What changed in this filing

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Item 1. Financial Statements

2023-11-06 compared with 2023-08-03 · 590 added, 189 removed, 649 unchanged (55% of the section changed)

3 unchanged sentences

(in thousands, except share amounts)

September 30,

Current assets:

12 unchanged sentences

118,975  

Noncurrent assets:

Property, plant and equipment, net of accumulated depreciation of $ 21,324 and $ 19,768 respectively

31 unchanged sentences

43,359  

Noncurrent liabilities:

Deferred tax liability

4 unchanged sentences

13,000  

Convertible senior notes, net of discounts and debt issuance costs

Convertible senior notes, net of debt issuance costs

170,733  

5 unchanged sentences

Common stock, no par value;

authorized 25,000,000 shares;

issued and outstanding, 5,384,280 and 5,369,466 shares, respectively

25,000,000 shares authorized; 

5,391,726 and 5,369,466 shares issued and outstanding, respectively

337,869  

15 unchanged sentences

(in thousands, except per share data)

Three Months Ended June 30,

Three Months Ended September 30,

Six Months Ended September 30,

$ 53,165  

$ 58,749  

$ 103,810  

$ 109,202  

Cost of revenues

Operating expenses:

21,056  

22,363  

40,518  

41,475  

32,109  

36,386  

63,292  

67,727  

Operating expense:

18,626  

19,223  

General and administrative

17,526  

18,202  

35,586  

38,414  

Research and development

Total operating expenses

Operating (loss)

10,689  

Total operating expense

32,169  

32,391  

64,016  

68,326  

Operating (loss) income

( 60 )  

( 724 )  

Nonoperating expense:

Interest expense and amortization of debt discount

Other (income), net

Interest expense and amortization of debt issuance costs

Other expense (income), net

( 603 )  

( 415 )  

Total nonoperating expense, net

(Loss) before income taxes

Income tax (benefit)

Net (loss) per share:

(Loss) earnings before income taxes

( 1,325 )  

( 2,262 )  

Income tax (benefit) expense

( 95 )  

( 483 )  

Net (loss) income

$ ( 1,230 )  

$ 1,306  

$ ( 1,779 )  

Net (loss) earnings per share:

$ ( 0.23 )  

$ 0.25  

$ ( 0.33 )  

$ ( 0.23 )  

$ 0.24  

$ ( 0.33 )  

Weighted-average common shares outstanding:

3 unchanged sentences

(in thousands)  

Three Months Ended June 30,

Three Months Ended September 30,

Six Months Ended September 30,

Net (loss) income

$ ( 1,230 )  

$ 1,306  

$ ( 1,779 )  

Other comprehensive (loss):

Foreign currency translation adjustments

( 1,353 )  

( 13,226 )  

( 8,014 )  

Comprehensive (loss)

$ ( 2,583 )  

$ ( 11,920 )  

$ ( 9,793 )  

See accompanying notes to Condensed Consolidated Financial Statements.

27 unchanged sentences

$ 387,719  

Exercise of stock options and vesting of restricted stock units

Tax withholding on vesting of restricted stock units

( 18 )  

Dividends paid, $ 0.16 per share

( 862 )  

Stock-based compensation expense

Foreign currency translation

( 1,353 )  

( 1,230 )  

September 30, 2023

5,391,726  

$ 337,869  

$ 70,699  

$ ( 20,809 )  

$ 387,759  

Number of Shares

21 unchanged sentences

$ 380,431  

Exercise of stock options and vesting of restricted stock units

42,014  

Tax withholding on vesting of restricted stock units

( 3,051 )  

( 572 )  

Dividends paid, $ 0.16 per share

( 852 )  

Stock-based compensation expense

Foreign currency translation

( 13,226 )  

September 30, 2022

5,336,271  

$ 324,905  

$ 74,848  

$ ( 25,517 )  

$ 374,236  

*Accumulated Other Comprehensive (Loss) Income.

3 unchanged sentences

(in thousands)

Three Months Ended June 30,

Six Months Ended September 30,

Cash flows from operating activities:

Adjustments to reconcile net income to net cash provided by operating (used in) activities:

$ ( 1,779 )  

Adjustments to reconcile net income to net cash from operating activities:

Depreciation and amortization

16,230  

16,189  

Stock-based compensation expense

Non-cash interest and debt amortization

Cash provided by (used in) changes in operating assets and liabilities:

Cash from changes in operating assets and liabilities:

Accounts receivable, net

( 184 )  

Prepaid expenses and other assets

( 3,528 )  

Accounts payable

( 1,307 )  

Accrued liabilities and taxes payable

( 1,743 )  

Unearned revenues

Net cash provided by (used in) operating activities

( 1,171 )  

Net cash provided by operating activities

19,715  

Cash flows from investing activities:

Purchases of property, plant and equipment

( 904 )  

Net cash (used in) investing activities

( 904 )  

Cash flows from financing activities:

Payments of debt

( 13,000 )  

( 1,721 )  

Proceeds from the exercise of stock options

Payment of tax withholding obligation on vesting of restricted stock

( 714 )  

Net cash (used in) financing activities

( 15,079 )  

Effect of exchange rate changes on cash and cash equivalents

Net (decrease) in cash and cash equivalents

( 1,025 )  

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

32,910  

49,346  

Cash and cash equivalents at end of period

$ 35,617  

$ 32,377  

See accompanying notes to Condensed C onsolidated Fin ancial Statements.

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We prefer markets in which we can establish a strong presence and achieve high gross profit margins.

As of June 30, 2023 , we managed our operations in four reportable segments, or divisions:

As of September 30, 2023 , we managed our operations in four reportable segments, or divisions:

Sterilization and Disinfection Control - manufactures and sells biological, cleaning, and chemical indicators used to assess the effectiveness of sterilization and disinfection processes in the pharmaceutical, medical device, hospital, and dental industries.

25 unchanged sentences

These estimates represent management's judgment about the outcome of future events.

The global business environment continues to be impacted by cost pressure, the overall effects of the current high inflation environment on customers' purchasing patterns, high interest rates, the conflict in Ukraine, and other factors.

The global business environment continues to be impacted by cost pressure, the overall effects of economic uncertainty on customers' purchasing patterns, high interest rates, and other factors.

It is not possible to accurately predict the future impact of such events and circumstances.

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Significant Transactions

Acquisition of GKE

On October 14, 2023, we executed a purchase agreement to acquire 100 % of the outstanding shares of GKE GmbH and SAL GmbH, and subject to applicable Chinese regulatory approvals, 100 % of the outstanding shares of Beijing GKE Science & Technology Co.

(together, "GKE" or the "GKE acquisition").

GKE develops, manufactures and sells a highly competitive portfolio of chemical sterilization indicators to protect patient safety across global healthcare markets.

GKE’s strength in chemical indicators and our Sterilization and Disinfection Control division’s strength in biologic indictors are complementary, as chemical and biologic indicators are used in the same sterility validation workflows.

Additionally, GKE’s healthcare-focused commercial capabilities and geographic coverage greatly expand our reach within the healthcare markets.

Total cash consideration for the GKE acquisition was €85,000, net of cash and debt and subject to customary purchase price adjustments.

Of the total acquisition price, €8,500 will be held back for a period of 18 months from the acquisition closing date as security against potential indemnification losses.

An additional €5,000 of the acquisition price, net of cash and debt and subject to customary adjustments, specifically related to the purchase of Beijing GKE Science & Technology Co.

Ltd., will be paid to the sellers upon satisfaction of applicable Chinese regulatory approvals.

We funded the acquisition through a combination of cash on-hand and $ 65,000 borrowed under our line of credit (See Note 7.

