Mesa Laboratories Inc 10-Q for FY2022 Q1
Mesa Laboratories Inc /Co/ (MLAB)
About this 10-Q
Mesa Laboratories Inc filed this 10-Q on August 5, 2021, covering the quarter ended June 30, 2021 (FY2022 Q1).
Headline figures
Quarter ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $34.92M
- up 16.6% from $29.94M a year earlier
- Net income
- $2M
- up 63.9% from net income of $1.22M a year earlier
- Diluted EPS
- $0.38
- up 46.2% from $0.26 a year earlier
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___ to ___
Commission File No:
MESA LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of | (I.R.S. Employer | |||
| incorporation or organization) | Identification number) | |||
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| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name on each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
Indicate the number of shares outstanding of each of the Issuer’s classes of common stock, as of the latest practicable date:
There were
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| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. Quantitative and Qualitative Disclosures about Market Risk |
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| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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| Item 5. Other Information | 26 | |
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| Exhibit 31.1 Certifications Pursuant to Rule 13a-14(a) |
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| Exhibit 31.2 Certifications Pursuant to Rule 13a-14(a) |
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| Exhibit 32.1 Certifications Pursuant to Rule 13a-14(b) and 18 U.S.C Section 1350 |
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| Exhibit 32.2 Certifications Pursuant to Rule 13a-14(b) and 18 U.S.C Section 1350 |
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Condensed Consolidated Balance Sheets
(unaudited)
(dollars in thousands, except share amounts)
| June 30, | March 31, | |||||||
| 2021 | 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, less allowances of and , respectively | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Deferred tax asset | ||||||||
| Other assets | ||||||||
| Intangibles, net | ||||||||
| Goodwill | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued payroll and benefits | ||||||||
| Unearned revenues | ||||||||
| Other accrued expenses | ||||||||
| Total current liabilities | ||||||||
| Deferred tax liability | ||||||||
| Other long-term liabilities | ||||||||
| Convertible senior notes, net of discounts and debt issuance costs | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, par value; authorized shares; issued and outstanding, and shares, respectively | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Income
(unaudited)
(in thousands, except per share data)
| Three Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Revenues | $ | $ | ||||||
| Cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Selling | ||||||||
| General and administrative | ||||||||
| Research and development | ||||||||
| Total operating expenses | ||||||||
| Operating income | ||||||||
| Nonoperating expenses | ||||||||
| Interest expense and amortization of debt discount | ||||||||
| Other expense, net | ||||||||
| Total nonoperating expense | ||||||||
| Earnings before income taxes | ||||||||
| Income tax (benefit) | ( | ) | ( | ) | ||||
| Net income | $ | $ | ||||||
| Earnings per share: | ||||||||
| Basic | $ | $ | ||||||
| Diluted | $ | $ | ||||||
| Weighted-average common shares outstanding: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
(in thousands)
| Three Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net income | $ | $ | ||||||
| Other comprehensive income: | ||||||||
| Foreign currency translation adjustments | ||||||||
| Comprehensive income | $ | $ | ||||||
See accompanying notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
| Three Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation | ||||||||
| Non-cash interest and debt amortization | ||||||||
| Other | ( | ) | ||||||
| Cash provided by changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ( | ) | ( | ) | ||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued liabilities and taxes payable | ( | ) | ||||||
| Unearned revenues | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| Net cash (used in) investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from the issuance of common stock, net | ||||||||
| Dividends | ( | ) | ( | ) | ||||
| Proceeds from the exercise of stock options | ||||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate changes on cash and cash equivalents | ||||||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
See accompanying notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited)
(dollars in thousands, except per share data)
| Common Stock | ||||||||||||||||||||
| Number of Shares | Amount | Retained Earnings | AOCI* | Total | ||||||||||||||||
| March 31, 2021 | $ | $ | $ | $ | ||||||||||||||||
| Exercise of stock options and vesting of restricted stock units | ||||||||||||||||||||
| Dividends paid, $0.16 per share | - | ( | ) | ( | ) | |||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||
| Foreign currency translation | - | |||||||||||||||||||
| Cumulative adjustment due to adoption of ASU No. 2020-06 | - | ( | ) | ( | ) | |||||||||||||||
| Net income | - | |||||||||||||||||||
| June 30, 2021 | $ | $ | $ | $ | ||||||||||||||||
| Common Stock | ||||||||||||||||||||
| Number of Shares | Amount | Retained Earnings | AOCI* | Total | ||||||||||||||||
| March 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Proceeds from the issuance of common stock, net of issuance costs of | ||||||||||||||||||||
| Exercise of stock options and vesting of restricted stock units | ||||||||||||||||||||
| Dividends paid, per share | - | ( | ) | ( | ) | |||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||
| Foreign currency translation | - | |||||||||||||||||||
| Adoption of accounting standards, net | ( | ) | ( | ) | ||||||||||||||||
| Net income | - | |||||||||||||||||||
| June 30, 2020 | ||||||||||||||||||||
*Accumulated Other Comprehensive Income (Loss).
See accompanying notes to Condensed Consolidated Financial Statements.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(dollar and share amounts in thousands, unless otherwise specified)
Note 1. Description of Business and Summary of Significant Accounting Policies
Description of Business
In this quarterly report on Form 10-Q, Mesa Laboratories, Inc., a Colorado corporation, together with its subsidiaries is collectively referred to as “we,” “us,” “our,” the “Company” or “Mesa Labs.”
We are a multinational manufacturer, developer, and seller of quality control products and services, many of which are sold into niche markets that are driven by regulatory requirements. We have manufacturing operations in the United States and Europe, and our products are marketed by our sales personnel in North America, Europe, and Asia, and by independent distributors in these areas as well as throughout the rest of the world. We prefer markets in which we can establish a strong presence and achieve high gross margins.
As of June 30, 2021, we managed our operations in
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, such unaudited information includes all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of our financial position and results of operations. The results of operations for the interim periods are not necessarily indicative of results that may be achieved for the entire year. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. This quarterly report should be read in conjunction with the consolidated financial statements included in our annual report on Form 10-K for the year ended March 31, 2021.
Our fiscal year ends on March 31. References in this Quarterly Report to a particular “year” or “year-end” mean our fiscal year, and references to the first quarter of fiscal year 2022 refers to the period from April 1, 2021 through June 30, 2021.
Risks and Uncertainties
The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the reporting date and revenues and expenses during the reporting periods. These estimates represent management's judgement about the outcome of future events. The current global business environment continues to be impacted directly and indirectly by the effects of the novel coronavirus ("COVID-19"), and it is not possible to accurately predict the future impact of COVID-19. However, we have reviewed the estimates used in preparing the financial statements and have identified the following factors that have a reasonable possibility of being materially affected by the impacts of COVID-19 during the near term:
| ● | Estimates regarding the future financial performance of the business used in the impairment tests for goodwill and long-lived assets acquired in a business combination; however, we identified no triggering events since our impairment analysis was completed during the quarter ended March 31, 2021; |
| ● | Estimates regarding the recoverability of deferred tax assets and estimates regarding cash needs and associated indefinite reinvestment assertions; |
| ● | Estimates regarding recoverability for customer receivables; |
| ● | Estimates of the net realizable value of inventory. |
Recently Issued Accounting Pronouncements
We have reviewed all recently issued accounting pronouncements and have concluded that they are either not applicable to or are not expected to have a significant impact on our consolidated financial statements.
