MESA LABORATORIES, INC. (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; results of acquisitions; management's strategy, plans and objectives for future operations or acquisitions, product development and sales; product research and development; regulatory approvals; selling, general and administrative expenditures; intellectual property; development and manufacturing plans; availability of materials and components; 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," "intend," "seek," "believe," "anticipate," "could," "estimate," "plan," "target," "may," "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: our ability to successfully grow our business, including as a result of acquisitions; the results that acquisitions have on our operations; our ability to consummate acquisitions at our historical rate and at appropriate prices, and our ability to effectively integrate acquired businesses and achieve desired results; the market acceptance of our products; technological or market viability of our products; reduced demand for our products, including as a result of competitive factors; conditions in the global economy and the particular markets we serve; the duration and impact of the COVID-19 pandemic and its adverse effects on our business; significant developments or uncertainties stemming from governmental actions, 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, earnings, expenses, margins, tax rates, tax provisions, liquidity, cash flows, 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? and assumptions underlying any of the foregoing. Such risks and uncertainties also include those listed in Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year endedMarch 31, 2022 and 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. Overview We are a multinational manufacturer, developer, and seller of life science tools and quality control products and services, many of which are sold into niche markets that are driven by regulatory requirements. We have manufacturing operations inthe United States andEurope , and our products are marketed by our sales personnel inNorth America ,Europe , andAsia Pacific , 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 profit margins. As ofJune 30, 2022 , we managed our operations in four reportable segments, or divisions: Clinical Genomics, Sterilization and Disinfection Control,Biopharmaceutical Development , and Calibration Solutions. Each of our divisions 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, in particular the pharmaceutical, healthcare services, and medical device verticals, that require dependable quality control and calibration solutions to ensure the safety and efficacy of the products they use. 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, price increases, and changes in foreign
currency rates. 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. 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. We typically
evaluate costs and pricing annually; however as a result of high inflation in
recent quarters, we have elected to put through additional price increases which
will take effect during the second quarter of our fiscal year 2023.
Gross profit is affected by many factors including our product mix,
manufacturing efficiencies, costs of products and labor, 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.
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Inorganic Growth - Acquisitions
During the third quarter of fiscal year 2022, we completed the acquisition of Agena for an aggregate net purchase price of$300,793 . Agena is a leading clinical genomics tools company that develops, manufactures, and sells highly sensitive, low-cost, high-throughput, genetic analysis tools used by clinical labs to perform genomic clinical testing in several therapeutic areas, such as newborn screenings, pharmacogenetics and oncology. The acquisition of Agena accelerated our strategic trajectory towards higher growth applications within the regulated segments of the life sciences tools market. Over the past decade, we have consummated a number of acquisitions as part of our growth strategy. The acquisitions of these businesses 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: Protecting 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 upThe 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. General Trends COVID-19 has caused or exacerbated broad market phenomena such as supply chain disruptions, inflation, and wage pressure to which we are susceptible. While supply chain constraints continue to impact all of our divisions and particularly our Calibration Solutions andBiopharmaceutical Development divisions, we expect that constraints will abate somewhat over the remainder of fiscal year 2023. We continue to work with our suppliers to understand the existing and potential future impacts to our supply chain and are taking actions in an effort to mitigate such impacts, including pre-ordering components in higher quantities than usual, which has resulted in increased raw materials balances on our consolidated balance sheets as ofJune 30, 2022 . We have also experienced labor shortages and inflationary pressures due to labor market conditions, impacting all of our divisions, but particularly our Sterilization and Disinfection Control division. It is possible that labor shortages in our Sterilization and Disinfection Control Division may continue to impact our ability to manufacture product on preferred timelines during the remainder of fiscal year 2023 which could directly impact our revenues