MESA LABORATORIES INC /CO/ Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
(in thousands of dollars, unless otherwise indicated)
Overview We are a multinational manufacturer, developer, and seller of life sciences 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 described in Note 14. "Segment Data" of the Notes to Consolidated Financial Statements contained within Item 8. Financial Statements and Supplementary Data of this annual report, during the third quarter of fiscal year 2022, following the acquisition of Agena, we changed our segment reporting to align with strategic changes in the way we manage our business units. As ofMarch 31, 2022 , we managed our operations in four reportable segments, or divisions: Sterilization and Disinfection Control,Biopharmaceutical Development , Calibration Solutions, and Clinical Genomics, which is comprised of the newly-acquired Agena. Each of our divisions are described further in "Results of Operations" below. Non-reportable operating segments (including our Cold Chain Packaging Division which ceased operations during the year endedMarch 31, 2020 ) 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 revenue 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. 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 and prices will continue to impact our overall gross profit.
Inorganic Revenue Growth – Acquisitions
During fiscal year 2022, we completed the acquisition of Agena for an aggregate purchase price of$300,793 , net of cash acquired, subject to customary purchase price adjustments. 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 acceleratesMesa's 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 a 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®. Page 27 --------------------------------------------------------------------------------
Contents
Improve our operational 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 learn so that performance continuously improves. As we integrate Agena into our business, we will focus on applyingThe Mesa Way to its operations which we hope will improve efficiency in some areas of Agena's business.
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.
COVID-19 and Business Update
The COVID-19 pandemic began to broadly impact our business late in fiscal year 2020, and its impacts continued to affect our business in various ways throughout fiscal year 2021 and, to a lesser extent, into fiscal years 2022 and 2023. We continue to monitor the impacts of COVID-19, including the current spread of certain variants of the virus, and we have taken and will continue to take steps to identify and mitigate the adverse impact on, and risks to, our business (including but not limited to our employees, customers, vendors, manufacturing capabilities and capacity, and supply and distribution channels) posed by the spread of COVID-19 and the government responses thereto. COVID-19 has caused or exacerbated broad market phenomena such as supply chain disruptions, inflation, and wage pressure to which we are susceptible. Throughout fiscal year 2022, we experienced increased supply constraints for certain components used in our operations, particularly components used by the Calibration Solutions andBiopharmaceutical Development divisions, and to a lesser extent the Sterilization and Disinfection Control and Clinical Genomics divisions. 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 balance sheet as ofMarch 31, 2022 . The impact of supply chain disruptions is discussed in more detail in our "Results of Operations" and Item 1A. Risk Factors. 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. The COVID-19 pandemic and related public health recommendations and mandated precautions to mitigate the spread of the virus, including regulations to close or limit the operating hours of our laboratory and facilities of our 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. While many recommendations and precautions that affected us in fiscal year 2021 have been rescinded inthe United States , some restrictions were reimposed for portions of the year endedMarch 31, 2022 as COVID-19 variants spread widely. Our operations inEurope andAsia have been most impacted because regulations and restrictions have tended to be more widespread in those areas. In contrast to the negative impacts experienced by our other divisions, our Clinical Genomics division produces a consumable reagent that can be used with its proprietary MassARRAY® instruments to accurately identify the presence of the COVID-19 virus and identify the variant from a biological sample. As a result, the Clinical Genomics division has benefited to some extent from outbreaks and resulting increased testing efforts. However, as in our other divisions, regulatory restrictions, particularly inAsia have negatively impacted commercial execution, limiting sales of Clinical Genomics products to new customers. We expect regulatory restrictions inAsia to continue into fiscal year 2023 which may negatively impact our Clinical Genomics division, and to a lesser extent, the rest of the company. Page 28 --------------------------------------------------------------------------------
