MESA LABORATORIES INC /CO/ 10-Q

Item 2 . Management’s Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except per share amounts) Forward Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ” ). The forward-looking statements in this Quarterly Report on Form 10-Q do not constitute guarantees of future performance. Investors are cautioned that statements in this Quarterly Report on Form 10-Q which are not strictly historical statements, including, without limitation, express or implied statements or guidance regarding current or future financial performance and position; results of acquisitions; management ’ s strategy, plans and objectives for future operations or acquisitions, product development and sales; and adequacy of capital resources and financing plans constitute forward-looking statements. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which the Company operates, and management ’ s beliefs and assumptions. In addition, other written and oral statements that constitute forward-looking statements may be made by the Company or on the Company ’ s behalf. Words such as “ seek, ” “ believe, ” “ may, ” “ intend, ” “ could, ” “ expect, ” “ anticipate, ” “ plan, ” “ target, ” “ estimate, ” “ project, ” or variations of such words and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated, including risks associated with: our ability to successfully grow our business, including as a result of acquisitions; the effect that acquisitions have on our operations; our ability to consummate acquisitions at our historical rate and at appropriate prices, and our ability to effectively integrate acquired businesses and achieve desired results; the market acceptance of our products; technological or market viability of our products; reduced demand for our products, including as a result of competitive factors; conditions in the global economy and the particular markets we serve; significant developments or uncertainties stemming from governmental actions, including changes in trade policies and medical device regulations; the timely development and commercialization, and customer acceptance, of enhanced and new products and services; retirement of old products and customer migration to new products; the potential inaccuracy of projections of revenues, growth, operating results, profit margins, earnings, expenses, margins, tax rates, tax provisions, liquidity, cash flows, demand, and competition; the effects of additional actions taken to become more efficient or lower costs ; supply chain challenges; cost pressures ; laws regulating fraud and abuse in the health care industry and the privacy and security of health and personal information; product liability; information security; outstanding claims, legal and regulatory proceedings; international business challenges including anti-corruption and sanctions laws and political developments; tax audits and assessments and other contingent liabilities; foreign currency exchange rates and fluctuations in those rates; general economic, industry, and capital markets conditions ; the timing of any of the foregoing ; and assumptions underlying any of the foregoing. Such risks and uncertainties also include those listed in Item 1A. “ Risk Factors ” in our Annual Report on Form 10-K for the year ended March 31, 2023 and in this report. The foregoing list sets forth many, but not all, of the factors that could impact our ability to achieve results described in any forward-looking statements. We disclaim any obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise. Overview We are a multinational manufacturer, developer, and seller of life science tools and quality control products and services, many of which are sold into niche markets driven by regulatory requirements. We have manufacturing operations in the United States and Europe, and our products are marketed by our sales personnel in North America, Europe, and Asia Pacific, as well as by independent distributors in these areas and throughout the rest of the world. We prefer markets in which we can establish a strong presence and achieve high gross profit margins. As of December 31, 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. Unallocated corporate expenses and other business activities are reported within "Corporate and Other." Corporate Strategy 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 ® 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, in which the safety, quality, and efficacy of products is critical. By delivering the highest quality products possible, we are committed to protecting the communities we serve. Organic Revenues Growth Organic revenues growth is driven by the expansion of our customer base, increases in sales volumes, new product offerings, and price increases, and may be affected positively or negatively by changes in foreign currency rates. Our ability to increase organic revenues is affected by general economic conditions, both domestic and international, customer capital spending trends, competition, our efforts to market and sell products, and the introduction of new products. Our policy is to price our products competitively and, where possible, we pass along cost increases to our customers in order to maintain our margins. We typically