and related gross profit. We continue to actively monitor the COVID-19 pandemic, including the spread of variants of the virus and the potential impacts that the virus may have on our employees, our customers, and our supply chain. Conditions related to the COVID-19 pandemic have generally improved during the first quarter of our fiscal year 2023; however, there has been significant variation in business impact by geography. For example, late in fiscal year 2022, an increase in COVID-19 cases in certain parts ofChina resulted in the re-imposition of government mandated shut-downs and restrictions, which impacted our operations inChina , particularly our Clinical Genomics division. Such regulatory restrictions have negatively impacted commercial execution, limiting sales of Clinical Genomics consumables to existing customers and instruments to new customers. As stay-at-home and quarantine mandates have eased to some extent, we expect an eventual return to normalized activity levels. The continued impact of COVID-19 remains highly uncertain because of the speed with which the situation continues to evolve, the global breadth of its spread, the range of governmental and community responses thereto and the diversity of our geographic reach and business offerings. Even after the COVID-19 pandemic has largely subsided as a public health matter, we may experience material adverse impacts to our business as a result of the pandemic's adverse impact on the global economy, in-person collaboration and sales efforts, and our customers' changed purchasing behaviors and confidence. 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 44% for the three months endedJune 30, 2022 . Revenues growth was primarily attributable to the acquisition of Agena; however, organic revenues growth was 3% for the three months endedJune 30, 2022 . Gross profit as a percentage of revenues decreased two percentage points for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 primarily as a result of continued supply chain constraints, wage and other inflationary pressures, and impacts of government-imposed lockdowns related to the COVID-19 pandemic. Results by reportable segment are as follows: Revenues Organic Revenues Growth Gross Profit as a % of Revenues Three Three Three Three Three Months Three Months Months Months Months Months Ended June Ended June Ended June Ended June Ended June Ended June 30, 2022 30, 2021 30, 2022 30, 2021 30, 2022 30, 2021
Clinical Genomics (*)$ 14,505 $ - N/A N/A 54 % N/A Sterilization and Disinfection Control 14,774 15,150 (2 %) 16 % 73 % 75 % Biopharmaceutical Development 10,967 8,877 24 % 49 % 65 % 53 % Calibration Solutions 10,207 10,893 (6 %) - % 55 % 56 % Mesa's reportable segments$ 50,453 $ 34,920 3 % 17 % 62 % 64 %
(*) Revenues in the Clinical Genomics division represent transactions subsequent
to the Agena Acquisition on
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Our unaudited condensed consolidated results of operations are as follows:
Three Months Ended June 30, Percentage
2022 2021 Change
Revenues $ 50,453 $ 34,920 44 %
Gross profit 31,341 22,211 41 %
Operating expenses 35,935 19,088 88 %
Operating (loss) income (4,594 ) 3,123 (247 %)
Net (loss) income $ (1,438 ) $ 1,995 (172 %)
Reportable Segments
Clinical Genomics
The Clinical Genomics division, created following the Agena Acquisition,
develops, manufactures, and sells highly sensitive, low-cost, high-throughput,
genetic analysis tools used by clinical labs to perform genomic clinical testing
in several therapeutic areas, such as screenings for hereditary diseases,
pharmacogenetics and oncology related applications.
Three Months Ended June 30, Percentage
2022 2021 Change
Revenues $ 14,505 $ - N/A
Gross profit 7,849 - N/A
Gross profit as a % of revenues 54 % N/A N/A
Clinical Genomics revenues were negatively impacted by the government-imposed
shutdowns in parts of China due to the COVID-19 pandemic, which began at the end
of fiscal year 2022 and continued throughout the majority of the first quarter
of fiscal year 2023. Shut-downs in China limited our sales efforts and decreased
sales of consumables as laboratory customers were closed, limiting usage of our
products. As these government-imposed shutdowns become less frequent, we expect
to see a recovery to more normal demand. Of the revenues reported, $195
represents revenues from COVID-19 related sales.
Clinical Genomics gross profit was $7,849 for the three months ended June 30,
2022 and was significantly impacted by lower than expected revenues due to the
government-imposed shutdowns in China related to the COVID-19 pandemic. The
decreased revenues impacted gross profit as a percentage of revenues as lower
revenues were available to cover our partially fixed cost base.
Sterilization and Disinfection Control
Our Sterilization and Disinfection Control division manufactures and sells biological, cleaning, and chemical indicators which are used to assess the effectiveness of sterilization and disinfection processes in the hospital, 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
2022 2021 Change
Revenues $ 14,774 $ 15,150 (2 %)
Gross profit 10,768 11,428 (6 %)
Gross profit as a % of revenues 73 % 75 % (2 %)
Sterilization and Disinfection Control revenues decreased 2% for the
three months ended June 30, 2022 primarily due to the strengthening of the U.S.
dollar ("USD") against the euro and labor shortages which impacted our ability
to manufacture products on desired timelines, partially offset by favorable
product mix and to a lesser extent price increases.
