Mesa Laboratories(MLAB) - 2024 Q4 - Annual Report

Part I Business Mesa Laboratories designs and manufactures life sciences tools and quality control solutions for regulated industries, focusing on organic growth, acquisitions, and operational efficiency - The company's business strategy is centered on organic growth, acquisitions, and improving operating efficiency through its proprietary lean-based system, "The Mesa Way"[18][19][21] - Mesa Laboratories operates and reports financial performance across four main segments: Sterilization and Disinfection Control, Clinical Genomics, Biopharmaceutical Development, and Calibration Solutions[22] - In fiscal year 2024, the company acquired GKE, a manufacturer of chemical sterilization indicators and biologics, to expand its Sterilization and Disinfection Control division in European and Asian healthcare markets[54] Backlog Information | Date | Backlog (approx.) | | :--- | :--- | | March 31, 2024 | $25.5 million | | March 31, 2023 | $38.1 million | - As of March 31, 2024, the company had 736 employees, with a notable decrease in voluntary employee turnover of approximately 6.8 percentage points compared to the previous fiscal year[72] Our Segments Mesa Laboratories operates through four distinct segments: Sterilization and Disinfection Control, Clinical Genomics, Biopharmaceutical Development, and Calibration Solutions - Sterilization and Disinfection Control: Manufactures biological, chemical, and cleaning indicators to assess sterilization and cleaning processes, expanded by the GKE acquisition in FY2024[23][54] - Clinical Genomics: Develops and sells genetic analysis tools, including the MassARRAY® system and related consumables, with consumables representing about 70% of this segment's revenue[29][30][33] - Biopharmaceutical Development: Provides automated systems for protein analysis (Gyrolab®) and peptide synthesis (PurePep®), with consumables at 42% of revenue and hardware at 32% in FY2024, reflecting softening capital equipment demand[35][36][38] - Calibration Solutions: Manufactures quality control products for measuring and calibrating critical parameters in various environments, including continuous monitoring systems, dialysate meters, data loggers, and gas flow calibrators[42] Risk Factors The company faces significant risks from global economic conditions, intense competition, operational challenges, acquisition integration, and financial vulnerabilities including goodwill impairment and debt servicing - The business is sensitive to global economic conditions, which can reduce demand, increase price competition, and cause supply interruptions[81] - The company faces operational risks from potential cybersecurity breaches of its IT systems and manufacturing/supply chain disruptions, including reliance on sole or limited-source suppliers for certain components[93][96][97] - A significant financial risk is the potential for additional impairment losses on goodwill and other intangible assets, with a $274.5 million impairment recorded in Q4 FY2024, particularly for Clinical Genomics and Biopharmaceutical Development divisions[130] - The company identified three material weaknesses in its internal control over financial reporting as of March 31, 2024, related to complex transactions, useful lives of acquired assets, and IT general controls, potentially leading to undetected material misstatements[133] - Servicing its debt, including the 1.375% convertible senior notes due 2025 and borrowings under its credit facility, requires significant cash flow and presents a financial risk[141][142] Cybersecurity Mesa Laboratories maintains a comprehensive cybersecurity program overseen by the Audit Committee, managed by an experienced Information Security Manager, and guided by industry standards - The Board of Directors delegates cybersecurity risk oversight to the Audit Committee, which receives quarterly updates from management's Business Information Services team[149] - The cybersecurity program is led by an Information Security Manager with over ten years of experience and involves regular risk assessments, ongoing security testing, and vulnerability management processes supported by external vendors[150][151] - To date, risks from cybersecurity threats have not materially affected the company's business strategy, results of operations, or financial condition, and the company maintains a cybersecurity insurance policy[154] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Mesa Laboratories' common stock