Mesa Laboratories, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2020. The request metadata identifies “2019 Q1,” but the filing text is Mesa Laboratories’ fiscal 2021 first-quarter Form 10-Q and compares results with the three months ended June 30, 2019.
Business context
Mesa Labs 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. Biopharmaceutical Development was added following the October 2019 acquisition of Gyros Protein Technologies Holding AB (“GPT”).
Key financial metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $29.941 million | $26.288 million | 14% |
| Gross profit | $19.968 million | $16.139 million | 24% |
| Gross margin | 66.7% | 61.4% | Up approximately 5.3 percentage points |
| Operating income | $3.198 million | $5.392 million | (41%) |
| Operating margin | 10.7% | 20.5% | Down approximately 9.8 percentage points |
| Net income | $1.025 million | $4.597 million | (78%) |
| Diluted EPS | $0.22 | $1.13 | Down $0.91 |
| Cash flow from operations | $2.068 million | $0.724 million | Up $1.344 million |
| Capital expenditures | $0.216 million | $0.226 million | Comparable |
Operating expenses increased 56% to $16.770 million, including selling expense of $4.075 million, general and administrative expense of $10.099 million, and research and development expense of $2.596 million. Interest expense and debt-discount amortization increased to $1.919 million from $0.395 million, primarily because of the convertible senior notes issued in August 2019.
At June 30, 2020, cash and cash equivalents were $230.951 million, compared with $81.380 million at March 31, 2020. Working capital was $249.281 million, compared with $96.784 million at March 31, 2020. The company had $172.500 million of convertible notes outstanding, with a net carrying value of $141.604 million. The notes bear interest at 1.375% and mature in August 2025.
Material changes versus the prior comparable period
- Revenue growth was driven by the GPT acquisition and higher Sterilization and Disinfection Control revenue. Organic revenue growth declined 4%.
- Sterilization and Disinfection Control revenue rose 8% to $13.067 million, with gross margin increasing to 76% from 70%. Temporary advance buying helped results, but orders slowed as customers began reversing those purchases.
- Instruments revenue declined 20% to $7.680 million, primarily because customers delayed discretionary spending during the COVID-19-related economic downturn.
- Biopharmaceutical Development contributed $5.949 million of revenue and $4.466 million of gross profit. GPT contributed a $2.176 million net loss, including acquisition-related effects.
- Continuous Monitoring revenue declined 2% to $3.245 million, while gross margin fell to 27% from 38% because service activity was constrained and technicians continued to be paid.
- Corporate and Other revenue fell to zero from $1.317 million following the discontinuation of the Cold Chain Packaging division.
- The company completed a public offering of 690,000 shares at $225 per share, generating $145.935 million of net proceeds. Shares outstanding increased to 5,102,939 at June 30, 2020 from 4,387,140 at March 31, 2020.
- Foreign currency translation adjustments increased accumulated other comprehensive income by $13.052 million.
Guidance, outlook, risks and unusual items
- Management expects COVID-19-related uncertainty, restrictions, and suppressed demand to continue affecting the business during the remainder of the fiscal year ending March 31, 2021.
- Management expects a gradual return toward normal demand, but warns that renewed outbreaks or restrictions could delay recovery. Hardware demand is expected to recover more slowly than consumables demand.
- Near-term selling expense is expected to approximate 10% to 15% of revenue, and research and development expense is expected to approximate 7% to 10% of revenue.
- Management expects a go-forward effective tax rate of approximately 25%, subject to volatility from excess tax benefits and deficiencies related to employee stock awards.
- The quarter included significant non-cash items, including $1.268 million of stock-based compensation, $3.354 million of amortization of acquisition-related intangible assets, and $1.326 million of non-cash interest and debt-discount amortization. A $0.436 million benefit reduced inventory step-up amortization following purchase-accounting adjustments.
- The GPT purchase-price allocation remains preliminary for property, plant and equipment and deferred taxes. Goodwill increased to $153.948 million, including a $6.543 million GPT-related adjustment.
- Contingent consideration under the IBP agreement ranges from zero to $0.490 million. Management believes payment of $0.490 million is more likely than not during the year ending March 31, 2021.
- COVID-19 may affect goodwill and long-lived-asset impairment assumptions, deferred tax asset recoverability, receivable collectability, and inventory valuation. No impairment triggering events were identified during the quarter.
- The company reported no material legal reserves, no off-balance-sheet arrangements, and compliance with its debt agreements.
- Management stated that the material weakness in information-technology general controls disclosed in the prior Form 10-K was remediated as of June 30, 2020; disclosure controls were considered effective.
- In July 2020, the board declared a $0.16 per-share quarterly dividend payable September 15, 2020.
Most important facts for investors to verify
- Whether COVID-19-related declines in Instruments, Biopharmaceutical Development, and Continuous Monitoring demand persist or recover.
- The sustainability of Sterilization and Disinfection Control growth after temporary customer advance buying reverses.
- GPT’s standalone profitability, integration progress, and the final purchase-price allocation, including goodwill and intangible-asset valuations.
- The effect of elevated operating expenses, acquisition-related amortization, and convertible-note interest on future operating and net margins.
- Cash deployment plans for acquisitions, debt management, dividends, and other corporate purposes following the $145.935 million equity offering.
- Potential dilution from the convertible notes, stock options, and restricted stock units.
- Exposure to foreign currency movements; management estimates that a hypothetical 10% strengthening of the U.S. dollar would reduce annual net earnings by approximately $1.8 million.