"Indebtedness").

We began operating GKE GmbH and SAL GmbH on October 16, 2023, on which date they will also be included as wholly owned subsidiaries in our consolidated financial statements.

Due to the recent nature of the acquisition, our initial purchase price accounting is incomplete. 

Belyntic GmbH

On November 17, 2022, we acquired substantially all of the assets and certain liabilities of Belyntic GmbH’s peptide purification business (“the Belyntic acquisition”) for $ 6,450 , of which $ 4,950  was paid on the date of acquisition.

The remaining $ 1,500  will be paid upon the approval of pending patent applications. The business complements our existing peptide synthesis business, part of the Biopharmaceutical Development segment, by adding a new consumables line.

The remaining $ 1,500  will be paid as patent applications are approved. The business complements our existing peptide synthesis business, part of the Biopharmaceutical Development segment, by adding a new consumables line.

The new PurePep®

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During fiscal year 2023 ,  we prepared a preliminary analysis of the valuation of net assets acquired in the Belyntic acquisition.

During the three months ended June 30, 2023, based on detailed financial analysis of the financial model, we recorded measurement period adjustments to reclassify amounts from intangible assets into goodwill.

During the six months ended September 30, 2023, based on a detailed financial analysis of the financial model, we recorded measurement period adjustments to reclassify amounts from intangible assets into goodwill.

Our preliminary purchase price allocation is subject to further revision as more detailed analyses are completed.

We develop, manufacture, market, sell and maintain life sciences tools and quality control instruments and related software, consumables, and services.

We evaluate revenues internally based primarily on operating segment and the nature of goods and services provided.

We develop, manufacture, market, sell and maintain life sciences tools and quality control instruments and related consumables, and services.

We evaluate revenues internally primarily based on operating segment and the nature of goods and services provided.

Hardware sales include physical products such as instruments used for molecular and genetic analysis, protein synthesizers, medical meters, wireless sensor systems, and data loggers.

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We also offer maintenance, calibration, and testing service contracts.

Under our service contracts we perform labor and replace parts on an as-needed basis over a contractually specified period of time or perform specific, discrete services. 

Typically, revenue is recognized upon shipment of a product, upon completion of a discrete service, or over a period of time reflective of the performance obligation period in the applicable contract, depending on when our obligation to the customer is satisfied.

Under our service contracts we perform labor and replace parts on an as-needed basis over a contractually specified period of time, or perform specific, discrete services. 

Typically, revenue is recognized upon shipment of a product, upon completion of a discrete service, or over a period of time reflective of the performance period in the applicable contract, depending on when our obligation to the customer is satisfied.

The significant majority of our revenues and related receivables are generated from contracts with customers that are 

12  months or less in duration.

The following tables present disaggregated revenues for the three  months ended June 30, 2023  and 2022 , respectively:

Three Months Ended June 30, 2023

The following tables present disaggregated revenues for the three and six months ended September 30, 2023  and September 30, 

2022 , respectively:

Three Months Ended September 30, 2023

Sterilization and Disinfection Control

2 unchanged sentences

Calibration Solutions

$ 14,749  

$ 9,963  

$ 4,187  

$ 29,685  

Hardware and Software

13,953  

Total Revenues

Three Months Ended June 30, 2022

$ 17,080  

$ 15,549  

$ 9,207  

$ 11,329  

$ 53,165  

Three Months Ended September 30, 2022

Sterilization and Disinfection Control

2 unchanged sentences

Calibration Solutions

$ 14,704  

$ 12,399  

$ 4,000  

$ 31,968  

Hardware and Software

16,580  

10,201  

Total Revenues

$ 16,964  

$ 18,435  

$ 12,144  

$ 11,206  

$ 58,749  

Six Months Ended September 30, 2023

Sterilization and Disinfection Control

Clinical Genomics

Biopharmaceutical Development

Calibration Solutions

$ 28,456  

$ 18,732  

$ 8,673  

$ 1,295  

$ 57,156  

Hardware and Software

13,962  

27,230  

19,424  

Total Revenues

$ 33,007  

$ 28,918  

$ 19,096  

$ 22,789  

$ 103,810  

Six Months Ended September 30, 2022

Sterilization and Disinfection Control

Clinical Genomics

Biopharmaceutical Development

Calibration Solutions

$ 26,932  

$ 23,930  

$ 7,664  

$ 1,719  

$ 60,245  

Hardware and Software

10,812  

11,673  

28,894  

20,063  

Total Revenues

$ 31,738  

$ 32,940  

$ 23,111  

$ 21,413  

$ 109,202  

Revenues from external customers are attributed to individual countries based upon the locations to which the products are shipped or exported, or locations where services are performed, as follows:

Three Months Ended June 30,

Three Months Ended September 30,

Six Months Ended September 30,

United States

$ 27,073  

$ 30,989  

$ 53,610  

$ 60,111  

13,642  

11,177  

18,563  

20,280  

36,558  

37,914  

Total revenues

Other than China, no  foreign country exceeds 10% of total revenues.

$ 53,165  

$ 58,749  

$ 103,810  

$ 109,202  

Other than China, no  foreign country exceeded 

10% of total revenues for the 

three and six months ended September 30, 2023  and 

Contract Balances

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Contract liabilities as of March 31, 2023

Prior year liabilities recognized in revenues during the three months ended June 30, 2023

Contract liabilities added during the three months ended June 30, 2023, net of revenues recognized

Contract liabilities balance as of June 30, 2023

$ 16,098  

Prior year contract liabilities recognized in revenues during the six months ended September 30, 2023

Contract liabilities added during the six months ended September 30, 2023, net of revenues recognized

Contract liabilities balance as of September 30, 2023

$ 14,633  

Contract liabilities primarily relate to service contracts with original expected service durations of 12 months or less and will be recognized to revenue over time as our performance obligations are satisfied.

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Concentration of credit risk with respect to accounts receivable is limited to customers to whom we make significant sales.

One distributor accounted for approximately 13 % of total trade receivables as of June 30, 2023, compared to 18 % as of our fiscal year ended March 31, 2023.

The distributor's outstanding balance was current as of June 30, 2023, 

and the substantial majority has since been collected.

We reserve an allowance for potential write-offs of accounts receivable using historical collection experience and current and expected future economic and market conditions.

No customers accounted for more than 10% of total trade receivables as of September 30, 2023 .

We record an allowance for potential uncollectible amounts against our accounts receivable using historical collection experience and current and expected future economic and market conditions.

To manage credit risk, we consider the creditworthiness of new and existing customers, and we regularly review outstanding balances and payment histories.

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limit future purchases until payments are made on past due amounts.

We have outstanding $ 172,500  aggregate principal of 

We have outstanding $ 172,500  aggregate principal amount of 

1.375 % convertible senior notes due 

August 15, 2025 ( the "Notes"). We estimate the fair value of the Notes based on the last actively traded price or observable market input preceding the end of the reporting period, and the fair value is approximately correlated to our stock price.

August 15, 2025 ( the "Notes"). We estimate the fair value of the Notes using Level 2 inputs based on the last actively traded price or observable market input preceding the end of the reporting period, and the fair value is approximately correlated to our stock price.

The estimated fair value and carrying value of the Notes was as follows:

June 30, 2023

September 30, 2023

March 31, 2023

7 unchanged sentences

$ 161,072  

Amounts recognized or disclosed at fair value in the unaudited condensed consolidated financial statements on a nonrecurring basis include the initial recognition and disclosure of most assets and liabilities purchased in a business acquisition and any related measurement period adjustments.