Recently Adopted Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-06, Debt with Conversion and Other Options and Derivatives and Hedging Accounting for Convertible Instruments and Contracts in an Entity's Own Equity ("ASU 2020-06"), which simplifies the accounting for certain financial instruments with characteristics of both liabilities and equity, such as our convertible senior notes, due 2025 (the "Notes"). ASU 2020-06 also enhances transparency and improves disclosures for convertible instruments and earnings per share guidance. It is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted at the beginning of any fiscal year after December 15, 2020. The update permits the use of either the modified retrospective or full retrospective method of transition.
We early adopted ASU 2020-06 effective April 1, 2021 on a modified retrospective basis, and our adoption of this standard had a material effect on our consolidated financial statements. Upon adoption, we derecognized the $
We have always intended to settle the Notes in shares of common stock rather than in cash, in each period in which the Notes have been outstanding, and therefore, we have applied the if-converted method to calculate the potentially dilutive impact of the Notes on earnings per share. In each reporting period, we have determined that the Notes were antidilutive. Due to decreases in non-cash interest expense that will result from the adoption of ASU 2020-06, it is likely the Notes will have a dilutive effect in future periods, which would decrease our diluted earnings per share.
Note 2. Revenue Recognition
We design, manufacture, market, sell, and maintain quality control instruments and software, consumables, and services driven primarily by the regulatory requirements of niche markets. Our consumables, such as biological indicator test strips are typically used on a standalone basis; however, some of our chemical solutions, such as protein synthesis and calibration solutions are critical to the ongoing use of our instruments. Hardware and software sales, such as medical meters, protein synthesizers, wireless sensor systems, and data loggers are generally driven by our acquisition of new customers, growth of existing customers, or customer replacement of existing equipment. Hardware sales may be offered with accompanying perpetual or annual software licenses, which in some cases are required for the hardware to function. We also offer on-demand and annual service contracts to support customers' use of our equipment. We evaluate our revenues internally based on product line, the timing of revenue generation, and the nature of goods and services provided. Typically, discrete revenue is recognized at the shipping point or upon completion of the service, while contracted revenue is recognized over a period of time reflective of the performance obligation period in the applicable contract. Consumables are typically used on a one-time basis requiring frequent replacement in our customers' operating cycles. Substantially all of our revenues and related receivables are generated from contracts with customers that are 12 months or less in duration.
The following tables present disaggregated revenues for the quarters ended June 30, 2021 and 2020, respectively:
| Three Months Ended June 30, 2021 | ||||||||||||||||||||
| Sterilization and Disinfection Control | Biopharmaceutical Development | Instruments | Continuous Monitoring | Total | ||||||||||||||||
| Discrete Revenues | ||||||||||||||||||||
| Consumables | $ | $ | $ | $ | $ | |||||||||||||||
| Hardware and Software | ||||||||||||||||||||
| Services | ||||||||||||||||||||
| Contracted Revenues | ||||||||||||||||||||
| Services | ||||||||||||||||||||
| Total Revenues | $ | $ | $ | $ | $ | |||||||||||||||
| Three Months Ended June 30, 2020 | ||||||||||||||||||||
| Sterilization and Disinfection Control | Biopharmaceutical Development | Instruments | Continuous Monitoring | Total | ||||||||||||||||
| Discrete Revenues | ||||||||||||||||||||
| Consumables | $ | $ | $ | $ | $ | |||||||||||||||
| Hardware and Software | ||||||||||||||||||||
| Services | ||||||||||||||||||||
| Contracted Revenues | ||||||||||||||||||||
| Services | ||||||||||||||||||||
| Total Revenues | $ | $ | $ | $ | $ | |||||||||||||||
Revenues from external customers are attributed to individual countries based upon locations to which the products are shipped or exported, as follows:
| Three Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| United States | $ | $ | ||||||
| Foreign | ||||||||
| Total revenues | $ | $ | ||||||
No foreign country exceeds 10% of total revenues.
Contract Balances
Our contracts have varying payment terms and conditions. Some customers prepay for services, resulting in unearned revenues or customer deposits, called contract liabilities, which are included within other accrued expenses and unearned revenues in the accompanying Condensed Consolidated Balance Sheets. We did have any contract assets as of June 30, 2021 or March 31, 2021. Unbilled receivables, which are not classified as contract assets, represent arrangements in which sales have been recorded prior to billing and right to payment is unconditional.
A summary of contract liabilities is as follows:
| Contract liabilities as of March 31, 2021 | $ | |||
| Prior year liabilities recognized in revenues during the quarter ended June 30, 2021 | ( | ) | ||
| Contract liabilities added during the quarter ended June 30, 2021, net of revenues recognized | ||||
| Contract liabilities balance as of June 30, 2021 | $ |
Note 3. Fair Value Measurements
Our financial instruments consist primarily of cash and cash equivalents, trade accounts receivable, obligations under trade accounts payable and debt. Due to their short-term nature, the carrying values for cash and cash equivalents, trade accounts receivable and trade accounts payable approximate fair value. We measure our cash equivalents at fair value and classify them within Level 1 of the fair value hierarchy, and we value them using quoted market prices in an active market. Cash and cash equivalents on our Condensed Consolidated Balance Sheets included $
During fiscal year 2020, we issued $
| June 30, 2021 | March 31, 2021 | |||||||||||||||
| Carrying Value | Fair Value (Level 2) | Carrying Value | Fair Value (Level 2) | |||||||||||||
| Notes | $ | $ | $ | $ | ||||||||||||
The carrying value of the Notes increased as a result of the adoption of ASU 2020-06, discussed further in Note 1. "Description of Business and Summary of Significant Accounting Policies" and Note 6. "Indebtedness."
Assets recognized or disclosed at fair value in the unaudited condensed consolidated financial statements on a nonrecurring basis include items such as property and equipment, operating lease assets, goodwill, and other intangible assets. These assets are measured at fair value if determined to be impaired. There were no transfers between the levels of the fair value hierarchy during the quarter ended June 30, 2021 or the quarter ended June 30, 2020.
Cash and cash equivalents and accounts receivables are the financial instruments that subject us to the highest concentration of credit risk. It is our policy to invest in highly liquid cash equivalent financial instruments with high credit ratings, and to maintain low single issuer exposure (except U.S. treasuries). Concentration of credit risk with respect to accounts receivable is limited to customers to whom we make significant sales. We reserve an allowance for potential write-offs of accounts receivable using historical collection experience, but we have not written off any significant accounts to date. To manage credit risk, we consider the creditworthiness of new and existing customers, and we regularly review outstanding balances and payment histories. We may require pre-payments from customers under certain circumstances and may limit future purchases until payments are made on past due amounts.