Contents
Our revenues are generated from product sales, which include consumables and hardware; as well as services, which include discrete and ongoing calibration, testing, and maintenance services. Revenues increase as a result of organic or inorganic revenues growth. Inorganic revenues growth is driven by acquisitions. 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 returned to more normal operations resulting in increased sales levels in most of our divisions, outbreaks and increasing numbers of COVID-19 cases in many areas, especiallyAsia , have and may continue to result in the reinstatement of strict regulations, which we expect will result in lower sales levels. However, as vaccine distribution progresses, we are hopeful that any reinstatements of strict regulations will be less frequent and shorter in duration. We are working on several research and development projects that, if completed, may result in enhanced or new products for both existing customers and new markets. We are hopeful that we will have enhanced or new products and services available for sale in the coming fiscal year. As discussed in Note 15. "Subsequent Events" within Item 8. Financial Statements and Supplementary Data, we entered into an Open Market Sale AgreementSM withJefferies LLC as sales agent subsequent to the year endedMarch 31, 2022 . Revenues for our reportable segments increased 38% for the year endedMarch 31, 2022 . Revenues growth was primarily attributable to the acquisition of Agena; however, organic revenues growth was 13%. Gross profit as a percentage of revenues decreased 6 percentage points for the year endedMarch 31, 2022 , primarily as a result of a$7,462 charge recorded as we amortized the fair value of inventory step up recorded as part of purchase accounting. Results by reportable segment are as follows: Revenues Organic Revenues Growth Gross Profit as a % of Revenues Year Ended Year Ended Year Ended Year Ended Year Ended March 31, March 31, March 31, March 31, March 31, Year Ended 2022 2021 2022 2021 2022 March 31, 2021
Sterilization and Disinfection Control$ 59,044 $ 53,119 11 % 7 % 74 % 75 % Biopharmaceutical Development 45,579 33,892 34 % 19 % 63 % 62 % Calibration Solutions 46,872 46,926 - % (9 %) 53 % 56 % Clinical Genomics 32,840 - N/A N/A 36 % N/A Reportable segments$ 184,335 $ 133,937 13 % 1 % 59 % 65 % Results of Operations Our results of operations and year-over-year changes are discussed in the following section. The tables and discussion below should be read in conjunction with the accompanying Consolidated Financial Statements and the notes thereto appearing in Item 8. Financial Statements and Supplementary Data (in thousands, except percent data). Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedMarch 31, 2021 , filed onJune 1, 2021 , for a comparison of results of operations for the years endedMarch 31, 2021 andMarch 31, 2020 .
Our condensed consolidated results of operations are as follows:
Year Ended March 31, Percentage Change
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Revenues $ 184,335 $ 133,937 $ 117,687 38 % 14 %
Gross profit 109,090 87,014 65,362 25 % 33 %
Operating expenses 104,388 74,656 57,439 40 % 30 %
Operating income 4,702 12,358 7,923 (62 %) 56 %
Net income $ 1,871 $ 3,274 $ 1,778 (43 %) 84 %
Page 29
--------------------------------------------------------------------------------
Table of Contents Reportable Segments
Control of sterilization and disinfection
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 pharmaceutical,
medical device, dental, and hospital 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.
Year Ended March 31, Percentage Change
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Revenues $ 59,044 $ 53,119 $ 49,660 11 % 7 %
Gross profit 43,720 39,870 35,797 10 % 11 %
Gross profit as % of turnover 74% 75% 72%
(1 %) 3 %
Sterilization and disinfection control revenue increased 11% driven by organic revenue growth, which was achieved through modest price increases, effective efforts by our sales team to market and sell select products to a broader customer base, and to volume increases with existing customers, particularly in the biopharmaceutical markets.
Sterilization and Disinfection Control's gross profit percentage decreased one percentage point during the year endedMarch 31, 2022 primarily due to higher labor costs as a result of strong competition for employees in the labor market, and higher freight costs as a result of the global supply chain disruptions.