evaluate costs and pricing annually with price increases effective January 1. Page 15 Table of Contents Inorganic Growth - Acquisitions Over the past decade, we have consummated a number of acquisitions as part of our growth strategy. These acquisitions have allowed us to expand our product offerings and the industries we serve, globalize our company, and increase the scale at which we operate. In turn, this growth affords us the ability to improve our operating efficiency, extend our customer base, and further the pursuit of our purpose: Protecting the Vulnerable®. Improving Our Operating Efficiency We maximize value in 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 the manufacturing and administrative aspects of 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 and prioritize the biggest opportunities; and Always Learning so that performance continuously improves. Gross profit is affected by many factors including our product mix, manufacturing efficiencies, costs of products and labor, foreign currency rates, and price competition. Historically, as we have integrated our acquisitions and taken advantage of manufacturing efficiencies, our gross profit percentages for some products have improved. There are, however, differences in gross profit percentages between product lines, and ultimately the mix of sales will continue to impact our overall gross profit. 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 and sustainably improve our products, our services, and ourselves, resulting in long-term value creation for our stakeholders. General Trends We are a global company, with multinational operations. During the three and nine months ended December 31, 2023, approximately 52% and 50% 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. We continue to invest in growing Mesa through further acquisitions, which helps us address the rapid pace of technological change in our served markets, further globalize our business, and enter new markets. To that end, during the third quarter of our fiscal year 2024, we completed the acquisition of GKE, a developer and manufacturer of high-margin consumable chemical sterilization indicators used to protect patient safety across global healthcare markets. GKE’s healthcare-focused commercial capabilities in Europe and Asia greatly expand our reach in the healthcare markets in those geographies. We are working to obtain regulatory 510(k) clearance on certain GKE products for sale in the United States, which would further expand organic revenues growth opportunities from the GKE business. We began consolidating the results of GKE's operations into our financial statements and began benefitting from the acquisition in the third quarter of our fiscal year. Several challenging macroeconomic factors persisted during the third quarter of fiscal year 2024: ● Continued softening of discretionary capital asset purchases across the life sciences tools market, contributing to declines in our organic revenues growth. ● Economic slowdowns and anti-corruption initiatives in China negatively impacting our revenues, particularly in our Clinical Genomics division. ● High interest rates resulting in expensive capital, negatively impacting our overall profitability. We expect these macroeconomic challenges to continue at least through the last quarter of our fiscal year 2024. 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 nine months ended December 31, 2023. Additionally, in response to weaker revenues, we worked to reduce operating expenses, taking steps to preserve our financial model by reducing costs in our Biopharmaceutical Development division through a reduction in force in the second quarter of fiscal year 2024, and following the loss of a significant customer to our Clinical Genomics division, Sema4, at the beginning of the third quarter of fiscal year 2023. Management's efforts, coupled with the GKE acquisition, have allowed us to maintain our gross profit margins as a percentage of revenues. Overall, our operating expenses, which include $1,275 of one-time GKE acquisition and integration costs as well as GKE's consolidated results of operations in the third quarter, remained approximately consistent during the nine months ended December 31, 2023 compared to the same period in the prior year despite a difficult overall 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. Generally, the USD strengthening against major currencies adversely impacts our reported revenues, but to a lesser extent, positively impacts our reported expenses; 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. Page 16 Table of Contents Results of Operations Our results of operations and period-over-period changes are discussed in the following section. The tables and discussion below should be read in conjunction with the accompanying Unaudited Condensed Consolidated Financial Statements and the notes thereto appearing in Item 1. Financial Statements (in thousands, except percent data). Revenues generated by our reportable segments for the three and nine months ended December 31, 2023 decreased 1% and 4%, respectively, largely due to softening demand for new capital equipment in the pharmaceutical markets, including lower demand for hardware sold by