Sterilization and Disinfection Control's gross profit percentage decreased two
percentage points for the three months ended June 30, 2022 as a result of lower
revenues due to the strengthening of the USD against the euro and increased
labor and labor-related costs.
Our
Three Months Ended June 30, Percentage
2022 2021 Change
Revenues $ 10,967 $ 8,877 24 %
Gross profit 7,077 4,692 51 %
Gross profit as a % of revenues 65 % 53 % 12 %
Biopharmaceutical Development revenues increased 24% for the three months ended
June 30, 2022 primarily due to increased sales of both consumables and services,
as well as price increases and an easier compare to the first quarter of fiscal
year 2022. Increases in revenues were partially offset by unfavorable changes in
foreign exchange rates.
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Biopharmaceutical Development's gross profit percentage increased 12 percentage points for the first quarter of fiscal year 2023 compared to the first quarter of fiscal year 2022 as a result of a favorable change in foreign exchange rates applied to costs recorded in Swedish Krona ("SEK"), favorable product mix of peptide synthesis solutions, and production efficiencies resulting from increased revenues, partially offset by higher labor and material costs.
Calibration Solutions
The Calibration Solutions division designs, manufactures, and markets quality
control and calibration products used to measure or calibrate temperature,
pressure, pH, humidity, and other such parameters for health and safety
purposes, primarily in hospital, medical device manufacturing, pharmaceutical,
and laboratory environments.
Three Months Ended June 30, Percentage
2022 2021 Change
Revenues $ 10,207 $ 10,893 (6 %)
Gross profit 5,664 6,112 (7 %)
Gross profit as a % of revenues 55 % 56 % (1 %)
Calibration Solutions division revenues decreased 6% for the three months ended
June 30, 2022 primarily as a result of supply constraints limiting our ability
to manufacture ordered quantities of certain products, partially offset by price
increases and increased calibration hardware sales.
The Calibration Solutions division's gross profit percentage decreased one
percentage point during the three months ended
Operating Expenses
Operating expenses increased 88% for the three months ended
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
2022 2021 Change
Selling expense $ 10,023 $ 4,858 106 %
As a percentage of revenues 20 % 14 % 6 %
Selling expense for the three months ended June 30, 2022 increased
106% primarily as a result of the acquisition of Agena. Excluding the impact of
Agena, selling expense increased 17% for the three months ended June 30, 2022 ,
primarily as a result of professional services costs as we made improvements to
our corporate website, as well as increased travel and tradeshow costs as we
continued to resume in-person meetings and events.
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
2022 2021 Change
General and administrative expense
77 % As a percentage of revenues 40 % 33 % 7 %
General and administrative expenses increased 77% for the three months ended
Excluding Agena, the increase in general and administrative costs for the first
quarter of fiscal year 2023 was a result of higher stock-based compensation
expense, increased labor and labor-related expenses, and costs associated with
the implementation of our enterprise resource planning tool for Agena, partially
offset by lower legal expenses.
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Table of Contents 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
2022 2021 Change
Research and development expense
103 % As a percentage of revenues 11 % 8 % 3 % Research and development expenses increased 103% for the three months endedJune 30, 2022 primarily as a result of the acquisition of Agena. Excluding the impact of Agena, research and development costs for the three months endedJune 30, 2022 increased 23% primarily as a result of our purchase of in process research and development technology that we intend to further develop in order to enhance a product offering in our Sterilization and Disinfection Control division. Nonoperating Expense Three Months Ended June 30, Percentage 2022 2021 Change Nonoperating (income) expense$ 818 1,705 (52 %) Nonoperating expense for the three months endedJune 30, 2022 is composed primarily of interest expense and amortization of the debt discount associated with the Notes and net gains on foreign currency transactions. Nonoperating expense was lower in the first quarter of fiscal year 2023 compared to the first quarter of fiscal year 2022 as the USD strengthened against the SEK and the euro resulting in realized and unrealized gains that partially offset interest expense and amortization of debt discount on the Notes and the Credit Facility. Income Taxes Three Months Ended June 30, Percentage 2022 2021 Change
Income tax provision (benefit)
589 % Effective tax rate 73.4 % (40.7 %) 114 % Our effective income tax rate was (73.4%) for the three months endedJune 30, 2022 and (40.7%) for the three months endedJune 30, 2021 . The effective tax rate for the three months endedJune 30, 2022 differed from the statutory federal rate of 21% primarily due to the share-based payment awards for employees and the effect of income generated in foreign jurisdictions The effective tax rate for the first quarter of our fiscal year 2023 was higher than the same period in 2022 primarily due to the share based compensation and the effect of income in foreign jurisdictions. Our future effective income tax rate depends on various factors, such as changes in tax laws, regulations, accounting principles, or interpretations thereof, and the geographic composition of our pre-tax income. We carefully monitor these factors and adjust our effective income tax rate accordingly.