Our
Year Ended March 31, Percentage Change
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Revenues $ 45,579 $ 33,892 $ 13,851 34 % 145 %
Gross profit 28,605 21,035 382 36 % 5,407 %
Gross profit as a % of revenues 63 % 62 % 3 % 1 % 59 %
The results of the Biopharmaceutical Development division were consolidated into
our results beginning on November 1, 2019 , the first day following our
acquisition of Gyros Protein Technologies Holding AB . Biopharmaceutical
Development's revenues increased 34% as a result of resumed in-person
sales efforts and a marketing strategy focused on packaging our hardware and
software products in a format that is more appealing to our customers. These
efforts resulted in increased hardware sales and to a lesser extent increased
consumables sales, particularly in the cell and gene therapy market.
Biopharmaceutical Development's gross profit percentage increased one percentage
point during the year ended March 31, 2022 as a result of a favorable mix shift
towards immunoassay products, as well as production efficiencies resulting from
increased revenues, partially offset by higher labor costs.
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 ("SEK") and translated to USD for reporting purposes.
During periods in which the USD is weaker against the SEK, such as in the first
and second quarters of fiscal year 2022, our USD reported costs are inflated and
gross profit percentage is lower. In periods in which the USD strengthens
against the SEK, such as in the third and fourth quarters of fiscal year 2022,
our USD reported costs are lower and gross profit percentage is higher.
Page 30
--------------------------------------------------------------------------------
Table of Contents Calibration Solutions
This new reportable segment is composed of the historical Instruments and Continuous Monitoring segments. The Calibration Solutions division designs, manufactures and markets quality control and calibration products used to measure or calibrate temperature, pressure, pH, humidity and other similar parameters for health and safety purposes. safety, primarily in hospitals, medical device manufacturing, pharmaceuticals and laboratories. environments.
Year Ended March 31, Percentage Change
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Revenues $ 46,872 $ 46,926 $ 51,713 - % (9 %)
Gross profit 24,989 26,112 28,765 (4 %) (9 %)
Gross profit as % of turnover 53% 56% 56%
(3 %) - % Calibration Solutions' revenues were flat for the year endedMarch 31, 2022 , primarily as a result of supply and labor constraints limiting our ability to manufacture ordered quantities of certain products, partially offset by slightly higher service revenues. As COVID-19 related restrictions were gradually lifted, our service technicians were able to go to client sites to complete service requests and hardware installations. Despite fulfillment delays for many customer orders, demand for the division's products increased during fiscal year 2022, and to date, we have been able to retain the substantial majority of our customers and orders. Calibration Solutions' gross profit percentage decreased three percentage points during the year endedMarch 31, 2022 . The decrease in gross profit percentage resulted primarily from increased freight on purchased components, higher labor costs as a result of strong competition for employees in the labor market, and costs associated with outsourcing certain calibration functions while we completed the move and manufacturing set up of certain product sets from ourButler, New Jersey facility toLakewood, Colorado . While we no longer are outsourcing our calibration functions, supply chain disruptions and higher labor costs are expected to continue through fiscal year 2023.
Clinical genomics
This is a new reportable segment comprised of the recently acquired Agena. The
Clinical Genomics division 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.
Year Ended March 31, Percentage Change
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Revenues $ 32,840 $ - $ - - % N/A
Gross profit 11,941 - - - % N/A
Gross profit as a % of revenues 36 % N/A N/A N/A N/A
Revenues in the Clinical Genomics division represent revenues from October 20,
2021 until March 31, 2022 . Of the revenues reported, $2,871 represents revenues
from COVID-19-related sales, of which the substantial majority are consumables.
We expect sales in fiscal year 2023 will be negatively impacted by continued
restrictions and lockdowns imposed in China as a result of the COVID-19
pandemic, which have limited our sales efforts beginning in late fiscal year
2022.
Clinical Genomics' gross profit was $11,941 for the period from October 20, 2021
until March 31, 2022 . Gross profit includes a $7,462 charge related
to amortization of an inventory step-up to fair value recorded in purchase
accounting. Excluding the step-up amortization, gross profit for the period
ended March 31, 2022 would have been $19,403 , and gross profit as a percentage
of revenues would have been 59%. Gross profit also includes $2,538 of
amortization of intellectual property from the Agena Acquisition. Going forward,
we expect gross profit as a percentage of revenues to range from the high 50s to
the low 60s, including an annual impact of $5,675 of non-cash amortization of
intellectual property.
