Mesa Laboratories, Inc. — Form 10-Q Summary
Reporting-period note: The supplied filing is for the quarterly and nine-month periods ended December 31, 2020, compared with December 31, 2019. This does not match the request metadata identifying “2019 Q3.”
Business Context and Reporting Period
Mesa Laboratories manufactures and sells quality-control products and services for regulated niche markets. Its four reportable segments are Sterilization and Disinfection Control, Instruments, Biopharmaceutical Development, and Continuous Monitoring. The Biopharmaceutical Development segment reflects the October 2019 acquisition of Gyros Protein Technologies (GPT). The filing is unaudited and covers the three and nine months ended December 31, 2020.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31 | Nine Months Ended Dec. 31 |
|---|---|---|
| Revenue | $34.2 million, up 8% | $96.0 million, up 15% |
| Gross profit | $20.7 million; 60.4% margin | $62.3 million; 64.9% margin |
| Operating income | $0.02 million | $8.1 million |
| Net income (loss) | $(4.5) million | $(0.6) million |
| Diluted EPS | $(0.89) | $(0.13) |
| Operating cash flow | Not separately provided | $23.6 million |
Operating expenses were $20.6 million for the quarter and $54.2 million year to date. Nonoperating expense was $5.7 million for the quarter and $10.7 million year to date, including interest and substantial foreign-currency losses. The nine-month effective tax rate was 75.0%, affected in part by a $0.6 million release of an uncertain tax position.
At December 31, 2020, cash and cash equivalents were $253.7 million, working capital was $267.5 million, and total assets were $621.6 million. Convertible senior notes had $172.5 million of principal outstanding and a $144.3 million net carrying value. The notes bear 1.375% interest and mature in August 2025. The company reported compliance with its debt agreements.
Material Changes Versus the Prior Comparable Period
- Revenue increased 8% for the quarter and 15% for the nine-month period, while gross margin expanded from 46.8% to 60.4% for the quarter and from 55.8% to 64.9% year to date.
- Quarterly operating results improved from a $3.3 million operating loss to approximately break-even; year-to-date operating income increased 17% to $8.1 million.
- Net results remained negative for the quarter and turned to a $0.6 million year-to-date loss, compared with $3.3 million of year-to-date net income in 2019, primarily because of higher operating costs, amortization, interest expense, and foreign-currency losses.
- Biopharmaceutical Development revenue increased to $8.7 million for the quarter and $23.8 million year to date, versus $5.6 million for the comparable 2019 periods. The segment’s gross margin was 53% for the quarter and 64% year to date.
- Instruments revenue declined 10% for the quarter and 15% year to date, reflecting lower discretionary customer spending. Continuous Monitoring revenue declined 18% and 7%, respectively.
- The company completed a common-stock offering of 690,000 shares for net proceeds of $145.9 million. Shares outstanding increased to 5.13 million at December 31, 2020 from 4.39 million at March 31, 2020.
- Operating cash flow increased to $23.6 million from $18.2 million. Investing cash use fell to $1.0 million from $185.0 million because the prior-year period included acquisition expenditures.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects COVID-19-related uncertainty, restrictions, and suppressed demand to continue affecting the business through the remainder of fiscal 2021 and into fiscal 2022. Instruments, Biopharmaceutical Development, and Continuous Monitoring remain particularly exposed to customer facility access and discretionary spending.
- Management expects near-term selling expense of approximately 10%–15% of revenue, research and development expense of approximately 7%–10% of revenue, and an adjusted effective tax rate of approximately 25%, subject to stock-compensation tax effects and other fluctuations.
- Management believes cash on hand and operating cash flow are sufficient for short- and long-term needs, while noting that future acquisitions may require additional debt or equity financing.
- Biopharmaceutical Development margin was affected by unfavorable foreign exchange, inventory overhead-rate changes, obsolete inventory write-offs, and product mix. Management estimated that the segment’s quarterly gross margin would have been approximately 61% absent the currency and inventory effects.
- The company expects to close its Butler, New Jersey facility during the quarter ending June 30, 2021; the quarter included a $0.2 million severance charge related to the closure.
- A previously identified material weakness in information-technology general controls was reported as remediated as of June 30, 2020. Management concluded disclosure controls were effective at December 31, 2020.
- The company corrected an immaterial ERP intercompany-elimination error through revisions to prior-period financial information. The filing states the correction had no impact on total cash flows or total comprehensive income.
- Potential contingencies include approximately $2.5 million of sales-tax, interest, and penalty exposure related to GPT subsidiaries, and expected contingent consideration of approximately $0.6 million, subject to operational and regulatory milestones. No material legal reserves were recorded.
- In January 2021, the board declared a quarterly dividend of $0.16 per share, payable March 15, 2021.
Important Facts for Investors to Verify
- Confirm the intended reporting period, because the supplied filing is for Q3 fiscal 2021, not 2019 Q3.
- Assess whether reported revenue and margin improvements are sustainable after COVID-19-related demand normalization, foreign-exchange effects, inventory adjustments, and acquisition accounting.
- Evaluate GPT’s ongoing contribution, including its significant intangible assets, goodwill, amortization burden, and foreign-currency exposure.
- Review the conversion terms and potential dilution associated with the $172.5 million convertible notes, whose if-converted value exceeded principal at December 31, 2020.
- Monitor COVID-19 effects on customer access, discretionary capital spending, supply continuity, installations, and laboratory operations.
- Verify the resolution and financial impact of the GPT-related sales-tax exposure, contingent consideration, ERP correction, and Butler facility closure.