Mesa Laboratories, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended December 31, 2012, filed February 8, 2013. The filing covers Mesa’s Instruments and Biological Indicators divisions, which provide quality-control instruments, disposable products, and sterilization indicators to regulated niche markets. The request metadata identifies “2011 Q3,” but the filing itself clearly reports the December 31, 2012 period.
Financial performance and position
| Metric | Three months ended Dec. 31 | Nine months ended Dec. 31 |
|---|---|---|
| Revenue | $11.361 million, up 18% | $33.627 million, up 17% |
| Gross profit | $6.947 million, up 18% | $20.651 million, up 21% |
| Gross margin | 61%, unchanged | 61%, versus 60% |
| Operating income | $2.464 million, down from $3.162 million | $9.173 million, versus $9.141 million |
| Net income | $1.543 million, down 22% | $5.891 million, up 3% |
| Diluted EPS | $0.44, versus $0.57 | $1.67, versus $1.66 |
Operating expenses increased 65% in the quarter and 45% year to date, primarily due to the Bios acquisition, amortization, personnel costs, CFO transition costs, stock-based compensation, ERP and SOX compliance work, and other acquired-operation expenses. The quarter’s net profit margin declined to 14% from 21%; the nine-month margin declined to 18% from 20%.
Nine-month cash flow from operations was $8.451 million, compared with $8.909 million in the prior year. Investing cash flow was negative $17.316 million, primarily due to the $16.660 million Bios acquisition and $656,000 of capital expenditures. Financing cash flow was positive $4.396 million, reflecting $11.000 million of borrowings, $6.000 million of debt repayments, $1.341 million of dividends, and $794,000 from option exercises.
Cash and cash equivalents were $2.722 million at December 31, 2012, down from $7.191 million at March 31, 2012. Working capital was $12.699 million, compared with $14.899 million at March 31, 2012. Total assets increased to $63.617 million from $50.696 million, largely reflecting acquired intangible assets and goodwill.
Long-term debt was $5.000 million at December 31, 2012, with $15.000 million of unused revolving credit capacity. The facility matures in February 2015, is secured by company assets, and requires specified leverage and fixed-charge coverage ratios. Mesa reported compliance with all covenants. A further $1.000 million principal payment was made in January 2013.
Material changes versus the prior comparable period
- Revenue growth was driven principally by the May 15, 2012 acquisition of Bios International Corporation and continued organic growth in Biological Indicators.
- Instruments revenue increased 26% in the quarter and 28% year to date, while Biological Indicators revenue increased 9% and 7%, respectively.
- Legacy Instruments revenue declined, which management attributed to quarter-to-quarter cyclical variability.
- The Bios acquisition added $18.800 million of aggregate consideration, including $16.660 million cash and $2.140 million of estimated contingent consideration, plus $9.190 million of goodwill and $8.200 million of identifiable intangibles.
- General and administrative expense increased substantially, including $526,000 of CFO transition costs in the quarter and $240,000 of incremental expense from modifying unvested options.
- Shares outstanding increased, and diluted weighted-average shares were 3.542 million for the quarter and 3.527 million year to date, versus 3.498 million and 3.454 million, respectively.
Outlook, risks, contingencies, and unusual items
Management stated that cash generated from operations, available credit, and other potential financing sources should be sufficient for short- and long-term needs. No formal revenue or earnings guidance was provided. Management expects acquisition integration to produce savings and income growth, but notes that product mix, economic conditions, customer capital spending, competition, manufacturing efficiency, and acquisition performance may affect results.
- Beginning January 1, 2013, Mesa became subject to a 2.3% medical device excise tax on most domestic medical instrument and Biological Indicator sales. Management renegotiated prices where possible but cannot assure full recovery of the tax.
- Bios contingent consideration may range from zero to $6.710 million, based on cumulative acquired-business revenue exceeding $22.127 million over the three-year earn-out period. The recorded liability was $2.140 million and is payable in the first quarter of fiscal 2016 if earned.
- Mesa recorded a $100,000 estimated state sales-tax liability during the quarter. Potential exposure in additional states remains under evaluation and is not currently estimable.
- Up to $225,000 of additional payments may be due under a biological-indicator technology license if development and performance milestones are met.
- Key risks include global economic weakness affecting discretionary Instruments purchases, customer financial instability, changing state sales-tax nexus requirements, acquisition integration, and variability in legacy Instruments demand.
- The board declared a quarterly dividend of $0.14 per share payable March 15, 2013.
- Management concluded that disclosure controls and internal control over financial reporting were effective at December 31, 2012, although the evaluation excluded Bios because of the recency of the acquisition.
Investor verification checklist
- Verify the filing period: the source document is for the quarter ended December 31, 2012, not 2011 Q3.
- Assess whether Bios revenue growth and integration benefits justify the acquisition-related goodwill, intangibles, debt, and contingent consideration.
- Monitor cash balances, debt repayment, covenant compliance, and remaining revolving-credit capacity.
- Evaluate the effect of higher operating expenses and amortization on sustainable operating margins.
- Confirm the company’s ability to pass the 2.3% medical device excise tax through to customers.
- Track potential state sales-tax liabilities and the Bios earn-out obligation.
- Distinguish reported growth from acquisition-related growth versus organic Biological Indicators growth and cyclical Instruments demand.