Mesa Laboratories, Inc. Form 10-Q Summary
Reporting period: Three months ended June 30, 2016. The filing metadata references “2015 Q1,” but the filing itself clearly reports the quarter ended June 30, 2016, compared with June 30, 2015. Financial statements are unaudited and presented in accordance with U.S. GAAP.
Business Context
Mesa operates four divisions serving regulated niche markets: Biological Indicators, Instruments, Cold Chain Monitoring, and Cold Chain Packaging. Products and services support healthcare, pharmaceutical, dental, food and beverage, medical device, environmental, and industrial customers. Management’s strategy emphasizes regulatory-driven markets, recurring-use products, organic growth, and acquisitions.
Financial Performance and Position
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $21.114 million | $18.158 million | +16% |
| Gross profit | $12.014 million | $11.141 million | +8% |
| Gross margin | 57% | 61% | Down 4 percentage points |
| Operating income | $2.575 million | $3.642 million | -29% |
| Net income | $1.930 million | $2.755 million | -30% |
| Net margin | 9% | 15% | Down 6 percentage points |
| Diluted EPS | $0.51 | $0.74 | -31% |
| Operating cash flow | $3.632 million | $2.861 million | +27% |
- Biological Indicators revenue increased 31% to $9.467 million, largely from acquisitions and 7% organic growth.
- Instruments revenue declined 1% to $8.222 million, primarily due to order timing.
- Cold Chain Monitoring revenue declined 11% to $2.317 million because of lower organic revenue and installation timing.
- Cold Chain Packaging generated $1.108 million of revenue and $411,000 of gross profit in its first comparable reporting period.
- Operating expenses increased 26% to $9.439 million. Selling expense rose 35%, general and administrative expense rose 26%, and research and development expense rose 7%.
- Net income included $1.621 million of non-cash intangible amortization. Stock-based compensation expense was $429,000, compared with $327,000 in the prior-year quarter.
- Cash and cash equivalents were $4.637 million at June 30, 2016, compared with $5.695 million at March 31, 2016. Working capital was $10.013 million, down from $13.215 million at March 31, 2016.
- Net cash used in investing activities was $6.021 million, including $2.565 million for acquisitions and $3.456 million for property, plant and equipment.
- Total debt was $46.000 million at June 30, 2016, consisting of a $29.000 million revolving line and a $17.000 million term loan. The debt carried an interest rate of 2.21% at quarter-end.
- As of July 31, 2016, outstanding indebtedness was $45.250 million and unused credit-facility capacity was $21.000 million. Mesa was in compliance with its debt covenants at June 30, 2016.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by Biological Indicators acquisitions and organic growth, partially offset by weaker Cold Chain Monitoring performance and slightly lower Instruments revenue.
- Gross margin contracted from 61% to 57%. Biological Indicators margins were pressured by acquired dental sterilizer-testing businesses and contractual purchases of externally produced biological indicators.
- Cold Chain Monitoring gross margin fell from 40% to 29% because of lower revenue against a relatively fixed cost base.
- Operating and net income declined despite higher revenue because of lower gross margins, acquisition-related costs, increased amortization, personnel costs, and administrative expenses.
- Operating cash flow improved through working-capital management, particularly a $2.890 million reduction in accounts receivable.
- Mesa completed three acquisitions during the fiscal year to date, including Pulse and ATS in April 2016 and HANSAmed in July 2016. Fiscal-year-to-date acquisition spending totaled $3.733 million.
- The company invested substantially in a new Bozeman, Montana facility. It had spent $3.008 million during the quarter and expected total project costs of approximately $14.750 million.
- Mesa early adopted accounting standards concerning stock compensation and deferred-tax classification. The prior-year quarter was restated, increasing reported net income from $2.306 million to $2.755 million.
Guidance, Outlook, Risks, and Unusual Items
- Management expects Cold Chain Monitoring revenue to run at approximately $2.5 million to $3.0 million per quarter over the next few quarters.
- Cold Chain Packaging revenue is expected to increase over the next two quarters relative to the June 2016 quarter because of organic growth and seasonality.
- Management expects the effective tax rate for the year ending March 31, 2017 to approximate 33% to 36%, excluding potentially significant year-to-year effects from share-based compensation tax benefits and deficiencies.
- Management expects Biological Indicators gross margins to improve as contractual purchases of externally produced indicators wind down and the company transitions to internally produced indicators, anticipated around the end of calendar 2016.
- A new Cold Chain Monitoring hardware system was expected to be ready around the end of the quarter ending September 30, 2016. Management expects possible cost and margin benefits but states that the magnitude is uncertain.
- Infitrak contingent consideration had a fair value of $9.156 million at June 30, 2016, with potential undiscounted payments of up to approximately $11.5 million based on future gross-profit performance. Payments begin in the second quarter of fiscal 2017, and changes in estimates could affect earnings.
- The company also recorded $300,000 of contingent consideration related to its process challenge device business; the amount may change based on future revenue performance.
- Management identifies exposure to economic conditions, customer capital spending, order and installation timing, product mix, competition, acquisition integration, foreign currency movements, and execution of new systems and facilities.
- The IRS was examining the company’s tax year ended March 31, 2015. Management did not expect the examination or related appeals to have a material effect on consolidated results.
- The company declared a quarterly dividend of $0.16 per share in July 2016, payable September 15, 2016.
- Management reported no material changes to previously disclosed risk factors, no derivative instruments, and minimal foreign currency and commodity-market risk. Disclosure controls and internal control over financial reporting were reported effective, although acquired entities were excluded from the internal-control evaluation because of acquisition timing.
Important Facts for Investors to Verify
- Confirm that revenue growth from acquisitions translates into sustainable organic growth and improved operating leverage.
- Monitor recovery of Biological Indicators and Cold Chain Monitoring gross margins, including the transition to internally produced indicators and the new monitoring system rollout.
- Assess leverage, covenant compliance, refinancing needs, variable-rate exposure, and the concentration of debt maturities, including the $34.750 million scheduled for fiscal 2021.
- Track cash requirements for the Bozeman facility, acquisitions, dividends, debt repayment, and contingent consideration.
- Reconcile the unusually low 11% quarterly effective tax rate with management’s 33% to 36% full-year expectation and the effects of share-based compensation tax accounting.
- Evaluate the valuation and timing of Infitrak and other contingent consideration, which may produce future cash payments and earnings volatility.
- Review the impact of the prior-period tax and stock-compensation restatements when comparing historical earnings.