Mesa Laboratories, Inc. Form 10-Q Summary
Reporting period: The source filing covers the three and nine months ended December 31, 2016, Mesa’s fiscal third quarter of fiscal 2017. The request metadata identifies “2015 Q3,” which does not match the filing period; December 31, 2015 is the comparative period.
Business Context
Mesa develops and sells quality-control products and services through four divisions: Biological Indicators, Instruments, Cold Chain Monitoring, and Cold Chain Packaging. Its markets are primarily regulatory-driven healthcare, pharmaceutical, food and beverage, medical device, environmental, and industrial applications. The company emphasizes niche markets with limited competition and recurring demand for disposable products and testing services.
Financial Performance and Position
| Metric | Three months ended Dec. 31, 2016 | Three months ended Dec. 31, 2015 | Nine months ended Dec. 31, 2016 | Nine months ended Dec. 31, 2015 |
|---|---|---|---|---|
| Revenue | $23.843 million | $19.913 million | $69.366 million | $59.847 million |
| Gross profit | $13.537 million | $12.209 million | $39.275 million | $36.417 million |
| Gross margin | 57% | 61% | 57% | 61% |
| Operating income | $4.386 million | $3.832 million | $10.973 million | $10.480 million |
| Net income | $3.252 million | $2.597 million | $7.540 million | $7.178 million |
| Diluted EPS | $0.84 | $0.69 | $1.97 | $1.91 |
| Operating cash flow | Not separately provided | Not separately provided | $6.771 million | $9.953 million |
Third-quarter revenue increased 20%, operating income increased 14%, and net income increased 25%. Nine-month revenue increased 16%, while operating income and net income increased 5% each. Net profit margin was 14% for the quarter versus 13% in the prior-year quarter, but 11% for the nine-month period versus 12% previously.
Cash and cash equivalents were $5.405 million at December 31, 2016, compared with $5.695 million at March 31, 2016. Working capital was $12.946 million versus $13.215 million at March 31, 2016.
Total debt was $53.0 million, consisting of $37.5 million drawn on the revolving line of credit and $15.5 million under the term loan, before the $3.0 million current portion classification. The debt facility bears variable interest, primarily LIBOR plus a margin, and matures in 2020. The company was in compliance with its debt covenants at December 31, 2016. As of January 31, 2017, outstanding indebtedness was $50.25 million and unused credit capacity was $14.5 million.
Material Changes Versus the Prior Comparable Period
- Organic revenue growth was 18% for the quarter and 9% for the nine-month period. Management stated that prior-year revenue was adversely affected by temporary order-fulfillment delays during implementation of a new ERP system.
- Cold Chain Packaging revenue increased 153% in the quarter and 170% for the nine-month period, substantially driven by growth from existing and new customers and one significant lower-margin contract.
- Biological Indicators revenue increased 18% in the quarter and 17% for the nine-month period, reflecting acquisitions and organic growth.
- Instruments revenue increased 9% in the quarter but was essentially flat for the nine-month period.
- Cold Chain Monitoring revenue increased 9% in the quarter and 13% for the nine-month period, primarily due to the FreshLoc acquisition.
- Consolidated gross margin declined four percentage points to 57% for both reported periods. The primary factors were product mix, lower margins in Cold Chain Packaging, integration effects in Cold Chain Monitoring, and reduced volume efficiencies in Instruments.
- Selling expense increased 59% for the quarter and 34% for the nine-month period, primarily due to personnel added through acquisitions and investment in Cold Chain Packaging sales capabilities.
- Operating cash flow declined $3.182 million year over year, primarily because of $5.076 million of contingent-consideration payments and $4.401 million of payments relating to accrued salaries, taxes, and other liabilities.
- The company completed six acquisitions during fiscal 2017; none was individually material. Acquisition-related cash payments were $6.618 million for the nine-month period.
Outlook, Risks, Contingencies, and Unusual Items
- Management expects continued growth from biological indicators and cold chain packaging, while noting that cold chain packaging revenue is seasonal and its gross margin is expected to remain below the historical margins of the other divisions.
- The company is constructing a new Bozeman, Montana facility at an estimated total cost of approximately $17 million. It had spent $8.008 million during the nine months ended December 31, 2016 and expected completion by February 28, 2017.
- Operations at Omaha and Traverse City are planned to be relocated to Bozeman during calendar 2017. Estimated restructuring costs are $2.1 million, of which $457,000 had been incurred through December 31, 2016. Expected annual savings after completion are approximately $750,000.
- Remaining Infitrak contingent consideration had a potential undiscounted range of zero to approximately $6.682 million and a recorded fair value of $4.436 million. The remaining payment is expected in the second quarter of the year ending March 31, 2018; changes in the estimate could affect earnings.
- The company recorded an additional $450,000 PCD earn-out accrual during the nine months and paid $450,000 during the third quarter. The final amount remains subject to actual revenue performance.
- Management expects the fiscal-year 2017 effective tax rate to approximate 22% to 25%, subject to fourth-quarter effects from excess tax benefits and deficiencies related to employee stock compensation.
- The January 2017 board declaration of a $0.16-per-share quarterly dividend is payable March 15, 2017.
- Demand for Instruments and Cold Chain Monitoring is more sensitive to economic conditions and customer capital spending. Additional risks include acquisition integration, foreign currency exposure, product mix, margin pressure, construction and relocation execution, and reliance on debt financing.
- The company reported no material changes to previously disclosed risk factors, no derivatives, and minimal exposure to foreign-currency and commodity market risks. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2016.
Important Facts for Investors to Verify
- Reconcile the requested “2015 Q3” period with the filing’s actual December 31, 2016 reporting period.
- Assess whether the substantial Cold Chain Packaging growth, including the lower-margin contract, is sustainable and how it affects consolidated margins.
- Monitor leverage, variable-rate interest expense, available credit capacity, covenant compliance, and required debt repayments.
- Verify the cost, timing, expected savings, and potential asset-sale proceeds associated with the Bozeman facility and the Omaha and Traverse City relocations.
- Review the valuation and final settlement risk of the Infitrak and PCD contingent consideration liabilities.
- Separate organic growth from acquisition-driven growth and evaluate integration performance across the six fiscal 2017 acquisitions.
- Consider the effects of stock-option tax benefits, foreign-currency translation losses, and the adoption of recently issued accounting standards on reported results.