MESA LABORATORIES INC quarterly report, Q3 FY2014

Mesa Laboratories, Inc. Form 10-Q Summary

Reporting period: Quarter and nine months ended December 31, 2014. The request metadata identifies “2013 Q3,” but the filing itself clearly reports fiscal 2015 third-quarter results and compares them with the periods ended December 31, 2013. The interim financial statements are unaudited.

Business context

Mesa manufactures and markets quality-control products for regulated niche markets through three segments: Biological Indicators, Instruments, and Continuous Monitoring. Products serve healthcare, pharmaceutical, medical device, food and beverage, environmental, industrial hygiene, and semiconductor customers. Biological indicators are generally recurring-use products, while instruments and monitoring systems are more discretionary and sensitive to economic conditions.

Financial performance and position

Metric	Three months ended Dec. 31, 2014	Three months ended Dec. 31, 2013	Nine months ended Dec. 31, 2014	Nine months ended Dec. 31, 2013
Revenue	$17.830 million	$13.116 million	$52.770 million	$37.010 million
Gross profit	$11.052 million	$7.706 million	$31.880 million	$22.103 million
Gross margin	62%	59%	60%	60%
Operating income	$3.708 million	$2.806 million	$11.663 million	$8.364 million
Net income	$2.403 million	$1.746 million	$7.344 million	$5.538 million
Diluted EPS	$0.66	$0.48	$2.01	$1.54

Third-quarter revenue increased 36%, operating income increased 32%, and net income increased 38% year over year. Nine-month revenue increased 43%, operating income increased 39%, and net income increased 33%.
Third-quarter net margin was approximately 13%, unchanged from the prior year. Nine-month net margin was approximately 14%, down from 15%.
Operating expenses increased 50% in the quarter and 47% year to date. Nine-month increases included higher amortization, personnel, acquisition-related costs, ERP and compliance spending, and research and development.
At December 31, 2014, cash and equivalents were $1.427 million, working capital was $16.629 million, and total assets were $116.178 million.
Accounts receivable were $11.849 million and inventories were $12.596 million, up from $9.278 million and $7.771 million, respectively, at March 31, 2014.
Total debt was $28.000 million, consisting of $14.500 million drawn under the revolving line and a $13.500 million term loan, of which $3.000 million was classified as current. The company reported compliance with its debt covenants at December 31, 2014.
Nine-month cash flow from operating activities was reported as $6.176 million in the cash flow statement, while the MD&A table reports $6.095 million; the filing does not clearly reconcile this discrepancy.
Investing cash outflows were $21.262 million, including $19.050 million for acquisitions and $2.212 million for property, plant and equipment. Financing cash inflows were $11.019 million, including $23.000 million of debt issuance, partially offset by $11.500 million of debt repayments and $1.618 million of dividends.
Cash declined by $4.148 million during the nine months, to $1.427 million at December 31, 2014.

Material changes versus the prior comparable period

Growth reflected acquisitions and organic expansion. Nine-month revenue increased 23% in Biological Indicators, 28% in Instruments, and 486% in Continuous Monitoring, with the latter benefiting substantially from the Amega and TempSys acquisitions completed in November 2013.
Third-quarter organic revenue growth was approximately 7% in Biological Indicators and 10% in existing Instruments product lines. Nine-month organic growth was approximately 9% in both areas, according to management.
Third-quarter segment gross margins improved to 60% for Biological Indicators, 66% for Instruments, and 55% for Continuous Monitoring. Nine-month Instruments margin declined to 63% from 64%, while Biological Indicators and Continuous Monitoring margins improved.
The company completed or integrated the BGI, Amilabo, ATI, and PCD acquisitions during 2014. Acquisition accounting increased goodwill and intangible assets, which contributed to higher amortization expense.
General and administrative expense included an additional $460,000 sales-tax accrual in the third quarter. Management stated that prior-period sales-tax exposure remains subject to change as filings and analysis continue.
Foreign currency translation produced a $250,000 after-tax comprehensive loss during the nine months, with no comparable loss in the prior year.
The company amended its credit facility in April 2014 to add a $15 million term loan and extend facility maturity to June 30, 2017. As of January 31, 2015, outstanding indebtedness was $27.250 million and unused capacity was $5.500 million.

Guidance, outlook, risks, and unusual items

Management expects continued growth from acquisitions and organic initiatives and stated that demand for Biological Indicators remains strong. It also described demand for Instruments and Continuous Monitoring as strong, while noting that these businesses are more exposed to economic conditions and customer capital-spending decisions.
The company is developing products for existing and new markets and expects all divisions may have new products available during the following year. No quantified revenue or earnings guidance was provided.
A new ERP system is being implemented and is expected to require significant cash expenditures over the next six to nine months. Management also continued investments in infrastructure, information systems, personnel, and research and development.
Contingent consideration liabilities include $500,000 related to Amega, $1.120 million related to Bios, and $300,000 related to PCD. Potential future payments could be materially higher, including up to $10.000 million for Amega, $6.710 million for Bios, and $1.500 million for PCD, subject to revenue performance.
Amega and its former owner filed litigation alleging issues involving employment termination, stock-option vesting, holdback consideration, and the earn-out. Mesa filed a motion to dismiss in January 2015 and stated that any potential loss could not yet be reasonably estimated.
The company has approximately $8.500 million of open purchase orders for routine supplies and inventory payable within one year.
A newly issued revenue-recognition standard will be effective for Mesa’s fiscal year ending March 31, 2018. The company was evaluating its impact.
Management stated that disclosure controls and internal control over financial reporting were effective as of December 31, 2014. The assessment excluded acquired entities representing 5% of nine-month revenue because of acquisition timing.
The board declared a quarterly dividend of $0.16 per share in January 2015, payable March 16, 2015.

Important facts for investors to verify

Reconcile the $6.176 million operating cash flow in the financial statements with the $6.095 million amount presented in MD&A.
Assess whether acquisition-driven revenue growth, especially in Continuous Monitoring, can continue after integration activities subside.
Monitor leverage, debt maturities, covenant compliance, interest rates, and the relatively low cash balance.
Evaluate the final purchase-price allocations, goodwill and intangible-asset valuations, and resulting amortization expense for recent acquisitions.
Track contingent consideration and the potential earnings impact if required payments exceed recorded liabilities.
Follow the Amega litigation and unresolved historical state sales-tax exposure, including possible additional accruals.
Consider ERP implementation costs, integration expenses, working-capital investment, and capital requirements for future acquisitions.
Review the company’s fiscal-year 2015 results and subsequent filings for updated guidance, liquidity, acquisition performance, and debt capacity.