Net Income
Net income for the three months endedJune 30, 2022 varied with the changes in revenues, gross profit, and operating expenses (and included$7,320 and$3,432 of non-cash amortization of intangible assets acquired in a business combination and stock-based compensation expense, respectively).
Liquidity and Capital Resources
Our sources of liquidity include cash generated from operations, cash and cash equivalents on hand, cash available from our Credit Facility and our Open Market Sale AgreementSM, working capital and potential additional equity and debt offerings. We believe that cash flows from operating activities and potential cash provided by borrowings from our Credit Facility or funds from our Open Market Sale AgreementSM, when necessary, will be sufficient to meet our ongoing operating requirements, scheduled interest payments on debt, dividend payments, and anticipated capital expenditures. We currently expect to settle the Notes in shares of our common stock, but we may re-finance the debt, depending on conditions in the market and the share price of our common stock. Our more significant uses of resources have historically included acquisitions, payments of debt and interest obligations, long-term capital expenditures, and quarterly dividends to shareholders. Working capital is the amount by which current assets exceed current liabilities. We had working capital of$84,000 and$76,263 as ofJune 30, 2022 andMarch 31, 2022 , respectively. As ofJune 30, 2022 , andMarch 31, 2022 , we had$43,747 and$49,346 , respectively, of cash and cash equivalents. We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
As of
InApril 2022 we entered into an Open Market Sale AgreementSM pursuant to which we may issue and sell, from time to time, shares of our common stock with an aggregate value of up to$150 million . We routinely evaluate opportunities for strategic acquisitions. 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; however, additional equity or debt financing, or other transactions, may not be available on acceptable terms, if at all. We may from time to time repurchase or 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 would depend on market conditions, our cash position, and other considerations. Page 19
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Table of Contents Dividends
We have paid regular quarterly dividends since 2003. We declared and paid
dividends of
InJuly 2022 , we announced that our Board of Directors declared a quarterly cash dividend of$0.16 per share of common stock, payable onSeptember 15, 2022 , to shareholders of record at the close of business onAugust 31, 2022 . Cash Flows Our cash flows from operating, investing, and financing activities were as follows (in thousands): Three Months EndedJune 30, 2022 2021
Net cash (used in) provided by operating activities
$ 9,589 Net cash (used in) investing activities (225 ) (653 ) Net cash (used in) provided by financing activities (1,407 ) 265 Cash flows from operating activities for the three months endedJune 30, 2022 used$2,811 . Of the amount of cash used,$10,233 related to net decreases working capital accounts,$4,972 represented net loss for the first quarter of 2023, partially offset by amortization and stock-based compensation expense. Cash used in working capital during the first quarter of fiscal year 2023 included: payment of bonuses accrued at year end, higher inventory as we work to manage supply chain constraints by increasing our stock of raw materials inventory, as well as payments made for prepaid insurance policies and other annual renewals. In the first quarter of fiscal year 2022, changes in operating assets and liabilities represented$1,430 as our cash bonus paid was smaller, and more receivables were collected during the quarter. Cash used in investing activities was lower during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 , due to less purchases of property, plant, and equipment during the period. Cash used by financing activities primarily resulted from$2,000 repaid on our Credit Facility during the quarter.
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 ofMarch 31, 2022 , see our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 , filed with theSecurities and Exchange Commission onMay 31, 2022 . On a consolidated basis, atJune 30, 2022 , we had contractual obligations for open purchase orders of approximately$24,081 for routine purchases of supplies and inventory, which are payable in less than one year. Open purchase orders continue to increase as we take proactive steps to mitigate risks in supply by increasing our orders of certain critical raw materials.
Off-Balance Sheet Arrangements
As of
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 circumstances. 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 endedMarch 31, 2022 , in the Critical Accounting Policies and Estimates section of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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