Mesa Laboratories, Inc. Form 10-Q Summary
Reporting period: Three and six months ended September 30, 2017. The request metadata identifies “2016 Q2,” but the supplied filing is the quarter ended September 30, 2017, for Mesa’s fiscal year ending March 31, 2018. Interim financial statements are unaudited.
Business Context
Mesa operates four divisions serving niche, regulation-driven quality-control markets: Sterilization and Disinfection Control, Instruments, Cold Chain Monitoring, and Cold Chain Packaging. Products and services support healthcare, pharmaceutical, food and beverage, medical device, environmental, and industrial customers.
Key Financial Metrics
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $23.0 million, down 6% | $45.6 million, essentially flat |
| Gross profit | $13.2 million, down 4% | $25.9 million, up 1% |
| Gross margin | 57.7%, versus 56.2% | 56.8%, versus 56.5% |
| Operating income | $3.6 million, down 9% | $5.6 million, down 15% |
| Net income | $2.4 million, essentially flat | $3.9 million, down 10% |
| Diluted EPS | $0.60, versus $0.62 | $0.98, versus $1.12 |
| Operating cash flow | Not separately provided | $7.4 million, versus $1.3 million |
Six-month operating expenses increased 6% to $20.3 million, primarily because of higher general and administrative costs, including personnel, employee relocation, acquisition-related costs, depreciation, and property taxes. Stock-based compensation was $985,000 for the six-month period.
Liquidity, Debt, and Capital Resources
- Cash and cash equivalents were $10.3 million at September 30, 2017, compared with $5.8 million at March 31, 2017.
- Working capital was $26.9 million, compared with $19.2 million at March 31, 2017.
- Total debt was approximately $52.3 million, consisting of a $33.0 million revolving line balance and a $19.25 million term loan, net of discount and current portion.
- The credit facility provides an $80 million revolving line, a $20 million term loan, and up to $2.5 million of letters of credit, with potential accordion increases of up to $100 million. The facility matures in March 2022 and is secured by company assets.
- The company was compliant with its debt covenants at September 30, 2017. As of October 31, 2017, outstanding indebtedness was $58.25 million and unused credit capacity was $41.0 million, subject to covenant restrictions.
- Six-month capital expenditures were $2.0 million. Mesa spent approximately $17.65 million on the new Bozeman facility and related land, completed in September 2017.
- Six-month dividends were $1.2 million. The board subsequently declared a $0.16-per-share quarterly dividend payable December 15, 2017.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined $1.5 million, primarily because of lower Instruments, Cold Chain Monitoring, and Cold Chain Packaging revenue. Sterilization and Disinfection Control revenue increased 12%.
- Six-month revenue was essentially unchanged because 10% growth in Sterilization and Disinfection Control and 4% growth in Cold Chain Monitoring offset declines in Instruments and Cold Chain Packaging.
- Cold Chain Packaging was the principal weakness: revenue declined 44% in the quarter and 36% year to date. Gross margin fell to 14% from 28% for the quarter and to 14% from 30% for the six-month period.
- Sterilization and Disinfection Control revenue increased 12% for the quarter and 10% year to date, with gross margin improving to 68% and 67%, respectively. Benefits included volume efficiencies and increased use of internally manufactured biological indicators.
- A $406,000 increase in inventory reserves related to discontinued products reduced year-to-date gross margin; management indicated the six-month margin would have been 58% rather than 57% without this charge.
- Operating income and net income declined year to date despite stable revenue, reflecting higher operating expenses and unusual costs.
- Operating cash flow improved substantially, mainly because the prior-year period included larger payments of contingent consideration and accrued liabilities, while the current period benefited from lower inventories.
- Foreign currency translation generated $1.7 million of other comprehensive income during the six months, compared with a $135,000 loss in the prior-year period.
Outlook, Risks, and Unusual Items
- Management expects fiscal 2018 effective tax rate to be approximately 36% to 39%, excluding potentially significant year-to-year effects from excess tax benefits and deficiencies related to employee stock awards.
- Management expects Cold Chain Packaging revenue for fiscal 2018 to be approximately $2 million to $3 million below fiscal 2017 because of lost business from a large customer, reduced orders from the largest customer, and longer sales cycles.
- The company is evaluating the Cold Chain Packaging segment for potential impairment. If an impairment analysis is required, management states that any resulting charge could be material.
- Facility relocation costs totaled $622,000 in the six months, with total relocation costs estimated at $2.1 million. The Omaha facility was sold for net proceeds of $1.1 million, producing a $116,000 gain. The old Bozeman facility was classified as held for sale and is expected to generate approximately $2.5 million when sold.
- A further $300,000 accrual was recorded for contingent consideration related to the process challenge device business. Total potential consideration under the arrangement ranges from zero to $1.5 million, and the final amount could change based on actual revenues through the earn-out period.
- Management expects continued growth from sterilization and disinfection products, while instruments and cold-chain monitoring remain more sensitive to economic conditions and customer capital spending. Several research and development projects may result in new products during the coming year.
- Management identifies risks from global economic conditions, discretionary customer spending, product transitions, acquisition integration, foreign currency movements, inventory obsolescence, facility relocation, and potential impairment.
- Mesa adopted the goodwill impairment standard in ASU 2017-04 early, effective April 1, 2017, and expects to adopt the new revenue recognition standard in fiscal 2019 using the modified retrospective method. Management preliminarily expects no material impact.
Important Facts for Investors to Verify
- Whether Cold Chain Packaging customer losses are temporary or lead to a sustained revenue and margin decline.
- The amount and timing of any impairment charge for the Cold Chain Packaging segment.
- Final contingent consideration payable for the process challenge device business and its effect on earnings.
- Progress, remaining cost, and operational impact of the Bozeman relocation through the expected June 30, 2018 completion date.
- Debt levels, covenant compliance, interest-rate exposure, and liquidity after the October 2017 borrowing activity.
- Whether revenue growth in Sterilization and Disinfection Control offsets weakness in Instruments and cold-chain businesses.
- The effect of product discontinuations and the $406,000 inventory reserve on future gross margins.
- Changes in the effective tax rate, particularly the volatility associated with employee stock-option exercises.