Mesa Laboratories, Inc. Form 10-Q Summary
Reporting period: Three months ended June 30, 2017, filed August 1, 2017. The request metadata identifies “2016 Q1,” but the filing itself clearly covers the first quarter of fiscal 2018 and compares it with the three months ended June 30, 2016.
Business Context
Mesa operates four reporting segments focused on quality-control products and services in regulated niche markets: Biological Indicators, Instruments, Cold Chain Monitoring, and Cold Chain Packaging. Products and services serve healthcare, pharmaceutical, medical device, food and beverage, environmental, industrial, and semiconductor customers.
Financial Performance and Position
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $22.673 million | $21.114 million | Up 7% |
| Gross profit | $12.671 million | $12.014 million | Up 5% |
| Gross margin | 56% | 57% | Down 1 point |
| Operating income | $1.982 million | $2.575 million | Down 23% |
| Net income | $1.517 million | $1.930 million | Down 21% |
| Diluted EPS | $0.39 | $0.51 | Down 24% |
| Operating cash flow | $2.681 million | $3.632 million | Down 26% |
- Segment revenue: Biological Indicators $10.183 million, Instruments $8.603 million, Cold Chain Monitoring $2.917 million, and Cold Chain Packaging $0.970 million.
- Operating expenses: $10.689 million, up 13%, including selling expense of $2.679 million, general and administrative expense of $6.857 million, and research and development expense of $1.153 million.
- Cash and liquidity: Cash and equivalents were $2.976 million at June 30, 2017. Working capital was $18.824 million.
- Debt: Total debt before debt discount was $51.0 million, consisting of a $31.5 million revolving-line balance and a $19.5 million term loan. The company reported compliance with its debt covenants.
- Capital expenditures: Property, plant and equipment purchases totaled $1.505 million during the quarter.
- Dividends: $0.601 million was paid during the quarter. The board subsequently declared a $0.16-per-share quarterly dividend payable September 15, 2017.
- Tax rate: The effective tax rate was negative 16.4%, compared with 11.0% in the prior-year quarter, primarily reflecting significant excess tax benefits from share-based compensation.
Material Changes Versus the Prior Comparable Period
- Revenue increased 7%, led by Cold Chain Monitoring revenue growth of 26%, Biological Indicators growth of 8%, and Instruments growth of 5%. Cold Chain Packaging revenue declined 12%.
- Management estimated that approximately $0.5 million of Biological Indicators revenue was accelerated into the quarter because customers ordered ahead of the Omaha facility relocation. Excluding that acceleration, overall organic growth would have been approximately 4% rather than 6%.
- Gross margin declined to 56% from 57%, primarily because of a $406,000 increase in inventory reserves for products being discontinued and $522,000 of facility-relocation costs. Management stated that gross margin would have been approximately 58% excluding the additional inventory reserve.
- General and administrative expense increased 15%, driven by higher personnel, relocation, employee moving, depreciation, and property-tax costs.
- Interest and other expense increased, and the company recorded a $300,000 additional accrual for contingent consideration related to its process challenge device business.
- Operating cash flow decreased by $951,000, while investing cash use improved because the prior-year period included significant acquisition spending.
- The company acquired substantially all relevant assets and certain liabilities of Hucker & Hucker GmbH’s biological-indicator distribution business in May 2017. Acquisitions during the quarter totaled $362,000 and none were material individually.
Outlook, Risks, and Unusual Items
- Management expects continued growth from organic initiatives and acquisitions. It stated that markets for Biological Indicators and Cold Chain Packaging remain strong, while Instruments and Cold Chain Monitoring are more sensitive to economic conditions and customer capital-spending decisions.
- Management expects Cold Chain Packaging revenue to improve during the remaining fiscal year because of product-line seasonality.
- The company is relocating Biological Indicator operations from Omaha and Traverse City to its Bozeman facility. Total relocation costs are estimated at $2.1 million, with completion expected by March 31, 2018.
- The Omaha facility was sold after quarter-end for approximately $1.2 million, and management expects the former Bozeman facility to be sold for approximately $2.5 million after the relocation is completed.
- Management anticipates an effective tax rate of approximately 35% to 38% for fiscal 2018, excluding potentially significant fluctuations from excess tax benefits and deficiencies related to employee stock awards.
- Contingent consideration for the process challenge device business may range from zero to $1.5 million. The earn-out is subject to further adjustment after the October 2017 measurement period.
- The company’s five-year credit facility matures in March 2022, is secured by company assets, and requires leverage and fixed-charge coverage compliance. As of July 31, 2017, outstanding debt was $51.0 million and unused credit capacity was $48.5 million.
- Management reported no material changes to previously disclosed risk factors, no derivatives, and minimal foreign-currency and commodity-market exposure.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of June 30, 2017.
Important Facts for Investors to Verify
- Whether accelerated Biological Indicators orders created a temporary pull-forward that could reduce revenue in subsequent quarters.
- The remaining cost and timing of the Bozeman consolidation and the proceeds and gains from planned facility sales.
- The final amount of contingent consideration payable after the October 2017 earn-out period.
- Whether inventory reserves and discontinued products continue to pressure gross margins.
- Debt repayment requirements, covenant headroom, interest-rate exposure, and the March 2022 maturity.
- Segment-level performance, particularly the sustainability of Cold Chain Monitoring growth and the expected seasonal recovery in Cold Chain Packaging.
- Future effective tax rates and the volatility caused by employee stock-option exercises.