karsten Kejihof to Vice President of Sales and Marketing for our Package Testing and Permeation segments. For the past 13 years, Karsten has represented our Dansensor MAP products in various sales and marketing capacities and he brings a wealth of product and market knowledge to his new role. One of his objectives going forward is to ensure that our permeation and package testing sales teams are committed to a high degree of customer focus under a strong, integrated brand. Overall, this realignment has resulted in a 5 percent reduction in our U.S. headcount. We expect the realignment plan, which also includes the elimination of several vacant positions within other areas of the Company, will result in approximately $1.7 million of pre-tax savings in 2016. We will record a pre-tax charge of approximately $500,000, or $0.09 per diluted share, in the fourth quarter of 2015 related to employee separation costs. We believe the decision to have common leadership over both of these businesses will not only strengthen our market presence, but will also provide a cost-effective approach to achieving our objectives. Congratulations to Karsten on this well-deserved promotion. We are all looking forward to your contributions toward our sales and marketing strategy moving forward.
In other news, Dan Mayer, our CTO recently announced that he is entering into semi-retirement. As part of this move, Dan will step down as our CTO at the end of 2015 while continuing to provide MOCON his expertise on a half time basis throughout 2016. His continued service will ensure a smooth transition while enabling MOCON to expand its technical capabilities through advanced research without having to backfill the CTO position; an example of the cost savings I mentioned earlier.
Dan Mayer and I have worked closely together at MOCON for over 30 years. His creative excellence in the areas of technology and methodology have made huge contributions to MOCON’s success. When I thought of something needed in the market, Dan figured out how to make it. When Dan thought of something clever to make, I figured out how to get it to market. We were a great match, and I am extremely grateful for his creativity and innovation.
In his new capacity, Dan will still be able to contribute his expertise in the areas of new sensor technologies. MOCON is always on the lookout for better ways to measure things, and we have many avenues for Dan to investigate. I hope you will join me in congratulating Dan Mayer on his lengthy career at MOCON, and wish him well as he enters semi-retirement.
I will go over the performance of our business segments later in the call, but for now, I’ll turn the discussion over to Elissa to go through the consolidated financials in detail.
Elissa Lindsoe
Thanks Bob, and thanks again to everyone for joining us. In Q3, 62 percent of our reported revenue was generated outside of the United States of which, 40 percentage points were sold in Europe so once again, we were significantly impacted by the strong dollar. Reported revenue for the third quarter of 2015 was $15.5 million, down slightly from $16.6 million during the third quarter of 2014. On a constant currency basis, revenue was $17.4 million, a 5 percent increase year-over-year. Year-to-date September 2015 reported revenue was $45.9 million, or $50.4 million on a constant currency basis which is 6 percent higher than year-to-date revenue as of September 2014.
As Bob mentioned earlier, we have a natural currency hedge in our business model that mitigates the impact of the top line reduction to our bottom line. Of the $1.9 million for the quarter and $4.5 million for the YTD currency impact to revenue, approximately 8% to 10% of the decline negatively impacted operating profits. In Q3 2015, we reported operating income of $1.6 million, or 10 percent of revenue, which is $863K below Q3 2014. Overall reported gross profit was 54 percent of revenue in Q3 2015 compared to 57 percent in Q3 2014 and total operating expenses were consistent year-over-year at 43 percent of revenue. Increased spending for professional fees associated with our initiative to reduce our number of legal entities, as we discussed last quarter, offset the overall operating expense favorability that was related to foreign currency translation.
Moving on to the remainder of our income statement:
Other Expense for the third quarter of 2015 was $48,000 compared to $117,000 during the same quarter in 2014 and our YTD September effective tax rate was 31 percent in 2015, up 1 percentage point from the comparable period in 2014. The increase in the rate is due primarily to a mix shift in the proportion of projected 2015 taxable income being generated in the U.S than was in 2014, as well as foreign tax rate increases.
Net income for the third quarter of 2015 was $1.2 million, or $0.20 per diluted share, compared to $1.6 million, or $0.30 per diluted share for the third quarter in 2014.
Adjusted EBITDA for third quarter of 2015 was $2.6 million compared to $3.3 million in the third quarter of 2014.
Moving on to our cash flow and balance sheet
Cash and cash equivalents were $6.4 million on September 30, 2015 compared to $6 million on June 30, 2015 and $6.3 million on December 31, 2014. The $0.1 million increase was driven by positive operating cash flows that were in excess of the use for investing and financing activities as well as $376K of negative foreign exchange rate fluctuations.
Accounts receivable was $8.7 million, which represents days sales outstanding of 51, a 6 day improvement compared to 57 days in the third quarter of 2014.
Inventory was $8.4 million, down from $9.2 million on June 30, 2015 driven by improvements in inventory management.
