Mesa Laboratories, Inc. Form 10-Q Summary
Reporting period: The supplied filing is for the three and six months ended September 30, 2019, Mesa’s fiscal second quarter of fiscal 2020, despite request metadata identifying “2018 Q2.” The filing was dated November 6, 2019. Mesa develops and sells quality-control products and services in niche, regulation-driven markets through four segments: Sterilization and Disinfection Control, Instruments, Cold Chain Monitoring, and Cold Chain Packaging.
Key financial metrics
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $25.536 million, up 3% | $51.824 million, up 4% |
| Gross profit | $15.476 million, up 6% | $31.615 million, up 7% |
| Gross margin | 61%, versus 59% | 61%, versus 59% |
| Operating income | $4.584 million, up 303% | $9.976 million, up 69% |
| Net income | $3.062 million, up 208% | $7.659 million, up 47% |
| Net margin | 12%, versus 4% | 15%, versus 10% |
| Diluted EPS | $0.71, versus $0.25 | $1.82, versus $1.30 |
| Operating cash flow | Not separately provided | $7.138 million, versus $10.200 million |
Liquidity and capital structure: Cash and cash equivalents were $245.443 million at September 30, 2019, compared with $10.185 million at March 31, 2019. Working capital was $253.987 million versus $9.962 million at March 31. The company issued $172.5 million of convertible senior notes and received $84.995 million of net proceeds from a common-stock offering during the quarter. Term-loan and revolver balances were repaid, and the Credit Facility was terminated in October 2019. Convertible notes had a $172.5 million principal balance and $137.682 million carrying value at quarter-end.
Cash flows: Six-month investing cash flow was an outflow of $3.098 million, including $2.555 million for acquisitions and $0.543 million for capital expenditures. Financing cash flow was $231.251 million, primarily reflecting the note and equity offerings, partly offset by $23.0 million of debt repayment and $1.321 million of dividends.
Material changes versus the prior comparable period
- Revenue growth was led by Sterilization and Disinfection Control, Instruments, and Cold Chain Monitoring. Cold Chain Packaging declined materially as Mesa exits that business.
- Six-month segment revenue changes were: Sterilization and Disinfection Control up 6% to $24.204 million; Instruments up 6% to $18.504 million; Cold Chain Monitoring up 12% to $6.903 million; and Cold Chain Packaging down 36% to $2.213 million.
- Gross margin improved by two percentage points to 61%, primarily from operating efficiencies and higher volume in Sterilization and Disinfection Control. Cold Chain Monitoring margins declined to 34% for the six-month period from 43%.
- Operating expenses declined because the prior-year period included a $3.3 million legal-settlement expense. Selling and research and development expenses increased as Mesa invested in sales, marketing, engineering, and product development.
- The April 2019 acquisition of IBP Medical GmbH expanded the Instruments segment with dialysis-testing meters.
- On April 1, 2019, Mesa adopted the new lease standard, recognizing operating lease right-of-use assets and liabilities; management stated that the standard materially affected the balance sheet but not income or cash flow materially.
Outlook, commentary, risks, and unusual items
- Management expects continued demand in sterilization and disinfection control, instruments, and cold-chain monitoring. It expects Cold Chain Monitoring gross margins to gradually improve toward 40%–45% as product offerings are consolidated.
- Mesa plans to exit Cold Chain Packaging by March 31, 2020. It stopped accepting new customers, reduced personnel and operating costs, and began liquidating remaining inventory.
- Management stated that the six-month effective tax rate was 15.1% and expects a forward effective tax rate of approximately 26%, subject to fluctuations from stock-based compensation tax benefits and deficiencies.
- On October 31, 2019, after the reporting date, Mesa acquired Gyros Protein Technologies Holding AB for $180 million in cash, subject to purchase-price adjustments. Purchase accounting was incomplete at filing, and the transaction will create a new Biopharmaceutical Development segment.
- Management expects significant additional stock-compensation expense beginning in the quarter ending December 31, 2019, associated with performance-based restricted stock units affected by the GPT acquisition.
- Key risks include execution of the GPT acquisition, the planned Packaging exit, fluctuations in Cold Chain Monitoring project timing and margins, economic sensitivity of capital-equipment sales, foreign-currency exposure, and potential changes in dialysis-care policy affecting Dialyguard products.
- The convertible notes mature August 15, 2025, bear 1.375% cash interest, and may require cash repayment at maturity or upon specified fundamental changes. Conversion-related dilution may become material if the notes become convertible and are not anti-dilutive.
- The prior class-action settlement liability of $3.3 million was paid during the quarter. Mesa reported no material off-balance-sheet arrangements and stated that internal control over financial reporting was effective at September 30, 2019.
Important facts for investors to verify
- Reconcile the request’s “2018 Q2” designation with the filing’s actual September 30, 2019 reporting period.
- Review the financing and dilution implications of the $172.5 million convertible notes, including conversion terms, maturity obligations, and potential share issuance.
- Assess the $180 million GPT acquisition, including final purchase accounting, financing of the transaction, goodwill and intangible assets, and expected integration costs.
- Monitor the planned exit from Cold Chain Packaging and potential inventory liquidation, restructuring, or impairment charges.
- Evaluate whether Cold Chain Monitoring margins recover toward management’s stated 40%–45% target.
- Track the effect of dialysis-care policy changes on the Dialyguard product line and the Instruments segment.
- Confirm future stock-based compensation expense and its effect on earnings, diluted shares, and effective tax rates.