Additionally, assets such as property and equipment, operating lease assets, goodwill, and other intangible assets are adjusted to fair value if determined to be impaired.

We recorded no impairments during the three months ended June 30, 2023 or 2022.

 Fair values of such assets and liabilities require measurement using Level 3 inputs.

There were no transfers between the levels of the fair value hierarchy during the three months ended June 30, 2023  or 

2022 , respectively.

We are obligated to pay contingent consideration of $ 1,500 cash related to the Belyntic acquisition upon approval of pending patent applications.

The fair value of the contingent consideration was $ 1,137 as of June 30, 2023 and is recorded in other long-term liabilities on the accompanying Condensed Consolidated Balance Sheets.

We estimated the fair value of the contingent consideration at inception using a probability-weighted outcome analysis based on our expectations of patent approval, leveraging our historical experience and expert input, and we adjust the contingent consideration to estimated fair value at each reporting period through earnings. 

We estimate the fair value of the contingent consideration using a probability-weighted outcome analysis based on our expectations of patent approval, leveraging our historical experience and expert input, and we adjust the estimated fair value at each reporting period through earnings.

The fair value of the contingent consideration was $ 1,180 as of September 30, 2023  and is recorded in other accrued expenses on the accompanying Condensed Consolidated Balance Sheets.

The first subset of patents was granted by the European Patent Office effective October 18, 2023, and we anticipate approval of the remaining pending patents within one year of September 30, 2023 .

Amounts recognized or disclosed at fair value in the unaudited condensed consolidated financial statements on a nonrecurring basis include the initial recognition and disclosure of most assets and liabilities purchased in business acquisitions and any related measurement period adjustments.

Additionally, assets such as property and equipment, operating lease assets, goodwill, and other intangible assets are adjusted to fair value if determined to be impaired.

We recorded no impairments during the three and six  months ended September 30, 2023  or 2022 . Fair values of such assets and liabilities require measurement using Level 3 inputs.

There were no transfers between the levels of the fair value hierarchy during the three and six months ended September 30, 2023  or 

Supplemental Balance Sheets Information

Inventories consisted of the following:

June 30, 2023

September 30, 2023

March 31, 2023

Raw materials

$ 20,203  

$ 20,064  

Work in process

Finished goods

12,043  

13,961  

Total inventories

$ 32,879  

$ 34,642  

The decrease in inventories is primarily attributable to non-cash scrap expense and transfers of instruments to be used in our business from inventory to fixed assets, partially offset by inventory purchases to meet current production needs. 

Prepaid expenses and other current assets consisted of the following: 

June 30, 2023

September 30, 2023

March 31, 2023

Prepaid expenses

$ 3,494  

$ 2,498  

Prepaid income taxes

1 unchanged sentence

Total prepaid expenses and other

$ 12,826  

$ 8,872  

Accrued payroll and benefits consisted of the following:

June 30, 2023

September 30, 2023

March 31, 2023

Bonus payable

$ 3,317  

$ 4,461  

Wages and paid-time-off payable

2 unchanged sentences

Total accrued payroll and benefits

Accrued other expenses consisted of the following: 

June 30, 2023

$ 8,353  

$ 9,433  

Other accrued expenses consisted of the following: 

September 30, 2023

March 31, 2023

Accrued business taxes

$ 6,079  

$ 5,941  

Current operating lease liabilities

1 unchanged sentence

Total other accrued expenses

$ 12,337  

$ 12,098  

Goodwill and Intangible Assets, Net

Intangible assets, the significant majority of which are finite-lived, consisted of the following:

June 30, 2023

September 30, 2023

March 31, 2023

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Customer relationships

$ 231,543  

$ ( 94,486 )  

$ 137,057  

$ 238,247  

$ ( 86,058 )  

$ 152,189  

Intellectual property

66,576  

( 23,160 )  

43,416  

65,950  

( 19,550 )  

46,400  

Other intangibles

24,437  

( 7,230 )  

17,207  

24,793  

( 6,567 )  

18,226  

$ 322,556  

$ ( 124,876 )  

$ 197,680  

$ 328,990  

$ ( 112,175 )  

$ 216,815  

Amortization expense for finite-lived intangible assets acquired in a business combination was as follows:

Three Months Ended June 30,

Three Months Ended September 30,

Six Months Ended September 30,

Amortization in cost of revenues

$ 1,756  

$ 1,691  

$ 3,484  

$ 3,399  

Amortization in general and administrative

For the following fiscal years ending

March 31, amortization expense is estimated as follows:

10,921  

11,027  

$ 7,185  

$ 7,106  

$ 14,405  

$ 14,426  

For the following fiscal years ending March 31, amortization expense is estimated as follows:

Remainder of 2024

$ 13,803  

26,523  

25,765  

25,270  

24,825  

The change in the carrying amount of goodwill was as follows:

4 unchanged sentences

March 31, 2023

$ 29,559  

$ 135,811  

$ 83,857  

$ 37,217  

286,444  

Effect of foreign currency translation

( 201 )  

( 180 )  

( 3,612 )  

( 24 )  

Measurement period adjustment - Belyntic Acquisition

June 30, 2023

Goodwill in the Biopharmaceutical Development division related to the Belyntic acquisition and is tax deductible.

September 30, 2023

$ 29,358  

$ 135,631  

$ 81,086  

$ 37,193  

$ 283,268  

Goodwill in the Biopharmaceutical Development division related to the Belyntic acquisition is tax deductible.

 Indebtedness

Credit Facility

We maintain a senior credit facility (the “Credit Facility”) that includes 1 ) a revolving credit facility in an aggregate principal amount of up to $ 75,000 , 

September 30, 2023 , we maintained a four -year senior credit facility (the “Credit Facility”) that included 

1 ) a revolving credit facility in an aggregate principal amount of up to $ 75,000 , 

2 ) a swingline loan in an aggregate principal amount 

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not  exceeding $ 2,500 . The Credit Facility matures in March 2025.

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. 

As of June 30, 2023 , we had $ 5,000 outstanding under the Credit Facility.

We paid an additional $ 3,500 on the outstanding Credit Facility balance in July 2023. 

Amounts borrowed under the Credit Facility bear interest at either a base rate or a SOFR rate, plus an applicable spread.

The interest rate on borrowings under our line of credit as of June 30, 2023  was 7.0 %.

We are obligated to pay quarterly unused commitment fees of between 0.15 % and 0.35 % of the Credit Facility’s aggregate principal amount, based on our leverage ratio. 

The financial covenants in the Credit Facility include a maximum leverage ratio of 

5.0  to 

1.0  for the period ended June 30, 2023 , except that we 

The financial covenants in the Credit Facility include a maximum leverage ratio of 4.5  to 

1.0  for the period ended September 30, 2023 , except that we 

have a leverage ratio of 

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 Other covenants include restrictions on our ability to incur debt, grant liens, make fundamental changes, engage in certain transactions with affiliates, or conduct asset sales.

June 30, 2023 , we were in compliance with all covenants.

September 30, 2023 , we were in compliance with all covenants.

Amounts borrowed under the Credit Facility bear interest at either a base rate or a SOFR rate plus an applicable spread.

We are obligated to pay quarterly unused commitment fees of between 0.15 % and 0.35 % of the Credit Facility’s aggregate principal amount, based on our leverage ratio. 

On October 5, 2023, we amended the terms of the Credit Facility to increase the maximum principal amount available to us from $ 75,000 to $ 125,000 .

On October 11, 2023, we borrowed $ 65,000 under the facility at a current interest rate of 6.9 % to partially fund the acquisition of GKE.

"Significant Transactions" for further information.

Convert ible Notes 

On August 12, 2019, we issued an aggregate principal amount of $ 172,500 of Notes.

