Mesa Laboratories, Inc. Form 10-Q Summary
Reporting period: Three months ended June 30, 2018, compared with June 30, 2017. The request metadata identifies “2017 Q1,” but the filing is for the quarter ended June 30, 2018, Mesa’s fiscal first quarter of fiscal 2019. Financial statements are unaudited and presented in thousands, except per-share data.
Business Context
Mesa develops and sells quality-control products and services in regulatory-driven niche markets through four divisions: Sterilization and Disinfection Control, Instruments, Cold Chain Monitoring, and Cold Chain Packaging. The company operates across eight locations and serves healthcare, pharmaceutical, food and beverage, medical device, industrial, and environmental markets.
Financial Results and Key Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $25.142 million | $22.673 million | 11% |
| Gross profit | $15.091 million | $12.671 million | 19% |
| Gross margin | 60% | 56% | Up 4 percentage points |
| Operating income | $4.764 million | $1.982 million | 140% |
| Net income | $4.230 million | $1.517 million | 179% |
| Net margin | 17% | 7% | Up 10 percentage points |
| Diluted EPS | $1.06 | $0.39 | Up $0.67 |
| Operating cash flow | $6.543 million | $2.681 million | Up $3.862 million |
Cost of revenues was $10.051 million, broadly flat year over year despite higher revenue. Operating expenses declined 3% to $10.327 million. Other expense was $364,000, primarily interest expense. Income tax expense was $170,000, producing a 3.9% effective tax rate versus a 16.4% benefit in the prior-year quarter. Management expects a normalized effective tax rate of approximately 26%, subject to fluctuations from share-based compensation tax benefits and other factors.
Revenue by Division
| Division | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Sterilization and Disinfection Control | $11.348 million | $10.183 million | 11% |
| Instruments | $8.731 million | $8.603 million | 1% |
| Cold Chain Monitoring | $3.223 million | $2.917 million | 10% |
| Cold Chain Packaging | $1.840 million | $970,000 | 90% |
Management reported 4% organic revenue growth. Acquisitions primarily drove SDC growth, while Cold Chain Packaging benefited from increased orders from its largest customer. The company reported organic growth of 10% in Cold Chain Monitoring and 1% in Instruments, partially offset by a 4% organic decline in SDC.
Cash Flow, Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $7.400 million at June 30, 2018, compared with $5.469 million at March 31, 2018.
- Net cash provided by operating activities was $6.543 million. Capital expenditures were $300,000, resulting in net investing cash use of $300,000.
- Financing cash use was $4.442 million, including $6.875 million of debt repayments and $610,000 of dividends, partially offset by $3.043 million from stock-option exercises.
- Working capital increased to $17.193 million from $14.698 million at March 31, 2018.
- Total interest-bearing debt was $39.750 million, down from $46.625 million at March 31, 2018. Debt consisted of a $21.500 million revolving line and an $18.250 million term loan, before discounts and current classification.
- The credit facility had $58.500 million of unused capacity at June 30, 2018, subject to covenant restrictions. Mesa was in compliance with all debt covenants.
- The credit facility matures March 1, 2022. Contractual debt maturities total $39.750 million, including $33.750 million due in the year ending March 31, 2022. Mesa subsequently paid $1.000 million on the line of credit in July 2018.
Material Changes Versus the Prior Comparable Period
- Revenue increased 11%, while organic revenue increased 4%.
- Gross margin expanded to 60% from 56%, aided by product mix, manufacturing efficiencies, and prior-year facility relocation and inventory-reserve charges.
- Operating income increased substantially as selling and research and development expenses declined and gross profit improved.
- General and administrative expense increased $743,000, primarily from higher stock-based compensation and amortization expense, plus $112,000 of one-time recruiting fees.
- Operating cash flow increased to $6.543 million from $2.681 million.
- Debt declined by $6.875 million from March 31, 2018.
- The relocation of the Omaha and Traverse City operations, together with the old Bozeman operations, was completed June 30, 2018. Total relocation costs were $1.584 million, and the remaining accrued balance was zero.
- Mesa adopted ASC 606 revenue recognition effective April 1, 2018 using the modified retrospective method. Management reported no material impact on the financial statements.
Guidance, Outlook, Risks, and Unusual Items
- Management expects to fulfill the majority of SDC backlog delayed by the Bozeman relocation during the quarter ending September 30, 2018.
- Management expects continued demand for SDC products, instruments, and cold chain monitoring services, while noting that instruments and monitoring systems are more sensitive to economic conditions and customer capital spending.
- The company expects new products from ongoing research and development projects may become available during the coming year and plans incremental investment in sales, marketing, and development.
- Management described liquidity as strong and believes operating cash flow, available credit, and other financing sources will satisfy ongoing business and debt-service requirements.
- The old Bozeman facility, carried at $1.934 million and classified as held for sale, is expected to sell for approximately $2.300 million before broker commissions.
- Two purported class actions allege unsolicited fax advertising in violation of the Telephone Consumer Protection Act and related laws. Mesa intends to defend the cases but cannot predict the outcome or potential liability.
- The company has approximately $3.194 million of open purchase-order commitments payable within one year.
- Mesa expects to adopt the new lease standard, ASU 2016-02, beginning April 1, 2019. The balance-sheet impact remains under assessment; management does not expect a significant income-statement or cash-flow impact.
- Foreign currency translation reduced other comprehensive income by $1.312 million. Foreign subsidiaries accounted for approximately 23% of revenue.
- In July 2018, the board declared a quarterly dividend of $0.16 per share, payable September 17, 2018.
Investor Verification Priorities
- Verify that the filing period is June 30, 2018, rather than the “2017 Q1” period stated in the request metadata.
- Assess whether SDC backlog was fulfilled as expected in the September 30, 2018 quarter and whether the division’s organic decline reversed.
- Monitor the sustainability of the 60% consolidated gross margin, particularly the impact of product mix and Cold Chain Packaging’s lower-margin customer contract.
- Review debt repayment progress, covenant compliance, interest-rate exposure, and the March 2022 maturity concentration.
- Track the status and potential exposure from the two TCPA class actions.
- Evaluate the effect of stock-based compensation tax benefits on the unusually low 3.9% effective tax rate and future earnings comparability.
- Confirm the timing and proceeds of the old Bozeman facility sale and the implementation impact of the new lease standard.