trades on Nasdaq under 'MLAB,' with a history of quarterly dividends and an active share repurchase plan, though no repurchases occurred in recent fiscal years - The company's common stock trades on the Nasdaq Global Market under the ticker symbol "MLAB"[159] - Mesa has paid quarterly dividends since 2003 and anticipates continuing this practice[159] - A share repurchase plan allows for the repurchase of up to 300,000 common shares, with 137,514 shares remaining available as of March 31, 2024, and no shares repurchased during fiscal year 2024[162] Management's Discussion and Analysis of Financial Condition and Results of Operations Mesa's FY2024 revenues decreased by 1% to $216.2 million, with a $254.2 million net loss primarily due to a $274.5 million goodwill impairment, while liquidity remains sufficient post-debt refinancing Consolidated Financial Results (in thousands) | Metric | FY 2024 | FY 2023 | % Change | | :--- | :--- | :--- | :--- | | Revenues | $216,187 | $219,080 | (1%) | | Gross Profit | $133,250 | $133,693 | -% | | Operating (Loss) Income | ($272,075) | $3,320 | (8,295%) | | Net (Loss) Income | ($254,246) | $930 | (27,438%) | - The company recorded total impairment losses of $274.5 million in Q4 FY2024 related to goodwill and intangible assets in its Clinical Genomics and Biopharmaceutical Development divisions[180][201] - Organic revenue growth was negative 5.6%, driven by declines in the Clinical Genomics (-15.6%) and Biopharmaceutical Development (-14.3%) segments, impacted by soft capital equipment demand and economic slowdowns in China[181][177] - Subsequent to fiscal year-end, in April 2024, the company amended its credit facility to include a $75 million term loan, the proceeds of which were used to repurchase $75 million in principal of its 2025 Convertible Senior Notes[213][399] Results of Operations by Segment Segment performance in FY2024 showed growth in Sterilization and Disinfection Control and Calibration Solutions, offset by declines in Clinical Genomics and Biopharmaceutical Development due to market headwinds FY 2024 Segment Performance vs. FY 2023 | Segment | Revenues (M) | Revenue Growth | Organic Growth | Gross Profit Margin | | :--- | :--- | :--- | :--- | :--- | | Sterilization & Disinfection Control | $75.1 | 16% | 1.9% | 71% | | Clinical Genomics | $52.6 | (16%) | (15.6%) | 51% | | Biopharmaceutical Development | $40.7 | (14%) | (14.3%) | 62% | | Calibration Solutions | $47.8 | 7% | 6.6% | 58% | - Sterilization and Disinfection Control: Revenue growth was primarily driven by the GKE acquisition, which contributed $9.3 million in revenue[184] - Clinical Genomics: Revenue decline was largely due to the loss of customer Sema4 in Q3 FY2023 and China's economic slowdown[187] - Biopharmaceutical Development: Revenue decrease was caused by continued soft demand for capital equipment in the biopharmaceutical industry[190] - Calibration Solutions: Revenue increased as production difficulties and supply constraints from the prior year abated, allowing for a return to normal operations[193] Liquidity and Capital Resources Mesa's liquidity as of March 31, 2024, included $28.2 million in cash and $65.0 million in working capital, with a post-year-end debt refinancing to repurchase 2025 Convertible Notes Key Liquidity Metrics (as of March 31) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $28,214 | $32,910 | | Working capital | $65,040 | $75,616 | | Cash from operating activities (FY) | $44,133 | $27,983 | - As of March 31, 2024, the company had $172.5 million in principal outstanding under its 2025 Convertible Notes and $50.5 million outstanding under its Credit Facility[212] - In April 2024, the company used proceeds from a new $75 million term loan to repurchase $75 million of its 2025 Notes for a cash price of $71.4 million[213] Critical Accounting Policies and Estimates Key critical accounting estimates include purchase accounting, goodwill and intangible asset impairment testing, stock-based compensation, and income taxes, with heightened risk of future impairment for Clinical Genomics and Biopharmaceutical Development - Key critical accounting estimates include purchase accounting for acquisitions, impairment testing for goodwill and intangible assets, stock-based compensation, and income taxes[221] - The company tests goodwill for impairment annually on January 1st or more frequently if indicators are present, with Clinical Genomics and Biopharmaceutical Development divisions having a heightened risk of future