The net proceeds from the Notes, after deducting underwriting discounts and commissions and other related offering expenses payable by us, were approximately $ 167,056 . The Notes mature on August 15, 2025, unless earlier repurchased or converted, and bear interest at a rate of 1.375 % payable semi-annually in arrears on February 15 and August 15 each year. The Notes are initially convertible at a conversion rate of 

3.5273  shares of common stock per 

$ 1,000  principal amount of Notes, which is equivalent to an initial conversion price of approximately $ 283.50  per share of common stock. 

Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election. The circumstances necessary for voluntary conversion were not met during the three months ended June 30, 2023 .

As of June 30, 2023 , the Notes are classified as a long-term liability on our Condensed Consolidated Balance Sheets. The if-converted value of the Notes did not exceed the principal balance as of 

June 30, 2023 .

Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election. The circumstances necessary for conversion were not met during the three and six months ended September 30, 2023 .

As of September 30, 2023 , the Notes were classified as a long-term liability on our Condensed Consolidated Balance Sheets. The if-converted value of the Notes did not exceed the principal balance as of 

September 30, 2023 .

The net carrying amount of the Notes was as follows:

June 30, 2023

September 30, 2023

March 31, 2023

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We recognized interest expense on the Notes as follows:

Three Months Ended June 30

Three Months Ended September 30,

Six Months Ended September 30,

Coupon interest expense at 1.375%

Amortization of debt discounts and issuance costs

$ 1,186  

Amortization of debt issuance costs

Total interest and amortization of debt issuance costs

$ 1,647  

$ 1,638  

The effective interest rate on the notes is approximately 1.9 %.

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Stock-Based Compensation

During the three months ended June 30, 2023 , we issued stock options, restricted stock units ("RSUs") and performance-based restricted stock units ("PSUs") pursuant to the Mesa Laboratories, Inc.

2021 Equity Incentive Plan (the "2021 Equity Plan"), which authorizes the issuance of 330 shares of common stock to eligible participants.

During the six months ended September 30, 2023 , we issued stock options, restricted stock units ("RSUs") and performance-based restricted stock units ("PSUs") pursuant to the Mesa Laboratories, Inc.

Amended and Restated 2021 Equity Incentive Plan (the "2021 Equity Plan"), which authorizes the issuance of 660 shares of common stock to eligible participants.

Expense recognized related to stock-based compensation is as follows: 

Three Months Ended June 30,

Three Months Ended September 30,

Six Months Ended September 30,

Stock-based compensation expense

1 unchanged sentence

$ 4,371  

Amount of income tax (benefit) recognized in earnings

$ 6,151  

$ 7,803  

Amount of income tax expense (benefit) recognized in earnings

( 89 )  

Stock-based compensation expense, net of tax

1 unchanged sentence

$ 4,282  

Stock-based compensation expense is included in cost of revenues, selling, general and administrative, and research and development expense in the accompanying unaudited Condensed Consolidated Statements of Operations.

The following is a summary of stock option award activity for the three months ended June 30, 2023 :

$ 6,668  

$ 5,722  

The following is a summary of stock option award activity for the six months ended September 30, 2023 :

Stock Options

10 unchanged sentences

( 15 )  

213.22  

Awards exercised

Outstanding as of June 30, 2023

132.40  

The stock options granted during the three months ended June 30, 2023  vest in equal installments on the first, second, and third anniversary of the grant date.

The following is a summary of RSU award activity for the three months ended June 30, 2023 :

Outstanding as of September 30, 2023

$ 181.90  

The stock options granted during the six  months ended September 30, 2023  vest in equal installments on the first, second, and third anniversary of the grant date.

The following is a summary of RSU and PSU award activity for the six months ended September 30, 2023 :

Time-Based Restricted Stock Units

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208.33  

Outstanding as of June 30, 2023 (1)

Outstanding as of September 30, 2023 (1)

$ 162.48  

1 unchanged sentence

Balances for PSUs are reflected at target.

The outstanding time-based RSUs vest and settle in shares of our common stock on a 

Outstanding time-based RSUs vest and settle in shares of our common stock on a 

one -for- one basis.

All of the RSUs granted during the three months ended June 30, 2023  vest in equal installments on the first, second, and third anniversary of the grant date.

The majority of the RSUs granted to employees during the six months ended September 30, 2023  vest in equal installments on the first, second, and third anniversary of the grant date.

RSUs granted to certain executives during the six months ended 

September 30, 2023 vest in equal installments on September 1, 2024, June 21, 2025 and June 21, 2026.

RSUs granted to non-employee directors during the six months ended September 30, 2023 vest one year from the grant date.

We recognize the expense relating to RSUs, net of estimated forfeitures, on a straight-line basis over the vesting period.

Mesa grants PSUs to certain key employees.

We grant PSUs to certain key employees.

The number of shares earned is determined at the end of each performance period based on Mesa's achievement of certain pre-defined targets defined in the related award agreement.

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We recognize the expense relating to the performance-based RSUs based on the probable outcome of achievement of the performance targets on a straight-line basis over the service period. 

During the three months ended June 30, 2023 , the Compensation Committee of the Board of Directors created a plan to award 

During the six months ended September 30, 2023 , the Compensation Committee of the Board of Directors created a plan to award 

32  PSUs at target (the "FY24 PSUs") with a grant date fair value of $ 132.29 that are subject to service, performance, and market conditions to eligible employees.

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20 % pursuant to a market-based measure of performance comparing Mesa’s share price to a peer group over the period from April 1, 2023 until March 31, 2026. 

Net  (Loss) Per Share

Basic net (loss) per share is computed by dividing net (loss) by the weighted-average number of common shares outstanding during the reporting period.

Diluted (loss) per share (“diluted EPS”) is computed similarly to basic (loss) per share, except that it includes the potential dilution that could occur if dilutive securities were exercised.

Potentially dilutive securities include stock options and both time and performance based RSUs (collectively “stock awards”), as well as common shares underlying the Notes.

Stock awards are excluded from the calculation of diluted EPS if they are subject to performance conditions that have not yet been achieved or are antidilutive. Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would then have an antidilutive effect.

The impact of the assumed conversion of the Notes calculated under the if-converted method was antidilutive, and as such, shares underlying the Notes were excluded from the diluted EPS calculation for the three  months ended June 30, 2023 . 

The following table presents a reconciliation of the denominators used in the computation of basic and diluted (loss) per share:

Three Months Ended June 30,

Net (loss) available for shareholders

Net  (Loss) Earnings Per Share

Basic net (loss) earnings per share is computed by dividing net (loss) income by the weighted-average number of common shares outstanding during the reporting period.

Diluted (loss) earnings per share (“diluted EPS”) is computed similarly to basic (loss) earnings per share, except that it includes the potential dilution that could occur if dilutive securities were exercised.

Potentially dilutive securities include stock options and both time and performance based RSUs (collectively “stock awards”), as well as common shares underlying our Notes.

Stock awards are excluded from the calculation of diluted EPS if they are subject to performance conditions that have not yet been achieved or if they are antidilutive. Diluted EPS does not consider the impact of potentially dilutive in periods in which there is a loss because the inclusion of the potential common shares would have an antidilutive effect in such cases.