Page 31
--------------------------------------------------------------------------------
Table of Contents Corporate and Other Corporate and Other primarily consists of results from ourCold Chain Packaging division, which was dissolved during the year endedMarch 31, 2020 and is no longer considered a reportable segment, as well as unallocated corporate expenses. Year Ended March 31, Percentage Change 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Revenues $ - $ -$ 2,463 N/A (100% ) Gross (loss) profit (165 ) (3 ) 418 5400 % (101% ) Gross profit as a % of revenues N/A N/A 17 % N/A N/A Operating Expenses
Operating expenses for the year ended
Sale
Selling expenses are primarily determined by labor costs, including salaries and commissions; therefore, it may vary depending on sales levels.
Year Ended March 31, Percentage Change
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Selling expense $ 28,310 $ 18,480 12,910 53 % 43 %
As a percentage of revenues 15 % 14 % 11 % 1 % 3 %
Selling expense increased 53% for the year ended March 31, 2022 primarily as a
result of the acquisition of Agena. Excluding the impact of Agena, selling
expense increased 15% for the year ended March 31, 2022 , as we executed on our
previously-announced plan to invest in sales and marketing resources in order to
increase organic revenues growth. We hired several sales employees throughout
fiscal year 2022, resulting in higher labor-related costs and higher commission
expense resulting from increased revenues. Further, travel-related costs
increased as we resumed various in-person sales events as restrictions on
gatherings lifted compared to fiscal year 2021. Including the acquisition of
Agena and its sales force, we expect total selling expense will approximate 16%
to 18% of revenues for fiscal year 2023.
General and Administrative
Labor costs, non-cash stock-based compensation, and amortization of intangible
assets drive the substantial majority of general and administrative expense.
Year Ended March 31, Percentage Change
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
General and administrative costs
32 % 20 % As a percentage of revenues 33 % 34 % 32 % (1 %) 2 % General and administrative expenses increased 32% for the year endedMarch 31, 2022 , primarily as a result of the acquisition of Agena. Excluding the impact of Agena, general and administrative expenses increased 15% for the year endedMarch 31, 2022 as a result of acquisition and integration costs, higher annual bonus accruals based on our financial results for the year endedMarch 31, 2022 , and increased stock-based compensation expense as we expanded the number of participants in our stock-based compensation programs. Page 32 --------------------------------------------------------------------------------
Table of Contents
Research and Development
Research and development expense is predominantly comprised of labor costs and
third-party consultants.
Year Ended March 31, Percentage Change
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Research and development costs
52 % 63 % As a percentage of revenues 9 % 8 % 5 % 1 % 3 % Research and development expenses for the year endedMarch 31, 2022 increased 52% primarily as a result of expenses attributable to Agena. Excluding the impact of Agena, research and development costs for the year endedMarch 31, 2022 increased 12% primarily as a result of higher personnel and 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 approximate 9% to 12% of revenues for fiscal year 2023. Nonoperating Expense Year Ended March 31, Percentage Change 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Nonoperating expense$ 1,128 10,055 4,061 (89 %) 148 %
Non-operating expenses for the year ended
During the year ended
Interest expense and amortization of debt discount was lower for the year endedMarch 31, 2022 compared to the year endedMarch 31, 2021 due to our adoption of ASU 2020-06, which resulted in a$4,090 reduction in non-cash interest expense related to the Notes. See Note 1. "Description of Business and Summary of Significant Accounting Policies" within Item 8. Financial Statements and Supplementary Data. Income Taxes Year Ended March 31, Percentage Change 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Income tax expense (benefit)$ 1,703 $ (971 ) $ 2,084 (275 %) (147 %) Effective tax rate 48 % (42 %) 54 % 90 % (96 %) 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; (please see Note 12. "Income Taxes" within Item 8. Financial Statements and Supplementary Data). Our effective tax rate increased during the year endedMarch 31, 2022 due to the limitations imposed by Section 162(m), and higher federal and state income taxes, partially offset by tax benefits, notably the exercise of stock options. 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 revenue
Net income for the year endedMarch 31, 2022 varied with the changes in revenues, gross profit, and operating expenses (including, respectively,$21,806 ,$11,391 , and$7,462 of non-cash amortization of intangible assets acquired in a business combination, stock-based compensation expense, and amortization of inventory step up). Prior to the adoption of ASU 2020-06 onApril 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. Page 33 --------------------------------------------------------------------------------
Table of Contents
Non-GAAP reconciliation
Adjusted operating income (which excludes the non-cash impact of amortization of
intangible assets acquired in a business combination, stock-based compensation
and impairment of goodwill and long-lived assets) is used by management as a
supplemental performance measure, in order to compare current financial
performance to historical performance, assess the ability of our assets to
generate cash, and evaluate potential acquisitions.