impairment losses post-FY2024 impairment[224][226][227] Quantitative and Qualitative Disclosures About Market Risk Mesa Laboratories is exposed to market risks from foreign currency exchange rates, interest rates, and inflation, with interest rate risk increasing post-year-end due to new variable-rate debt - The company faces foreign currency exchange rate risk, particularly in its Biopharmaceutical Development division, which incurs expenses in Swedish Krona while generating revenue in U.S. dollars and euros[234] - Interest rate risk is present due to variable-rate debt under the Credit Facility, with a hypothetical 1 percentage point increase adding approximately $505,000 in annual interest expense, further increased by a new $75 million term loan post-year-end[236] - Inflation risk is managed by passing cost increases for labor, materials, and freight to customers through annual price increases, though this may impact sales volume[237] Financial Statements and Supplementary Data This section presents Mesa's audited consolidated financial statements for FY2024, including an adverse opinion on internal controls, a $254.2 million net loss, and a $274.5 million impairment charge - The independent auditor's report expressed an adverse opinion on the company's internal control over financial reporting as of March 31, 2024, due to three material weaknesses related to complex transactions, useful lives of acquired assets, and IT general controls[256][259] Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2024 | March 31, 2023 | | :--- | :--- | :--- | | Total Assets | $446,796 | $661,832 | | Goodwill | $180,096 | $286,444 | | Total Liabilities | $301,403 | $268,352 | | Total Stockholders' Equity | $145,393 | $393,480 | - The company acquired GKE for total consideration of $87.2 million, adding $48.9 million in goodwill and $44.1 million in intangible assets to the Sterilization and Disinfection Control segment[368][370] - Total impairment losses of $274.5 million were recorded in FY2024, consisting of $156.9 million for goodwill and $117.6 million for finite-lived intangible assets, primarily within the Clinical Genomics and Biopharmaceutical Development segments[384][387] - Subsequent to year-end, on April 11, 2024, the company repurchased $75 million of its 2025 Notes for approximately $71.3 million in cash, funded by a new $75 million term loan[440][441] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were ineffective as of March 31, 2024, due to three material weaknesses, with remediation plans underway - Management concluded that disclosure controls and procedures were not effective as of March 31, 2024[444] - A material weakness was identified in the design of controls over accounting for complex and non-routine transactions, specifically goodwill impairment and acquisitions[449] - A material weakness was identified in the design of controls for determining the useful lives of recently acquired intangibles, related to the GKE acquisition's customer relationships[450] - A material weakness was identified due to ineffective IT general controls (change management and logical access) for the company's ERP system for a portion of the fiscal year[451] - Remediation plans are underway, which include engaging third-party advisors for complex accounting, modifying the useful life of the GKE intangible asset, and enhancing IT control designs and reviews[452][453][454] Part III Directors, Executive Compensation, Security Ownership, and Principal Accountant Fees Information for Items 10-14, covering directors, executive compensation, security ownership, and principal accountant fees, is incorporated by reference from the forthcoming 2024 Proxy Statement - Details regarding directors, executive officers, corporate governance, executive compensation, security ownership, and principal accountant fees are incorporated by reference from the forthcoming 2024 Proxy Statement[468][469][472][474] Part IV Exhibits and Financial Statement Schedules This section lists financial statements and exhibits filed with the Form 10-K, with all financial statement schedules omitted as the information is included in the notes - This section contains a list of all financial statements and exhibits filed with the Form 10-K, with all required financial statements located in Part II, Item 8[476] - All financial statement schedules have been omitted because they are either not applicable or the necessary information is already disclosed in the Notes to Consolidated Financial Statements[476]