Mesa Laboratories, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2022, filed May 31, 2022. The request metadata references “2020 Q4,” but the supplied filing is the fiscal 2022 annual report and does not provide a separate 2020 fourth-quarter filing.
Business context
Mesa manufactures and sells life sciences tools, sterilization and disinfection indicators, calibration and quality-control products, clinical genomics instruments and consumables, and related testing, maintenance and calibration services. Operations span the United States and Europe, with sales in North America, Europe, Asia Pacific and other markets.
Following the October 20, 2021 acquisition of Agena Bioscience, Mesa reported four segments: Sterilization and Disinfection Control, Biopharmaceutical Development, Calibration Solutions, and Clinical Genomics. Agena operations were included from the acquisition date.
Financial performance and liquidity
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | $184.335 million | $133.937 million | 38% |
| Gross profit | $109.090 million | $87.014 million | 25% |
| Gross margin | 59.2% | 65.0% | Down approximately 6 percentage points |
| Operating income | $4.702 million | $12.358 million | Down 62% |
| Net income | $1.871 million | $3.274 million | Down 43% |
| Diluted EPS | $0.35 | $0.64 | Down 45% |
| Operating cash flow | $39.223 million | $37.073 million | Up 6% |
Product revenue was $149.422 million and service revenue was $34.913 million. Adjusted operating income, a non-GAAP measure, was $37.899 million versus $36.139 million in the prior year. The reconciliation excludes $21.806 million of acquired-intangible amortization and $11.391 million of stock-based compensation.
- Segment revenue: Sterilization and Disinfection Control $59.044 million, Biopharmaceutical Development $45.579 million, Calibration Solutions $46.872 million, and Clinical Genomics $32.840 million.
- Organic growth: Reportable-segment organic revenue growth was 13%; growth was 11% in Sterilization and Disinfection Control, 34% in Biopharmaceutical Development, and approximately flat in Calibration Solutions.
- Margins: Segment gross margins were 74%, 63%, 53% and 36%, respectively. Clinical Genomics margin was reduced by a $7.462 million purchase-accounting inventory step-up amortization; excluding that charge, its gross margin was approximately 59%.
- Cash and working capital: Cash and equivalents declined to $49.346 million from $263.865 million. Working capital declined to $76.263 million from $271.166 million, primarily reflecting the Agena acquisition.
- Debt: Mesa had $49.000 million outstanding under its revolving credit facility and $172.500 million principal amount of 1.375% convertible senior notes due August 2025. The notes had a $169.365 million carrying value. Mesa was in compliance with debt covenants.
- Cash deployment: Investing cash outflow was $305.225 million, including $300.793 million for Agena and $4.432 million for capital expenditures. Financing cash inflow was $52.576 million, including a $70.000 million credit-facility draw and $21.000 million of repayments.
- Dividends: Quarterly dividends were $0.16 per share, or $0.64 per share for the year.
Material changes versus the prior comparable period
- Agena added the Clinical Genomics segment, contributed $32.840 million of revenue and a $7.779 million net loss from October 20, 2021 through March 31, 2022, and materially increased goodwill and intangible assets.
- Revenue increased substantially, but operating income and net income declined because operating expenses rose 40%, acquired-intangible amortization increased, and the Agena inventory step-up reduced gross profit.
- Selling, general and administrative, and research and development expenses increased to $28.310 million, $60.311 million and $15.767 million, respectively, driven primarily by Agena, increased sales investments, integration costs, compensation and product development.
- Supply-chain constraints, freight inflation, labor costs and the relocation of production from Butler, New Jersey to Lakewood, Colorado reduced fulfillment capacity and margins. Backlog increased to approximately $21.3 million from $11.3 million.
- Mesa early adopted ASU 2020-06, eliminating the separate equity component of the convertible notes and reducing non-cash interest expense.
- Foreign-currency translation produced a $12.450 million comprehensive loss in FY2022, compared with $26.485 million of translation income in FY2021.
Guidance, outlook, risks and unusual items
- Management expected fiscal 2023 selling expense to be approximately 16%–18% of revenue and research and development expense to be approximately 9%–12% of revenue.
- Clinical Genomics gross margin was expected to range from the high 50s to low 60s, including approximately $5.675 million of annual non-cash intellectual-property amortization.
- Management expected supply-chain disruptions and elevated labor costs to continue through fiscal 2023. COVID-19 restrictions and lockdowns in China were expected to adversely affect Clinical Genomics revenue and, to a lesser extent, the rest of the company.
- Key risks include integration and valuation risk from Agena, potential goodwill and intangible-asset impairment, component shortages and sole-source suppliers, foreign-currency volatility, regulatory and product-liability exposure, cybersecurity and data-privacy risks, competition, healthcare-market changes and reliance on acquisitions for growth.
- Goodwill and other intangible assets totaled $541.3 million at March 31, 2022. Management concluded that no impairment existed, but the balance is sensitive to revenue growth, customer attrition, royalty rates, discount rates and broader market conditions.
- Mesa entered into an at-the-market equity sales agreement in April 2022 allowing issuance of up to $150 million of common stock, which could provide liquidity but dilute existing shareholders.
- A corporate restructuring announced in April 2022 resulted in $557,000 of FY2022 general and administrative expense and expected additional severance of $195,000 in the first quarter of FY2023.
- No material legal proceeding was reported. A sales-tax liability was $2.080 million at year-end and was expected to be resolved in fiscal 2023.
- Management and the independent auditor concluded that internal control over financial reporting was effective; however, Agena was excluded from the fiscal 2022 control assessment because it was acquired during the year.
Most important facts for investors to verify
- Separate Agena operating performance, including revenue growth, profitability, integration progress and the effect of COVID-19 restrictions in China.
- Whether supply-chain constraints, wage inflation and freight costs continue to suppress gross margins and increase backlog.
- Cash generation, remaining credit-facility capacity, convertible-note repayment or conversion requirements, and compliance with debt covenants.
- Assumptions supporting the $541.3 million of goodwill and intangible assets and the risk of future impairment charges.
- Expected recurring amortization from Agena and its effect on GAAP earnings, EPS and segment margins.
- Potential dilution from the $150 million at-the-market offering, convertible notes and equity compensation.
- Resolution of the $2.080 million sales-tax liability and ongoing tax audits, including the $1.329 million unrecognized tax benefit balance.
- Future dividend sustainability given reduced cash balances, acquisition financing and planned capital needs.