our Biopharmaceutical Development, as well as due to China's economic slowdown and anti-corruption initiatives. Revenues also decreased for the year to date period compared to the corresponding prior year period due to the fiscal year 2023 loss of Sema4. These decreases in revenue were partially offset by approximately $3,837 of inorganic revenues growth from the GKE acquisition during the three and nine months ended December 31, 2023. Although revenues were lower in the first three quarters of fiscal year 2024 compared to the prior year periods, gross profit as a percentage of revenues remained steady due to our proactive cost containment efforts and favorable product mix. Results by reportable segment are as follows: Revenues Organic Revenues Growth (non-GAAP) Gross Profit as a % of Revenues Three Months Ended December 31, 2023 Three Months Ended December 31, 2022 Three Months Ended December 31, 2023 Three Months Ended December 31, 2022 Three Months Ended December 31, 2023 Three Months Ended December 31, 2022 Sterilization and Disinfection Control $ 19,338 $ 16,283 (4.8 %) 17.7 % 72 % 71 % Clinical Genomics 12,546 15,585 (19.5 %) (10.0 %) 51 % 52 % Biopharmaceutical Development 9,430 11,646 (19.1 %) (8.7 %) 62 % 63 % Calibration Solutions 12,159 10,773 12.9 % (7.3 %) 59 % 53 % Mesa's reportable segments $ 53,473 $ 54,287 (8.6 %) (2.1 %) 63 % 60 % Revenues Organic Revenues Growth (non-GAAP) Gross Profit as a % of Revenues Nine Months Ended December 31, 2023 Nine Months Ended December 31, 2022 Nine Months Ended December 31, 2023 Nine Months Ended December 31, 2022 Nine Months Ended December 31, 2023 Nine Months Ended December 31, 2022 Sterilization and Disinfection Control $ 52,345 $ 48,021 1.0 % 11.6 % 73 % 72 % Clinical Genomics 41,464 48,525 (14.6 %) (10.0 %) 50 % 55 % Biopharmaceutical Development 28,526 34,757 (18.2 %) 8.0 % 62 % 63 % Calibration Solutions 34,948 32,186 8.6 % (4.7 %) 57 % 54 % Mesa's reportable segments $ 157,283 $ 163,489 (6.2 %) 3.5 % 62 % 61 % Organic revenues growth is a non-GAAP measure of financial performance. See "Non-GAAP Measures" below for further information and for a reconciliation of organic revenues growth to total revenues growth. Our unaudited condensed consolidated results of operations are as follows: Three Months Ended December 31, Percentage Nine Months Ended December 31, Percentage 2023 2022 Change 2023 2022 Change Revenues $ 53,473 $ 54,287 (1 %) $ 157,283 $ 163,489 (4 %) Gross profit 33,402 32,765 2 % 96,694 100,492 (4 %) Operating expense 33,469 29,363 14 % 97,485 97,689 - % Operating (loss) income (67 ) 3,402 (102 %) (791 ) 2,803 (128 %) Net income $ 2,116 $ 451 369 % $ 337 $ 319 6 % Page 17 Table of Contents Reportable Segments Sterilization and Disinfection Control The Sterilization and Disinfection Control Division manufactures and sells biological, chemical, and cleaning indicators used to assess the effectiveness of sterilization and disinfection processes in the pharmaceutical, medical device, hospital, and dental industries. The division also provides testing and laboratory services, mainly to the dental industry. Sterilization and disinfection control products are disposable and are used on a routine basis. Three Months Ended December 31, Percentage Nine Months Ended December 31, Percentage 2023 2022 Change 2023 2022 Change Revenues $ 19,338 $ 16,283 19 % $ 52,345 $ 48,021 9 % Gross profit 13,951 11,614 20 % 38,018 34,581 10 % Gross profit as a % of revenues 72 % 71 % 1 % 73 % 72 % 1 % Sterilization and Disinfection Control's revenues increased 19% and 9%, respectively, for the three and nine months ended December 31, 2023 compared to the prior year periods. The GKE acquisition contributed $3,837 of revenues and $2,742 of gross profit of to the Sterilization and Disinfection control division during the three and nine months ended December 31, 2023. GKE's gross profit as a percentage of revenues was 71% for the three and nine months ended December 31, 2023. Excluding the GKE acquisition, revenues in the Sterilization and Disinfection Control division would have decreased 5% during the three months ended December 31, 2023 due to slower than usual order fulfillment, despite an increase in orders placed during the third quarter of fiscal year 2024. Revenues would have increased 1% for the nine months ended December 31, 2023 compared to the prior year period, primarily due to price increases implemented during the fourth quarter of fiscal year 2023. Sterilization and Disinfection Control's gross profit percentage increased 1% for both the three and nine months ended December 31, 2023 compared to the prior year periods. Excluding $412 of amortization of the non-cash inventory step-up related to the GKE acquisition during the three and nine months ended December 31, 2023, the division's gross profit would have been 74% and 73%, respectively. 