Mesa Laboratories, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2016; fiscal year ending March 31. The request metadata identifies “2015 Q2,” but the filing itself clearly covers the second quarter of fiscal 2017 and was filed November 7, 2016. Financial amounts are in thousands except per-share data.
Business Context
Mesa provides quality-control products and services through four divisions: Biological Indicators, Instruments, Cold Chain Monitoring, and Cold Chain Packaging. Its markets are generally supported by regulatory requirements and include healthcare, pharmaceutical, medical device, food and beverage, environmental, and industrial customers.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2016 | Three Months Ended September 30, 2015 | Six Months Ended September 30, 2016 | Six Months Ended September 30, 2015 |
|---|---|---|---|---|
| Revenue | $24,409 | $21,776 | $45,523 | $39,934 |
| Gross profit | $13,724 | $13,067 | $25,738 | $24,208 |
| Gross margin | 56% | 60% | 57% | 61% |
| Operating income | $4,012 | $3,006 | $6,587 | $6,648 |
| Net income | $2,358 | $1,826 | $4,288 | $4,581 |
| Net margin | 10% | 8% | 9% | 11% |
| Diluted EPS | $0.62 | $0.48 | $1.12 | $1.22 |
- Revenue mix: Second-quarter revenue was $8,897 from Biological Indicators, $8,693 from Instruments, $3,545 from Cold Chain Monitoring, and $3,274 from Cold Chain Packaging.
- Cash flow: Six-month operating cash flow was $1,329, down from $8,962. Investing cash outflow was $10,070, including $3,401 for acquisitions and $6,669 for property, plant and equipment. Financing cash inflow was $8,098.
- Liquidity: Cash and equivalents were $5,070 at September 30, 2016, compared with $5,695 at March 31, 2016. Working capital was $12,541, versus $13,215 at March 31, 2016.
- Debt: Debt totaled $52,750, comprising $36,500 under the revolving line of credit and $16,250 under the term loan. The facility bears variable interest; the stated rate was 2.27% at September 30, 2016. As of October 31, 2016, outstanding debt was $54,000 and unused credit capacity was $11,500.
- Tax rate: The effective tax rate was 26.6% for the quarter and 20.3% for the six-month period. Management expects a fiscal-year rate of approximately 33% to 36%, subject to the impact of share-based payment tax benefits and deficiencies.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 12%, while six-month revenue increased 14%, primarily due to acquisitions and growth in Cold Chain businesses.
- Quarterly operating income increased 33% and net income increased 29%; however, six-month operating income decreased 1% and net income decreased 6%.
- Revenue growth was strongest in Cold Chain Packaging, up 110% for the quarter and 182% for the six-month period, and Cold Chain Monitoring, up 41% and 15%, respectively.
- Biological Indicators revenue increased 5% for the quarter and 17% year to date, while Instruments revenue declined 6% and 4%, respectively, because of softer demand for one instrument product.
- Gross margin declined four percentage points for both the quarter and six-month period. Cold Chain Packaging margins were pressured by a significant lower-margin contract, and Instruments margins declined because of product mix and lower volume efficiencies.
- Six-month operating cash flow declined primarily because of a $4,594 payment of contingent consideration and a $5,392 reduction in accrued salaries, taxes, and other accrued liabilities.
- Comparability was affected by the $1,709 Amato litigation-settlement charge recorded in the prior-year period. The company also recorded a $450 accrual for additional PCD earn-out consideration in the current period.
Guidance, Outlook, Risks, and Unusual Items
- Management expects Cold Chain Monitoring revenue to run at approximately $2,500 to $3,000 per quarter over the next few quarters, while noting that installation timing can cause significant quarterly fluctuations.
- Management expects significant overall growth in Cold Chain Packaging, but cautions that the business is seasonal and margins are expected to remain below those of other divisions.
- The company expects the downturn in Instruments demand to be short term but will continue monitoring it.
- A new Cold Chain Monitoring hardware system was expected to be ready around the middle of the quarter ending December 31, 2016. Management expects potential cost and margin benefits, but the magnitude is uncertain.
- Mesa is constructing a new Bozeman facility at an estimated total cost of approximately $17,000. The company expects completion by January 31, 2017. It plans to relocate Omaha and Traverse City operations to Bozeman during calendar 2017.
- Estimated restructuring costs are $2,100, of which $220 had been incurred through September 30, 2016. Expected annual savings after relocation are approximately $750. Potential proceeds from selling existing facilities are estimated at $2,000 to $2,500 for the current Bozeman facility and $1,000 to $1,500 for the Omaha facility.
- Remaining Infitrak contingent consideration was recorded at $4,498, with potential undiscounted consideration of up to approximately $6,847 based on performance. The remaining amount is payable in the second quarter of fiscal 2018.
- The company recorded $450 of additional PCD earn-out accrual and expected an estimated $600 payment during the quarter ending December 31, 2016. Future amounts remain subject to actual revenue performance.
- Debt is secured by company assets and subject to a maximum funded-debt-to-EBITDA ratio of 3.0 to 1.0 and a minimum fixed-charge coverage ratio of 1.35 to 1.0. Mesa was in compliance at September 30, 2016.
- Management states that there were no material changes to previously disclosed risk factors. Key exposures include economic conditions affecting discretionary instrument purchases, acquisition integration, foreign currency, contingent consideration, execution of facility relocations, margin pressure, and customer or order timing.
- The company adopted ASU 2016-09 and ASU 2015-17 early. Prior-period income, EPS, comprehensive income, and cash-flow captions were restated; investors should use the restated comparative figures.
Investor Verification Priorities
- Verify the sustainability of revenue growth after acquisition effects, particularly in Biological Indicators and Cold Chain Packaging.
- Assess whether Instruments demand recovers and whether Cold Chain Monitoring reaches the stated quarterly run rate.
- Monitor the four-point gross-margin decline and the effect of lower-margin Cold Chain Packaging contracts.
- Reconcile operating cash flow with earnings, including contingent-consideration payments, accrued-liability movements, and continuing capital expenditures.
- Confirm total debt, available revolver capacity, covenant compliance, interest-rate exposure, and near-term maturities.
- Track the remaining Infitrak and PCD earn-out obligations and the potential effect of changes in fair-value estimates on earnings.
- Evaluate the cost, timing, execution risk, and expected savings from the Bozeman construction and facility relocations.
- Confirm the effective tax rate, the $0.16 quarterly dividend declared after quarter-end, and the impact of share-based compensation and related tax benefits or deficiencies.