Mesa Laboratories, Inc. Form 10-Q Summary
Reporting period: Quarterly and six-month periods ended September 30, 2012, compared with the corresponding 2011 periods. The supplied metadata identifies “2011 Q2,” but the filing itself is for the quarter ended September 30, 2012. The financial statements are unaudited.
Business Context
Mesa operates two divisions: Biological Indicators, which provides sterilization indicators, and Instruments, which provides quality-control instruments, disposables, parts and services for healthcare, pharmaceutical, food and beverage, industrial and related markets.
On May 15, 2012, Mesa acquired specified assets and assumed certain liabilities of Bios International Corporation. The acquisition expanded the Instruments division and contributed results from the acquisition date.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Six Months Ended September 30 |
|---|---|---|
| Revenue | $11.706 million, up 21% | $22.266 million, up 17% |
| Gross profit | $7.248 million | $13.704 million |
| Gross margin | 62%, versus 60% | 62%, versus 59% |
| Operating income | $3.488 million | $6.708 million |
| Net income | $2.248 million, up 9% | $4.348 million, up 16% |
| Diluted earnings per share | $0.64, versus $0.59 | $1.23, versus $1.09 |
| Net profit margin | 19%, versus 21% | 20%, unchanged |
Quarterly operating expenses increased 51% to $3.760 million, primarily from higher general and administrative and research and development costs. Six-month operating expenses increased 35% to $6.996 million.
Six-month operating cash flow was $4.926 million, compared with $4.605 million in the prior year. Investing cash flow was negative $17.030 million, principally because of the $16.660 million Bios acquisition. Financing cash flow was positive $7.685 million, including $11.000 million of borrowings, partially offset by $3.000 million of debt repayments and $871,000 of dividends.
Cash and cash equivalents declined to $2.772 million at September 30, 2012, from $7.191 million at March 31, 2012. Working capital was approximately $13.371 million, compared with $14.899 million at March 31, 2012.
Long-term debt was $8.000 million at September 30, 2012, under a $20.000 million revolving credit facility. Unused borrowing capacity was $12.000 million. Mesa made an additional $1.500 million principal payment in October 2012. The facility matures in February 2015 and includes funded-debt-to-EBITDA and fixed-charge coverage covenants.
Material Changes Versus Prior Period
- Revenue growth was driven primarily by the Bios acquisition, particularly in Instruments product revenue, which increased 61% for the quarter and 40% for the six-month period.
- Biological Indicators revenue increased 3% for the quarter and 6% for the six-month period.
- Instruments revenue increased 42% for the quarter and 29% for the six-month period; service revenue increased 27% and 21%, respectively.
- Gross margins improved because of higher sales and manufacturing efficiencies.
- General and administrative expense increased by approximately $1.025 million for the quarter and $1.531 million for the six months, reflecting acquisition-related amortization, personnel, professional fees and ERP/Sarbanes-Oxley implementation costs.
- Research and development expense increased $213,000 for the quarter and $185,000 for the six months.
- Goodwill increased to $23.640 million from $14.450 million and intangibles increased to $16.769 million from $9.819 million, primarily because of the Bios acquisition.
Outlook, Risks and Unusual Items
Management stated that it expects the Bios acquisition to generate integration savings and income growth and to maintain Mesa’s historic profitability measures. Management believes cash from operations, available credit and other potential financing sources will be sufficient to meet short- and long-term needs. No formal earnings or revenue guidance was provided.
The Bios transaction included contingent consideration based on cumulative acquisition-related revenue exceeding $22.127 million over three years. The potential undiscounted payment ranges from zero to $6.710 million; Mesa recorded a $2.140 million liability, payable in the first quarter of the fiscal year ending March 31, 2016. Changes in the liability could affect future income or expense.
Mesa is evaluating a potential state sales-tax liability, but recorded no adjustment for the period. A technology license also provides for up to $225,000 of additional milestone payments and potential royalties.
Key risks include weaker global economic conditions, delayed customer capital spending, tighter credit markets, customer financial instability, acquisition integration, product mix and competition. Management reported that the New Jersey operations were not significantly affected by Hurricane Sandy.
Management concluded that disclosure controls and internal control over financial reporting were effective as of September 30, 2012, although the Bios operations were excluded from the internal-control evaluation because of the recency of the acquisition.
In November 2012, the board declared a quarterly dividend of $0.14 per share. On October 1, 2012, Mesa increased authorized common shares from 8 million to 25 million.
Investor Verification Items
- Verify the reported filing period, since the request metadata refers to 2011 Q2 while the filing covers the quarter ended September 30, 2012.
- Assess the sustainability of growth attributable to the Bios acquisition versus organic growth.
- Review acquisition-related amortization, goodwill, intangible assets and the contingent consideration estimate.
- Monitor debt repayment, covenant compliance, interest rates and remaining credit capacity.
- Evaluate liquidity after the acquisition, dividends and debt repayments, including the relatively low cash balance.
- Track the unresolved state sales-tax matter and the potential Bios earn-out payment of up to $6.710 million.
- Consider the effect of higher general and administrative, research and development, stock-based compensation and integration costs on future margins.