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 December 31, Percentage Nine Months Ended December 31, Percentage 2023 2022 Change 2023 2022 Change Revenues $ 12,546 $ 15,585 (19 %) $ 41,464 $ 48,525 (15 %) Gross profit 6,449 8,045 (20 %) 20,904 26,535 (21 %) Gross profit as a % of revenues 51 % 52 % (1 %) 50 % 55 % (5 %) Clinical Genomics revenues decreased 19% and 15%, respectively, for the three and nine months ended December 31, 2023 compared to the prior year periods. The decreases for the three and nine months ended December 31, 2023 were primarily due to decreases in new systems-related revenues in China as a result of China's economic slowdown and anti-corruption initiatives, which began to significantly impact us during the third quarter of fiscal year 2024. Excluding the loss of Sema4, revenues from our Clinical Genomics division would have been 5% lower during the nine months ended December 31, 2023 compared to the prior year period. Gross profit percentage for the Clinical Genomics division decreased 1% and 5%, respectively, for the three and nine months ended December 31, 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 that existed during the first two quarters of fiscal year 2023. Although orders and revenues in China were fairly strong in the first two quarters of fiscal year 2024, we expect the ongoing macroeconomic slowdowns in China to negatively affect our reported revenues and new orders in the last quarter of fiscal year 2024. Biopharmaceutical Development Our Biopharmaceutical Development division develops, manufactures, and sells automated systems for protein analysis (immunoassays) and peptide synthesis solutions. Immunoassays and peptide synthesis solutions accelerate the discovery, development, and manufacture of biotherapeutic therapies, among other applications. Three Months Ended December 31, Percentage Nine Months Ended December 31, Percentage 2023 2022 Change 2023 2022 Change Revenues $ 9,430 $ 11,646 (19 %) $ 28,526 $ 34,757 (18 %) Gross profit 5,841 7,359 (21 %) 17,783 21,993 (19 %) Gross profit as a % of revenues 62 % 63 % (1 %) 62 % 63 % (1 %) Biopharmaceutical Development revenues decreased 19% and 18%, respectively, for the three and nine months ended December 31, 2023 compared to the prior year periods, primarily due to continued softening demand for capital equipment, partially offset by an increase in revenues from consumables and services as well as price increases. Despite adverse macroeconomic factors, revenues from the division's consumables and services have remained strong during fiscal year 2024, with growth of 14.3% during the nine months ended December 31, 2023 compared to the prior year period. Gross profit percentage for the three and nine months ended December 31, 2023 decreased 1% compared to the prior year periods primarily due to a decrease in overall revenues on a partially fixed cost base, partially offset by favorable product mix with a higher percentage of consumables and services. Page 18 Table of Contents 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 December 31, Percentage Nine Months Ended December 31, Percentage 2023 2022 Change 2023 2022 Change Revenues $ 12,159 $ 10,773 13 % $ 34,948 $ 32,186 9 % Gross profit 7,212 5,740 26 % 20,050 17,411 15 % Gross profit as a % of revenues 59 % 53 % 6 % 57 % 54 % 3 % Calibration Solutions revenues increased 13% and 9%, respectively, for the three and nine months ended December 31, 2023 compared to the prior year periods, primarily due to the abatement of production difficulties and supply constraints that limited our ability to manufacture ordered quantities of certain products during the first nine months of fiscal year 2023. This abatement has allowed us to return to normal operations during fiscal year 2024, driving steady orders along with a reduction of past due backlog. The Calibration Solutions division's gross profit percentage increased 6% and 3% for the three and nine months ended December 31, 2023, respectively, compared to the prior year periods, primarily due to increased revenues on a partially fixed cost base and favorable product mix. Operating Expense Operating expense increased 14% for the three months ended December 31, 2023 compared to the prior year period. Excluding expenses related to the acquisition and integration of GKE ($770 of acquisition and integration related costs and $1,456 of operating expenses attributable to GKE), operating expenses would have increased 6% for the three months ended December 31, 2023. We decreased our estimate of bonus payouts in both the third quarter of fiscal year 2023 and the third quarter of fiscal year 2024 based on company performance; the reduction was approximately $1,000 greater in the third quarter of fiscal year 2023. Operating expense remained consistent for the nine months ended December 31, 2023, primarily as a result of lower stock-based compensation expense attributable to the timing of award grants in fiscal year 2024. Additionally, cost savings from our strategic cost containment activities following the loss of Sema4 and from the reduction in force in our Biopharmaceutical Development division in the third quarter of fiscal year 2024 reduced our operating expenses. Excluding the GKE acquisition, operating expense would have decreased approximately 3% for the nine months ended December 31, 2023. Selling Expense Selling expense is driven primarily by labor costs, including salaries and commissions; accordingly, it may vary with sales levels. Three Months Ended December 31, Percentage Nine Months Ended December 31, Percentage 2023 2022 Change 2023 2022 Change Selling expense $ 