Total debt was $3.7 million on September 30, 2015 compared to $4.6 million on June 30, 2015 and December 31, 2014. In early April, we paid off the Dansensor seller financing in full and during Q3 we paid down our revolving line of credit. We entered into an amended revolving credit facility in August which increased our borrowing capacity to $10 million. As a result of the terms of this refinancing, we began classifying our revolving debt which equaled $3.5 million on September 30, 2015 into long term liabilities which had previously been classified as current.
Net cash provided by operations was $4.4M in the first nine months of 2015 compared to $6.4 million in the same period of 2014. The change was primarily driven by the reduction in net income and a $2.3 million decline in accounts payable and accrued compensation, offset by a $1.5 million reduction in inventory.
With that, I will now turn the call back over to Bob.
Robert Demorest
Thanks Elissa.
I will wrap up our prepared remarks by giving you an overview of our performance by business segment:
Our largest segment in Q3 was Package Testing, comprising 46 percent of overall revenue on a constant currency basis. Reported revenue for this segment was $6.5 million in Q3 2015 and on a constant currency basis was $8.1 million, representing a 10 percent increase over Q3 of 2014 and a sequential increase of 7 percent. 79 percent of Package Testing revenue on a constant currency basis was sold outside of the U.S. in Q3 compared to 77 percent in Q3 of 2014. The majority of this foreign revenue was denominated in euros and therefore, this segment bore the weight on the majority ($1.6 million) of the $1.9 million overall currency impact we experienced in Q3. As a reminder, the majority of the operations supporting our Package Testing segment are based in Europe and as a result, FX favorably impacted costs which offset the majority of the revenue impact. Package Testing gross margin was 55 percent of revenue in the third quarter of 2015 compared to 53 percent of revenue in Q3 2014. This improvement was driven primarily by increased volume from our higher margin headspace and accessory products. Operating expenses were 40 percent of revenue in Q3 2015 compared to 39 percent in the year-ago quarter, resulting in operating margins that were 15 percent of revenue compared to 14 percent in Q3 of 2014.
Our next largest segment for the quarter was Permeation comprising 39 percent of overall revenue on a constant currency basis. Reported revenue in Q3 2015 was $6.5 million and $6.8 million on a constant currency basis, or an 18 percent increase over Q3 2014. Of the Permeation constant currency revenue reported in Q3 2015, 66 percent was sold outside of the United States compared to 70 percent in the same quarter of 2014. A larger portion of foreign revenue is denominated in USD and therefore, our Permeation segment took less of a hit to the top line ($276K) than Package Testing did, however, the majority of our Permeation operations are in the USA and therefore, our Permeation segment did experience a greater impact to operating profits. Gross margin was 55 percent of revenue in the third quarter of 2015 compared to 65 percent of revenue in the year-ago quarter. In addition to foreign currency, third quarter gross margin was negatively impacted by increased production of the next generation of products. We have initiatives in place to reduce costs as our production processes and material sourcing for these new products are further optimized. Operating expenses were 39 percent of revenue in Q3 which is down from 44 percent in the year ago quarter. This decline in operating expenses was offset by the decrease in gross margin, which resulted in Q3 operating margins of 16 percent in 2015 compared to 21 percent in 2014.
Representing the smallest portion of our overall revenue, our Industrial Analyzers and Other segment comprised 15 percent of our revenue on a constant currency basis. Substantially all of the revenue in our Industrial Analyzers segment is denominated in USD and therefore is not subject to foreign exchange fluctuations. Q3 revenue in this segment was $2.6 million which is down 29 percent from the $3.6 million reported in Q3 of 2014. The decline in revenue was driven by reduced sales to customers in the oil and gas industry. 33 percent and 41 percent of our Q3 revenue was sold to foreign markets in 2015 and 2014 respectively. Q3 gross margin was 47 percent in 2015 compared to 56 percent in 2014. The year-over-year decline in the Industrial Analyzers and Other gross profit rate was primarily driven by reduced volume which results in a lower base to absorb semi-variable and fixed manufacturing costs. In addition, our operating expenses were 60 percent of revenue in Q3 2015 compared to 49 percent of revenue in Q3 2014. This 11 percentage point increase was driven by lower volume. On an absolute dollar basis, we have reduced our operating costs in this segment by taking advantage of attrition opportunities while exercising caution to avoid cutting too deep into areas that are fueling growth in the medium and longer term. Q3 2015 operating margin of negative 13 percent compared to positive 7 percent in Q3 2014. As we said on our last call, we continue to believe that low oil prices do not represent long-term challenges to our business. Our customers express confidence that our superior technology positions us well to continue to be a leading player in this market now and as oil prices increase.
In summary, I remain confident in our ability to stay the course for the remainder of 2015, and I look forward to updating you again when we report our full year results.
With that, let me open up the call for your questions. Operator, please instruct our listeners on how to queue up.
After the Q&A:
Robert Demorest
Thank you again for joining us on today’s call. We will look forward to discussing our Q4 results with you sometime in late February or early March. Have a great evening!
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