Mesa Laboratories, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2015; filed November 4, 2015. The request metadata references “2014 Q2,” but the filing itself is for fiscal 2016 second quarter. Results are unaudited and should be read with the fiscal 2015 Form 10-K.
Business context
Mesa develops and sells quality-control products and services through four segments: Biological Indicators, Instruments, Continuous Monitoring, and Cold Chain. Its markets are primarily regulatory-driven and include healthcare, pharmaceutical, medical device, food and beverage, environmental, and industrial customers.
Financial performance
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $21.8 million, up 17% | $39.9 million, up 14% |
| Gross profit | $13.1 million; 60% margin | $24.2 million; 61% margin |
| Operating income | $3.0 million, down 39% | $6.6 million, down 16% |
| Net income | $1.8 million, down 43% | $4.1 million, down 18% |
| Diluted EPS | $0.47 versus $0.84 | $1.09 versus $1.35 |
Revenue growth reflected acquisitions and organic growth in Biological Indicators and Instruments, partially offset by lower Continuous Monitoring revenue. Cold Chain contributed $1.8 million of second-quarter and year-to-date revenue following the Infitrak acquisition. Biological Indicators revenue increased 32% in the quarter and 22% year to date; Instruments increased 2% and 5%, respectively; Continuous Monitoring declined 27% and 10%.
Operating expenses increased 62% in the quarter and 36% year to date. The increases included higher selling costs, amortization, personnel, ERP implementation costs, research and development, and a $1.7 million Amato litigation settlement charge. Six-month net income also included $2.8 million of non-cash intangible amortization.
Cash flow, liquidity, and debt
- Six-month operating cash flow was $9.0 million versus $3.7 million in the prior year.
- Investing cash flow was $(25.7) million, including $20.7 million of acquisition spending and $5.0 million of capital expenditures.
- Financing cash flow was $20.2 million, primarily from $22.5 million of debt issuance, partly offset by $2.0 million of debt repayment and $1.1 million of dividends.
- Cash increased to $5.5 million from $2.0 million at March 31, 2015. Working capital was $11.1 million versus $15.0 million at March 31, 2015.
- Total debt was $46.8 million at September 30, 2015, consisting of a $27.5 million line-of-credit balance and $19.25 million term loan, before the current portion presentation.
- The amended credit facility matures June 30, 2020, provides a $50 million revolving line and a $20 million term loan, and bears interest generally at LIBOR plus 1.5% to 2.25%. Mesa was in compliance with its debt covenants at September 30, 2015.
- As of October 31, 2015, outstanding indebtedness was $48.0 million and unused credit capacity was $20.5 million.
Material changes versus the prior comparable period
- Revenue and gross profit increased, but substantially higher operating expenses reduced operating and net income.
- Gross margin was stable at 60% for the quarter and improved to 61% year to date from 60%.
- Biological Indicators benefited from the ATI, PCD, Fruh, Cherwell, and North Bay acquisitions, price increases, and volume efficiencies.
- Continuous Monitoring margins declined because of product and service mix and unfavorable comparison with unusually strong prior-year system installations. Management reported a 43% quarterly margin, up from 40% in the immediately preceding quarter, and is pursuing integration and cost-reduction initiatives.
- Total assets increased to $155.9 million from $117.3 million, primarily reflecting acquisitions, goodwill, and intangible assets. Goodwill increased to $65.4 million from $44.9 million.
Acquisitions, outlook, risks, and unusual items
- Infitrak was acquired July 6, 2015 for preliminary aggregate consideration of $18.9 million, including $9.5 million of estimated contingent consideration. North Bay was acquired August 6, 2015 for preliminary aggregate consideration of $11.3 million.
- Infitrak contingent consideration can range from zero to approximately $11.5 million, with installments beginning in the second quarter of fiscal 2017. The estimate may change based on future Cold Chain performance.
- Management expects Continuous Monitoring revenue to run at approximately $2.5 million per quarter over the next few quarters. Management also expects to continue pursuing organic growth, acquisitions, new products, and operating efficiencies.
- Management expects a fiscal 2016 effective tax rate of approximately 35% to 37%.
- A new Bozeman, Montana facility is under construction, with estimated total cost of $14.75 million and expected completion by September 30, 2016. Mesa had spent $3.5 million during the six months ended September 30, 2015.
- The new ERP system went live October 1, 2015; management anticipated up to $500,000 of additional post-go-live and enhancement costs.
- Mesa settled the Amato litigation in October 2015 for $3.165 million. Insurance covered $415,000, $1.041 million was covered by existing accruals, and $1.709 million was recorded as general and administrative expense. The settlement eliminated future Amega earn-out obligations.
- Potential contingent consideration remains for the PCD acquisition, estimated at $300,000 and payable in the quarter ending December 31, 2015, subject to final performance.
- The company declared a $0.16 per-share dividend payable December 15, 2015. No shares were repurchased during the quarter.
- Management stated that there were no material changes to the risk factors in the fiscal 2015 Form 10-K. Principal risks include acquisition integration, debt and covenant compliance, contingent consideration estimates, execution of the facility and ERP projects, foreign currency exposure, economic conditions affecting discretionary purchases, and product mix.
Important facts for investors to verify
- Reconcile reported growth with the contribution from acquisitions and assess underlying organic growth by segment.
- Monitor whether Continuous Monitoring margins recover and whether management’s $2.5 million quarterly revenue run rate is achieved.
- Evaluate leverage, interest-rate exposure, required debt amortization, and compliance with the 3.25-to-1 and subsequently 3.0-to-1 funded-debt-to-EBITDA covenants.
- Review the valuation and future cash requirements for Infitrak contingent consideration, PCD earn-out obligations, goodwill, and acquired intangible assets.
- Track cash spending for the Bozeman facility, ERP implementation, acquisitions, dividends, and other capital commitments against operating cash generation.
- Confirm the final accounting and cash impact of the October 2015 Amato settlement and subsequent European Biological Indicators distributor acquisitions.