Adjusted operating income should not be considered an alternative to, or more
meaningful than, net income, operating income, cash flow from operating
activities or any other measure of financial performance presented in accordance
with GAAP as measures of operating performance or liquidity.
The following table sets forth our reconciliation of adjusted operating income,
a non-GAAP measure:
Year Ended March 31,
2022 2021 2020
Operating income $ 4,702 $ 12,358 $ 7,923
Amortization of intangible assets acquired
in a business combination 21,806 14,513
10,637
Stock-based compensation 11,391 9,268
5,525
Impairment loss on goodwill and long-lived assets - - 276 Adjusted Operating Income$ 37,899 $ 36,139 $ 24,361
Cash and capital resources
Our sources of liquidity include cash generated from operations, cash and cash equivalents on hand, cash available from our revolving credit facility, swingline loan, and letters of credit (together referred to as the "Credit Facility"), working capital and potential additional equity and debt offerings. 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 remainder of the unused capacity under our Credit Facility, and potential funds from our Open Market Sale AgreementSM, will be sufficient to meet our short-term and long-term needs. 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$76,263 and$271,166 onMarch 31, 2022 and 2021, respectively. We also had$49,346 and$263,865 of cash and cash equivalents as ofMarch 31, 2022 and 2021, respectively. We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
On
OnMarch 5, 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. During the third quarter of fiscal year 2022, we borrowed$70,000 under the line of credit to fund the acquisition of Agena and repaid$21,000 during the third and fourth quarters of fiscal year 2022 using cash on hand and cash generated from operations. As ofMarch 31, 2022 , we had$26,000 remaining to draw on the Credit Facility. As ofMarch 31, 2022 , we have$172,500 aggregate principal of senior convertible notes outstanding. The Notes bear interest at a rate of 1.375% payable semi-annually in arrears onFebruary 15 andAugust 15 of each year. The Notes can be converted prior to maturity if certain conditions are met; no such conditions were met during the year endedMarch 31, 2022 . 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 onMarch 31, 2022 and for all prior years presented and have met all debt payment obligations. Refer to Note 8. "Indebtedness" within Item 8. Financial Statements and Supplementary Data for more details on these transactions. 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 . Page 34 --------------------------------------------------------------------------------
Contents
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 otherwise retire 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 been paying regular quarterly dividends since 2003. We have declared and paid dividends of
In
Cash Flows
Our cash flows from operating, investing, and financing activities were as
follows:
Year Ended March 31,
2022 2021 2020
Net cash flow generated by operating activities
26,988
Net cash (used in) investing activities (305,225 ) (1,992 ) (185,585 ) Net cash provided by financing activities 52,576 146,228 231,277
Cash flows from operating activities for the year endedMarch 31, 2022 provided$39,223 . The$2,150 increase in cash flows from operating activities primarily resulted from non-cash adjustments to net income, particularly increased depreciation and amortization as a result of higher intangibles balances resulting from the Agena Acquisition and amortization of the inventory step-up associated with the Agena Acquisition. Further, cash provided by operating assets and liabilities decreased by$12,444 for the year endedMarch 31, 2022 compared to the year endedMarch 31, 2021 , primarily as a result of the impact of timing on our working capital accounts. Cash used in investing activities was higher during the year endedMarch 31, 2022 compared to the year endedMarch 31, 2021 , due to cash expended on the Agena Acquisition, and to a lesser extent purchases of property, plant, and equipment, primarily to support the renovations of ourLakewood, Colorado facility. Cash provided by financing activities primarily resulted from a$70,000 draw on our Credit Facility, net of$21,000 repaid during the year. The draw on our Credit Facility was used to fund a portion of the purchase price of the Agena Acquisition. Our equity raise completed during the year endedMarch 31, 2021 provided$145,935 .