9,737 $ 8,437 15 % $ 28,363 $ 27,660 3 % As a percentage of revenues 18 % 16 % 2 % 18 % 17 % 1 % Selling expense for the three and nine months ended December 31, 2023 increased 15% and 3%, respectively, compared to the prior year periods, primarily as a result of increased marketing efforts, our implementation of Salesforce in certain divisions and backfilling select open positions in our Biopharmaceutical Division, partially offset by lower commissions on lower revenues in fiscal year 2024 to date. Excluding the GKE acquisition, selling expense for the three and nine months ended December 31, 2023 would have increased 12% and 2%, respectively. General and Administrative Expense 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 December 31, Percentage Nine Months Ended December 31, Percentage 2023 2022 Change 2023 2022 Change General and administrative expense $ 19,438 $ 16,129 21 % $ 55,024 $ 54,543 1 % As a percentage of revenues 36 % 30 % 6 % 35 % 33 % 2 % General and administrative expenses increased 21% and 1%, respectively, for the three and nine months ended December 31, 2023 compared to the prior year periods, largely due to the GKE acquisition. Acquisition and integration costs were $770 and $1,275, respectively for the three and nine months ended December 31, 2023, compared to $251 and $874, respectively, for the three and nine months ended December 31, 2022 related to the Belyntic and Agena acquisitions. Further, amortization of intangible assets acquired in the GKE acquisition resulted in $838 of non-cash general and administrative amortization expense. The third quarter of fiscal year 2023 also included a release in bonus expense resulting from a change in the estimated payout of the bonus. Increases in general and administrative expense for the three and nine months ended December 31, 2023 were partially offset by our general cost containment measures. Excluding GKE, general and administrative expenses would have increased 13% for the three months ended December 31, 2023 and would have decreased 1% for the nine months ended December 31, 2023. Research and Development Expense Research and development expense is predominantly comprised of labor costs and costs of third-party consultants. Three Months Ended December 31, Percentage Nine Months Ended December 31, Percentage 2023 2022 Change 2023 2022 Change Research and development expense $ 4,294 $ 4,797 (10 %) $ 14,098 $ 15,486 (9 %) As a percentage of revenues 8 % 9 % (1 %) 9 % 9 % - % Research and development expenses decreased 10% and 9%, respectively, for the three and nine months ended December 31, 2023 compared to the prior year periods, primarily due to our cost containment efforts in fiscal year 2024, including the reduction in force related to our Biopharmaceutical Development division during the second quarter of fiscal year 2024 and due to 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. Page 19 Table of Contents Nonoperating (Income) Expense, Net Three Months Ended December 31, Percentage Nine Months Ended December 31, Percentage 2023 2022 Change 2023 2022 Change Nonoperating (income) expense, net $ (2,013 ) $ 1,486 (235 %) $ (475 ) $ 2,915 (116 %) Nonoperating (income) expense, net for the three and nine months ended December 31,2023 is composed primarily of gains and losses on foreign currency transactions as well as interest expense and amortization of the debt issuance costs associated with the Notes and the Credit Facility. In addition, during the three months ended December 31, 2023, Mesa issued an intercompany loan denominated in U.S. dollars to our wholly owned subsidiary, Mesa Germany GmbH, to purchase GKE. As a result, nonoperating income increased for the three and nine months ended December 31, 2023 as we recorded net unrealized gains on foreign currency of $3,291 resulting from the movement of the euro against the U.S. dollar. Income Taxes Three Months Ended December 31, Percentage Nine Months Ended December 31, Percentage 2023 2022 Change 2023 2022 Change Income tax (benefit) $ (170 ) $ 1,465 (112 %) $ (653 ) $ (431 ) 52 % Effective tax rate (8.7 %) 76.5 % (85 %) 206.6 % 384.8 % (178 %) Our effective income tax rate was (8.7)% and 76.5% for the three and nine months ended December 31, 2023, respectively, and 206.6% and 384.8% for the three and nine months ended December 31, 2022, respectively. The effective tax rate for the three and nine months ended December 31, 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 and nine months ended December 31, 2023 compared to the prior period 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 Income Net income varies with changes in revenues, gross profit, and operating expense (and included $22,380 and $9,144 of non-cash amortization of intangible assets acquired in business combinations and stock-based compensation expense, respectively, for the three and nine months ended December 31, 2023). Market-Based Awards The performance-based restricted stock awards granted during the nine months ended December 31, 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, 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 $74,172 and $75,616 as of December 31, 2023 and March 31, 2023, respectively. As of December 31, 2023 and March 31, 2023, we