The following table presents a reconciliation of the denominators used in the computation of basic and diluted (loss) earnings per share:

Three Months Ended September 30,

Six Months Ended September 30,

Net (loss) income

$ ( 1,230 )  

$ 1,306  

$ ( 1,779 )  

Weighted average outstanding shares of common stock

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Fully diluted shares

Basic (loss) per share

Diluted (loss) per share

Basic (loss) earnings per share

$ ( 0.23 )  

$ 0.25  

$ ( 0.33 )  

Diluted (loss) earnings per share

$ ( 0.23 )  

$ 0.24  

$ ( 0.33 )  

The following stock awards were excluded from the calculation of diluted EPS:

Three Months Ended June 30,

Three Months Ended September 30,

Six Months Ended September 30,

Assumed conversion of the Notes

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There is a potential for volatility in the effective tax rate due to several factors, including changes in the mix of the pre-tax income and the jurisdictions to which they relate, changes in tax laws and foreign tax holidays, settlement with taxing authorities, and foreign currency fluctuations.

Our effective income tax rate was 41.4 % for the three  months ended June 30, 2023  and 73.4 % for the three months ended June 30, 2022. 

The effective tax rate for the three months ended June 30, 2023  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 change in our effective tax rate for the three months ended June 30, 2023 is primarily due to lower windfall benefits on stock option exercises and the effect of income in foreign jurisdictions.

Our effective income tax rate was 21.4 % for the six months ended September 30, 2023 

and 93.5 % for the six months ended September 30, 2022. 

The effective tax rate for the six months ended September 30, 2023 

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 change in our effective tax rate for the six months ended September 30, 2023 compared to the prior period is primarily due to lower windfall benefits on stock option exercises.

Commitments and Contingencies

We review the adequacy of our legal reserves on a quarterly basis and establish reserves for loss contingencies that are both probable and reasonably estimable.

As of June 30, 2023 , there were no material legal reserves recorded on the accompanying unaudited Condensed Consolidated Balance Sheets.

As of September 30, 2023 , there were no material legal reserves recorded on the accompanying unaudited Condensed Consolidated Balance Sheets.

As part of the Belyntic acquisition, we have agreed to pay $ 1,500  to the sellers if contractually specified patents are issued.

We believe it is probable the patents will be issued and we will pay the sellers in full within the next 36 months. 

Effective October 18, 2023, a subset of the patents was issued by the European Patent Office, and we believe it is probable the remaining patents will be issued and we will pay the sellers in full within the next 12 months. 

As part of the GKE acquisition consummated on October 14, 2023, we will pay the sellers €8,500 of the acquisition price 18 months following the acquisition date, pending adjustments for potential indemnification losses that may arise.

We will pay the sellers an additional €5,000 of the acquisition price, net of cash and debt and subject to customary adjustments, upon satisfaction of Chinese regulatory approvals for the Beijing GKE Science & Technology Co.

portion of the acquisition.

S egment Information

The following tables set forth our segment information:

Three Months Ended June 30,

Three Months Ended September 30,

Six Months Ended September 30,

Sterilization and Disinfection Control

$ 17,080  

$ 16,964  

$ 33,007  

$ 31,738  

Clinical Genomics

15,549  

18,435  

28,918  

32,940  

Biopharmaceutical Development

12,144  

19,096  

23,111  

Calibration Solutions

11,329  

11,206  

22,789  

21,413  

Total revenues (a)

$ 53,165  

$ 58,749  

$ 103,810  

$ 109,202  

Gross profit:

Sterilization and Disinfection Control

$ 12,476  

$ 12,199  

$ 24,067  

$ 22,967  

Clinical Genomics

10,641  

14,455  

18,490  

Biopharmaceutical Development

11,942  

14,634  

Calibration Solutions

12,838  

11,671  

Reportable segment gross profit

32,119  

36,404  

63,302  

67,762  

Corporate and Other (b)

( 10 )  

( 18 )  

( 10 )  

$ 32,109  

$ 36,386  

$ 63,292  

$ 67,727  

Reconciling Items:

Operating expenses

Operating (loss)

Operating expense

32,169  

32,391  

64,016  

68,326  

Operating (loss) income

( 60 )  

( 724 )  

Nonoperating expense, net

(Loss) before income taxes

(Loss) earnings before income taxes

$ ( 1,325 )  

$ 3,384  

$ ( 2,262 )  

Intersegment revenues are not significant and are eliminated to arrive at consolidated totals.

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not  provided with any other segment asset information.

September 30,

Sterilization and Disinfection Control

$ 3,889  

$ 3,492  

Clinical Genomics

11,330  

13,985  

Biopharmaceutical Development

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Total inventories

$ 32,879  

$ 34,642  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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We prefer markets in which we can establish a strong presence and achieve high gross profit margins. 

As of June 30, 2023, we managed our operations in four reportable segments, or divisions:

As of September 30, 2023, we managed our operations in four reportable segments, or divisions:

Sterilization and Disinfection Control, Clinical Genomics, Biopharmaceutical Development, and Calibration Solutions. Each of our divisions is described further in "Results of Operations" below.

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Corporate Strategy

We strive to create shareholder value and further our purpose of Protecting the Vulnerable ®

We strive to create stakeholder 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 ®

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Improving Our Operating Efficiency

We maximize value in both our existing businesses and those we acquire by implementing efficiencies in our manufacturing, commercial, engineering, and administrative operations.

We achieve efficiencies using the four pillars that make up the Mesa Way , which is our customer-centric, lean-based system for continuously improving and operating a set of high-margin, niche businesses. The Mesa Way  is focused on:

We maximize value in our existing businesses and those we acquire by implementing efficiencies in our manufacturing, commercial, engineering, and administrative operations.

We achieve efficiencies using the four pillars that make up the Mesa Way , which is our customer-centric, lean-based system for continuously improving and operating our 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;

Sustainably Improving using lean-based tools designed to help us identify the root cause of opportunities and prioritize the biggest opportunities;

Sustainably Improving using lean-based tools designed to help us identify and prioritize the biggest opportunities;

and Always Learning so that performance continuously improves. 

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We are a global company, with multinational operations.

During the three months ended June 30, 2023, approximately 48% of our revenues were derived from revenues earned outside of the United States.

Since Mesa serves a number of industries across a variety of global markets, we may be affected by world-wide, regional, or industry-specific economic or political factors.

However, our diversity in industry, geography, and product and service offerings may limit the impact of changes in specific industry trends or local economic changes in our consolidated operating results. We actively monitor trends affecting industries we operate in, including monitoring key competitors and customers, as well as staying abreast of changes to local economies and how they may affect our divisions.  

Several challenging macroeconomic factors persisted during the first quarter of fiscal 2024, including high interest rates, high inflation rates, and softening demand for discretionary capital asset purchases across the life sciences tools market. On the other hand, supply chain disruptions, labor shortages and resulting manufacturing difficulties that impacted business operations in fiscal year 2023 largely abated during the three months ended June 30, 2023.

Following the loss of Sema4, a significant customer in our Clinical Genomics division, in the third quarter of fiscal year 2023, we took strategic steps to contain costs and preserve our operating model.

Gross profit as a percentage of revenues in the Clinical Genomics division for the three months ended June 30, 2023 was modestly lower than the prior year period;

however, our operating expenses decreased, demonstrating that adjustments to the operating model allowed us to largely preserve our financial model despite the customer loss.

Our cost containment actions and the resulting significant reductions in our operating expenses during the three months ended June 30, 2023 ultimately allowed us to produce higher earnings before taxes for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. 

During the three and six months ended September 30, 2023, approximately 49% and 48% of our revenues, respectively, were earned outside of the United States.

Since we serve a number of industries across a variety of global markets, we may be affected by world-wide, regional, or industry-specific economic or political factors, trends and costs associated with a global labor force, and increasing regulation.

However, our diversity in industry, geography, and product and service offerings may limit the impact of changes in specific industry trends or local economic changes in our consolidated operating results. We actively monitor trends affecting industries we operate in, including by monitoring key competitors and customers and by staying abreast of changes to local economies and how they may affect our operations.  

