Mesa Laboratories, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2012. The supplied filing is not a 2010 fourth-quarter report; it is the annual Form 10-K filed June 29, 2012.
Business Context
Mesa operates through two segments: Instrumentation Products, which includes quality-control instruments, meters, data loggers, torque systems, parts and services; and Biological Indicators, which provides biological and chemical indicators used to assess sterilization processes. Revenue is generated primarily from product sales, parts, disposables and services. Approximately 60% of fiscal 2012 sales were to U.S. customers and 40% to foreign customers.
The company’s growth strategy emphasizes expanded distribution, new products and acquisitions. Prior acquisitions included SGM Biotech and the Apex biological-indicator business. In May 2012, after fiscal year-end, Mesa acquired specified assets and assumed liabilities of Bios International Corporation.
Financial Performance and Liquidity
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Revenue | $39.616 million | $34.227 million | +16% |
| Gross profit | $23.511 million | $19.568 million | +20% |
| Gross margin | 59% | 57% | +2 percentage points |
| Operating income | $12.477 million | $9.864 million | +26% |
| Operating margin | 31% | 29% | +2 percentage points |
| Net income | $7.919 million | $6.183 million | +28% |
| Diluted EPS | $2.29 | $1.86 | +23% |
| Operating cash flow | $12.489 million | $8.868 million | +41% |
Biological Indicator revenue increased 21% to $20.423 million, with approximately half of the increase described as organic. Instrumentation revenue increased 10% to $19.193 million, including product, parts and disposables, and service revenue.
Cash and cash equivalents were $7.191 million at March 31, 2012, compared with $3.546 million at March 31, 2011. Working capital increased to $14.899 million from $7.387 million, and the current ratio improved to approximately 4:1 from 2:1. Inventory declined to $4.438 million, while inventory turns improved to 3.0 from 2.3 and days revenues outstanding improved to 53 from 60.
Investing cash outflows were $1.420 million, including $683,000 of capital expenditures. Financing cash outflows were $7.424 million, including $6.500 million of debt repayment and $1.645 million of dividends. Mesa ended the fiscal year with no debt outstanding on the balance sheet and had $20 million of unused capacity under its new revolving credit facility.
In February 2012, Mesa entered into a three-year $20 million revolving credit facility, plus up to $1 million of letters of credit. Borrowings bear variable interest based on LIBOR or the bank’s commercial floating rate. The facility is secured by company assets and includes leverage and fixed-charge coverage covenants.
Material Changes Versus the Prior Period
- Revenue, gross profit, operating income and net income increased substantially, reflecting organic growth, a full year of acquired operations and improved acquisition integration.
- Gross margin increased to 59%, partly due to higher volume, manufacturing efficiencies and a favorable contribution from internally manufacturing a product line.
- General and administrative expense increased 18%, driven by a $250,000 estimated sales-tax liability, higher labor costs and acquisition-related amortization.
- Research and development expense decreased 6% as reported, although total development spending increased because $175,000 of biological-indicator technology costs was capitalized.
- Mesa recorded a $350,000 impairment charge on an Instrumentation segment indefinite-lived trade-name intangible because revenue growth was below the assumptions used in its valuation. Goodwill was not impaired.
- Debt was repaid and the prior credit arrangements were replaced with the new revolving facility.
- Quarterly dividends increased from $0.11 or $0.12 per share in fiscal 2011 to $0.12 or $0.13 per share in fiscal 2012. The board declared another $0.13 per share dividend in May 2012.
Outlook, Risks and Unusual Items
Management stated that cash generated from operations, working capital and available financing should be sufficient for expected short- and long-term needs, including dividends, debt obligations, capital expenditures and potential acquisitions. No specific revenue or earnings guidance was provided.
The May 2012 Bios acquisition required a $15.660 million closing payment, a $1 million escrow payment and potential earn-out consideration of up to $6.710 million over three years if revenue targets are exceeded. Mesa borrowed $11 million under the credit facility to finance the transaction and used available cash for the balance. It also assumed a lease requiring approximately $15,000 per month through January 2015.
- Intense competition from larger companies with greater capital, sales and research capabilities.
- Technological change and evolving industry standards could make products obsolete or less competitive.
- Variable-rate debt exposes the company to higher interest expense if market rates increase.
- Acquisition integration, earn-outs, loss of key employees or customers and lower-than-expected acquired profitability could adversely affect results.
- Medical-device and manufacturing operations are subject to FDA, state and foreign regulatory requirements; noncompliance could result in recalls, fines, operating restrictions or halted sales.
- Revenue and earnings may fluctuate with customer capital spending, order timing, product acceptance, manufacturing or supply delays, regulatory approvals and impairment testing.
- Mesa accrued $250,000 for a potential state sales-tax liability; the ultimate amount could change based on jurisdiction, exemptions, penalties and interest.
- Approximately $225,000 of additional payments may be due under a biological-indicator technology license if development and performance milestones are achieved.
Investor Verification Points
- Confirm that the intended period is fiscal 2012 rather than 2010 Q4, because the filing text covers the year ended March 31, 2012.
- Review the Bios acquisition accounting, financing, escrow and potential earn-out obligations in subsequent filings.
- Assess variable-rate credit-facility exposure, covenant compliance and borrowings after the May 2012 acquisition.
- Evaluate whether the $350,000 intangible impairment signals weaker prospects for the affected Instrumentation product line.
- Monitor the unresolved state sales-tax exposure and any additional penalties, interest or reserve adjustments.
- Reconcile reported margin comparisons for the disclosed reclassification of customer shipping payments from cost of revenue to revenue.
- Review acquisition-related amortization, goodwill and intangible balances, including future estimated amortization of $1.660 million in fiscal 2013.
- Consider regulatory, competitive, technology, distributor, supply-chain and product-liability risks when assessing sustainability of growth.