Mesa Laboratories, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2013, compared with the corresponding 2012 periods. The request metadata identifies “2012 Q2,” but the filing itself is a 2013 Form 10-Q for the quarter ended September 30, 2013. Financial statements are unaudited.
Business Context
Mesa develops, manufactures and markets quality-control products through its Biological Indicators and Instruments divisions. Its products serve healthcare, pharmaceutical, food and beverage, medical device, industrial hygiene, semiconductor and petrochemical markets. Biological Indicators products are recurring-use disposables, while Instruments products generally involve more discretionary capital spending.
Financial Performance and Position
| Metric | Three months ended Sept. 30, 2013 | Three months ended Sept. 30, 2012 | Six months ended Sept. 30, 2013 | Six months ended Sept. 30, 2012 |
|---|---|---|---|---|
| Revenue | $12.676 million | $11.706 million | $23.894 million | $22.266 million |
| Gross profit | $7.600 million | $7.248 million | $14.397 million | $13.704 million |
| Gross margin | 60% | 62% | 60% | 62% |
| Operating income | $2.515 million | $3.488 million | $5.558 million | $6.708 million |
| Net income | $1.932 million | $2.248 million | $3.792 million | $4.348 million |
| Diluted EPS | $0.54 | $0.64 | $1.06 | $1.23 |
Quarterly revenue increased 8% and six-month revenue increased 7%. Quarterly net income declined 14%, while six-month net income declined 13%. Approximate operating margins decreased to 20% from 30% for the quarter and to 23% from 30% for the six-month period. Net profit margins declined to 15% from 19% for the quarter and to 16% from 20% for the six-month period.
- Segment revenue: Biological Indicators increased 13% for the quarter and 4% year to date. Instruments increased 4% for the quarter and 10% year to date.
- Cash flow: Six-month operating cash flow was $5.579 million, compared with $4.926 million in 2012. Investing cash use was $1.831 million, versus $17.030 million, principally reflecting the prior-year Bios acquisition. Financing cash use was $4.330 million, compared with $7.685 million of financing cash provided in 2012.
- Cash and liquidity: Cash was $3.424 million at September 30, 2013, versus $4.006 million at March 31, 2013. Working capital was $13.914 million, versus $14.793 million at March 31, 2013.
- Debt: The $4.000 million of long-term debt outstanding at March 31, 2013 was repaid. No borrowings were outstanding at September 30, 2013, and the company reported $20.000 million of unused revolving credit capacity.
- Capital returns: Six-month dividends paid were $952,000. The board subsequently declared a $0.15 per-share quarterly dividend payable December 16, 2013.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by continued Biological Indicators growth, backlog fulfillment, organic growth in the Bios product line and the July 2013 SureTorque acquisition.
- Gross margin fell two percentage points because of product replacement costs in Biological Indicators and purchase-accounting effects associated with SureTorque. Instruments’ quarterly gross margin declined to 62% from 66%.
- Operating expenses increased 35% for the quarter and 26% for the six months. General and administrative expense included a $1.106 million accrual for potential historical state sales-tax obligations.
- On July 1, 2013, Mesa acquired substantially all assets of the SureTorque bottle-cap torque testing business for aggregate consideration of $1.821 million, including a $100,000 holdback.
- On August 12, 2013, Mesa sold its NuSonics product line for $661,000, recognizing a $468,000 pretax gain.
Guidance, Outlook, Risks and Unusual Items
- Management expects Biological Indicators markets to remain strong, supported by regulatory-driven demand and the recurring-use nature of the products.
- Management stated that economic uncertainty has slowed organic Instruments growth because instrument purchases are more discretionary, although demand remains strong and the company intends to maintain or grow revenue.
- The company expects its effective tax rate to approximate 36.3% going forward. No formal revenue or earnings guidance was provided.
- Management is pursuing organic growth, research and development projects, and potential acquisitions. It expects SOX compliance costs to remain relatively flat during the year ending March 31, 2014.
- The Bios acquisition carries contingent consideration of $0 to $6.710 million based on revenue performance; the recorded liability was $2.164 million at September 30, 2013 and is payable in the first quarter of fiscal 2016. Changes in the ultimate amount could affect earnings.
- The $1.106 million sales-tax accrual remains an estimate and could change as additional analysis and state filings are completed.
- Other disclosed risks include economic weakness, delayed customer capital spending, competition, acquisition integration, supply-chain disruption, cybersecurity, catastrophic events, political instability and environmental conditions.
- The company reported no derivative instruments and minimal foreign-currency and commodity-market exposure. Management concluded that disclosure controls and internal control over financial reporting were effective.
Investor Verification Items
- Verify the filing period: the source document is for September 30, 2013, not 2012.
- Assess whether the $1.106 million state sales-tax accrual adequately reflects potential penalties, interest and additional exposure.
- Monitor SureTorque integration, purchase-accounting effects and the sustainability of Instruments margins.
- Evaluate the likelihood and amount of the Bios contingent consideration, with a potential undiscounted payment of up to $6.710 million.
- Reconcile revenue growth with underlying organic growth, backlog normalization and acquisition contributions.
- Review cash generation, capital expenditures, dividends and potential acquisition financing against the $20.000 million revolving facility and its covenants.