Mesa Laboratories, Inc. Form 10-Q Summary
Reporting period: The supplied filing covers the three and nine months ended December 31, 2021, Mesa’s fiscal third quarter and first nine months of fiscal 2022. The request metadata identifies “2020 Q3,” which does not match the filing period.
Business Context
Mesa manufactures and sells life science tools and critical quality-control products and services through four reportable segments: Sterilization and Disinfection Control, Biopharmaceutical Development, Calibration Solutions, and Clinical Genomics. Clinical Genomics was added following the October 20, 2021 acquisition of Agena Bioscience, Inc.
Key Financial Metrics
| Metric | Three Months Ended December 31 | Nine Months Ended December 31 |
|---|---|---|
| Revenue | $54.7 million, up 60% | $125.5 million, up 31% |
| Gross profit | $28.6 million | $74.0 million |
| Gross margin | 52.3%, versus 60.4% | 59.0%, versus 64.9% |
| Operating income | $(2.5) million | $4.8 million |
| Net income | $(2.1) million | $3.7 million |
| Diluted EPS | $(0.39) | $0.69 |
| Operating cash flow | Not separately provided for the quarter | $29.9 million |
- Organic revenue growth was 12% for the quarter and 14% for the nine-month period.
- Clinical Genomics contributed $16.5 million of revenue and $3.9 million of reported gross profit after the acquisition date. Its gross profit included $6.1 million of inventory step-up amortization; excluding that charge, gross margin would have been approximately 61% rather than 24%.
- Operating expenses increased 51% in the quarter and 28% year to date, primarily because of Agena and increased investment in selling, general and administrative, and research and development activities.
- Cash and cash equivalents were $51.7 million at December 31, 2021, compared with $263.9 million at March 31, 2021. Working capital was $74.2 million versus $271.2 million at March 31, 2021.
- Cash used in investing activities was $304.4 million, primarily reflecting the $300.8 million Agena acquisition and $3.7 million of capital expenditures.
Debt, Liquidity, and Capital Resources
- The company had $60.0 million outstanding under its senior secured Credit Facility at December 31, 2021, with $15.0 million of remaining availability. Mesa repaid an additional $4.0 million in January 2022.
- Convertible senior notes had $172.5 million of principal outstanding and a $169.1 million carrying value. The notes bear interest at 1.375% and mature in August 2025.
- Mesa was in compliance with all debt covenants at December 31, 2021. Management believes cash, operating cash flow, and available borrowing capacity are sufficient for expected needs.
- The company paid quarterly dividends of $0.16 per share and announced another $0.16 per-share dividend payable March 15, 2022.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially because of the Agena acquisition and organic growth. Excluding Agena, revenue growth remained positive.
- Gross margin declined six percentage points year to date and eight percentage points in the quarter, principally because of the $6.1 million purchase-accounting inventory step-up amortization related to Agena.
- Quarterly operating results moved from approximately break-even operating income in the prior-year period to a $2.5 million operating loss, while the year-to-date operating income declined 40%.
- Quarterly net loss improved from $4.5 million to $2.1 million, and year-to-date results improved from a $0.6 million loss to $3.7 million of net income.
- Foreign currency translation reduced other comprehensive income by $6.2 million in the quarter and $7.3 million year to date.
- Mesa early adopted ASU 2020-06, increasing the carrying value of the convertible notes and reducing non-cash interest expense. Future periods may experience dilution from the notes.
- Reporting segments were realigned; prior-period segment information was reclassified without changing consolidated amounts.
Guidance, Outlook, Risks, and Unusual Items
- Management expects supply-chain disruptions, component shortages, elevated freight costs, inflation, and labor pressure to persist at least through fiscal 2023. Calibration Solutions was particularly affected by production constraints and delayed fulfillment.
- Management expects Clinical Genomics gross margin to range from the high 50s to low 60s, including approximately $1.2 million of quarterly non-cash intellectual-property amortization.
- For fiscal 2023, selling expense is expected to approximate 16% to 18% of revenue and research and development expense approximately 9% to 12% of revenue. Management expects a go-forward effective tax rate of approximately 26%, subject to stock-compensation tax effects.
- COVID-19 continues to affect customer access, international operations, demand, and supply chains. Clinical Genomics benefited to some extent from COVID-19 testing demand, including $1.5 million of related revenue during the quarter.
- The Agena purchase-price allocation remains preliminary and could change materially, including allocations to goodwill, intangible assets, inventory, and deferred taxes.
- The company recorded a $1.2 million uncertain tax position related to Agena research and development tax credits. IRS examinations of certain prior tax years remain ongoing, although management does not expect a material near-term effect.
- A sales-tax liability related to legacy GPT operations was $2.3 million at December 31, 2021. No material legal reserves or off-balance-sheet arrangements were reported.
- No goodwill impairment was identified as of December 31, 2021.
Important Facts for Investors to Verify
- Confirm the intended period, because the filing is for the quarter ended December 31, 2021, not 2020 Q3.
- Assess whether Agena’s revenue contribution and integration benefits offset its purchase-accounting charges, ongoing amortization, and lower reported margins.
- Monitor liquidity after the Agena acquisition, including cash of $51.7 million, Credit Facility availability, debt covenants, and the January 2022 repayment.
- Evaluate the duration and financial impact of supply-chain, labor, freight, inflation, and COVID-19-related disruptions.
- Review the final Agena purchase-price allocation and resulting goodwill, intangible amortization, deferred tax liabilities, and impairment exposure.
- Consider potential future diluted EPS impact from the convertible notes and outstanding equity awards.