Note 4. Inventories, Net
Inventories consist of the following:
| June 30, 2021 | March 31, 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Inventories, net | $ | $ | ||||||
Note 5. Goodwill and Intangible Assets, Net
Finite-lived intangible assets consist of the following:
| June 30, 2021 | March 31, 2021 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||
| Intellectual property | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Trade names | ( | ) | ( | ) | ||||||||||||||||||||
| Customer relationships | ( | ) | ( | ) | ||||||||||||||||||||
| Non-compete agreements | ( | ) | ( | ) | ||||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
Amortization expense for finite-lived intangible assets acquired in a business combination was $
The following is estimated amortization expense for the fiscal years ending March 31,:
| Remainder of 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 |
The change in the carrying amount of goodwill was as follows:
| Sterilization and Disinfection Control | Biopharmaceutical Development | Instruments | Continuous Monitoring | Total | ||||||||||||||||
| March 31, 2021 | $ | $ | $ | |||||||||||||||||
| Effect of foreign currency translation | ||||||||||||||||||||
| June 30, 2021 | $ | $ | $ | $ | $ | |||||||||||||||
Note 6. Indebtedness
Credit Facility
On March 5, 2021, we entered into a -year senior secured credit agreement that includes 1) a revolving credit facility in an aggregate principal amount of up to $
The Credit Facility bears interest at either a base rate or a Eurodollar rate, plus an applicable spread. The balance of unamortized customary lender fees of $
The most restrictive financial covenants include a maximum leverage ratio of
As of and throughout the quarter ended June 30, 2021, we had
Convertible Notes
We issued the Notes on August 12, 2019, and they mature on August 15, 2025, unless earlier repurchased or converted. The Notes bear interest at a rate of
| (i) | during any calendar quarter commencing after the calendar quarter ended on December 31, 2019 (and only during such calendar quarter), if the last reported sale price per share of our common stock exceeds | ||
| (ii) | during the five consecutive business days immediately after any | ||
| (iii) | upon the occurrence of certain corporate events or distributions on our common stock, including certain distributions, the occurrence of a fundamental change (as defined in the indenture governing the Notes) or a transaction resulting in the Company’s common stock converting into other securities or property or assets; and | ||
| (iv) | at any time from, and including, April 15, 2025 until the close of business on the second scheduled trading day immediately before the maturity date. |
Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election. Our current intent is to settle conversions entirely in shares of common stock. We will reevaluate this policy from time to time as we receive conversion notices from note holders. The circumstances necessary for conversion were not met during the quarter ended June 30, 2021. As of June 30, 2021, the Notes are classified as a long-term liability on our Condensed Consolidated Balance Sheets as the circumstances necessary for conversion were not satisfied as of the end of the quarter. The if-converted value of the Notes did not exceed the principal balance as of June 30, 2021.
Debt issuance costs related to the Notes are comprised of discounts and commissions payable to the initial purchasers of $
Due to our adoption of ASU No. 2020-06 on April 1, 2021, we no longer bifurcate the Notes into a liability and an equity component in our Condensed Consolidated Balance Sheets (see Note 1. "Description of Business and Summary of Significant Accounting Policies"). The Notes are accounted for entirely as a liability, and the issuance costs of the Notes are accounted for wholly as debt issuance costs. The equity conversion feature that was recorded to common stock, as well as the unamortized debt discount and amortization expense attributable to equity, have been derecognized.
The net carrying amount of the Notes were as follows:
| June 30, 2021 | March 31, 2021 | |||||||
| Principal outstanding | $ | $ | ||||||
| Unamortized debt discount attributable to equity | ( | ) | ||||||
| Unamortized debt issuance costs | ( | ) | ( | ) | ||||
| Net carrying value | $ | $ | ||||||
We recognized interest expense on the Notes as follows:
| Three Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Coupon interest expense at 1.375% | $ | $ | ||||||
| Amortization of debt discounts and issuance costs | ||||||||
| Total | $ | $ | ||||||
The effective interest rate on the notes is approximately
Note 7. Stockholders' Equity
Stock-Based Compensation
Amounts recognized related to stock-based compensation are as follows:
| Three Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Stock-based compensation expense | $ | $ | ||||||
| Amount of income tax (benefit) recognized in earnings | ( | ) | ( | ) | ||||
| Stock-based compensation expense, net of tax | $ | ( | ) | $ | ||||
Stock-based compensation expense is included in cost of revenues, selling, general and administrative, and research and development expense in the accompanying unaudited Condensed Consolidated Statements of Income.
The following is a summary of stock option award activity for the quarter ended June 30, 2021:
| Stock Options | ||||||||||||||||
| Shares Subject to Options | Weighted- Average Exercise Price per Share | Weighted-Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding as of March 31, 2021 | $ | $ | ||||||||||||||
| Awards granted | ||||||||||||||||
| Awards forfeited or expired | ( | ) | ||||||||||||||
| Awards exercised or distributed | ( | ) | ||||||||||||||
| Outstanding as of June 30, 2021 | $ | $ | ||||||||||||||
The following is a summary of restricted stock unit ("RSU") award activity for the quarter ended June 30, 2021:
| Time-Based Restricted Stock Units | Performance-Based Restricted Stock Units | |||||||||||||||
| Number of Shares | Weighted- Average Grant Date Fair Value per Share | Number of Shares | Weighted- Average Grant Date Fair Value per Share | |||||||||||||
| Outstanding as of March 31, 2021(1) | $ | $ | ||||||||||||||
| Awards granted | ||||||||||||||||
| Performance adjustment(2) | ||||||||||||||||
| Awards forfeited | ( | ) | ||||||||||||||
| Awards distributed | ( | ) | ( | ) | ||||||||||||
| Outstanding as of June 30, 2021(1) | $ | $ | ||||||||||||||
| (1) | Balances for performance-based restricted stock units ("PSUs") are reflected at target. |
| (2) | During the quarter ended June 30, 2021, the fiscal year 2019 PSUs vested and were paid at |
The outstanding time-based RSUs vest and settle in shares of our common stock on a one-for-one basis. Time-based RSUs issued to non-employee directors vest year from the grant date. Outstanding time-based RSUs issued to employees have historically been granted with vesting periods of , , or years. We recognize the expense relating to RSUs, net of estimated forfeitures, on a straight-line basis over the vesting period.
Performance-based RSUs vest upon completion of the service period described in the award agreement and based on achievement of the financial targets described in the award agreements. We recognize the expense relating to the performance-based RSUs based on the probable outcome of achievement of the financial targets on a straight-line basis over the service period. During fiscal year 2020, we awarded
During the quarter ended June 30, 2021, the Compensation Committee of the Board of Directors modified a time-based restricted stock award granted to our Chief Executive Officer during fiscal year 2017, distributing
Public Offering of Common Stock
On June 12, 2020, we completed the sale and issuance of
Note 8. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share (“diluted EPS”) is computed similarly to basic earnings per share, except that it includes the potential dilution that could occur if dilutive securities were exercised. Potentially dilutive securities include stock options and RSUs, including RSUs that contain performance conditions which have been achieved as of the reporting period (collectively “stock awards”), as well as common shares underlying our convertible senior notes. Stock awards are excluded from the calculation of diluted EPS in the event that they are subject to performance conditions that have not yet been achieved or are antidilutive. Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an antidilutive effect.
The impact of the assumed conversion of the Notes calculated under the if-converted method was anti-dilutive, and as such, shares underlying the Notes were excluded from the diluted EPS calculation for quarter ended June 30, 2021.
The following table presents a reconciliation of the denominators used in the computation of basic and diluted earnings per share:
| Three Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net income available for shareholders | $ | $ | ||||||
| Weighted average outstanding shares of common stock | ||||||||
| Dilutive effect of stock options | ||||||||
| Dilutive effect of RSUs | ||||||||
| Fully diluted shares | ||||||||
| Basic earnings per share | $ | $ | ||||||
| Diluted earnings per share | $ | $ | ||||||
The following stock awards were excluded from the calculation of diluted EPS:
| Three Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Assumed conversion of convertible debt | ||||||||
| Stock awards that were anti-dilutive | ||||||||
| Stock awards subject to performance conditions | ||||||||
| Total stock awards excluded from diluted EPS | ||||||||
Note 9. Income Taxes
For interim income tax reporting, we estimate our annual effective tax rate and apply this effective tax rate to our year-to-date pre-tax income. Each quarter, our estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. Additionally, the tax effects of significant unusual or infrequently occurring items are recognized as discrete items in the interim period in which the events occur. The impact of changes in tax laws or rates on deferred tax amounts, impairments of non-deductible goodwill, excess benefits from stock-based compensation, and changes in tax reserves resulting from the finalization of tax audits or reviews are examples of significant unusual or infrequently occurring items that are recognized as discrete items in the interim period in which the event occurs. There is a potential for volatility of the effective tax rate due to several factors, including changes in the mix of the pre-tax income and the jurisdictions to which it relates, changes in tax laws and foreign tax holidays, settlement with taxing authorities, and foreign currency fluctuations.
