Mesa Laboratories, Inc. — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2021, representing the first quarter of fiscal 2022. The request metadata identifies “2020 Q1,” but the filing text clearly covers 2021 Q1 and compares it with the quarter ended June 30, 2020. Financial statements are unaudited and presented under U.S. GAAP.
Business context
Mesa Laboratories manufactures and sells quality-control products and services in regulatory-driven niche markets. Its four reportable segments are Sterilization and Disinfection Control, Biopharmaceutical Development, Instruments, and Continuous Monitoring. Manufacturing operations are located in the United States and Europe, with sales globally.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $34.920 million | $29.941 million | 17% |
| Gross profit | $22.211 million | $20.340 million | 9% |
| Gross margin | 63.6% | 67.9% | Down approximately 4.3 percentage points |
| Operating income | $3.123 million | $3.570 million | Down 13% |
| Net income | $1.995 million | $1.217 million | Up 64% |
| Basic EPS | $0.39 | $0.27 | Up $0.12 |
| Diluted EPS | $0.38 | $0.26 | Up $0.12 |
| Cash flow from operations | $9.589 million | $2.260 million | Up $7.329 million |
| Capital expenditures | $0.653 million | $0.216 million | Higher |
Operating expenses increased 14% to $19.088 million, including selling expense of $4.858 million, general and administrative expense of $11.419 million, and research and development expense of $2.811 million. The reported effective tax rate was a 40.7% benefit, compared with a 61.4% benefit in the prior-year quarter, primarily reflecting excess tax benefits from share-based awards and foreign-derived intangible income.
Revenue and segment performance
| Segment | Q1 FY2022 revenue | Prior-year revenue | Revenue change | Q1 FY2022 gross margin |
|---|---|---|---|---|
| Sterilization and Disinfection Control | $15.150 million | $13.067 million | 16% | 75% |
| Biopharmaceutical Development | $8.877 million | $5.949 million | 49% | 53% |
| Instruments | $7.562 million | $7.680 million | Down 2% | 62% |
| Continuous Monitoring | $3.331 million | $3.245 million | 3% | 44% |
Growth was entirely organic. Sterilization and Disinfection Control benefited from higher volumes, healthcare-market recovery, broader customer penetration, modest pricing, and a stronger euro. Biopharmaceutical Development benefited from easing COVID-19 restrictions and an 86% increase in consumables revenue, but its margin declined because of foreign exchange, higher labor costs, and a favorable purchase-accounting adjustment in the prior-year period. Instruments revenue was affected by production relocation and staffing shortages. Continuous Monitoring benefited from greater access to customer sites and improved product pricing and mix.
Liquidity, cash flow, debt, and balance sheet
- Cash and cash equivalents were $275.710 million at June 30, 2021, compared with $263.865 million at March 31, 2021.
- Working capital was $281.863 million, compared with $271.166 million at March 31, 2021.
- Total assets were $612.490 million; total liabilities were $213.487 million; and stockholders’ equity was $399.003 million.
- The company generated $9.589 million of operating cash flow and ended the quarter with a net cash increase of $11.845 million.
- The company had $172.500 million principal amount of 1.375% convertible senior notes due August 2025. The carrying value was $168.695 million and estimated fair value was $198.806 million.
- No amounts were outstanding under the $75 million revolving credit facility, and the company was in compliance with all debt covenants. The facility also permits certain incremental commitments subject to conditions.
- The company paid a quarterly dividend of $0.16 per share and subsequently announced another $0.16 per share dividend payable September 15, 2021.
Material changes and unusual items
- Mesa early adopted ASU 2020-06 on April 1, 2021. The adoption increased the convertible-notes carrying value by approximately $22.799 million, removed the separately recorded equity conversion feature, and produced a $17.052 million net adjustment to beginning retained earnings. It is expected to materially reduce future non-cash interest expense.
- Lower non-cash interest expense from ASU 2020-06 contributed to higher net income. The convertible notes were antidilutive in the quarter, but the company expects they may become dilutive in future periods.
- The Butler, New Jersey facility was closed and production of gas-flow calibration and air-sampling equipment is being moved to Lakewood, Colorado. The company incurred $53 thousand of severance costs and had $156 thousand accrued at quarter-end. Management does not expect material future costs from the consolidation.
- Stock-based compensation expense increased to $2.197 million from $1.268 million, including $351 thousand related to the modification of a restricted stock award for the chief executive officer.
- The company recorded a $2.517 million accrued liability related to historical sales-tax collection and remittance matters involving acquired GPT subsidiaries. Approximately $1.899 million was treated as a preacquisition contingency.
- Foreign currency translation increased accumulated other comprehensive income by $5.371 million during the quarter.
Guidance, outlook, and risks
- Management expects selling expense to be approximately 14%–16% of revenue for fiscal 2022 and research and development expense to remain approximately 7%–10% of revenue in the near term.
- Management stated that cash on hand, operating cash generation, and unused credit capacity should be sufficient for short- and long-term needs, including potential acquisitions, although additional financing may not be available on acceptable terms.
- COVID-19 restrictions had eased in several markets, supporting recovery in healthcare, laboratory, and service activity. However, renewed outbreaks, restrictions, customer caution, and broader economic effects could continue to suppress demand, particularly for discretionary hardware.
- Key operating risks include foreign exchange exposure, labor shortages, production relocation and integration, acquisition execution, product acceptance, regulatory changes, supply and demand conditions, information security, product liability, tax audits, and contingent liabilities.
- The IRS is examining the 2018 tax year of Gyros US, Inc. and its subsidiary, and is reviewing Mesa’s fiscal year ended March 31, 2019. Management does not expect a material effect from changes in unrecognized tax benefits during the next 12 months.
- No material legal reserves, off-balance-sheet arrangements, or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Confirm the applicable period: the filing is for Q1 fiscal 2022 ended June 30, 2021, not Q1 2020.
- Assess whether revenue growth can continue after COVID-related comparisons normalize, particularly in Biopharmaceutical Development.
- Monitor gross-margin pressure from labor costs, foreign exchange, product mix, and production-transition costs.
- Verify completion and expected benefits of the Butler-to-Lakewood manufacturing relocation, including resolution of Instruments staffing constraints.
- Evaluate the effect of ASU 2020-06 on future interest expense, diluted EPS, and potential dilution from the convertible notes.
- Track liquidity and covenant compliance while considering the $172.5 million convertible-notes principal balance and potential acquisition activity.
- Review the sales-tax contingency, pending tax examinations, and any changes in related accrued liabilities.