Several challenging macroeconomic factors persisted during the second quarter of fiscal year 2024, including continued softening of discretionary capital asset purchases across the life sciences tools market, high interest rates, and high inflation, all of which contributed to the decline in our organic revenues growth year to date. On the other hand, supply chain disruptions, labor shortages and resulting manufacturing difficulties that impacted business operations in fiscal year 2023 largely abated during the six months ended September 30, 2023, which allowed us to largely maintain our gross profit margins as a percentage of revenues.

Additionally, in response to weaker revenues, we worked to reduce operating expenses, taking steps to preserve our financial model.

For example, we incurred approximately $350 in costs related to a reduction in force during the six months ended September 30, 2023;

however, the reduction in force is expected to result in annual savings of approximately $2,000 starting in our fiscal third quarter.

We continue to invest in growing the company organically and through further acquisitions, which helps us address the rapid pace of technological change in our served markets, further globalize our business, and be responsive to customers throughout the world.

To that end, we completed the acquisition of GKE in October 2023.

The results of GKE's operations and the benefits of the acquisition will be consolidated into our financial statements beginning in the third quarter of fiscal year 2024.

Overall, our operating expenses, which include approximately $505 of one-time GKE acquisition costs, decreased during the three and six months ended September 30, 2023 compared to the same periods in the prior year, demonstrating that adjustments to our operations allowed us to largely preserve our financial model despite challenges in the macroeconomic environment. 

A weakening or strengthening of foreign currencies against the United States dollar ("USD") increases or decreases our reported revenues, gross profit margins, and operating expenses, and impacts the comparability of our results between periods.

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conversely, the weakening of the U.S.

dollar against major currencies positively impacts our reported revenues but negatively impacts our reported expenses. The ultimate impact to gross profit as a percentage of revenue depends on the magnitude of changes in foreign currencies. Overall, the strengthening of the U.S.

dollar against the euro during the three months ended June 30, 2023 had less of an impact on our reported revenues than the weakening of the U.S.

dollar against the euro during the three months ended June 30, 2022.

Results of Operations

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Financial Statements (in thousands, except percent data).

Revenues from our reportable segments and gross profit as a percentage of revenues remained largely consistent for the three months ended June 30, 2023, compared to the same period in the prior year.  

Revenues from our reportable segments for the three and six months ended September 30, 2023 decreased 10% and 5%, respectively, largely due to softening demand for new capital equipment in the pharmaceutical markets, including lower demand for hardware sold by our Biopharmaceutical Development.

Revenues also decreased compared to the corresponding prior year periods due to the fiscal year 2023 loss of Sema4, a significant customer in our Clinical Genomics business. 

Although revenues were lower in the first two quarters of fiscal year 2024 compared to the prior year periods, gross profit as a percentage of revenues did not fall significantly due to our proactive cost containment efforts and favorable product mix.

Modest gross profit percentage declines of 2% and 1%, respectively, for the three and six months ended September 30, 2023 compared to the same periods in the prior year are primarily due to lower revenues on a partially fixed cost base, offset by our efforts to preserve our financial model. 

Results by reportable segment are as follows:

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Gross Profit as a % of Revenues

Three Months Ended June 30, 2023

Three Months Ended June 30, 2022

Three Months Ended June 30, 2023

Three Months Ended June 30, 2022

Three Months Ended June 30, 2023

Three Months Ended June 30, 2022

Three Months Ended September 30, 2023

Three Months Ended September 30, 2022

Three Months Ended September 30, 2023

Three Months Ended September 30, 2022

Three Months Ended September 30, 2023

Three Months Ended September 30, 2022

Sterilization and Disinfection Control

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Mesa's reportable segments

Organic Revenues Growth

Gross Profit as a % of Revenues

Six Months Ended September 30, 2023

Six Months Ended September 30, 2022

Six Months Ended September 30, 2023

Six Months Ended September 30, 2022

Six Months Ended September 30, 2023

Six Months Ended September 30, 2022

Sterilization and Disinfection Control

Clinical Genomics

Biopharmaceutical Development

Calibration Solutions

Mesa's reportable segments

Our unaudited condensed consolidated results of operations are as follows:

Three Months Ended June 30,

Operating expenses

Operating (loss)

Three Months Ended September 30,

Six Months Ended September 30,

Operating expense

Operating (loss) income

Net (loss) income

Reportable Segments

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Sterilization and disinfection control products are disposable and are used on a routine basis.

Three Months Ended June 30,

Three Months Ended September 30,

Six Months Ended September 30,

Gross profit as a % of revenues

Sterilization and Disinfection Control revenues increased 8% for the three months ended June 30, 2023 compared to the prior year period, primarily due to unusually low revenues during the three months ended June 30, 2022 attributable to labor shortages that delayed production and order fulfillment, which abated in the second half of fiscal year 2023. The division also benefited from price increases during the three months ended June 30, 2023. 

Sterilization and Disinfection Control's gross profit percentage was flat for the quarters ended June 30, 2023 and 2022.

Sterilization and Disinfection Control's revenues increased 1% and 4%, respectively, for the three and six months ended September 30, 2023 compared to the prior year periods.

The modest revenue increases for the three and six months ended September 30, 2023 are attributable primarily to price, and to a lesser extent, volume increases against a difficult prior period comparison.

Sterilization and Disinfection Control's gross profit percentage increased 1% for the three and six months ended September 30, 2023 compared to the prior year periods primarily due to higher revenues on a partially fixed cost base. 

Clinical Genomics

The Clinical Genomics division develops, manufactures and sells highly sensitive, low-cost, high-throughput genetic analysis tools and related consumables and services that enable clinical labs to perform genomic testing for a broad range of diagnostic and research applications in several therapeutic areas, such as screenings for hereditary diseases, pharmacogenetics, and oncology related applications.

Three Months Ended June 30,

Three Months Ended September 30,

Six Months Ended September 30,

Gross profit as a % of revenues

Clinical Genomics revenues decreased 8% for the three months ended June 30, 2023 compared to the prior year period, primarily as a result of the loss of revenues from Sema4 and unfavorable changes to foreign currency exchange rates, partially offset by higher revenues in China, particularly hardware revenues.

Gross profit percentage for the Clinical Genomics division decreased four percentage points for the three months ended June 30, 2023 compared to the prior year period, primarily due to lower revenues on a partially fixed cost base and to a lesser extent, unfavorable product mix. 

Clinical Genomics revenues decreased 16% and 12%, respectively, for the three and six months ended September 30, 2023 compared to the prior year periods, primarily as a result of the loss of revenues from Sema4 at the beginning of the third quarter of fiscal year 2023.

Excluding the loss of Sema4, revenues from our Clinical Genomics division would have been 3% lower during the three months ended September 30, 2023 compared to the prior year period, primarily due to the fact that China earned unusually high revenues during the three months ended September 30, 2022 upon reopening from COVID lockdowns.

Revenues would have been flat for the six months ended September 30, 2023 compared to the prior year period, excluding the loss of Sema4. 

Gross profit percentage for the Clinical Genomics division decreased 8% for the three months ended September 30, 2023 and 6% for the six months ended September 30, 2023 compared to the prior year periods, primarily due to lower revenues on a partially fixed cost base, and to a lesser extent, unfavorable product mix, particularly due to the loss of high-margin consumables revenues from Sema4. 

Although orders and revenues in China have been fairly strong in the first half of fiscal year 2024, we believe that ongoing macroeconomic slowdowns beginning in China may negatively affect our reported revenues and new orders in the second half of fiscal year 2024. 