Our effective income tax rate was (
The tax year ended December 31, for Gyros US, Inc., and its subsidiary, which we acquired as part of the Gyros Protein Technologies ("GPT") acquisition, is under examination by the IRS. We expect the examination to be completed during fiscal year 2022. Additionally, the tax year ended March 31, for Mesa Laboratories, Inc. is under review by the IRS. We do not currently have a timeline for the completion of the Mesa Laboratories, Inc. examination.
Since we are subject to audit by various taxing authorities, it is reasonably possible that the amount of unrecognized tax benefits will change during the next 12 months. However, we do not expect the change, if any, to have a material effect on our financial condition or results of operations within the next 12 months.
Note 10. Commitments and Contingencies
We review the adequacy of our legal reserves on a quarterly basis and establish reserves for loss contingencies that are both probable and reasonably estimable. As of June 30, 2021, there were no material legal reserves recorded on the accompanying unaudited Condensed Consolidated Balance Sheets.
Companies are required to collect and remit sales tax from certain customers if the company is determined to have nexus in a particular state. The determination of nexus varies by state and often requires technical knowledge of each jurisdiction's tax case law. During fiscal year 2021, we determined that certain subsidiaries of GPT had established nexus in various jurisdictions during prior periods without properly collecting and remitting sales tax, and in certain cases had collected sales tax and not remitted it. The estimated accrued liability for this matter is included in other accrued expenses on the Condensed Consolidated Balance Sheets. The balance was $
Note 11. Significant Transaction
We completed the previously-announced closure of our Butler, New Jersey facility during the quarter ended June 30, 2021. The facility was primarily used in the production of our gas flow calibration and air sampling equipment, which is part of our Instruments division. Our manufacturing facility in Lakewood, Colorado is currently undergoing renovations that will allow it to accommodate the production of the gas flow calibration and air sampling equipment. Consolidating the production of these products is expected to reduce facilities costs and streamline our use of lean manufacturing tools under central management to further encourage production efficiencies.
As a result of the facility consolidation, we incurred $
Note 12. Segment Information
As of June 30, 2021, we had
| Three Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Total revenues (a) | ||||||||
| Sterilization and Disinfection Control | $ | $ | ||||||
| Biopharmaceutical Development | ||||||||
| Instruments | ||||||||
| Continuous Monitoring | ||||||||
| Total revenues (a) | $ | $ | ||||||
| Gross profit (loss) | ||||||||
| Sterilization and Disinfection Control | $ | $ | ||||||
| Biopharmaceutical Development | ||||||||
| Instruments | ||||||||
| Continuous Monitoring | ||||||||
| Reportable segment gross profit | ||||||||
| Corporate and Other (b) | ( | ) | ( | ) | ||||
| Gross profit | $ | $ | ||||||
| Reconciling Items: | ||||||||
| Operating expenses | ||||||||
| Operating income | ||||||||
| Nonoperating expense, net | ||||||||
| Earnings before income taxes | $ | $ | ||||||
| (a) | Intersegment revenues are not significant and are eliminated to arrive at consolidated totals. |
| (b) | Non-reportable operating segments and unallocated corporate expenses are reported within Corporate and Other. |
The following table sets forth inventories by reportable segment. Our chief operating decision maker is not provided with any other segment asset information.
| June 30, | March 31, | |||||||
| 2021 | 2021 | |||||||
| Sterilization and Disinfection Control | $ | $ | ||||||
| Biopharmaceutical Development | ||||||||
| Instruments | ||||||||
| Continuous Monitoring | ||||||||
| Total inventories | $ | $ | ||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands, except per share amounts)
Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements in this Quarterly Report on Form 10-Q do not constitute guarantees of future performance. Investors are cautioned that statements in this Quarterly Report on Form 10-Q which are not strictly historical statements, including, without limitation, express or implied statements or guidance regarding current or future financial performance and position, potential impairment of future earnings, anticipated effects of, and future actions to be taken in response to, the COVID-19 pandemic, management’s strategy, plans and objectives for future operations or acquisitions, product development and sales, product research and development, regulatory approval, selling, general and administrative expenditures, intellectual property, development and manufacturing plans, availability of materials and product and adequacy of capital resources and financing plans constitute forward-looking statements. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which the Company operates, and management’s beliefs and assumptions. In addition, other written and oral statements that constitute forward-looking statements may be made by the Company or on the Company’s behalf. Words such as “expect,” “anticipate,” “intend,” “seek,” “plan,” “believe,” “could,” “estimate,” “may,” “target,” “project,” or variations of such words and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated, including risks associated with: the duration and impact of the COVID-19 pandemic and the myriad of its adverse effects on our business; our ability to successfully grow our business, including as a result of acquisitions; the market acceptance of our products; technological or market viability of our products; reduced demand for our products;, inability to consummate acquisitions at our historical rate and at appropriate prices, and to effectively integrate acquired businesses; conditions in the global economy and the particular markets we serve; significant developments or uncertainties stemming from governments, including changes in trade policies and medical device regulations; the timely development and commercialization, and customer acceptance, of enhanced and new products and services; retirement of old products and customer migration to new products; projections of revenues, growth, operating results, profit margins, expenses, earnings, margins, tax rates, tax provisions, cash flows, liquidity, demand, and competition; the effects of additional actions taken to become more efficient or lower costs; restructuring activities; laws regulating fraud and abuse in the health care industry and the privacy and security of health and personal information; product liability; information security; outstanding claims, legal and regulatory proceedings; international business challenges including anti-corruption and sanctions laws; tax audits and assessments and other contingent liabilities; foreign currency exchange rates and fluctuations in those rates; general economic, industry, and capital markets conditions; the timing of any of the foregoing; assumptions underlying any of the foregoing; and any other statements that address events or developments that we intend or believe will or may occur in the future. Such risks and uncertainties also include those listed in Item 1A. “Risk Factors,” and elsewhere in this report. The foregoing list sets forth many, but not all, of the factors that could impact our ability to achieve results described in any forward-looking statements. We disclaim any obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.
Business Overview
We are a multinational manufacturer, developer, and seller of quality control products and services, many of which are sold into niche markets that are driven by regulatory requirements. We have manufacturing operations in the United States and Europe, and our products are marketed by our sales personnel in North America, Europe, and Asia, and by independent distributors in these areas as well as throughout the rest of the world. We prefer markets in which we can establish a strong presence and achieve high gross margins. As of June 30, 2021, we managed our operations in four reportable segments, or divisions: Sterilization and Disinfection Control, Biopharmaceutical Development, Instruments, and Continuous Monitoring, each of which are described further in Results of Operations below. Non-reportable operating segments and unallocated corporate expenses are reported within Corporate and Other.
Corporate Strategy
We strive to create shareholder value and further our purpose of Protecting the Vulnerable® by growing our business both organically and through acquisitions, by improving our operating efficiency, and by continuing to hire, develop and retain top talent. As a business, we commit to our purpose of Protecting the Vulnerable® every day by taking a customer-focused approach to developing, building, and delivering our products. We serve a broad set of industries that require dependable quality control and calibration solutions to ensure the safety and efficacy of the products they use, and by delivering the highest quality products possible, we are committed to protecting people, the environment, and end products.
