Mesa Laboratories, Inc. Form 10-Q Summary
Reporting period: The supplied filing is for the quarter and nine months ended December 31, 2017, filed February 6, 2018. This conflicts with the request metadata identifying “2016 Q3”; the filing text clearly reports fiscal 2018 third-quarter results versus the comparable 2016 period.
Business Context
Mesa operates four reporting segments focused on quality-control products and services: Sterilization and Disinfection Control, Instruments, Cold Chain Monitoring, and Cold Chain Packaging. Its products serve healthcare, pharmaceutical, food and beverage, medical device, industrial hygiene, and environmental markets.
Financial Highlights
| Metric | Three months ended Dec. 31 | Nine months ended Dec. 31 |
|---|---|---|
| Revenue | $23.7 million, down 1% | $69.3 million, essentially flat |
| Gross profit | $12.7 million | $38.6 million |
| Gross margin | 54%, versus 57% | 56%, versus 57% |
| Operating income (loss) | $(10.1) million | $(4.5) million |
| Net income (loss) | $(11.1) million | $(7.2) million |
| Diluted EPS | $(2.93) | $(1.92) |
| Operating cash flow | Not separately provided for the quarter | $15.2 million, versus $6.8 million |
The quarter’s net loss included a $13.8 million goodwill impairment charge related to Cold Chain Packaging. Excluding this charge, reported operating performance was materially better than the GAAP loss suggests, although the filing does not present a non-GAAP adjusted earnings measure.
Segment and Margin Developments
- Sterilization and Disinfection Control: Revenue increased 15% in the quarter and 12% year to date, supported by acquisitions, organic growth, price increases, and favorable euro exchange rates. Gross margin was 67% in both periods.
- Instruments: Revenue declined 9% in the quarter and 4% year to date, primarily because adoption of an updated medical product was slower than expected. Management reported adoption normalized near quarter-end.
- Cold Chain Monitoring: Revenue increased 5% in the quarter and 4% year to date, but gross profit was $(43,000) in the quarter due largely to a $1.7 million inventory reserve. Year-to-date gross margin was 22%, versus 40%.
- Cold Chain Packaging: Revenue declined 36% in both the quarter and year to date due to lower orders from a major customer, loss of another customer, and lengthy sales cycles. Management expects fiscal 2018 revenue to be approximately $2.25 million to $2.75 million below fiscal 2017.
Liquidity, Debt, and Cash Flow
- Cash and cash equivalents were $5.8 million at December 31, 2017, compared with $5.8 million at March 31, 2017.
- Working capital was $19.7 million at December 31, 2017, versus $19.2 million at March 31, 2017.
- Total debt was approximately $56.5 million before debt discounts, consisting of a $37.5 million revolving-line balance and a $19.0 million term loan. The carrying value of long-term debt was $54.6 million, net of discounts and the current portion.
- The five-year credit facility includes an $80 million revolving line, a $20 million term loan, covenant requirements, and potential additional borrowing capacity of up to $100 million. The company was compliant with its covenants at December 31, 2017.
- As of January 31, 2018, outstanding indebtedness was $53.0 million and unused credit capacity was $46.0 million, subject to covenant restrictions. Mesa made a $3.5 million revolving-line payment in January 2018.
- Year-to-date investing cash outflows were $16.8 million, including $15.4 million for acquisitions and $2.5 million for capital expenditures. Financing cash inflows were $1.8 million after debt borrowings, repayments, dividends, and stock-option proceeds.
Material Changes and Unusual Items
- A $13.8 million goodwill impairment was recorded for Cold Chain Packaging after reduced customer demand and lower projected revenue, margin, and profitability. Remaining goodwill and intangible assets in that segment were $1.4 million and $4.3 million, respectively, and could face further impairment.
- Inventory reserves increased by approximately $2.1 million year to date, including a $1.7 million Cold Chain Monitoring reserve associated with discontinued or slow-moving products. Reported company-wide gross margin would have been 61% for the quarter and 59% year to date without the additional reserves identified by management.
- Management incurred $772,000 of facility-relocation costs year to date. The relocation of Omaha and Traverse City operations to the new Bozeman facility is expected to be completed by June 30, 2018; total relocation costs are estimated at $2.1 million.
- Mesa completed three acquisitions during fiscal 2018 for total acquisition cash payments of $15.4 million; none was individually material.
- The Tax Cuts and Jobs Act produced a provisional net tax benefit of $437,000. The company had not completed its accounting for all tax effects, so the provisional amounts may change.
- Management plans to adopt the new revenue-recognition standard, ASC 606, on a modified retrospective basis beginning April 1, 2018, and expects no material financial-statement impact based on its assessment to date.
Outlook, Risks, and Contingencies
- Management expects continued growth in Sterilization and Disinfection Control and believes demand for Instruments and Cold Chain Monitoring remains solid, while noting sensitivity to economic conditions and customer capital spending.
- Management expects Cold Chain Packaging order rates from its largest customer to begin normalizing in the quarter ending March 31, 2018 and during the following fiscal year, but the segment remains subject to further impairment risk.
- The company is investing in infrastructure, personnel, acquisitions, ERP implementation, and research and development projects that may support future products and growth.
- Key risks include customer concentration and lost business in Cold Chain Packaging, product adoption and product discontinuation, inventory obsolescence, acquisition integration, foreign-currency exposure, debt covenant compliance, tax-law changes, and cybersecurity or information-technology disruptions.
- The company had approximately $3.2 million of open purchase orders payable in less than one year. The PCD contingent consideration obligation was fully paid in November 2017 after a $300,000 additional accrual during the current fiscal year.
- The board declared a quarterly dividend of $0.16 per share payable March 15, 2018.
Investor Verification Points
- Confirm the intended period, because the request metadata says 2016 Q3 while the supplied filing is for December 31, 2017.
- Assess whether Cold Chain Packaging revenue, margins, and customer demand improve sufficiently to avoid additional impairment charges.
- Separate recurring operating performance from the $13.8 million goodwill impairment, inventory reserves, relocation costs, acquisition expenses, and other unusual items.
- Evaluate debt repayment capacity, covenant headroom, the $49.75 million debt maturity scheduled for fiscal 2022, and the effect of variable interest rates.
- Verify the final accounting effects of the Tax Cuts and Jobs Act and the company’s eventual ASC 606 adoption impact.
- Monitor inventory levels and reserves, especially in Cold Chain Monitoring and discontinued product lines.