Biopharmaceutical Development

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Immunoassays and peptide synthesis solutions accelerate the discovery, development, and manufacture of biotherapeutic therapies, among other applications. 

Three Months Ended June 30,

Three Months Ended September 30,

Six Months Ended September 30,

Gross profit as a % of revenues

Biopharmaceutical Development revenues decreased 10% for the three months ended June 30, 2023 compared to the prior year period, primarily due to softening demand for capital equipment and to a lesser extent, unfavorable changes in foreign currency, partially offset by an increase in revenues from consumables.

Given the current economic landscape related to softening demand for capital equipment, revenues for this segment are unlikely to grow at historical levels in fiscal year 2024. 

While Biopharmaceutical Development's revenues decreased 10% for the three months ended June 30, 2023 compared to the prior year period, gross profit percentage remained flat, primarily due to a significant increase in consumables revenues, which have a higher gross margin as a percentage of revenues, and to a lesser extent price increases. 

Biopharmaceutical Development revenues decreased 24% and 17% for the three and months ended September 30, 2023 compared to the prior year period, primarily due to softening demand for capital equipment, partially offset by an increase in revenues from consumables and services as well as price increases.

Given the current economic landscape, we cannot predict whether hardware sales will increase substantially during the third quarter of our fiscal year, as we have seen in the past, as our customers approach the end of their annual budget cycles.

Despite adverse macroeconomic factors, revenues from consumables and services have continued to grow during fiscal year 2024. 

Gross profit percentage for the three and six months ended September 30, 2023 decreased 2% and remained flat, respectively, compared to the prior year periods.

Revenues from consumables, which have slightly higher gross profit percentages than hardware in our Biopharmaceutical Division, have increased for both the three and six months ended September 30, 2023, and along with favorable product mix, this partially mitigated the impact of decreased hardware revenues.

Calibration Solutions

The Calibration Solutions division develops, manufactures and sells quality control products using principles of advanced metrology to measure or calibrate critical chemical or physical parameters in various dialysis, process monitoring, instrument monitoring, environmental monitoring, gas flow, environmental air quality, and torque applications, primarily in medical device manufacturing, pharmaceutical manufacturing, laboratory, and hospital environments.

Three Months Ended June 30,

Three Months Ended September 30,

Six Months Ended September 30,

Gross profit as a % of revenues

Calibration Solutions revenues increased 12% for the three months ended June 30, 2023 compared to the prior year period, primarily due to the abatement of production difficulties and supply constraints that had limited our ability to manufacture ordered quantities of certain products during the three months ended June 30, 2022.

Calibration Solutions' gross profit percentage increased 1% for the three months ended June 30, 2023 compared to the prior year period, primarily due to increased revenues on a partially fixed cost base, partially offset by increased costs for third-party contractors.  

Operating Expenses

Operating expenses decreased 11% for the three months ended June 30, 2023 compared to the prior year period, primarily as a result of lower personnel costs related to strategic cost containment activities undertaken following the loss of Sema4.

Calibration Solutions revenues increased 1% and 6%, respectively, for the three and six months ended September 30, 2023 compared to the prior year periods, primarily due to the abatement of production difficulties and supply constraints that had limited our ability to manufacture ordered quantities of certain products during the first six months of fiscal year 2023.

This abatement has allowed us to return to normal operations during fiscal year 2024, driving increased orders along with a modest reduction of past due backlog. 

The Calibration Solutions division's gross profit percentage increased 3% and 1% for the three and six months ended September 30, 2023, respectively, compared to the prior year periods, primarily due to favorable product mix and increased revenues on a partially fixed cost base.

Operating Expense

Operating expense decreased 1% and 6%, respectively for the three and months ended September 30, 2023 compared to the prior year periods, primarily as a result of lower stock-based compensation expense as the performance-based restricted stock units associated with the fiscal year 2022 acquisition of Agena Bioscience, Inc.

were no longer amortizing in fiscal year 2024, along with the timing of award grants in fiscal year 2024.

Cost savings from our strategic cost containment activities following the loss of Sema4 also contributed to the decrease in operating expenses, partially offset by regular annual wage increases.

Selling expense is driven primarily by labor costs, including salaries and commissions;

accordingly, it may vary with sales levels.

Three Months Ended June 30,

Three Months Ended September 30,

Six Months Ended September 30,

Selling expense

As a percentage of revenues

Selling expense for the three months ended June 30, 2023 decreased 10% compared to the prior year period, primarily as a result of lower personnel costs, in particular the realized benefits of the proactive cost savings efforts we initiated after the loss of Sema4.

Selling expense for the three months ended September 30, 2023 increased 5% compared to the prior year period, primarily as a result of our implementation of Salesforce in our Biopharmaceutical Development division and backfilling select open positions in our Biopharmaceutical Division.

Selling expense for the six months ended September 30, 2023 decreased 3% compared to the prior year period, primarily as a result of lower commissions on lower revenues in fiscal year 2024, as well as other decreases in personnel costs realized from our proactive cost savings efforts initiated after the loss of Sema4.

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,

Labor costs, non-cash stock-based compensation and non-cash amortization of intangible assets drive the substantial majority of our general and administrative expense.

Three Months Ended September 30,

Six Months Ended September 30,

General and administrative expense

As a percentage of revenues

General and administrative expenses decreased 11% for the three months ended June 30, 2023 compared to the prior year period, primarily as a result of reduced personnel costs largely attributable to strategic cost savings activities following the loss of Sema4 and lower stock-based compensation expense as the performance-based restricted stock units associated with the fiscal 2022 acquisition of Agena Bioscience, Inc.

were no longer amortizing during the first quarter of fiscal year 2024.

Additionally, we incurred lower professional services costs during the three months ended June 30, 2023 compared to the prior year period. 

General and administrative expenses decreased 4% and 7%, respectively, for the three and six months ended September 30, 2023 compared to the prior year periods, primarily as a result lower stock-based compensation expense, as well as lower professional services costs, partially offset by higher legal and other expenses related to the acquisition of GKE. 

Research and Development

Research and development expense is predominantly comprised of labor costs and costs of third-party consultants.

Three Months Ended June 30,

Three Months Ended September 30,

Six Months Ended September 30,

Research and development expense

As a percentage of revenues

Research and development expenses decreased 16% for the three months ended June 30, 2023 compared to the prior year period, primarily due the prior period purchase of in-process research and development technology used to enhance an existing Sterilization and Disinfection Control division product offering and cost containment actions.

Research and development expenses were flat for the three months ended September 30, 2023 compared to the prior year period.

Research and development expenses decreased 8% for the six months ended September 30, 2023 compared to the prior year period, primarily due to our cost containment efforts in fiscal year 2024 and the purchase of in-process research and development technology used to enhance an existing Sterilization and Disinfection Control division product offering during the first quarter of fiscal year 2023.

Nonoperating Expense, Net

Three Months Ended June 30,

Three Months Ended September 30,

Six Months Ended September 30,

Nonoperating expense, net

Nonoperating expense, net for the three months ended June 30, 2023 is composed primarily of interest expense and amortization of the debt discount associated with the Notes and the Credit Facility as well as gains and losses on foreign currency transactions.

During the three months ended June 30, 2023, these expenses were partially offset by a payment received from a former customer outside the normal course of business reimbursing us for costs incurred in previous periods.

The reimbursement agreement was not included in the original sales contract with the customer. 

Three Months Ended June 30,

Nonoperating expense, net for the three months ended September 30, 2023 is composed primarily of interest expense and amortization of the debt issuance costs associated with the Notes and the Credit Facility as well as gains and losses on foreign currency transactions. 