Organic Revenues Growth
Organic revenues growth is primarily driven by the expansion of our customer base, increases in sales volumes, and price increases. Our ability to increase organic revenues is affected by general economic conditions, both domestic and international, customer capital spending trends, competition, and the introduction of new products. We typically evaluate costs and pricing annually. Our policy is to price our products competitively and, where possible, we pass along cost increases to our customers in order to maintain our margins.
Inorganic Revenues Growth - Acquisitions
Over the past decade, we have consummated a number of transactions accounted for as business combinations as part of our growth strategy. The acquisitions of these businesses, which are in addition to organic revenues growth, have allowed us to expand our product offerings, globalize our company, and increase the scale at which we operate, which in turn affords us the ability to improve our operating efficiency, extend our customer base, and further the pursuit of our purpose to Protect the Vulnerable®.
Improving Our Operating Efficiency
We maximize value in both our existing businesses and those we acquire by implementing efficiencies in our manufacturing, commercial, engineering, and administrative operations. We achieve efficiencies using the four pillars that make up The Mesa Way, which is our customer-centric, lean-based system for continuously improving and operating a set of high-margin, niche businesses. The Mesa Way is focused on: Measuring what matters using our customers' perspective and setting high standards for performance; Empowering teams to improve operationally and exceed customer expectations; Steadily improving using lean-based tools designed to help us identify the root cause of opportunities and prioritize the biggest opportunities; and Always learning so that performance continuously improves.
Hire, Develop, and Retain Top Talent
At the center of our organization are talented people who are capable of taking on new challenges using a team approach. It is our exceptionally talented workforce that works together and uses our lean-based tool set to find ways to continuously improve our products, our services, and ourselves, resulting in long-term value creation for our shareholders.
Business Update and COVID-19
During March 2020, the impact from the spreading of COVID-19 was declared a global pandemic by the World Health Organization and a national public health emergency in the United States. The COVID-19 pandemic began to impact our business late in fiscal year 2020, and its impacts affected our business in various ways throughout fiscal year 2021 and to some extent, into the first quarter of fiscal year 2022. The pandemic and related public health recommendations and mandated precautions to mitigate the spread of COVID-19, including regulations to close or limit the operating hours of our laboratory and other customers, and to prevent non-essential personnel from going on-site to customer locations to service or market our products, have negatively affected our operations. Specifically, during fiscal year 2021 the Biopharmaceutical Development division, the Instruments division, and the Continuous Monitoring division were materially negatively impacted. While many recommendations and precautions that affected us in fiscal year 2021 have been rescinded in the United States, some regulations impacting our operations, particularly in Europe, affected our operations in the first quarter of fiscal year 2022 and continue to do so. Additionally, we believe that macroeconomic uncertainties that caused some of our customers to defer the purchase of our products persisted into the first quarter of fiscal year 2022, primarily affecting our Instruments division.
During fiscal year 2021, in response to the pandemic, we implemented several measures that we believe helped us protect the health and safety of our employees, and we continue to enforce some of these policies in the first quarter of fiscal year 2022. We continue to require most office-based employees to work remotely when possible and we enforce safety measures to comply with applicable regulations to allow personnel to continue to work in our facilities. In the first quarter of fiscal year 2022, we allowed our employees to travel for non-essential business. Due to the critical nature of our products and services, we were generally exempt from governmental orders in the U.S. and other countries requiring businesses to suspend operations.
Sales of our hardware products have historically been more sensitive to general economic conditions than sales of our consumables. Even as the broad healthcare industry has begun to return to more normal operations resulting in increased sales levels in some of our divisions, outbreaks and increasing numbers of COVID-19 cases in many areas of the world have and may continue to result in the reinstatement of strict regulations, which we expect would result in lower sales levels. We believe that COVID-19 related uncertainties, restrictions, and suppressed demand may continue to negatively impact our business during fiscal year 2022. Even after the COVID-19 pandemic has subsided as a public health matter, we may experience material adverse impacts to our business as a result of its adverse impact on the global economy, in-person collaboration and sales efforts, and our customers’ changed purchasing behavior and confidence. We are also susceptible to broad market phenomena emerging in the wake of COVID-19, such as inflation and corresponding wage pressure.
Gross profit is affected by many factors including our product mix, manufacturing efficiencies, foreign currency rates, and price competition. Historically, as we have integrated our acquisitions and taken advantage of manufacturing efficiencies, our gross profit percentages for some products have improved. There are, however, differences in gross profit percentages between product lines, and ultimately the mix of sales will continue to impact our overall gross profit.
We completed the previously-announced closure of our Butler, New Jersey facility during the quarter ended June 30, 2021. The facility was primarily used in the production of our gas flow calibration and air sampling equipment, which is part of our Instruments division. Our manufacturing facility in Lakewood, Colorado is currently undergoing renovations that will allow it to accommodate the production of the gas flow calibration and air sampling equipment. Consolidating the production of these products is expected to reduce facilities costs and streamline our use of lean manufacturing tools under central management to further encourage production efficiencies.
Results of Operations
Our results of operations and period-over-period changes are discussed in the following section. The tables and discussion below should be read in conjunction with the accompanying Unaudited Condensed Consolidated Financial Statements and the notes thereto appearing in Item 1. Financial Statements (in thousands, except percent data).
Revenues from our reportable segments increased 17%, which was entirely a result of organic revenues growth, and gross profit as a percentage of revenues decreased four percentage points for the quarter ended June 30, 2021 compared to the quarter ended June 30, 2020. Results by reportable segment are as follows:
| Revenues |
Organic Revenues Growth |
Gross Profit as a % of Revenues |
||||||||||||||||||||||
| Three Months Ended June 30, 2021 |
Three Months Ended June 30, 2020 |
Three Months Ended June 30, 2021 |
Three Months Ended June 30, 2020 |
Three Months Ended June 30, 2021 |
Three Months Ended June 30, 2020 |
|||||||||||||||||||
| Sterilization and Disinfection Control |
$ | 15,150 | $ | 13,067 | 16 | % | 8 | % | 75 | % | 77 | % | ||||||||||||
| Biopharmaceutical Development |
8,877 | 5,949 | 49 | % | N/A | 53 | % | 75 | % | |||||||||||||||
| Instruments |
7,562 | 7,680 | (2 | %) | (20 | %) | 62 | % | 61 | % | ||||||||||||||
| Continuous Monitoring |
3,331 | 3,245 | 3 | % | (2 | %) | 44 | % | 37 | % | ||||||||||||||
| Mesa Labs' reportable segments |
$ | 34,920 | $ | 29,941 | 17 | % | (4 | %) | 64 | % | 68 | % | ||||||||||||
Our unaudited condensed consolidated results of operations are as follows:
| Three Months Ended June 30, |
Percentage |
|||||||||||
| 2021 |
2020 |
Change |
||||||||||
| Revenues |
$ | 34,920 | $ | 29,941 | 17 | % | ||||||
| Gross profit |
22,211 | 20,340 | 9 | % | ||||||||
| Operating expenses |
19,088 | 16,770 | 14 | % | ||||||||
| Operating income |
3,123 | 3,570 | (13 | %) | ||||||||
| Net income |
$ | 1,995 | $ | 1,217 | 64 | % | ||||||
Reportable Segments
Sterilization and Disinfection Control
Our Sterilization and Disinfection Control division manufactures and sells biological, cleaning, and chemical indicators. Biological, cleaning, and chemical indicators are used to assess the effectiveness of sterilization and disinfection processes in the hospital, dental, medical device, and pharmaceutical industries. The division also provides testing and laboratory services, mainly to the dental industry. Sterilization and disinfection control products are disposable and are used on a routine basis.
| Three Months Ended June 30, |
Percentage |
|||||||||||
| 2021 |
2020 |
Change |
||||||||||
| Revenues |
$ | 15,150 | $ | 13,067 | 16 | % | ||||||
| Gross profit |
11,428 | 10,021 | 14 | % | ||||||||
| Gross profit as a % of revenues |
75 | % | 77 | % | (2 | %) | ||||||
Sterilization and Disinfection Control revenues increased 16% for the quarter ended June 30, 2021, which was achieved through volume increases with existing customers, recovery of the healthcare services markets, effective efforts by our sales team to market and sell certain products to a larger customer base, and to a lesser extent, the strengthening of the euro against the U.S. dollar, and modest price increases.
