Mesa Laboratories, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended September 30, 2018, filed October 31, 2018. The request metadata identifies “2017 Q2,” but the filing itself reports the 2018 second fiscal quarter. Mesa operates four divisions: Sterilization and Disinfection Control, Instruments, Cold Chain Monitoring, and Cold Chain Packaging.
Financial performance and position
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $24.865 million, up 8% | $50.007 million, up 10% |
| Gross profit | $14.577 million; 59% margin | $29.668 million; 59% margin |
| Operating income | $1.138 million, down 69% | $5.902 million, up 5% |
| Net income | $994 thousand, down 58% | $5.224 million, up 35% |
| Diluted EPS | $0.25, versus $0.60 | $1.30, versus $0.98 |
| Net cash from operations | Not separately provided | $10.200 million, versus $7.368 million |
Six-month revenue growth reflected acquisitions and organic growth of approximately 3%. Second-quarter revenue increased in Sterilization and Disinfection Control and Instruments, but declined in Cold Chain Monitoring and Cold Chain Packaging. The six-month gross margin improved from 57% to 59%.
At September 30, 2018, cash and cash equivalents were $5.625 million, working capital was $14.059 million, and total debt was $33.375 million, compared with $46.625 million at March 31, 2018. The company had $64.5 million of unused credit-facility capacity, subject to covenants, and reported compliance with all debt covenants. Debt is principally due in 2022, with total contractual maturities of $33.375 million.
Six-month investing cash flow was a $1.373 million source, including $2.222 million of proceeds from the sale of the old Bozeman facility. Financing cash flow was a $11.300 million use, principally reflecting $13.250 million of debt repayment and $1.226 million of dividends. Capital expenditures were $849 thousand.
Material changes versus the prior comparable periods
- Second-quarter revenue rose 8%, while gross profit increased 10%; however, a $3.3 million estimated legal settlement caused operating income and net income to decline substantially.
- Six-month revenue increased 10%, gross profit increased 15%, operating income increased 5%, and net income increased 35%.
- General and administrative expense increased 17% in the quarter and 14% year to date, driven primarily by higher non-cash stock-based compensation and intangible-amortization expense.
- Selling expense declined 21% in the quarter and 26% year to date; research and development expense declined 5% and 18%, respectively.
- Debt declined by $13.25 million from March 31, 2018, supported by operating cash flow and the facility sale.
- The Bozeman relocation was completed by June 30, 2018. Total relocation costs were $1.584 million, and the related accrued balance was fully paid by September 30, 2018.
- Foreign currency translation produced a $1.361 million year-to-date loss in other comprehensive income, compared with a $1.699 million gain in the prior-year period.
Outlook, commentary, risks, and unusual items
- Management stated that liquidity is strong and expected to meet ongoing operating and debt-service requirements. It expects an effective tax rate of approximately 26%, subject to excess tax benefits or deficiencies from share-based compensation.
- Management expects continued growth organically and through acquisitions, additional investment in sales and marketing, research and development, personnel, and the European ERP rollout. No specific revenue or earnings guidance was provided.
- Cold Chain Packaging margins were pressured by lower-price business from a large customer and higher commodity costs. Management is pursuing price increases but expects margins to remain substantially below those of other divisions.
- Instrument and Cold Chain Monitoring demand is more sensitive to economic conditions and discretionary customer capital spending. Division results may also fluctuate based on order timing, installations, and customer demand.
- The company accrued $3.3 million for purported class actions alleging unsolicited fax advertising in violation of the Telephone Consumer Protection Act and related laws. Management intends to defend the cases, and the ultimate liability could be greater or less than the accrued amount.
- The company had not completed its accounting for all Tax Cuts and Jobs Act effects as of September 30, 2018; further adjustments may affect tax balances or expense.
- Mesa early-adopted guidance for capitalizing implementation costs in cloud-computing arrangements and capitalized $144 thousand related to its European ERP implementation. Revenue-recognition adoption had no material financial-statement impact.
- Management reported effective disclosure controls and internal control over financial reporting, with no material changes during the quarter. No material changes to previously disclosed risk factors were reported.
Investor verification items
- Verify the filing period against the request metadata: the document is for the quarter ended September 30, 2018, not 2017.
- Assess the sustainability of reported earnings excluding the $3.3 million legal accrual, the $288 thousand facility-sale gain, and elevated stock-based compensation and amortization.
- Review the status and ultimate exposure of the fax-advertising litigation.
- Monitor Cold Chain Packaging pricing, commodity costs, customer concentration, and margin recovery efforts.
- Confirm debt amortization, covenant compliance, interest-rate exposure, and available revolver capacity.
- Evaluate acquisition contributions versus organic growth, particularly in Sterilization and Disinfection Control.
- Track the finalization of TCJA tax accounting, the effective tax rate, and potential stock-compensation-related tax volatility.