Mesa Laboratories, Inc. — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2012, representing the first quarter of fiscal 2013. The request metadata identifies “2011 Q1,” but the filing itself clearly reports June 30, 2012 results. The financial statements are unaudited. Mesa operates through Biological Indicators and Instruments segments.
Financial performance and position
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Revenue | $10.559 million | $9.297 million | +14% |
| Gross profit | $6.455 million | $5.388 million | +20% |
| Gross margin | 61% | 58% | +3 percentage points |
| Operating income | $3.219 million | $2.693 million | +20% |
| Net income | $2.099 million | $1.679 million | +25% |
| Net profit margin | 20% | 18% | +2 percentage points |
| Diluted EPS | $0.59 | $0.49 | +20% |
| Operating cash flow | $3.412 million | $2.888 million | +18% |
| EBITDA-like non-GAAP measure | $3.969 million | $3.184 million | +25% |
Biological Indicators revenue increased 10% to $5.118 million, supported by organic growth and expansion into new markets. Instruments revenue increased 18% to $5.441 million, primarily due to the Bios acquisition; revenue from other Instruments product lines was relatively flat. The company attributed improved gross profit to higher sales, manufacturing efficiencies and the acquisition.
Operating expenses increased 20% to $3.236 million. General and administrative expense rose $506,000, principally from additional amortization, higher personnel costs and approximately $80,000 of Bios-related professional fees. Research and development expense declined modestly.
At June 30, 2012, cash and cash equivalents were $4.593 million, total assets were $66.711 million, working capital was approximately $13.330 million and the current ratio was approximately 4:1. Net inventory was $5.575 million and gross trade receivables were $7.519 million.
Cash flow, debt and liquidity
- Operating activities generated $3.412 million of cash.
- Investing activities used $16.845 million, including $16.660 million for the Bios acquisition and $185,000 of capital expenditures.
- Financing activities provided $10.835 million, including $11.000 million of new borrowings, partially offset by $434,000 of dividends, $43,000 of treasury stock purchases and other items.
- Cash declined by $2.598 million during the quarter, from $7.191 million to $4.593 million.
- Debt was $11.000 million at quarter-end under a $20.000 million revolving credit facility maturing in February 2015. The company reported $9.000 million of unused capacity.
- The credit facility is secured by company assets and requires a maximum funded-debt-to-defined-EBITDA ratio of 2.5:1 and a minimum fixed-charge coverage ratio of 1.5:1.
Material changes and unusual items
On May 15, 2012, Mesa acquired specified assets and assumed certain liabilities of Bios International Corporation. Aggregate preliminary consideration was $18.900 million, consisting of $16.660 million in cash and $2.240 million of contingent consideration. The transaction added approximately $8.228 million of identifiable intangibles and $9.200 million of goodwill, all assigned to the Instruments segment.
The Bios results were included only from the May 15 acquisition date. Pro forma revenue for the quarter, assuming the acquisition occurred at the beginning of the period, was $11.340 million, with pro forma net income of $2.120 million; management cautioned that these figures are not indicative of actual results.
Contingent consideration is payable in the first quarter of fiscal 2016 if cumulative Bios revenues during the three-year earn-out exceed approximately $22.127 million. Potential undiscounted future payments range from zero to $6.710 million. The preliminary liability may change as purchase accounting is finalized, with subsequent changes potentially affecting earnings.
The company reclassified approximately $409,000 of customer shipping payments from cost of revenue to revenue for the June 2011 quarter and comparable historical periods. This increased reported revenue and margins but did not affect other income-statement amounts.
Outlook, commentary and risks
Management stated that cash generated from operations, working capital and available credit capacity should be sufficient for short- and long-term needs. Key uses of cash include dividends, debt obligations, capital expenditures and potential acquisitions. Management expects integration of acquisitions generally to require six to twelve months and anticipates savings and income growth from integrating Bios operations and marketing.
The company maintains a quarterly dividend policy. A $0.13-per-share dividend was declared in August 2012, payable September 17, 2012. Management also continued to evaluate strategic acquisitions and had authority to repurchase up to 300,000 shares under its existing plan.
Principal risks include economic conditions, customer capital spending, competition across the company’s markets, integration of acquisitions, changes in business strategy, personnel capabilities and unusual items arising from ongoing strategic evaluations. The filing reported no material change to the risk factors in the March 31, 2012 Form 10-K. Internal controls were considered effective, although the Bios operations were excluded from the evaluation because of the recency of the acquisition.
Investor verification points
- Verify the final purchase-price allocation for Bios, including the allocation between goodwill and acquired intangibles.
- Monitor Bios revenue performance against the approximately $22.127 million earn-out threshold and the potential payment of up to $6.710 million.
- Assess post-acquisition Instruments growth separately from legacy Instruments operations, which management described as relatively flat.
- Review compliance with the credit facility’s leverage and fixed-charge coverage covenants as debt service and acquisition integration continue.
- Evaluate whether the 61% gross margin and 20% net margin are sustainable after acquisition-related amortization, integration costs and product-mix changes.
- Confirm the effect of the shipping-payment reclassification when comparing historical revenue and margin trends.