Sterilization and Disinfection Control gross profit percentage decreased two percentage points for the quarter ended June 30, 2021, primarily as a result of slightly higher production costs.
Biopharmaceutical Development
Our Biopharmaceutical Development division develops, manufactures, and sells automated systems for protein analysis (immunoassays) and peptide synthesis solutions. Immunoassays and peptide synthesis solutions accelerate the discovery, development, and manufacturing of biotherapeutic drugs.
| Three Months Ended June 30, |
Percentage |
|||||||||||
| 2021 |
2020 |
Change |
||||||||||
| Revenues |
$ | 8,877 | $ | 5,949 | 49 | % | ||||||
| Gross profit |
4,692 | 4,466 | 5 | % | ||||||||
| Gross profit as a % of revenues |
53 | % | 75 | % | (22 | %) | ||||||
Biopharmaceutical Development's revenues increased 49% for the quarter ended June 30, 2021 due primarily to loosening COVID-19 restrictions versus the quarter ended June 30, 2020, and to a lesser extent, increased digital marketing efforts. Whereas many laboratories that use this division's products were closed or operating at reduced hours during the first quarter of fiscal year 2021, the majority of laboratories in North America and Asia-Pacific were open for more normal operating hours throughout the first quarter of fiscal year 2022. As a result, the division's laboratory customers used more consumables, driving an 86% increase in consumables revenues.
Biopharmaceutical Development's gross profit percentage was 53% for the quarter ended June 30, 2021. Gross profit decreased as a result of an unfavorable change in foreign exchange rates, higher labor-related costs, and the benefit of a positive $258 purchase accounting adjustment in the quarter ended June 30, 2020. Substantially all of this division's sales are invoiced in either euros or U.S. dollars ("USD"); however, the majority of the costs in this division are recorded in Swedish Krona and translated to USD for reporting purposes. Since the USD has weakened against the Swedish Krona from the first quarter of fiscal year 2021 to the first quarter of fiscal year 2022, our reported costs in USD have increased substantially, while revenues have not benefited significantly from the change in currency valuation.
Instruments
Our Instruments division designs, manufactures, and markets quality control instruments and consumable products utilized in the healthcare, pharmaceutical, food and beverage, medical device, industrial hygiene, and environmental air sampling industries. Instrument products have a longer life, and their purchase by our customers is discretionary, so sales are more sensitive to general economic conditions. Service demand is driven by our customers’ quality control and regulatory environments, which require periodic repair and recalibration or certification of our instrument products.
| Three Months Ended June 30, |
Percentage |
|||||||||||
| 2021 |
2020 |
Change |
||||||||||
| Revenues |
$ | 7,562 | $ | 7,680 | (2 | %) | ||||||
| Gross profit |
4,660 | 4,688 | (1 | %) | ||||||||
| Gross profit as a % of revenues |
62 | % | 61 | % | 1 | % | ||||||
Instruments revenues decreased 2% for the quarter ended June 30, 2021 primarily as a result of lower order fulfillment of gas flow calibration and air sampling equipment as we work to relocate the manufacturing of those items from our Butler, New Jersey facility, to our Lakewood, Colorado facility. In addition, we are somewhat understaffed in this division as we have had difficulty hiring manufacturing employees, which has affected our ability to fulfill orders. To a lesser extent, we believe that continued economic uncertainty stemming from the COVID-19 pandemic has resulted in certain of our customers limiting or delaying spend on Instruments division products. We are hopeful that the relocation and integration of those Instruments products that were moved from the Butler facility will be completed in our fiscal second quarter.
Instruments gross profit percentage increased one percentage point during the quarter ended June 30, 2021. The increase in gross profit percentage resulted from favorable product mix, and operating efficiencies for products manufactured in the Lakewood, Colorado facility, partially offset by increased labor costs as a result of a higher competition for employees in the labor market.
Continuous Monitoring
Our Continuous Monitoring division designs, develops, and markets systems which are used to monitor various environmental parameters such as temperature, humidity, and differential pressure to ensure that critical storage and processing conditions are maintained in hospitals, pharmaceutical and medical device manufacturers, blood banks, pharmacies, and laboratory environments. Continuous Monitoring products and systems have a longer life, and their purchase by our customers is discretionary, so sales are sensitive to general economic conditions. Continuous monitoring products may be sold in conjunction with a perpetual or subscription-based software license, which may be required for the related hardware to function. Service demand is driven by our customers’ quality control and regulatory environments, which require periodic repair and recalibration or certification of our continuous monitoring systems.
| Three Months Ended June 30, |
Percentage |
|||||||||||
| 2021 |
2020 |
Change |
||||||||||
| Revenues |
$ | 3,331 | $ | 3,245 | 3 | % | ||||||
| Gross profit |
1,452 | 1,185 | 23 | % | ||||||||
| Gross profit as a % of revenues |
44 | % | 37 | % | 7 | % | ||||||
The Continuous Monitoring division's revenues increased 3% for the quarter ended June 30, 2021 due primarily to an increase in discrete service revenues as our service technicians were able to go to client sites to complete service requests. Our ability to go on-site to many of our customers facilities to install and service systems was severely restricted during parts of the first quarter of fiscal year 2021. As this division's sales are exclusively in North America, the majority of COVID-19 related restrictions that affected our ability to generate revenue in fiscal year 2021 were relaxed during the first quarter of fiscal year 2022.
Continuous Monitoring gross profit percentage increased seven percentage points for the quarter ended June 30, 2021 primarily due to modifications made to our product offerings and pricing models partway through the first quarter of fiscal year 2021, and to a lesser extent, the reorganization of the business during the first quarter of fiscal year 2021.
Operating Expenses
Operating expenses for the quarter ended June 30, 2021 increased 14% compared to the prior year as our overall business grew.
Selling
Selling expense is driven primarily by labor costs, including salaries and commissions; accordingly, it may vary with sales levels.
| Three Months Ended June 30, |
Percentage |
|||||||||||
| 2021 |
2020 |
Change |
||||||||||
| Selling expense |
$ | 4,858 | $ | 4,075 | 19 | % | ||||||
| As a percentage of revenues |
14 | % | 14 | % | - | % | ||||||
Selling expense for the quarter ended June 30, 2021 increased 19%, as we executed on our previously-announced plan to invest in sales and marketing resources in order to increase organic revenues growth. Specifically, we hired several sales employees, resulting in higher labor-related costs, including accruing commissions on higher sales. Further, we invested in new marketing materials to support our sales staff, incurred increased employee travel-related expenses as COVID-19 restrictions lifted, and to a lesser extent, we experienced unfavorable foreign exchange rates for selling expenses incurred in Swedish Krona. As a percentage of revenues, selling expense was 14% for both the quarter ended June 30, 2021 and June 30, 2020. We expect total selling expense will approximate 14%-16% of revenues for fiscal year 2022.