Significant Accounting Policies and Estimates
Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted inthe United States , which require management to make estimates, judgments, and assumptions that affect the amounts reported in our Consolidated Financial Statements and accompanying notes. We believe that the following are the more critical judgment areas in the application of accounting policies that currently affect our financial condition and results of operations. Management has discussed the development, selection, and disclosure of critical accounting policies and estimates with the Audit Committee of our Board of Directors. While our estimates and assumptions are based on our knowledge of current events and circumstances and actions we may take in the future, actual results may ultimately differ from these estimates and assumptions. For a discussion of our significant accounting policies, see Note 1. "Description of Business and Summary of Significant Accounting Policies" in Item 8. Financial Statements and Supplementary Data. Page 35 --------------------------------------------------------------------------------
Table of Contents Revenue Recognition Our revenues come from product sales, which include consumables and hardware; as well as services, which include discrete and ongoing calibration, testing, and maintenance services and contracts. Revenues are recognized when we satisfy our performance obligations under the terms of a contract, which occurs when control of the promised products or services transfers to our customers. We recognize as revenue the amount of consideration we expect to receive in exchange for transferring products or services to our customers (the transaction price). For all revenue arrangements, prices are fixed at the time of purchase and no price protections or variables are offered. The significant majority of our revenues and related receivables are generated from contracts with customers that are 12 months or less in duration. We generally recognize revenues as follows: Product sales: Our performance obligations related to product sales generally consist of the promise to sell tangible goods to distributors or end users. Control of these goods is typically transferred upon shipment, at which time our performance obligation is satisfied and revenue is recognized. For products requiringMesa's personnel to complete installation, control transfers to the customer and revenue is recognized when our technicians have completed the installation at the customer's location. Purchase orders typically provide evidence of an arrangement for product sales. Products sold include an assurance-type warranty which is accounted for as part of accrued warranty expense. Services: We generate service revenues from discrete or contracted calibration, testing, and maintenance services performed on our hardware products. Performance obligations arise when discrete services are contracted in advance and performed at a future time, often at the time of the customer's choosing. In such cases, our performance obligation is satisfied and revenue is recognized upon completion of the specified work. Alternately, performance obligations arising from ongoing service contracts are satisfied by completing any service that is contractually required during the contract period, if requested by the customer, or simply by the passage of time if no services are requested. For ongoing service contracts, revenue is recognized on a straight-line basis over the life of the contract in a faithful depiction of our obligation to provide services over the contract period. Evidence of a service arrangement may be in the form of a formal contract or a purchase order. Collectability is reasonably assured through our customer review process, and payment is typically due within 60 days or less. Upon adoption of Accounting Standards Codification ("ASC") 606, we elected the practical expedient to expense commission costs as incurred. The substantial majority of our contracts have original durations of one year or less, and we have elected not to disclose the expected timing or allocated transaction prices of future performance obligations. Additionally, we have elected the practical expedient to not assess whether a significant financing component exists when the period between when we perform our performance obligation and when the customer remits payment is one year or less. None of our contracts contained a financing component as ofMarch 31, 2022 orMarch 31, 2021 . Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. Standalone selling prices are based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price considering available information such as market conditions and internally approved pricing guidelines. Discounts may be approved at the time of purchase and are included within a contract's fixed transaction price. Discounts are typically allocated to the performance obligations included in the contract based on the standalone values of such obligations. Inventories Inventories are stated at the lower of cost or net realizable value using a weighted average costing methodology. Work in progress and finished goods inventory acquired in an acquisition are recorded at fair market value. Our work in process and finished goods inventories include the costs of raw materials, labor and overhead, which are estimated based on trailing twelve months of expense and standard labor hours for each product. We evaluate labor and overhead costs annually unless specific circumstances necessitate a mid-year evaluation for specific items. We monitor inventory costs relative to selling prices and perform physical cycle count procedures on inventories throughout the year to determine if a lower of cost or net realizable value reserve is necessary. We estimate and maintain an inventory reserve as needed for such matters as excess or obsolete inventory, shrinkage, and scrap. This reserve may fluctuate as our assumptions change due to new information, discrete events, or changes in our business, such as entering new markets or discontinuing a specific product; however, once inventory is written down, a new cost basis is established that is not subsequently written back up in future periods. Page 36 --------------------------------------------------------------------------------
Contents
Purchase accounting for acquisitions
We account for all business combinations in which we obtain control over another entity using the acquisition method of accounting, which requires most assets (both tangible and intangible) and liabilities (including contingent consideration) to be recognized at fair value at the date of acquisition. The excess of the purchase price over the fair value of assets less liabilities is recognized as goodwill. We determine fair value using widely accepted valuation techniques, primarily discounted cash flow and market multiple analyses. These types of analyses require us to make and monitor assumptions and estimates regarding industry and economic factors, the profitability of future business strategies, discount rates and cash flow. Certain adjustments to the assessed fair values of acquired assets or liabilities made subsequent to the acquisition date but within the measurement period are recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period are recorded within earnings. We expense all costs as incurred related to an acquisition in selling, general, and administrative expenses. Results of operations of the acquired company are included in our Consolidated Financial Statements from the date of the acquisition forward. If actual results are not consistent with our assumptions and estimates, or if our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future. Acquired Intangible Assets Our business acquisitions typically result in the recognition of goodwill and other intangible assets, which affect the amount of future period amortization expense and possible impairment charges we may incur. Intangible assets with a definite life are amortized over their useful lives using the straight-line method and the amortization expense is recorded within cost of products or selling, general and administrative expense in the Consolidated Statements of Income. Intangible assets and their related useful lives are reviewed at least annually to determine if any adverse conditions exist that would indicate the carrying value of these assets may not be recoverable. More frequent impairment assessments are conducted if certain conditions exist, including a change in the competitive landscape, any internal decisions to pursue new or different technology strategies, a loss of a significant customer, or a significant change in the marketplace, including changes in the prices paid for our products or changes in the size of the market for our products. If impairment indicators are present, we determine whether the underlying intangible asset is recoverable through estimated future undiscounted cash flows. The fair value measurement for asset impairment is based on Level 3 inputs. If the asset is not found to be recoverable, it is written down to the estimated fair value of the asset based on the sum of the future cash flows expected to result from the use and disposition of the asset. If the estimate of an intangible asset's remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life. We continue to believe that our definite lived intangible assets are recoverable as ofMarch 31, 2022 . We test goodwill for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to: current economic and market conditions, including a decline in market capitalization; a significant adverse change in legal factors; business climate or operational performance of the business; and an adverse action or assessment by a regulator.Goodwill is tested for impairment during the fourth quarter of each year, or more frequently as warranted by events or changes in circumstances mentioned above. Our impairment tests for other indefinite lived intangible assets are similar to the tests performed for goodwill but are conducted at the individual asset level. We accounted for the economic uncertainty caused by the COVID-19 pandemic when conducting our impairment analyses of goodwill and other indefinite lived intangible assets during the fourth quarter of our year endedMarch 31, 2022 . Our impairment tests begin with the optional qualitative assessment to determine whether it is more likely than not that the carrying value of a goodwill reporting unit or other intangible asset exceeds its fair value, as permitted by the accounting guidance. If, after this qualitative assessment, we determine it is more likely than not that the fair value is greater than the carrying amount, then no further quantitative testing is necessary. A quantitative assessment is performed if the qualitative assessment results in a more likely than not determination or if a qualitative assessment is not performed. The quantitative assessment considers whether the carrying amount of a reporting unit or indefinite lived intangible asset exceeds its fair value, in which case an impairment charge is recorded to the extent carrying value exceeds fair value. Fair value is determined using an income approach, which relies heavily on Level 3 inputs. Our qualitative assessments over each of our reportable segments and our other indefinite lived intangible assets during the year endedMarch 31, 2022 concluded that no impairment exists as ofMarch 31, 2022 . Page 37 --------------------------------------------------------------------------------
Table of Contents Debt Accounting As ofMarch 31, 2022 , our long-term debt balance is related to our 1.375% convertible senior notes due 2025, which were issued inAugust 2019 and are carried at their principal amount less unamortized debt discount. We account for our convertible notes as liabilities. For a discussion on the change in accounting for convertible debt, refer to Note 1. "Description of Business and Summary of Significant Accounting Policies" in Item 8. Financial Statements and Supplementary Data. Debt discount is amortized to interest expense in our Consolidated Statements of Income over the term of the convertible notes using the effective interest rate method.
Stock-based compensation
We recognize compensation expense for equity awards over the vesting period based on the award's fair value. We use the Black-Scholes valuation model to determine the fair value of our stock options. The Black-Scholes model requires assumptions to be made regarding our stock price volatility, the expected life of the award, and expected dividend rates. The volatility assumption and the expected life assumptions are based on our historical data. The compensation expense of performance share awards is based in part on the estimated probability of achieving levels of performance associated with particular levels of payout for performance shares. We determine the probability of achievement of future levels of performance by comparing the relevant performance level with our internal estimates of future performance. Those estimates are based on a number of assumptions, and different assumptions may have resulted in different conclusions regarding the probability of achieving future levels of performance relevant to the payout levels for the awards. Had we arrived at different assumptions of stock price volatility or expected lives of our options, or different assumptions regarding the probability of our achieving future levels of performance with respect to performance share awards, our stock-based compensation expense and results of operations could have been different.
Income taxes
Our provision for income taxes requires the use of estimates in determining the timing and amounts of deductible and taxable items including impacts on effective tax rates, deferred tax items and valuation allowances based on management's interpretation and application of complex tax laws and accounting guidance. We establish reserves for uncertain tax positions for material, known tax exposures relating to deductions, transactions and other matters involving some uncertainty as to the measurement and recognition of the item. While we believe that our reserves are adequate, issues raised by a tax authority may be finally resolved at an amount different than the related reserve and could materially increase or decrease our income tax provision in the current and/or future periods.
Recent accounting standards and pronouncements
For a discussion of the new accounting standards impacting the Company, refer to Note 1. "Description of Business and Summary of Significant Accounting Policies" in Item 8. Financial Statements and Supplementary Data.
Contractual obligations, commitments and off-balance sheet arrangements
Off-balance sheet arrangements
From
Contractual Obligations 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, 2021 , see our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2021 , filed with theSecurities and Exchange Commission onJune 1, 2021 . As a result of the Agena Acquisition in the third quarter of fiscal year 2022, we assumed certain contractual obligations, including an additional$9,884 of payments under existing lease agreements, and$4,373 of open purchase orders as ofMarch 31, 2022 . On a consolidated basis, atMarch 31, 2022 , we had contractual obligations for open purchase orders of approximately$19,025 for routine purchases of supplies and inventory, of which the substantial majority 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. Page 38
--------------------------------------------------------------------------------
Contents
© Edgar Online, source
Comments are closed.