had $28,224 and $32,910, respectively, of cash and cash equivalents. As of December 31, 2023, Notes with an aggregate principal amount of $172,500 were outstanding and $62,000 was outstanding under the Credit Facility. During the three months ended December 31, 2023, we borrowed a total of $71,000 under the Credit Facility to fund the majority of the acquisition of GKE. At our current interest rate, we expect to incur interest expense of approximately $4,464 per year on borrowings of $62,000 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. We have not sold any shares under this agreement. We routinely evaluate opportunities for strategic acquisitions. Future material acquisitions may require that we obtain additional capital, assume additional third-party debt or incur other long-term obligations. We believe that we have the ability to issue more equity or debt in the future in order to finance our acquisition and investment activities; however, additional equity or debt financing, or other transactions, may not be available on acceptable terms, if at all. We may from time to time repurchase or take other steps to reduce our debt. These actions may include retirements or refinancing of outstanding debt, pursuing privately negotiated transactions, or otherwise. The amount of debt that may be retired, if any, could be material. Retirement would be decided at the sole discretion of our Board of Directors and would depend on market conditions, our cash position, and other considerations. Dividends We have paid regular quarterly dividends since 2003. We declared and paid dividends of $0.16 per share during each of the quarters ended June 30, 2023, September 30, 2023, and December 31, 2023, as well as each quarter of fiscal year 2023. In January 2024, we announced that our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on March 15, 2024, to shareholders of record at the close of business on February 29, 2024. Page 20 Table of Contents Cash Flows Our cash flows from operating, investing, and financing activities were as follows (in thousands): Nine Months Ended December 31, 2023 2022 Net cash provided by operating activities $ 31,250 $ 15,464 Net cash (used in) investing activities (81,732 ) (8,468 ) Net cash provided by (used in) financing activities 45,769 (28,936 ) Cash flows from operating activities for the nine months ended December 31, 2023 provided $31,250. Net income and non-cash adjustments totaled $33,838 for the nine months ended December 31, 2023 compared to $34,588 for the nine months ended December 31, 2022. We generated $16,536 more cash from working capital in the nine months ended December 31, 2023 than in the nine months ended December 31, 2022, primarily due to higher collections on trade receivables and lower inventory purchases, as we were building safety stock during the nine months ended December 31, 2023 to mitigate supply chain risks. Cash used in investing activities for the nine months ended December 31, 2023 increased compared to the nine months ended December 31, 2022 primarily due to the acquisition of GKE. Cash provided by financing activities primarily resulted from a $71,000 total drawdown on the Credit Facility offset by $22,000 repaid during the nine months ended December 31, 2023 compared to $30,000 repaid on the Credit Facility for the nine months ended December 31, 2022. Contractual Obligations and Other Commercial Commitments We are party to many contractual obligations that involve commitments to make payments to third parties in the ordinary course of business. For a description of our contractual obligations and other commercial commitments as of March 31, 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 December 31, 2023, we had contractual obligations for open purchase orders of approximately $12,539 for routine purchases of supplies and inventory, the majority of 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 paid $188 to the Belyntic sellers during the three months ending December 31, 2023. We are committed to pay an additional $563 during the fourth quarter of fiscal year 2024, 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 during the three months ended December 31, 2023, we have agreed to pay the GKE sellers approximately $9,500 of the acquisition price approximately 18 months following the acquisition, pending adjustments for potential indemnification losses that may arise. The liability is recorded as in Other long-term liabilities in our Condensed Consolidated Balance Sheets as of December 31, 2023. Critical Accounting Policies and Estimates Critical accounting estimates are those that we believe are both significant and require us to make difficult, subjective, or complex judgments, often because we need to estimate the effect of inherently uncertain matters. These estimates are based on historical experience and various other factors that we believe to be appropriate under the circumstances. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for the year ended March 31, 2023, in the Critical Accounting Policies and Estimates section of Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . Although we believe that our estimates, assumptions, and judgements are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions. Acquired Intangible Assets and Financial Condition Fair values assigned to intangible assets acquired in the GKE acquisition were measured using Level 3 inputs. Material changes in our financial condition as of December 31, 2023 compared to March 31, 2023, including changes in acquired intangibles and other balances, are primarily attributable to the GKE acquisition. Non-GAAP Measures In addition to the financial measures prepared in accordance with generally accepted accounting principles, we present organic revenues growth (reported revenues growth excluding revenues from recent acquisitions), as a supplemental non-GAAP financial measure. We believe that presenting supplemental organic revenues growth facilitates comparability between current period and prior period information, and provides insight into Mesa’s short-term and long-term financial trends. We use organic revenue growth internally to forecast and evaluate Mesa’s operating performance, to compare revenues of current periods to prior periods, in our financial and operating decision-making, and for compensation purposes. Page 21 Table of Contents A reconciliation of organic revenues growth to total revenues growth is as follows: Total Revenues Growth Impact of Acquisitions Organic Revenues Growth (non-GAAP) Three Months Ended December 31, 2023 Three Months Ended December 31, 2022 Three Months Ended December 31, 2023 Three Months Ended December 31, 2022 Three Months Ended December 31, 2023 Three Months Ended December 31, 2022 Sterilization and Disinfection Control 18.8% 17.7% (23.6%) -% (4.8%) 17.7% Clinical Genomics (19.5%) (5.5%) -% (4.5%) (19.5%) (10.0%) Biopharmaceutical Development (19.0%) (8.7%) (0.1%) -% (19.1%) (8.7%) Calibration Solutions 12.9% (7.3%) -% -% 12.9% (7.3%) Total Company (1.5%) (0.7%) (7.1%) (1.4%) (8.6%) (2.1%) Total Revenues Growth Impact of Acquisitions Organic Revenues Growth (non-GAAP) Nine Months Ended December 31, 2023 Nine Months Ended December 31, 2022 Nine Months Ended December 31, 2023 Nine Months Ended December 31, 2022 Nine Months Ended December 31, 2023 Nine Months Ended December 31, 2022 Sterilization and Disinfection Control 9.0% 11.6% (8.0%) -% 1.0% 11.6% Clinical Genomics (1) (14.6%) 194.4% -% (204.4%) (14.6%) (10.0%) Biopharmaceutical Development (17.9%) 8.0% (0.3%) -% (18.2%) 8.0% Calibration Solutions 8.6% (4.7%) -% -% 8.6% (4.7%) Total Company (3.8%) 30.3% (2.4%) (26.8%) (6.2%) 3.5% (1) GAAP Clinical Genomics revenues growth was 194.4% for the nine months ended December 31, 2022 due to a significantly shorter period of ownership during the nine months ended December 31, 2021. I tem 3. Quantitative and Qualitative Disclosures a bout Market Risk Foreign Currency Exchange Rates We face exchange rate risk from transactions with customers in countries outside the United States and from intercompany transactions between affiliates. Transactional exchange rate risk arises from the purchase and sale of goods and services in currencies other than the functional currency of the applicable subsidiary. We also face translational exchange rate risk related to the translation of financial statements of our foreign operations into U.S. dollars, our functional currency. Costs incurred and sales recorded by subsidiaries operating outside of the United States are translated into U.S. dollars using average exchange rates effective during the respective period. As a result, we are exposed to movements in the exchange rates of various currencies against the U.S. dollar. Our Biopharmaceutical Development division is particularly susceptible to currency exposures since it incurs a substantial portion of its expenses in Swedish Krona, while most of the division's revenue contracts are in U.S. dollars and euros. Therefore, when the Swedish Krona strengthens or weakens against the U.S. dollar, operating profits are increased or decreased, respectively. As we continue to consummate acquisitions of companies with foreign operations or with functional currencies other than the U.S. dollar, our foreign currency exchange rate risk will increase. The effect of a change in currency exchange rates on our international subsidiaries' assets and liabilities is reflected in the accumulated other comprehensive income component of stockholders’ equity. Interest Rates Our Credit Facility bears interest at either a base rate or a SOFR rate plus an applicable spread. Based on the balance outstanding as of December 31, 2023, we estimate that if interest rates increased 1 percentage point, we would incur approximately $620 of additional interest expense per year. Inflation Risk Inflation generally impacts us by increasing our costs of labor, materials, and freight. The rates of inflation experienced in recent years have not had a significant impact on our financial statements as inflationary cost increases have been offset by annual price increases. However, any price increases imposed may lead to declines in sales volume if competitors do not similarly adjust prices. We cannot reasonably estimate our ability to successfully recover any impact of inflation cost increases into the future. Other We have no derivative instruments. We have minimal exposure to commodity market risks. Page 22 Table of Contents