Mesa Laboratories, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended December 31, 2015. The request metadata identifies “2014 Q3,” but the supplied filing is the quarter ended December 31, 2015, with comparable 2014 periods.
Business Context
Mesa provides quality-control products and services through four segments: Biological Indicators, Instruments, Continuous Monitoring, and Cold Chain. Its markets are primarily regulatory-driven healthcare, pharmaceutical, industrial, environmental, and logistics applications. The company completed the Infitrak and North Bay acquisitions during the period and also completed additional European biological-indicator distributor acquisitions in October 2015.
Key Financial Metrics
| Metric | Three months ended Dec. 31, 2015 | Three months ended Dec. 31, 2014 | Nine months ended Dec. 31, 2015 | Nine months ended Dec. 31, 2014 |
|---|---|---|---|---|
| Revenue | $19.913 million | $17.830 million | $59.847 million | $52.770 million |
| Gross profit | $12.209 million | $11.052 million | $36.417 million | $31.880 million |
| Gross margin | 61% | 62% | 61% | 60% |
| Operating income | $3.832 million | $3.708 million | $10.480 million | $11.663 million |
| Net income | $2.361 million | $2.403 million | $6.419 million | $7.344 million |
| Net margin | 12% | 13% | 11% | 14% |
| Diluted EPS | $0.63 | $0.66 | $1.72 | $2.01 |
Cash flow: Nine-month operating cash flow was $9.953 million, compared with $6.176 million in the prior-year period. Investing cash use was $29.490 million, including acquisitions and $6.291 million of capital expenditures. Financing cash inflow was $20.826 million, primarily from $25.000 million of debt issuance, partly offset by debt repayments and $1.724 million of dividends. Ending cash was $3.272 million, up from $2.034 million at March 31, 2015.
Balance sheet and liquidity: Working capital was $13.345 million at December 31, 2015. Total debt was $47.000 million, consisting of $28.500 million outstanding under the line of credit and $18.500 million under the term loan. The credit facility was amended to provide a $50.000 million revolving line, a $20.000 million term loan, and a maturity date of June 30, 2020. Management stated that the company was in compliance with its debt covenants and believed available liquidity and operating cash flow were sufficient for its needs.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue increased 13%, driven principally by acquisitions and growth in Biological Indicators and Cold Chain.
- Third-quarter revenue increased 12%; Biological Indicators revenue rose 12%, Instruments rose 1%, Continuous Monitoring declined 2%, and Cold Chain contributed $1.239 million versus no prior-year comparable revenue.
- Nine-month gross margin improved to 61% from 60%, while third-quarter gross margin declined to 61% from 62% due principally to mix.
- Nine-month operating income declined 10% and net income declined 13%, despite revenue growth, because operating expenses increased 28%.
- General and administrative expense increased by $4.823 million for the nine-month period, including $1.709 million related to the Amato litigation settlement, higher amortization, personnel costs, ERP implementation costs, and acquired-business expenses.
- The company recognized $9.541 million of estimated contingent consideration related to the Infitrak acquisition, with potential consideration of up to approximately $10.800 million based on exchange rates at December 31, 2015.
- Property, plant and equipment increased to $15.685 million from $9.598 million, reflecting capital investment including construction of a new Bozeman facility.
Guidance, Outlook, Risks, and Unusual Items
- Management expects the new ERP system’s order-fulfillment delays to be timing-related. Open-order backlog increased approximately $500,000 at quarter end, and management expects normalization over the following one to two quarters.
- Management expects Continuous Monitoring revenue to approximate $2.5 million per quarter over the next few quarters and Cold Chain revenue to approximate the prior quarter’s $1.840 million level, subject to seasonality and currency effects.
- The company expects its fiscal-year effective tax rate to be approximately 34% to 37%.
- The new Bozeman facility is expected to cost approximately $14.750 million and be completed no later than September 30, 2016. Management expects potential proceeds of $2 million to $3 million from selling the existing facility.
- In January 2016, the board declared a quarterly dividend of $0.16 per share, payable March 15, 2016.
- Contingent consideration, foreign-currency movements, acquisition integration, ERP execution, customer capital spending, and product mix are significant sources of uncertainty.
- The Amato litigation was settled for $3.165 million; insurance covered $415,000, $1.041 million had previously been accrued, and $1.709 million was charged to general and administrative expense.
- The company reported no material changes to previously disclosed risk factors, no derivative instruments, and minimal exposure to foreign-currency and commodity market risks.
Important Facts for Investors to Verify
- Reconcile reported organic growth with acquisition-related revenue and the approximately $500,000 ERP-related backlog.
- Monitor debt leverage, covenant compliance, interest-rate exposure, and the remaining $21.500 million of unused credit capacity reported as of January 31, 2015 in the filing’s liquidity discussion.
- Assess the eventual amount and timing of Infitrak and other contingent consideration payments beginning in fiscal 2017.
- Evaluate whether the Amato settlement and other unusual expenses distort reported nine-month earnings and margins.
- Track integration progress, profitability, and margin recovery in Continuous Monitoring and Cold Chain.
- Verify the cost, completion schedule, and expected sale proceeds associated with the Bozeman facility.
- Consider currency effects on the French and Canadian operations and the effect of future acquisitions on goodwill and intangible-asset amortization.