Mesa Laboratories, Inc. Form 10-Q Summary
Reporting period: The supplied filing covers the quarter and nine months ended December 31, 2011, Mesa’s fiscal third quarter of fiscal 2012. The request metadata identifies “2010 Q3,” which conflicts with the filing’s stated period.
Business Context and Reporting Period
Mesa operates two reporting segments: Biological Indicators, which provides sterilization indicators, and Instrumentation Products, which provides quality-control instruments, parts, disposables, and services. The interim financial statements are unaudited, and management states that interim results are not necessarily indicative of full-year results.
Financial Results and Key Metrics
| Metric | Three Months Ended Dec. 31, 2011 | Three Months Ended Dec. 31, 2010 | Nine Months Ended Dec. 31, 2011 | Nine Months Ended Dec. 31, 2010 |
|---|---|---|---|---|
| Revenue | $9.259 million | $7.652 million | $27.438 million | $22.861 million |
| Gross profit | $5.885 million | $4.440 million | $17.047 million | $13.373 million |
| Gross margin | 64% | 58% | 62% | 58% |
| Operating income | $3.162 million | $2.002 million | $9.141 million | $6.538 million |
| Net income | $1.987 million | $1.258 million | $5.720 million | $4.006 million |
| Diluted EPS | $0.57 | $0.37 | $1.66 | $1.21 |
| Net profit margin | 21% | 16% | 21% | 18% |
For the nine-month period, earnings before income tax, depreciation and amortization, a non-GAAP measure used by management, were $10.647 million versus $7.758 million in the prior-year period.
Operating expenses were $2.723 million for the quarter and $7.906 million for the nine-month period. Nine-month expenses included $1.056 million of research and development and $3.924 million of general and administrative expense.
Cash Flow, Balance Sheet, Debt, and Liquidity
- Net cash provided by operating activities was $8.909 million for the nine months ended December 31, 2011, compared with $7.031 million in the prior-year period.
- Cash used in investing activities was $1.257 million, including $545,000 of capital expenditures and $712,000 for business acquisitions and intangibles. Prior-year investing cash use was $20.551 million, primarily due to acquisitions and building expenditures.
- Cash used in financing activities was $5.507 million, including $4.750 million of debt repayment and $1.216 million of dividends.
- Cash and cash equivalents increased from $3.546 million at March 31, 2011, to $5.691 million at December 31, 2011.
- Working capital was approximately $12.834 million, compared with $5.731 million at March 31, 2011. The reported current ratio was approximately 4:1.
- Total debt was $1.750 million at December 31, 2011, consisting of $1.000 million current and $750,000 long-term debt, compared with $6.500 million at March 31, 2011. The $4.000 million revolving credit facility was retired in December 2011.
- The remaining reducing line of credit bears variable interest subject to a 3.25% floor, is secured by most company assets, and is subject to restrictive covenants. Mesa reported compliance with the covenants at December 31, 2011.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue increased 20%, gross profit increased 27%, operating income increased 40%, and net income increased 43% year over year.
- Quarterly revenue increased 21%, while quarterly net income increased 58%. Gross margin increased to 64% from 58%.
- Biological Indicators revenue increased by approximately $3.190 million for the nine-month period, including approximately $1.780 million attributable to the December 2010 asset acquisition; the remaining increase reflected organic growth.
- Instrumentation revenue increased approximately $1.390 million for the nine-month period. Approximately $200,000 of the increase came from sales to one customer, with the balance attributed to customer upgrades and expansions.
- Management attributed improved margins to higher sales volumes, manufacturing efficiencies, acquisition integration, and relatively flat fixed costs. The company noted that biological indicator margins are generally lower than instrumentation margins.
- General and administrative expense increased approximately $680,000 for the nine-month period, including a $250,000 estimated state sales-tax liability and approximately $260,000 of additional labor costs and salary adjustments.
- Capital expenditures declined to $545,000 from $2.578 million, and acquisition and intangible spending declined to $712,000 from $17.973 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that cash generated from operations, working capital, and available financing are expected to be sufficient for short- and long-term needs. No specific revenue or earnings guidance was provided.
- Mesa entered into a license agreement for biological-indicator technology. It paid $150,000 initially, owed an additional $25,000 by the end of January 2012, and could owe up to $225,000 in milestone payments. Licensed product sales will also bear royalties.
- The company recorded a $250,000 estimated state sales-tax liability. The ultimate amount may change based on tax jurisdictions, customer exemptions or taxes already paid, and penalties and interest. Management does not expect the matter, after accrual, to have a material adverse effect.
- Management cited risks from general economic conditions, competition, customer capital spending, acquisitions, personnel, business-strategy changes, and unusual items. The filing states that there were no material changes to the risk factors in the fiscal 2011 Form 10-K.
- The Board declared a quarterly dividend of $0.13 per share on February 8, 2012, payable March 15, 2012. The company was minimizing share repurchases; 815 shares were repurchased during the quarter.
- No legal proceedings were reported. Management concluded that disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the intended reporting period because the request metadata says “2010 Q3,” while the supplied filing is for the quarter ended December 31, 2011.
- Assess the sustainability of the 62% nine-month gross margin and 21% net margin, including product mix and the lower-margin Biological Indicators segment.
- Review customer concentration and the approximately $200,000 of instrumentation growth attributed to one customer.
- Monitor the unresolved state sales-tax exposure and any additional license payments, milestone obligations, and royalties.
- Verify debt repayment requirements, variable interest-rate exposure, covenant compliance, and the remaining scheduled maturities of the $1.750 million credit balance.
- Evaluate acquisition-related amortization, integration performance, and the carrying value of approximately $14.450 million of goodwill and $10.966 million of intangibles and other assets.