Mesa Laboratories, Inc. Form 10-Q Summary
Reporting period: Three months ended June 30, 2019. The source metadata identifies “2018 Q1,” but the filing itself is the quarter ended June 30, 2019, compared with June 30, 2018. Financial statements are unaudited and presented in thousands, except per-share data.
Business Context
Mesa develops and sells quality-control products and services in niche, regulation-driven markets through four segments: Sterilization and Disinfection Control, Instruments, Cold Chain Monitoring, and Cold Chain Packaging. The company intends to exit the Cold Chain Packaging business by March 31, 2020. During the quarter, Mesa acquired IBP Medical GmbH, a manufacturer of medical meters used in dialysis applications.
Key Financial Metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $26.288 million | $25.142 million | 5% |
| Gross profit | $16.139 million | $15.091 million | 7% |
| Gross margin | 61% | 60% | Up 1 percentage point |
| Operating income | $5.392 million | $4.764 million | 13% |
| Operating margin | Approximately 20.5% | Approximately 18.9% | Improved |
| Net income | $4.597 million | $4.230 million | 9% |
| Net margin | Approximately 17.5% | Approximately 16.8% | Improved |
| Diluted EPS | $1.13 | $1.06 | 7% |
| Net cash from operations | $0.724 million | $6.543 million | Down $5.819 million |
Segment revenue was $12.110 million for Sterilization and Disinfection Control, $9.544 million for Instruments, $3.317 million for Cold Chain Monitoring, and $1.317 million for Cold Chain Packaging. Segment gross margins were 70%, 64%, 38%, and 25%, respectively.
Cash and cash equivalents were $7.315 million at June 30, 2019, compared with $10.185 million at March 31, 2019. Working capital was $12.501 million, up from $9.962 million. Total interest-bearing debt was $20.000 million, down from $23.000 million, including a $3.500 million revolving-line balance and a $16.500 million term loan before discounts and current classification. Mesa reported $76.500 million of unused line-of-credit capacity and compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue increased 5%, driven primarily by Sterilization and Disinfection Control and Instruments.
- Sterilization and Disinfection Control revenue increased 7%, partly because the prior-year period was affected by fulfillment delays related to a facility move.
- Instruments revenue increased 9%, reflecting 4% organic growth and the IBP acquisition.
- Cold Chain Monitoring revenue increased 3% on the prior-year Point Six acquisition, but organic revenue declined 13%. Delayed contract renewals reduced contracted revenue by approximately $501,000, and gross margin fell to 38% from 45%.
- Cold Chain Packaging revenue declined 28% as Mesa stopped accepting new customers, completed a large customer contract, reduced costs, and prepared to exit the business.
- Selling expense increased 17% and research and development expense increased 22% due to staffing and infrastructure investments. General and administrative expense declined 1%.
- Operating cash flow declined substantially because of working-capital movements, higher incentive compensation and income-tax payments, and the effect of adopting the new lease standard.
- Mesa completed the $2.555 million IBP acquisition and paid down $3.000 million of debt during the quarter.
- On April 1, 2019, Mesa adopted ASC 842. The adoption added a $1.461 million operating lease right-of-use asset and $1.411 million operating lease liability at adoption; the filing states that the effect on income and cash flow was not significant.
Guidance, Outlook, Risks, and Unusual Items
- Management expects the Cold Chain Monitoring integration to be completed by March 31, 2020 and expects the division’s gross margin to reach approximately 40%–45% after integration.
- Mesa plans to exit Cold Chain Packaging no later than March 31, 2020 and is assisting customers in transitioning to other vendors.
- Management expects a go-forward effective tax rate of approximately 26%, subject to volatility from excess tax benefits and deficiencies associated with employee equity awards. The reported quarterly effective tax rate was 14.2%, versus 3.9% in the prior-year quarter.
- Management described liquidity as strong and expects cash generation and available credit to meet ongoing operating and debt-service requirements. The term loan and remaining debt maturities total $20.000 million through 2022, with $15.750 million due in 2022.
- Mesa accrued a $3.300 million settlement liability related to a Telephone Consumer Protection Act class action and expected payment during the quarter ending September 30, 2019.
- A newly disclosed risk concerns potential changes in kidney-care policy. Dialyguard products used in dialysis clinics represent approximately one-third of Instruments segment revenue and gross margin; a shift toward in-home dialysis could reduce demand.
- Additional risks include economic sensitivity of instruments and cold-chain products, acquisition integration, foreign-currency exposure, product mix and margin pressure, and delays in contract renewals or installations.
- The board declared a quarterly dividend of $0.16 per share payable September 16, 2019.
Important Facts for Investors to Verify
- Confirm the applicable reporting period: the filing is for June 30, 2019, despite the supplied “2018 Q1” metadata.
- Assess the sustainability of revenue and margin growth after excluding acquisition benefits and considering the planned Packaging exit.
- Monitor Cold Chain Monitoring contract renewals, Point Six integration costs, and progress toward the stated 40%–45% gross-margin objective.
- Review the IBP acquisition accounting, contingent consideration, and its contribution to Instruments results.
- Track operating cash conversion, debt repayments, the $3.300 million litigation settlement, and remaining debt maturities.
- Evaluate the potential impact of changes in dialysis reimbursement and delivery policy on the Dialyguard product line.
- Consider tax-rate volatility from equity compensation benefits and the expected approximately 26% normalized rate.