Mesa Laboratories, Inc. Form 10-Q Summary
Business context and reporting period
This filing covers the quarter and six months ended September 30, 2020, Mesa Laboratories’ second quarter of fiscal 2021. The filing is not a 2019 second-quarter filing; 2019 results are presented for comparison. Mesa manufactures and sells quality-control products and services through four reportable segments: Sterilization and Disinfection Control, Instruments, Biopharmaceutical Development, and Continuous Monitoring.
Key financial metrics
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $31.9 million vs. $25.5 million; up 25% | $61.8 million vs. $51.8 million; up 19% |
| Gross profit | $21.3 million vs. $15.6 million; up 37% | $41.6 million vs. $31.8 million; up 31% |
| Gross margin | 66.8% vs. 61.0% | 67.3% vs. 61.3% |
| Operating income | $4.5 million vs. $4.7 million; down 5% | $8.0 million vs. $10.2 million; down 21% |
| Net income | $2.7 million vs. $3.2 million; down 16% | $3.9 million vs. $7.8 million; down 50% |
| Diluted EPS | $0.51 vs. $0.73 | $0.79 vs. $1.86 |
| Net cash from operations | Not provided for the quarter | $12.6 million vs. $7.1 million |
Operating expenses increased 54% in the quarter and 55% year to date, primarily from GPT-related selling, general and administrative, research and development, amortization, and stock-based compensation costs. Six-month stock-based compensation was $3.3 million, amortization of acquired intangible assets was $6.9 million, and non-cash interest and debt amortization was $2.7 million.
At September 30, 2020, cash and cash equivalents were $241.9 million, compared with $81.4 million at March 31, 2020. Working capital was $260.6 million. Convertible senior notes had $172.5 million principal outstanding and a $142.9 million carrying value; the notes mature August 15, 2025 and bear interest at 1.375%. The company reported compliance with its debt agreements and no off-balance-sheet arrangements.
Material changes versus the prior comparable period
- The GPT acquisition, completed October 31, 2019 for $181.5 million in cash, added the Biopharmaceutical Development segment and contributed $15.1 million of six-month revenue and a $2.1 million net loss in the current period.
- Mesa raised $145.9 million net from issuing 690,000 common shares at $225 per share. The offering materially increased cash and shares outstanding.
- Reported revenue growth was largely inorganic: organic revenue declined 8% for the quarter and 6% for the six-month period.
- Gross margin improved approximately four percentage points for both the quarter and six-month period, helped by product mix, labor efficiencies, and lower acquisition-related inventory step-up amortization.
- Profitability declined despite higher revenue because operating expenses, interest expense, amortization, and other acquisition-related costs increased substantially.
- Instruments revenue declined 16% in the quarter and 18% year to date as customers deferred discretionary capital spending. Sterilization and Disinfection Control revenue declined 4% in the quarter but increased 2% year to date. Continuous Monitoring revenue was up 1% in the quarter and down 1% year to date.
- The company corrected an immaterial ERP intercompany-elimination error and revised prior-period results. The correction increased full-year fiscal 2020 operating income and net income by approximately $429,000 and increased diluted EPS by $0.10; it increased current fiscal-year first-quarter net income by approximately $192,000 and diluted EPS by $0.04.
- A $630,000 uncertain tax position was released in the quarter, contributing to an income-tax benefit and unusually negative effective tax rates of 12.4% for the quarter and 24.2% for the six-month period.
Guidance, outlook, commentary, and risks
- Management expects COVID-19-related uncertainty, restrictions, and suppressed demand to negatively affect the business through the remainder of fiscal 2021 and potentially into fiscal 2022.
- Sterilization and Disinfection Control benefited from earlier customer buying, but management expects the reversal of that buying and lost OEM and distributor business to pressure organic growth for the remainder of the fiscal year.
- Biopharmaceutical Development and Continuous Monitoring demand improved as customer-site restrictions eased, but renewed COVID-19 outbreaks could again limit access and reduce demand.
- Management expects Instruments demand to recover slowly because its products are discretionary and sensitive to economic conditions.
- Management believes available cash and operating cash flow are sufficient for short- and long-term needs, while noting that future acquisitions may require additional debt or equity financing.
- Near-term selling expense is expected to approximate 10% to 15% of revenue, and research and development expense is expected to approximate 7% to 10% of revenue. Management indicated an adjusted effective tax rate of approximately 25%, subject to stock-compensation tax effects.
- Potential contingent consideration under the amended IBP agreement ranges from €0 to €450; management expects a payment of approximately $530,000 during fiscal 2021.
- Key risks include COVID-19 disruption, customer demand and capital-spending delays, acquisition integration and impairment, foreign-currency fluctuations, supply-chain interruptions, regulatory and trade changes, tax audits, and market acceptance of new products.
- The previously reported material weakness in information-technology general controls was remediated as of June 30, 2020. Management concluded disclosure controls were effective as of September 30, 2020.
Important facts for investors to verify
- Confirm the requested period: this source is a Form 10-Q for September 30, 2020, not 2019 Q2.
- Assess the sustainability of growth excluding the GPT acquisition and the effect of COVID-related demand reversals.
- Review GPT’s continuing losses, acquisition-related amortization, goodwill of $89.0 million, and remaining purchase-price-allocation estimates.
- Evaluate leverage and dilution from the $172.5 million convertible notes and the 690,000-share equity offering.
- Separate recurring operating performance from the $630,000 tax benefit, acquisition accounting adjustments, non-cash amortization, and ERP error correction.
- Monitor cash conversion, foreign-exchange exposure, contingent consideration, inventory reserves, and COVID-19 effects on customer access and supply chains.