General and Administrative
Labor costs including non-cash stock-based compensation, and amortization of intangible assets drive the substantial majority of our general and administrative expense.
| Three Months Ended June 30, |
Percentage |
|||||||||||
| 2021 |
2020 |
Change |
||||||||||
| General and administrative expense |
$ | 11,419 | $ | 10,099 | 13 | % | ||||||
| As a percentage of revenues |
33 | % | 34 | % | (1 | %) | ||||||
General and administrative expenses increased 13% for the quarter ended June 30, 2021, primarily as a result of higher non-cash stock-based compensation expense and amortization expense, partially offset by lower professional services expenses. The increase in non-cash stock-based compensation expense is attributable to the modification of a restricted stock award that resulted in recognition of compensation costs totaling $351 during the quarter ended June 30, 2021 and to the issuance of restricted stock units in place of a portion of our executive team's cash bonuses and salaries, which were outstanding for a larger portion of the first quarter of fiscal year 2022 than the first quarter of fiscal year 2021. The increase in amortization expense is due to a $344 cumulative effect decrease to amortization expense recorded during the quarter ended June 30, 2020, resulting from a purchase price adjustment to reduce the value of our intangible assets acquired in a business combination. Professional services expenses have returned to more normal levels after they were higher than usual during the quarter ended June 30, 2020 as we worked to implement our enterprise resource planning tool at Gyros Protein Technologies AB ("GPT") during that time.
Research and Development
Research and development expense is predominantly comprised of labor costs and costs of third-party consultants.
| Three Months Ended June 30, |
Percentage |
|||||||||||
| 2021 |
2020 |
Change |
||||||||||
| Research and development expense |
$ | 2,811 | $ | 2,596 | 8 | % | ||||||
| As a percentage of revenues |
8 | % | 9 | % | (1 | %) | ||||||
Research and development expenses are predominantly comprised of labor costs and costs of third-party consultants. Research and development expenses increased 8% for the quarter ended June 30, 2021, primarily as a result of third-party contractor expenditures supporting our continued incremental investments in enhancing existing products as well as the development of new products and features. We expect research and development expenses will continue to approximate 7%-10% of revenues in the near term.
Nonoperating Expense
| Three Months Ended June 30, |
Percentage |
|||||||||||
| 2021 |
2020 |
Change |
||||||||||
| Nonoperating expense |
$ | 1,705 | 2,816 | (39 | %) | |||||||
Nonoperating expense for the quarter ended June 30, 2021 is composed primarily of interest expense and amortization of the debt discount associated with our 1.375% convertible senior notes due August 15, 2026 (the "Notes"), interest income earned on cash and cash equivalents, and gains and losses on foreign currency transactions.
Interest expense and amortization of debt discount for the quarter ended June 30, 2021 decreased compared to the quarter ended June 30, 2020 due to our adoption of Accounting Standards Update 2020-06, which resulted in a reduction in non-cash interest expense related to the Notes.
Income Taxes
| Three Months Ended June 30, |
Percentage |
|||||||||||
| 2021 |
2020 |
Change |
||||||||||
| Income tax (benefit) expense |
$ | (577 | ) | $ | (463 | ) | 25 | % | ||||
| Effective tax rate |
(41 | %) | (61 | %) | 21 | % | ||||||
Our effective tax rate benefited notably from the the exercise of stock options and to a lesser extent, the benefit of federal derived intangible income, partially offset by the limitations imposed by Section 162(m) and higher state income taxes. Our income tax rate varies based upon many factors, but in general, we anticipate that on a go-forward basis our effective tax rate will be approximately 26%, plus or minus the impact of excess tax benefits and deficiencies associated with share-based payment awards to employees; see Note 9. “Income Taxes” within Item 1. Financial Statements for additional discussion. The excess tax benefits and deficiencies associated with share-based payment awards to our employees have caused and, in the future, may cause large fluctuations in our realized effective tax rate based on timing, volume, and nature of stock options exercised under our share-based payment program.
Net Income
Net income for the quarter ended June 30, 2021 varied with the changes in revenues, gross profit, and operating expenses (and includes $2,197 and $3,816 of non-cash: stock-based compensation and amortization of intangible assets acquired in a business combination, respectively). Prior to the adoption of ASU 2020-06 on April 1, 2021, we were required to recognize non-cash interest expense related to the amortization of debt discounts and issuance costs. Subsequent to the adoption, we recognize non-cash interest expense related to amortization of debt issuance costs only, resulting in higher net income subsequent to the adoption of ASU 2020-06.
Liquidity and Capital Resources
Our sources of liquidity include cash generated from operations, cash and cash equivalents on hand, working capital and potential additional equity and debt offerings. Despite lingering uncertainties surrounding the economic impacts of the COVID-19 pandemic, we continue to believe that we have the liquidity required to continue operations even if volatility in the economic environment reoccurs. We believe that cash and cash equivalents on hand and cash generated from operations, as well as the unused capacity under our Credit Facility will be sufficient to meet our short-term and long-term needs or could provide funds for one or more acquisitions. Additionally, we believe that we have access to equity and credit markets if necessary. However, additional equity or debt financing, or other transactions, may not be available on acceptable terms, if at all. We routinely evaluate opportunities for strategic acquisitions, and material acquisitions may require that we obtain additional capital, assume additional third-party debt, or incur other long-term obligations.
Our more significant uses of resources have historically included acquisitions, long-term capital expenditures, payment of debt and interest obligations, and quarterly dividends to shareholders. Working capital is the amount by which current assets exceed current liabilities. We had working capital of $281,863 and $271,166 as of June 30, 2021, and March 31, 2021, respectively. As of June 30, 2021, and March 31, 2021, we had $275,710 and $263,865, respectively, of cash and cash equivalents, which were held primarily in money market funds. We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. We expect to make tax payments of about $2,100 during the second quarter of fiscal year 2022.
During fiscal year 2021, we entered into a four-year senior secured credit agreement that includes 1) a revolving credit facility in an aggregate principal amount of up to $75,000, 2) a swingline loan in an aggregate principal amount not exceeding $5,000, and 3) letters of credit in an aggregate stated amount not exceeding $2,500 at any time. The Credit Facility also provides for an incremental term loan or an increase in revolving commitments in an aggregate principal amount of at a minimum $25,000 and at a maximum $75,000, subject to the satisfaction of certain conditions and lender considerations. We have not drawn from the Credit Facility.
As of June 30, 2021, $172,500 in aggregate principal amount Notes was outstanding. The Notes bear interest at a rate of 1.375% payable semi-annually in arrears on February 15 and August 15 of each year, beginning with our first payment made on February 15, 2020. These Notes can be converted by holders prior to maturity if certain conditions are met. We currently expect to settle future conversions of the Notes entirely in shares of our common stock and will reevaluate this policy from time to time in the event that conversion conditions are met and conversion notices are received from holders of the Notes. We were in compliance with all debt agreements at June 30, 2021 and for all prior years presented and have met all debt payment obligations. Refer to Note 6. "Indebtedness" within Item 1. Financial Statements for more details on these transactions.
