Mesa Laboratories, Inc. Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2015, with comparisons to fiscal years 2014 and 2013. The provided metadata references “2013 Q4,” but the filing is an annual report for fiscal 2015.
Business Context
Mesa manufactures and sells regulatory-driven quality-control products through three segments: Biological Indicators, Instruments, and Continuous Monitoring. Revenue is generated from product sales and services, with customers in healthcare, pharmaceutical, medical device, food and beverage, industrial hygiene, environmental, and laboratory markets.
The company completed six acquisitions during fiscal 2015, including BGI, Amilabo, PCD, ATI, Cherwell, and Früh. These transactions expanded the Instruments and Biological Indicators businesses. Continuous Monitoring also benefited from the full-year contribution of the prior-year Amega and TempSys acquisitions.
Financial Performance and Liquidity
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $71.330 million | $52.724 million | 35% |
| Gross profit | $43.392 million | $31.688 million | 37% |
| Gross margin | 61% | 60% | Up 1 percentage point |
| Operating income | $15.864 million | $11.785 million | 35% |
| Operating margin | 22% | 22% | Flat |
| Net income | $9.583 million | $9.000 million | 6% |
| Net margin | 13% | 17% | Down 4 percentage points |
| Diluted EPS | $2.63 | $2.49 | 6% |
| Adjusted net income | $12.502 million | $11.046 million | 13% |
Product revenue was $58.910 million and service revenue was $12.420 million. Segment revenue was $33.054 million for Instruments, $27.390 million for Biological Indicators, and $10.886 million for Continuous Monitoring. Continuous Monitoring revenue increased 226%, principally due to acquisitions and organic growth.
Net cash provided by operating activities was $10.816 million, compared with $12.373 million in fiscal 2014. Investing cash use was $23.371 million, including $20.543 million for acquisitions and $2.828 million for capital expenditures. Financing cash inflow was $9.072 million, including $23.000 million of debt issuance, partly offset by $13.250 million of debt repayments and $2.182 million of dividends.
Cash and cash equivalents declined to $2.034 million from $5.575 million. Working capital was $14.965 million, compared with $16.351 million. Accounts receivable increased to $12.145 million and inventories increased to $12.420 million, reflecting growth and acquisitions.
At March 31, 2015, debt consisted of a $13.500 million line of credit and a $12.750 million term loan, including $3.000 million classified as current. The facilities are variable-rate, secured by company assets, and mature or require significant payments through 2017-2018. Mesa reported compliance with its debt covenants at year-end and had $7.000 million of unused capacity as of May 31, 2015.
Material Changes Versus the Prior Period
- Revenue growth was driven by the six fiscal 2015 acquisitions and organic growth in all three divisions.
- Biological Indicators revenue increased 19%, with gross margin rising to 63% from 57%, helped by acquisitions, pricing, volume efficiencies, and the absence of the prior-year product-batch replacement issue.
- Instruments revenue increased 25%; gross margin declined to 63% from 64% due to BGI integration activities and product/service mix.
- Continuous Monitoring revenue increased to $10.886 million from $3.343 million; gross margin improved to 50% from 48%, although integration costs continued to affect profitability.
- General and administrative expense increased 49% to $17.058 million, primarily due to amortization, personnel, ERP implementation, and acquisition costs.
- Research and development expense increased 42% to $3.294 million; total research and development spending, including capitalized amounts, was $3.800 million.
- Net income growth lagged operating income growth because fiscal 2014 included a $1.020 million gain from reducing Bios contingent consideration and a $468,000 gain on the NuSonics disposition, while fiscal 2015 included interest expense and higher amortization.
- Net intangible assets increased to $33.231 million and goodwill increased to $44.869 million, reflecting acquisition activity. No impairment charges were recorded.
Outlook, Risks, Contingencies, and Unusual Items
Management stated that Biological Indicators markets remained strong and relatively resilient because the products are disposable and used routinely for regulatory quality control. Instrument and Continuous Monitoring demand was described as strong during fiscal 2015, but these businesses remain more sensitive to economic conditions and customer capital spending.
Management expects to continue organic growth, pursue acquisitions, develop new products, upgrade information systems, and invest in infrastructure. Mesa planned to construct a new Bozeman facility, with estimated remaining construction cost of approximately $14 million after acquiring the land for $741,000. The company expected construction to begin in July 2015 and completion by September 30, 2016.
The ERP upgrade was expected to go live in the second quarter of fiscal 2016. Mesa incurred $993,000 of ERP-related expense in fiscal 2015 and anticipated up to $500,000 of additional implementation and post-go-live support costs.
The company’s effective tax rate is expected to approximate 36% to 37%. A one-percentage-point increase in interest rates was estimated to increase annual interest expense by approximately $260,000.
- Amega contingent consideration may range from zero to $10 million; Mesa recorded $500,000 and expects payment in the third quarter of fiscal 2017.
- PCD contingent consideration may range from zero to $1.5 million; Mesa recorded $300,000, with installments beginning in the third quarter of fiscal 2016.
- Mesa paid $1.120 million of finalized Bios contingent consideration in May 2015.
- Mesa recorded an additional $460,000 accrual for potential historical state sales-tax liabilities during fiscal 2015; the ultimate liability remained subject to change.
- Amega and its owner sued Mesa, seeking up to $10 million under the earn-out, acceleration of 10,000 stock options, more than $500,000 in other damages, lost future earnings, punitive damages, and $704,066 of allegedly withheld consideration. Mesa could not predict the outcome or estimate a loss range.
- Key ongoing risks include acquisition integration, goodwill and intangible-asset impairment, variable-rate debt, regulatory compliance, product liability, foreign currency exposure, cybersecurity and ERP implementation, competition, supply interruptions, tax assessments, and litigation.
Mesa paid quarterly dividends totaling $0.62 per share during fiscal 2015 and declared a further $0.16 per-share dividend in April 2015. The company had repurchased 162,486 shares under its 300,000-share authorization through March 31, 2015, with no repurchases during the fourth quarter.
Management and the independent auditor concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2015, although the audit excluded evaluation of Amilabo’s internal controls due to the timing of that acquisition.
Important Facts for Investors to Verify
- Confirm the revenue and earnings contribution, purchase accounting effects, and integration performance of the six fiscal 2015 acquisitions.
- Assess liquidity after acquisitions, planned Bozeman construction, ERP spending, dividends, debt repayments, and contingent consideration payments.
- Review the maturity schedule, variable-rate exposure, covenant requirements, and remaining availability under the credit facility.
- Evaluate whether Continuous Monitoring margins improve after integration activities are substantially complete.
- Monitor the Amega litigation, Amega and PCD earn-outs, and unresolved state sales-tax exposure.
- Assess the sustainability of earnings excluding acquisition-related amortization and other unusual gains or charges; adjusted net income is a non-GAAP measure.
- Review goodwill and intangible assets, which totaled $78.100 million at year-end, for impairment sensitivity.
- Verify the timing and cost of the Bozeman facility and ERP implementation, including any cost overruns or operational disruptions.