Mesa Laboratories, Inc. Form 10-Q Summary
Reporting period: The supplied filing covers the three and six months ended September 30, 2021, Mesa’s fiscal second quarter and first six months of fiscal 2022. The request metadata identifies “2020 Q2,” but the filing itself is for fiscal 2022 second quarter.
Business Context
Mesa manufactures and sells life science tools and critical quality-control products and services through four reportable segments: Sterilization and Disinfection Control, Biopharmaceutical Development, Instruments, and Continuous Monitoring. Operations are based in the United States and Europe, with sales across North America, Europe, Asia, and other markets.
Financial Performance
| Metric | Q2 FY2022 | Q2 FY2021 | Change |
|---|---|---|---|
| Revenue | $35.840 million | $31.860 million | 12% |
| Gross profit | $23.140 million | $21.285 million | 9% |
| Gross margin | 64.6% | 66.8% | Down 2.2 points |
| Operating income | $4.201 million | $4.470 million | Down 6% |
| Net income | $3.720 million | $2.679 million | 39% |
| Diluted EPS | $0.70 | $0.51 | 37% |
| Metric | Six Months FY2022 | Six Months FY2021 | Change |
|---|---|---|---|
| Revenue | $70.760 million | $61.801 million | 14% |
| Gross profit | $45.351 million | $41.625 million | 9% |
| Gross margin | 64.1% | 67.4% | Down 3.3 points |
| Operating income | $7.324 million | $8.040 million | Down 9% |
| Net income | $5.715 million | $3.896 million | 47% |
| Diluted EPS | $1.07 | $0.79 | 35% |
Cash Flow, Liquidity, and Debt
- Six-month operating cash flow was $14.023 million, compared with $12.610 million in the prior-year period.
- Capital expenditures were $1.591 million, primarily related to renovations at the Lakewood, Colorado facility.
- Cash and cash equivalents were $278.294 million at September 30, 2021, compared with $263.865 million at March 31, 2021.
- Working capital was $290.714 million at September 30, 2021, compared with $271.166 million at March 31, 2021.
- The company had $172.500 million principal amount of 1.375% convertible senior notes due August 2025. Net carrying value was $168.917 million and estimated fair value was $211.097 million.
- No borrowings were outstanding under the $75 million revolving credit facility at September 30, 2021. Mesa was in compliance with its debt covenants.
- After quarter-end, Mesa drew $70 million under the credit facility to help fund the Agena Bioscience acquisition, leaving $5 million of revolving capacity available.
- The company paid quarterly dividends of $0.16 per share and announced another $0.16 per-share dividend payable December 15, 2021.
Material Changes Versus Prior Comparable Period
- Revenue growth was entirely organic. Sterilization and Disinfection Control revenue increased 21% in the quarter, Biopharmaceutical Development increased 16%, Continuous Monitoring increased 18%, while Instruments declined 8%.
- Biopharmaceutical Development benefited from higher consumables demand as laboratory customers resumed more normal operations. Its gross margin declined because of unfavorable product mix, higher labor costs, and foreign exchange effects.
- Instruments revenue and margin were pressured by component shortages, labor constraints, higher component and freight costs, and the relocation of production from Butler, New Jersey, to Lakewood, Colorado.
- Continuous Monitoring revenue increased and gross margin improved substantially, aided by greater customer-site access and prior changes to product offerings and pricing models.
- Operating expenses increased 13% in both the quarter and six-month period, reflecting investments in sales and marketing, higher stock-based compensation, software implementation costs, amortization, and foreign exchange effects.
- Operating income declined despite revenue growth because gross-margin compression and higher operating expenses more than offset the increase in gross profit.
- Net income benefited from lower non-cash interest expense following the April 1, 2021 adoption of ASU 2020-06, which eliminated separate equity-component accounting for the convertible notes.
- ASU 2020-06 increased the recorded carrying value of the convertible notes by $22.799 million and increased beginning retained earnings by $5.683 million, net of tax. Future non-cash interest expense is expected to be lower, but the convertible notes may become dilutive to EPS.
Guidance, Outlook, Risks, and Unusual Items
- Management expects selling expense to be approximately 13% to 16% of revenue for fiscal 2022 and research and development expense to remain approximately 7% to 10% of revenue in the near term.
- Management expects an effective tax rate of approximately 26%, subject to fluctuations from excess tax benefits and deficiencies related to employee equity awards.
- Supply-chain disruptions, component shortages, inflation, freight costs, and labor-market pressure are expected to persist for at least the next four to six fiscal quarters and may continue to depress Instruments’ margins and delay order fulfillment.
- Mesa completed the $300 million acquisition of Agena Bioscience on October 20, 2021, funded with cash on hand and the $70 million credit-facility draw. Purchase accounting was incomplete as of the filing date, so the effects on goodwill, intangible assets, and future results were not yet determined.
- The Butler, New Jersey facility closure was completed during the quarter. Mesa recorded $77 thousand of severance costs, with $70 thousand remaining accrued at September 30, 2021; no material future consolidation costs were expected.
- COVID-19 restrictions and related economic effects continued to affect customer access, demand, manufacturing, and supply chains, particularly in Europe and in discretionary hardware businesses.
- Foreign currency movements, especially involving the Swedish krona, affected reported costs, gross margins, operating expenses, comprehensive income, and goodwill.
- A $2.700 million accrued liability remained for historical sales-tax collection and remittance issues associated with acquired GPT subsidiaries. No material legal reserves were recorded.
- The filing states that there were no off-balance-sheet arrangements and no material changes to other previously disclosed risk factors, apart from the expanded supply-chain risk.
Important Facts for Investors to Verify
- Confirm the reporting-period mismatch: the filing is for September 30, 2021, fiscal Q2 2022, not 2020 Q2.
- Assess whether the Agena acquisition’s purchase accounting, integration costs, financing, and resulting leverage materially change future results.
- Monitor component availability, order backlogs, pricing actions, and whether supply-chain inflation is passed through without further margin erosion.
- Evaluate the sustainability of net-income growth after separating the benefit from lower non-cash convertible-note interest expense and favorable tax effects.
- Track potential dilution from the convertible notes, which were antidilutive during the reporting period but may become dilutive in future periods.
- Review the effect of foreign exchange, COVID-19 restrictions, customer capital spending, and the Instruments division’s production relocation on future revenue and margins.