We routinely evaluate opportunities for strategic acquisitions. We currently have cash and cash equivalents on hand, but future material acquisitions may require that we obtain additional capital, assume additional third-party debt or incur other long-term obligations. We believe that we have the ability to issue more equity or debt in the future in order to finance our acquisition and investment activities, although the terms of any such possible future financing are unknown.
We may from time to time repurchase or otherwise retire our debt and take other steps to reduce our debt. These actions may include retirements or refinancing of outstanding debt, privately negotiated transactions or otherwise. The amount of debt that may be retired, if any, could be material and would be decided at the sole discretion of our Board of Directors and will depend on market conditions, our cash position and other considerations.
Dividends
We have paid regular quarterly dividends since 2003. We declared and paid dividends of $0.16 per share during the quarter ended June 30, 2021 as well as each quarter of fiscal year 2021.
In July 2021, we announced that our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on September 15, 2021, to shareholders of record at the close of business on August 31, 2021.
Cash Flows
Our cash flows from operating, investing, and financing activities were as follows (in thousands):
| Three Months Ended June 30, |
||||||||
| 2021 |
2020 |
|||||||
| Net cash provided by operating activities |
$ | 9,589 | $ | 2,260 | ||||
| Net cash (used in) investing activities |
(653 | ) | (216 | ) | ||||
| Net cash provided by financing activities |
265 | 146,885 | ||||||
Cash flows from operating activities for the quarter ended June 30, 2021 provided $9,589, which primarily resulted from favorable changes in our working capital accounts. Cash used in investing was higher during the quarter ended June 30, 2021 compared to the quarter ended June 30, 2020, due to purchases of property, plant, and equipment, primarily to support the renovations of our Lakewood, Colorado facility. Our equity raise completed during the quarter ended June 30, 2020 provided $145,935.
Contractual Obligations and Other Commercial Commitments
We are party to many contractual obligations that involve commitments to make payments to third parties in the ordinary course of business. For a description of our contractual obligations and other commercial commitments as of March 31, 2021, see our Form 10-K for the fiscal year ended March 31, 2021, filed with the Securities and Exchange Commission on June 1, 2021. During the quarter ended June 30, 2021, there were no material changes with respect to the nature of our contractual obligations and other commercial commitments outside the ordinary course of business. At June 30, 2021, we had contractual obligations for open purchase orders of approximately $8,959 for routine purchases of supplies and inventory, which are payable in less than one year.
Off-Balance Sheet Arrangements
As of June 30, 2021, we had no off-balance sheet arrangements or obligations.
Critical Accounting Policies and Estimates
Critical accounting estimates are those that we believe are both significant and require us to make difficult, subjective, or complex judgments, often because we need to estimate the effect of inherently uncertain matters. These estimates are based on historical experience and various other factors that we believe to be appropriate under the circumstance. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for the year ended March 31, 2021, in the Critical Accounting Policies and Estimates section of “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.”
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We have no derivative instruments and minimal exposure to commodity market risks. Our reporting currency is U.S. dollars, and the functional currency of each of our foreign subsidiaries is its respective local currency. Our operations include activities outside of the U.S. and we have currency risk on the transactions in other currencies and translation adjustments resulting from the conversion of our international financial results into the U.S. dollar. We face currency exposures in our global operations as a result of various factors including intercompany currency denominated loans, selling our products in various currencies, purchasing raw materials and equipment in various currencies and tax exposures not denominated in the functional currency. These exposures have increased as we have continued to expand internationally, including the acquisition of GPT, which conducts a substantial portion of its business expenses in Swedish Krona. Fluctuations in exchange rates have, and may continue to adversely affect our results of operations, financial position, and cash flows; however we do not believe a 10% adverse change in currency would materially affect our consolidated results.
We hold investments in money market funds. As a result, we are exposed to potential loss from market risks that may occur as a result of changes in interest rates, credit quality of the issuer, or other factors.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
As of June 30, 2021, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
See Note 10. “Commitments and Contingencies” within Item 1. “Financial Statements.” for information regarding any legal proceedings in which we may be involved.
During the quarter there were no material changes from the risk factors described in Item 1A Risk Factors of our Annual Report on Form 10-K for the year ended March 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On November 7, 2005, our Board of Directors adopted a share repurchase plan which allows for the repurchase of up to 300,000 of our common shares, of which 162,486 have been purchased to date; however, no shares have been purchased under the plan in the last three fiscal years. This plan will continue until the maximum is reached or the plan is terminated by further action of the Board of Directors.
Item 5. Other Information
Due to input we received from Institutional Shareholders Services (ISS), we are providing the information below, which is not required in this Form 10-Q or on Form 8-K.
Item 4 in our proxy statement filed on July 16, 2021 requests that our stockholders approve the Mesa Laboratories, Inc. 2021 Equity Plan (the “2021 Plan”), an omnibus equity incentive plan which, if approved by our stockholders, will replace the Mesa Laboratories, Inc. 2014 Equity Incentive Plan (the “2014 Plan”).
The following disclosure appears in Item 4 of the above-referenced proxy statement. In addition to the disclosure below from our proxy statement, we are confirming that we have not issued any awards under the 2014 Equity Plan since March 31, 2021 and will not issue any additional awards under the 2014 Equity Plan unless our shareholders do not approve the 2021 Plan at the Annual Meeting of Shareholders on August 27, 2021.
Determination of Number of Shares for the 2021 Plan
If the 2021 Plan is approved, we will immediately terminate the 2014 Equity Plan (the "2014 Plan") and will not make any further awards under the 2014 Plan. The aggregate number of shares of common stock that will be reserved and available for issuance pursuant to awards under the 2021 Plan will be 330,000. In setting the number of proposed shares issuable under the 2021 Plan, the Compensation Committee and the Board of Directors primarily considered historical equity award granting practices, including the Company’s two-year average share usage rate. The following table reflects the effect on our equity incentive plans if we obtain stockholder approval of the 2021 Plan.
| Shares available for issuance under the 2014 Plan prior to termination, as of March 31, 2021 |
44,039 |
| Shares that would no longer be available for issuance upon termination of the 2014 Plan |
(44,039) |
| Shares available for issuance under the 2021 Plan |
330,000 |
| Total shares available for issuance pursuant to new awards upon approval of the 2021 Plan |
330,000 |
Shares Available and Outstanding Equity Awards under the Prior Plan
As of March 31, 2021, there were 5,140,568 total outstanding shares of the Company's common stock. As of March 31, 2021, there were 253,144 stock options outstanding under the Company's equity compensation plans, with a weighted average exercise price of $129.55 and a weighted-average remaining term of 2.7 years. In addition, as of March 31, 2021, there were 36,747 RSUs and 20,059 PSUs outstanding under the company's equity compensation plan. Other than the foregoing, no other awards were outstanding as of March 31, 2021 under the Company's equity compensation plans.
| Exhibit No. |
Description of Exhibit |
| 31.1+ |
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2+ |
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1* |
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2* |
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.INS+ | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH+ | Inline XBRL Taxonomy Extension Schema Docment. |
| 101.CAL+ | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF+ | Inline XBRL Taxonomy Extension Definitions Linkbase Document |
| 101.LAB+ | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE+ | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104+ |
Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101.*). |
+ Filed herewith
* Furnished herewith
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MESA LABORATORIES, INC.
(Registrant)
| DATED: August 5, 2021 | BY: | /s/ Gary M. Owens. Gary M. Owens Chief Executive Officer |
| DATED: August 5, 2021 | BY: | /s/ John V. Sakys John V. Sakys Chief Financial Officer |