Three Months Ended September 30,

Six Months Ended September 30,

Income tax (benefit)

Effective tax rate

Our effective income tax rate was 41.4% for the three months ended June 30, 2023 and 73.4% for the three months ended June 30, 2022. The effective tax rate for the three months ended June 30, 2023 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 change in our effective tax rate for the three months ended June 30, 2023 is primarily due to lower windfall benefits on stock option exercises and the effect of income in foreign jurisdictions.

Our effective income tax rate was 7.2% and 21.4% for the three and six months ended September 30, 2023, respectively, and 61.4% and 93.5% for the three and six months ended September 30, 2022, respectively. The effective tax rate for both the three and six months ended September 30, 2023 differed from the statutory federal rate of 21% primarily due to share-based payment awards for employees and the effect of income generated in foreign jurisdictions. The change in our effective tax rate for the three and six months ended September 30, 2023 compared to the prior year periods is primarily due to lower windfall benefits on stock option exercises.

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 (Loss) 

Net (loss) varies with changes in revenues, gross profit, and operating expenses (and included $7,220 and $2,968 of non-cash amortization of intangible assets acquired in business combinations and stock-based compensation expense, respectively, for the three months ended June 30, 2023).

Net (Loss) Income

Net (loss) income varies with changes in revenues, gross profit, and operating expense (and included $14,405 and $6,151 of non-cash amortization of intangible assets acquired in business combinations and stock-based compensation expense, respectively, for the six months ended September 30, 2023).

Market-Based Awards

The performance-based restricted stock awards granted during the three months ended June 30, 2023 included a market-based component. 

The performance-based restricted stock awards granted during the three and six months ended September 30, 2023 included a market-based component. 

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 Open Market Sale Agreement SM , 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 Agreement SM , when necessary, will be sufficient to meet our ongoing operating requirements, scheduled interest payments on debt, dividend payments, and anticipated capital expenditures.

At our option, we may settle the Notes in shares of our common stock or in cash, or we may re-finance our debt, depending on conditions in the market and the share price of our common stock. 

At our option, we may settle the Notes in shares of our common stock or in cash, 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 $75,682 and $75,616 as of June 30, 2023 and March 31, 2023, respectively.

As of June 30, 2023, and March 31, 2023, we had $32,376 and $32,910, respectively, of cash and cash equivalents.

As of June 30, 2023, $172,500 in aggregate principal Notes were outstanding and $5,000 was outstanding under the Credit Facility.

In July 2023, we paid an additional $3,500 on our Credit Facility. 

We had working capital of $77,846 and $75,616 as of September 30, 2023 and March 31, 2023, respectively.

As of September 30, 2023, and March 31, 2023, we had $35,617 and $32,910, respectively, of cash and cash equivalents.

As of September 30, 2023, Notes with an aggregate principal amount of $172,500 were outstanding and there was no outstanding balance under the Credit Facility.

During the third quarter of fiscal year 2024, we amended our Credit Facility to increase the total principal amount available to us from $75,000 to $125,000. In October 2023, we borrowed $65,000 under our Credit Facility to partially fund the acquisition of GKE.

At our current interest rate, we expect to incur interest expense of approximately $4,485 per year on borrowings of $65,000 under the Credit Facility. 

In April 2022, we entered into an Open Market Sale Agreement SM  pursuant to which we may issue and sell, from time to time, shares of our common stock with an aggregate value of up to $150,000.

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We have paid regular quarterly dividends since 2003.

We declared and paid dividends of $0.16 per share during the three months ended June 30, 2023, as well as each quarter of fiscal year 2023.

In July 2023, we announced that our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on September 15, 2023, to shareholders of record at the close of business on August 31, 2023.

We declared and paid dividends of $0.16 per share during each of the quarters ended June 30, 2023 and September 30, 2023, as well as each quarter of fiscal year 2023.

In October 2023, we announced that our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on December 15, 2023, to shareholders of record at the close of business on November 30, 2023.

Our cash flows from operating, investing, and financing activities were as follows (in thousands):

Three Months Ended June 30,

Net cash provided by (used in) operating activities

Six Months Ended September 30,

Net cash provided by operating activities

Net cash (used in) investing activities

Net cash (used in) financing activities

Cash flows from operating activities for the three months ended June 30, 2023 provided $9,939.

Net loss and non-cash adjustments totaled $11,066 for the three months ended June 30, 2023 compared to $7,682 for the three months ended June 30, 2022.

We generated $9,366 more cash from working capital in the three months ended June 30, 2023 compared to the three months ended June 30, 2022, primarily due to higher collections on trade receivables and lower bonus payments to employees.

Cash used in investing activities for the three months ended June 30, 2023 approximated cash used in investing activities during the three months ended June 30, 2022, as we purchased similar values of capital equipment in both periods.

Cash used by financing activities primarily resulted from $8,000 repaid on our Credit Facility during the three months ended June 30, 2023 compared to $2,000 for the three months ended June 30, 2022. 

Cash flows from operating activities for the six months ended September 30, 2023 provided $19,715.

Net loss and non-cash adjustments totaled $22,200 for the six months ended September 30, 2023 compared to $22,768 for the six months ended September 30, 2022.

We generated $12,537 more cash from working capital in the six months ended September 30, 2023 compared to the six months ended September 30, 2022, primarily due to higher collections on trade receivables and lower inventory purchases, as we were building safety stock during the six months ended September 30, 2023 to mitigate supply chain risks.

Cash used in investing activities for the six months ended September 30, 2023 decreased compared to the six months ended September 30, 2022 as we purchased less capital equipment.

Cash used by financing activities primarily resulted from $13,000 repaid on our Credit Facility during the six months ended September 30, 2023 compared to $22,000 for the six months ended September 30, 2022. 

Contractual Obligations and Other Commercial Commitments

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For a description of our contractual obligations and other commercial commitments as of March 31, 2023, see our Annual Report on Form 10-K for the fiscal year ended March 31, 2023, filed with the Securities and Exchange Commission on May 30, 2023.  

On a consolidated basis, as of June 30, 2023, we had contractual obligations for open purchase orders of approximately $17,347 for routine purchases of supplies and inventory, which are payable in less than one year. 

On a consolidated basis, as of September 30, 2023, we had contractual obligations for open purchase orders of approximately $12,419 for routine purchases of supplies and inventory, which are payable in less than one year. 

As part of the Belyntic acquisition, we agreed to pay $1,500 to the sellers if contractually specified patents related to the technology purchased are issued.

We believe it is probable that the patents will be issued and that we will pay the sellers in full within 36 months following the acquisition date.

One subset of the patents was approved by the European patent office effective October 18, 2023, and we believe it is probable the remaining patents will be issued and that we will pay the sellers in full within the next 12 months. 

We will pay the sellers an additional €5,000 of the acquisition price, net of cash and debt and subject to customary adjustments, upon satisfaction of applicable Chinese regulatory approvals for the Beijing GKE Science & Technology Co.

portion of the acquisition.

Critical Accounting Policies and Estimates

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Interest Rates

Our Credit Facility bears interest at either a base rate or a SOFR rate, plus an applicable spread.

Based on our interest rate and the balance outstanding as of June 30, 2023, we estimate that if interest rates increased 1 percentage point, we would incur approximately $50 of additional interest expense per year.

Our Credit Facility bears interest at either a base rate or a SOFR rate plus an applicable spread.

We had no balance outstanding as of September 30, 2023;

however, based on the most recently available interest rate and borrowings used to fund the GKE acquisition, we estimate that if interest rates increased 1 percentage point, we would incur approximately $650 of additional interest expense per year.

Inflation Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements