MESA LABORATORIES INC /CO/ - Quarter Report: 2019 September (Form 10-Q)

 

 

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Table of Contents

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

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FORM 10-Q

 

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

or

 

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___ to ___

 

Commission File No: 0-11740

 

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MESA LABORATORIES, INC.

(Exact name of registrant as specified in its charter)

	Colorado		84-0872291
	(State or other jurisdiction of		(I.R.S. Employer
	incorporation or organization)		Identification number)
	12100 West Sixth Avenue
	Lakewood, Colorado		80228
	(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code: (303) 987-8000

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol	Name on each exchange on which registered
Common Stock, no par value	MLAB	The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐     No ☒

 

Indicate the number of shares outstanding of each of the Issuer’s classes of common stock, as of the latest practicable date:

 

There were 4,365,061 shares of the Issuer’s common stock, no par value, outstanding as of October 30, 2019.

 

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Table of Contents

 

 

 

Part I. Financial Information		1
	Item 1. Financial Statements	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Income	2
	Condensed Consolidated Statements of Comprehensive Income	3
	Condensed Consolidated Statements of Cash Flows	4
	Condensed Consolidated Statements of Stockholders’ Equity	5
	Notes to Condensed Consolidated Financial Statements	6
	Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
	Item 3.  Quantitative and Qualitative Disclosures about Market Risk	20
	Item 4.  Controls and Procedures	20
Part II. Other Information		21
	Item 1.  Legal Proceedings	21
	Item 1A.  Risk factors	21
	Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	21
	Item 6.  Exhibits	22
	Signatures	23
	Exhibit 31.1 Certifications Pursuant to Rule 13a-14(a)
	Exhibit 31.2 Certifications Pursuant to Rule 13a-14(a)
	Exhibit 32.1 Certifications Pursuant to Rule 13a-14(b) and 18 U.S.C Section 1350
	Exhibit 32.2 Certifications Pursuant to Rule 13a-14(b) and 18 U.S.C Section 1350

 

 

 

		September 30,				March 31,
		2019				2019
ASSETS
Current assets:
Cash and cash equivalents		$	245,443			$	10,185
Accounts receivable, less allowances of $117 and $121, respectively			12,228				12,516
Inventories, net			6,848				6,772
Prepaid income taxes			2,896				2,552
Prepaid expenses and other			3,313				1,598
Total current assets			270,728				33,623
Property, plant and equipment, net			21,731				22,225
Deferred taxes			219				1,323
Other assets			1,173				--
Intangibles, net			31,527				33,219
Goodwill			67,087				66,377
Total assets		$	392,465			$	156,767
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	2,339			$	2,898
Accrued salaries and payroll taxes			5,237				7,324
Current portion of long-term debt			--				2,125
Unearned revenues			3,980				3,965
Current portion of contingent consideration			512				45
Legal liability			--				3,300
Other accrued expenses			4,673				4,004
Total current liabilities			16,741				23,661
Deferred income taxes			8,400				1,077
Long-term debt, net of debt issuance costs and current portion			--				20,613
Convertible senior notes, net of discounts and debt issuance costs			137,682				--
Other long-term liabilities			485				105
Total liabilities			163,308				45,456
Stockholders’ equity:
Common stock, no par value; authorized 25,000,000 shares; issued and outstanding, 4,365,049 and 3,890,138 shares, respectively			152,021				39,823
Retained earnings			79,641				73,303
Accumulated other comprehensive (loss)			(2,505	)			(1,815	)
Total stockholders’ equity			229,157				111,311
Total liabilities and stockholders’ equity		$	392,465			$	156,767

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		Three Months Ended September 30,								Six Months Ended September 30,
		2019				2018				2019				2018
Revenues		$	25,536			$	24,865			$	51,824			$	50,007
Cost of revenues			10,060				10,288				20,209				20,339
Gross profit			15,476				14,577				31,615				29,668
Operating expenses:
Selling			2,274				1,804				4,482				3,694
General and administrative			7,703				7,493				15,223				15,093
Research and development			915				842				1,934				1,679
Legal settlement			--				3,300				--				3,300
Total operating expenses			10,892				13,439				21,639				23,766
Operating income			4,584				1,138				9,976				5,902
Other expense (income), net			920				(168	)			952				196
Earnings before income taxes			3,664				1,306				9,024				5,706
Income tax expense			602				312				1,365				482
Net income		$	3,062			$	994			$	7,659			$	5,224
Earnings per share:
Basic		$	0.74			$	0.26			$	1.90			$	1.36
Diluted			0.71				0.25				1.82				1.30
Weighted-average common shares outstanding:
Basic			4,155				3,850				4,029				3,833
Diluted			4,321				4,046				4,205				4,029

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		Three Months Ended September 30,								Six Months Ended September 30,
		2019				2018				2019				2018
Net income		$	3,062			$	994			$	7,659			$	5,224
Other comprehensive income, net of tax:
Foreign currency translation adjustments			(876	)			(49	)			(690	)			(1,361	)
Comprehensive income		$	2,186			$	945			$	6,969			$	3,863

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		Six Months Ended September 30,
		2019				2018
Cash flows from operating activities:
Net income			7,659			$	5,224
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			4,444				4,889
Stock-based compensation			2,050				1,729
Gain on disposition of assets			--				(288	)
Non-cash interest and other			706				--
Change in inventory reserve			70				67
Adjustment to contingent consideration			(54	)			(33	)
Other			183				44
Cash used by changes in operating assets and liabilities
Accounts receivable, net			246				643
Inventories, net			295				1,022
Prepaid expenses and other			(2,508	)			(1,301	)
Accounts payable			(571	)			(70	)
Accrued liabilities and taxes payable			(5,385	)			(866	)
Unearned revenues			14				(177	)
Contingent Consideration			(11	)			(683	)
Net cash provided by operating activities			7,138				10,200
Cash flows from investing activities:
Acquisitions			(2,555	)			--
Purchases of property, plant and equipment			(543	)			(849	)
Proceeds from sale of assets			--				2,222
Net cash (used in) provided by investing activities			(3,098	)			1,373
Cash flows from financing activities:
Proceeds from the issuance of convertible senior notes, net			167,070				--
Proceeds from the issuance of common stock, net			84,995				--
Payments on debt			(23,000	)			(13,250	)
Dividends			(1,321	)			(1,226	)
Proceeds from the exercise of stock options			3,507				3,176
Net cash provided by (used in) financing activities			231,251				(11,300	)
Effect of exchange rate changes on cash and cash equivalents			(33	)			(117	)
Net increase in cash and cash equivalents			235,258				156
Cash and cash equivalents at beginning of period			10,185				5,469
Cash and cash equivalents at end of period		$	245,443			$	5,625
Cash paid for:
Income taxes		$	1,797			$	5,310
Interest			388				938
Supplemental non-cash activity:
Deferred tax liability related to the conversion option associated with the convertible senior notes		$	8,448				--

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		Common Stock
		Number of Shares				Amount				Retained Earnings				AOCI*				Total
March 31, 2019			3,890,138			$	39,823			$	73,303			$	(1,815	)		$	111,311
Exercise of stock options and vesting of restricted stock units			31,441				2,709				--				--				2,709
Dividends paid, $0.16 per share			--				--				(624	)			--				(624	)
Stock-based compensation			--				868				--				--				868
Foreign currency translation			--				--				--				186				186
Net income			--				--				4,597				--				4,597
June 30, 2019			3,921,579				43,400				77,276				(1,629	)			119,047
Exercise of stock options and vesting of restricted stock units			12,220				798				--				--				798
Proceeds from issuance of common stock, net of issuance costs of $5,568			431,250				84,995				--				--				84,995
Proceeds from conversion feature of convertible senior notes, due 2025, net of allocated costs and taxes of $9,427			--				21,646				--				--				21,646
Dividends paid, $0.16 per share			--				--				(697	)			--				(697	)
Stock-based compensation			--				1,182				--				--				1,182
Foreign currency translation			--				--				--				(876	)			(876	)
Net income			--				--				3,062				--				3,062
September 30, 2019			4,365,049			$	152,021			$	79,641			$	(2,505	)		$	229,157

		Common Stock
		Number of Shares				Amount				Retained Earnings				AOCI*				Total
March 31, 2018			3,801,439			$	30,516			$	68,281			$	564			$	99,361
Exercise of stock options and vesting of restricted stock units			46,586				3,043				--				--				3,043
Dividends paid, $0.16 per share			--				--				(610	)			--				(610	)
Stock-based compensation			--				739				--				--				739
Foreign currency translation			--				--				--				(1,312	)			(1,312	)
Net income			--				--				4,230				--				4,230
June 30, 2018			3,848,025				34,298				71,901				(748	)			105,451
Exercise of stock options and vesting of restricted stock units			4,722				133				--				--				133
Dividends paid, $0.16 per share			--				--				(616	)			--				(616	)
Stock-based compensation			--				990				--				--				990
Foreign currency translation			--				--				--				(49	)			(49	)
Net income			--				--				994				--				994
September 30, 2018			3,852,747			$	35,421			$	72,279			$	(797	)		$	106,903

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Note 1. Description of Business and Summary of Significant Accounting Policies

 

Description of Business

  

In this quarterly report on Form 10-Q, Mesa Laboratories, Inc., a Colorado corporation, together with its subsidiaries is collectively referred to as “we,” “us,” “our,” the “Company” or “Mesa.”

 

We pursue a strategy of focusing primarily on quality control products and services which are sold into niche markets that are driven by regulatory requirements. We prefer markets in which we can establish a strong presence and achieve high gross margins. As of September 30, 2019 we are organized into four divisions, or segments. Our Sterilization and Disinfection Control Division manufactures and sells biological, cleaning, and chemical indicators. Biological, cleaning, and chemical indicators are used to assess the effectiveness of sterilization and disinfection processes in the hospital, dental, medical device, and pharmaceutical industries. The division also provides testing and laboratory services, mainly to the dental industry. Our Instruments Division designs, manufactures, and markets quality control instruments and disposable products utilized in the healthcare, pharmaceutical, food and beverage, medical device, industrial hygiene, and environmental air sampling industries. Our Cold Chain Monitoring Division designs, develops, and markets systems which are used to monitor various environmental parameters such as temperature, humidity, and differential pressure to ensure that critical storage and processing conditions are maintained in hospitals, pharmaceutical and medical device manufacturers, blood banks, pharmacies, and laboratory environments. Our Cold Chain Packaging Division, which we plan to exit no later than March 31, 2020, provides thermal packaging products such as coolers, boxes, insulation materials, and phase-change products to control temperature during the customer’s transport of their own products.

 

Basis of Presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, such unaudited information includes all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of our financial position and results of operations. The results of operations for the interim periods are not necessarily indicative of results that may be achieved for the entire year. The financial statements and related notes do not include all information and footnotes required by U.S. GAAP for annual reports. This quarterly report should be read in conjunction with the consolidated financial statements included in our annual report on Form 10-K for the year ended March 31, 2019.

 

Acquisitions

 

In April 2019, we completed a business combination (the “IBP Acquisition”) whereby we acquired the common stock of IBP Medical GmbH, a company whose business manufactures medical meters used to test various parameters of dialysis fluid (dialysate), and the proper calibration and operation of a dialysis machine.  During the six months ended September 30, 2019, we allocated the purchase price according to the fair value of assets acquired and liabilities assumed using information obtained during due diligence and through the use of financial and other information available to us. Fair value of the assets and liabilities acquired was determined using Level 3 inputs (unobservable inputs) based on a discounted cash flow method.

 

Recently Issued Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments -Credit Losses (Topic 316): Measurement of Credit Losses on Financial Instruments, as modified by ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in earlier recognition of allowances for losses. The ASU is effective for public business entities for fiscal years beginning after December 15, 2019, with early adoption permitted. We have not yet completed our assessment of the impact of the new standard on our consolidated financial statements; however, we believe that the most notable impact of this ASU will relate to our processes around the assessment of the adequacy of our allowance for doubtful accounts on trade accounts receivable and the recognition of credit losses.   

 

In July 2018, the FASB issued ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement, which will remove, modify, and add disclosure requirements for fair value measurements to improve the overall usefulness of such disclosures. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for any removed or modified disclosure requirements. Transition is on a prospective basis for the new and modified disclosures, and on a retrospective basis for disclosures that have been eliminated. We do not intend to early adopt any portion of this disclosure guidance. We believe that the guidance will increase the amount of disclosure required in the event of a transaction conducted involving Level 3 assets, such as an impairment or an acquisition. We expect minimal impact on the consolidated financial statements and other fair value disclosures.

 

Recently Adopted Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The pronouncement requires lessees to recognize a liability for lease obligations, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use asset on the balance sheet for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to present financial statement users with the ability to assess the amount, timing, and uncertainty of cash flows arising from leases. 

 

 

On April 1, 2019, we adopted ASU 2016-02 using the modified retrospective method for all lease arrangements at the beginning of the period of adoption. Results for reporting periods beginning April 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under topic 840, Leases.  The standard had a material impact on our Condensed Consolidated Balance Sheets, but did not have a significant impact on our Condensed Consolidated Statements of Income or our Condensed Consolidated Statements of Cash Flows. The most significant impact was the recognition of the right-of-use ("ROU") assets and lease liabilities on our Condensed Consolidated Balance Sheets.  

 

As part of adopting the new lease standard, we have made the following elections:

 

●

To carry forward the historical lease determination and classification conclusions as established under the old standard, and not reassess initial direct costs for existing leases;

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Not to apply the balance sheet recognition requirements of the new lease standard to leases with a term of one year or less (short-term leases); and

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For all classes of underlying assets, to account for non-lease components of a contract separately from the lease component to which they are related.

 

As a result of the cumulative impact of adopting ASU 2016-02, we recorded operating lease ROU assets of $1,461 and operating lease liabilities of $1,411 as of April 1, 2019. Our calculations were based on the present value of the future lease payments on the date of adoption. Refer to Note 5. Leases for additional disclosures required by ASC 842. 

 

 

Note 2. Revenue Recognition

 

We design, manufacture, market, sell, and maintain quality control instruments and software, consumables, and services driven primarily by the regulatory requirements of niche markets. Our consumables, such as biological indicator test strips and packaging materials, are typically used on a standalone basis; however, some, such as calibration solutions, are also critical to the ongoing use of our instruments. Hardware and software sales, such as medical meters, wireless sensor systems, and data loggers are generally driven by our acquisition of new customers, growth of existing customers, or customer replacement of existing equipment. Hardware sales may be offered with perpetual or annual software licenses, which in some cases are required for the hardware to function. We evaluate our revenues internally by product line, timing of revenue generation, and the nature of goods and services provided. Typically, discrete revenue is recognized at the shipping point or upon completion of the service, while contracted revenue is recognized over a period of time reflective of the performance obligation period in the applicable contract.

 

Substantially all of our revenues and related receivables are generated from contracts with customers that are 12 months or less in duration. For both discrete and contracted revenue, evidence of an arrangement is typically in the form of a formal contract and/or purchase order. Prices are fixed at the time of the order and no price protections or variables are offered. Collectability is reasonably assured through our customer credit and review process, and payment is typically due within 60 days or less. Revenue is recognized when performance obligations under the terms of the contracts with our customers are satisfied. We elected to adopt the practical expedient that allows us to expense commission costs as incurred.

 

Our performance obligations related to the sale of instruments and consumables generally consist of the promise to sell tangible goods to distributors or end users. Ownership of these goods is typically transferred at time of shipment, at which point we have satisfied our performance obligation and we recognize revenue.

 

Our performance obligations related to services may include testing, installation, and/or maintenance of our products, either on-site at our customers’ facilities or in our own calibration laboratories. Performance obligations arise from service contracts when discrete services are contracted in advance and performed at a future time, often at the time of the customer’s choosing. In this case, the performance obligation is satisfied, and revenue is recognized, upon the customer’s acceptance of the completion of the specified work. Alternatively, service revenue may be recognized for contracted services or maintenance provided continually over a period of time, and our performance obligations are satisfied by completing any service that is contractually required, if applicable, or simply by the passage of time if no services are required or requested. For contracted services, revenue is recognized on a straight-line basis over the life of the service contract, which is a faithful depiction of these annual service contracts, which may or may not be invoked.

 

The following tables present disaggregated revenues for the three and six months ended September 30, 2019 and three and six months ended September 30, 2018 respectively:

 

 

 

 

 

 

 

 

 

 

Contract Balances

 

Our contracts have varying payment terms and conditions. Some customers prepay for services, resulting in unearned revenues or customer deposits, called contract liabilities, which are included within other accrued expenses and unearned revenues in the accompanying Condensed Consolidated Balance Sheets. Contract assets would exist when sales are recorded (i.e. the control of the goods or services has been transferred to the customer), but customer payment is contingent on a future event besides the passage of time (such as satisfaction of additional performance obligations). We do not have any contract assets. Unbilled receivables, which are not classified as contract assets, represent arrangements in which sales have been recorded prior to billing and right to payment is unconditional.

 

A summary of contract liabilities is as follows:

 

 

 

 

Note 3. Fair Value Measurements

 

Our financial instruments consist primarily of cash and cash equivalents, trade accounts receivable, obligations under trade accounts payable and short and long-term debt. We measure our cash equivalents at fair value, and classify them within Level 1 of the fair value hierarchy and we value them using quoted market prices in an active market. As of September 30, 2019 and March 31, 2019, cash and cash equivalents on our Condensed Consolidated Balance Sheets included $235,989 and $0, respectively, in a money market account. Due to their short-term nature, the carrying values of trade accounts receivable and trade accounts payable approximate fair value. 

 

Historically, we have had debt balances for our term loan and revolver; however, the balances associated with those instruments were paid off during the three months ended September 30, 2019.  Debt balances as of March 31, 2019 had a variable interest rate, so the carrying amount approximated fair value because interest rates on these instruments approximated the interest rate of debt with similar terms available to us. 

 

During the three months ended September 30, 2019, we issued $172,500 aggregate principal amount of 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 market observable input before the end of the reporting period. The estimated fair value and carrying value of the Notes were as follows:

 

 

 

The Notes are discussed in more detail in Note 6. "Indebtedness." 

 

Assets recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as property and equipment, operating lease assets, goodwill, and other intangible assets. These assets are measured at fair value if determined to be impaired. Except as stated below in "Acquisitions," we had no non-financial assets or liabilities that were measured using Level 3 inputs during the six months ended September 30, 2019. There were no transfers between the levels of the fair value hierarchy during the three and six months ended September 30, 2019 and three and six months ended September 30, 2018 respectively. 

 

Cash and cash equivalents and accounts receivables are the financial instruments that subject us to the highest concentration of credit risk. It is our policy to invest cash equivalents in highly liquid financial instruments with high credit ratings, and low exposure to a single issuer (except U.S. treasuries). Concentration of credit risk with respect to accounts receivable is limited to customers to which we make significant sales. We reserve an allowance for potential write-offs of accounts receivable, but we have not written off any significant accounts to date. To control credit risk, we perform regular credit evaluations of our customers’ financial condition.

 

 

 

Note 4. Inventories

 

Inventories consist of the following:

 

 

 

Note 5. Leases

 

Under the new lease standard, a contract is a lease or contains one when (1) the contract contains an explicitly or implicitly identified asset and (2) the customer obtains substantially all of the economic benefits from the use of that underlying asset and directs how and for what purpose the asset is used during the term of the contract in exchange for consideration. We assess whether an arrangement is a lease, or contains a lease, upon inception of the contract. As of September 30, 2019, we have operating leases for buildings, warehouses, and office equipment.  Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments. Adjustments would also be made for accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets, none of which are present in any of our current lease contracts. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases. When readily determinable, the discount rate used to calculate the lease liability is the rate implicit in the lease. Otherwise we use our incremental borrowing rate based on the information available at lease commencement. Our short-term leases are not material.

 

Our leases typically contain rent escalations over the lease term. We recognize expense for these leases on a straight-line basis over the lease term.  Many of our leases include one or more renewal or termination options at our discretion, which are included in the determination of the lease term if we are reasonably certain to exercise the option. We have also entered into lease agreements that have variable payments related to certain indexes. Variable lease payments are recognized in the period in which those payments are incurred. All nonlease components are readily identifiable in our lease contract. 

 

The following table presents the lease balances within the Condensed Consolidated Balance Sheets related to our operating leases as of September 30, 2019:

 

 

Lease term and discount rates were as follows as of September 30, 2019:

 

 

 

The components of lease costs were as follows for the three month period ended September 30, 2019:

 

 

Supplemental cash flow information related to leases were as follows for the three month period ended September 30, 2019:

 

 

 

Maturities of lease liabilities were as follows as of September 30, 2019:

 

 

As of September 30, 2019, we had no additional significant operating leases that had not yet commenced. 

 

Total noncancellable operating leases in effect at March 31, 2019, as reported under previous lease accounting guidance, require rental payments of the following amounts in each of the following periods:

 

 

 

 

Note 6.  Indebtedness

 

On March 1, 2017, we entered into a five-year agreement, as amended most recently on August 7, 2019 (the “Credit Facility”) for an $80,000 revolving line of credit (“Line of Credit”), a $20,000 term loan (“Term Loan”) and up to $2,500 of letters of credit with a banking syndicate of four banks. In addition, the Credit Facility provides a post-closing accordion feature which allows for the Company to request to increase the Line of Credit or Term Loan up to an additional $100,000.

 

Line of Credit and Term Loan indebtedness bears interest at either: (1) LIBOR, as defined in the agreement, plus an applicable margin ranging from 1.50% to 2.50%; or (2) the alternate base rate (“ABR”), which is the greater of JPMorgan’s prime rate or the federal funds effective rate or the overnight bank funding rate plus 0.5%. We elect the interest rate with each borrowing under the line of credit. In addition, there is an unused line fee of 0.15% to 0.35%. Letter of credit fees are based on the applicable LIBOR rate.

 

The Credit Facility is secured by all of our assets and requires us to maintain a ratio of funded debt to our trailing four quarters of EBIDTA (the “Leverage Ratio”), as defined in the agreement, of less than 3.0 to 1.0, provided that, we may once during the term of the Credit Facility, in connection with a Permitted Acquisition for which the aggregate consideration paid or to be paid in respect thereof equals or exceeds $20,000, elect to increase the maximum Leverage Ratio permitted hereunder to (i) 3.50 to 1.00 for a period of four consecutive fiscal quarters commencing with the fiscal quarter in which such Permitted Acquisition occurs (the “Initial Holiday Period”) and (ii) 3.25 to 1.00 for the period of four consecutive fiscal quarters immediately following the Initial Holiday Period. The Credit Facility also requires us to maintain a minimum fixed charge coverage ratio of less than 1.25 to 1.0. We were in compliance with all debt covenants as of September 30, 2019.

 

During the six months ended September 30, 2019, we paid off the balance of our Term Loan and our Line of Credit. We recorded the balance of our unamortized debt discount in the amount of $238 to interest expense in conjunction with the extinguishment of the term loan. In October 2019 we terminated the Credit Facility due to the issuance of the Notes. 

 

On August 12, 2019, we issued the Notes, which consist of an aggregate principal amount of $172,500 of convertible senior notes. 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 of each year beginning on February 15, 2020. The Notes are initially convertible at a conversion rate of 3.5273 shares of the 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. Noteholders may convert their Notes at their option only in the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on December 31, 2019 (and only during such calendar quarter), if the last reported sale price per share of  our common stock exceeds 130% of the conversion price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; (ii) during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of our common stock on such trading day and the conversion rate on such trading day; (iii) upon the occurrence of certain corporate events or distributions on our common stock, including certain distributions, the occurrence of a fundamental change (as defined in the indenture governing the Notes) or a transaction resulting in the Company’s common stock converting into other securities or property or assets; and (iv) at any time from, and including, April 15, 2025 until the close of business on the second scheduled trading day immediately before the maturity date.  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. Our intent is to settle conversions entirely in shares of common stock. We will reevaluate this policy from time to time as conversion notices are received from holders of the Notes. The circumstances required to allow the holders to convert their Notes were not met during the three months ended September 30, 2019.  As of September 30, 2019, the if-converted value of the Notes did not exceed the principal balance.

 

We accounted for the transaction by bifurcating the Notes into liability and equity components. The carrying amount of the liability component was $141,427 upon issuance and was calculated by using the income approach and measuring the fair value of a similar debt instrument that does not have an associated convertible feature.  The implied interest rate assuming no conversion option was estimated using the Tsiveriotis-Frenandes model (a Level 3 unobservable input); all other assumptions used in measuring the fair value represent what market participants would use in pricing the liability component, including market interest rates, credit standing, and yield curves, all of which are defined as Level 2 observable inputs.  The carrying amount of the equity component representing the conversion option was $31,073 and was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount (the "Debt Discount") will be amortized to interest expense using the effective interest method over the six-year contractual term of the Notes.

 

Debt issuance costs related to the Notes comprised of discounts and commissions payable to the initial purchasers of $5,175 and third party offering costs of $255. We allocated the total amount incurred to the liability and equity components of the Notes based on their relative values. Issuance costs attributable to the liability component were $4,452 and will be amortized to interest expense using the effective interest method over the contractual term.  Issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity.

 

The net carrying amount of the Notes were as follows:

 

 

The net carrying amount of the equity component of the Notes were as follows:

 

 

 

 

We recognized interest expense on the Notes as follows:

 

 

 

The effective interest rate of the liability component of the note is approximately 5.5%.

 

 

Note 7. Stockholders' Equity

 

Public Offering of Common Stock

On August 12, 2019, we completed the sale and issuance of a total of 431,250 shares of our common stock, which includes our underwriters' exercise in full of an option to purchase up to an additional 56,250 shares. The offering price to the public was $210.00 per share. The total proceeds we received from the offering, net of underwriting discounts and commissions and other offering expenses we paid was $84,995. 

 

Stock-Based Compensation

Amounts recognized in the Condensed Consolidated Financial Statements related to stock-based compensation are as follows:

 

 

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

 

The following is a summary of stock option and restricted stock unit ("RSU") award activity for the six months ended September 30, 2019 (shares in thousands):

 

 

Eight of the RSUs granted during the six months ended September 30, 2018 were subject to performance and service conditions and are considered performance share units ("PSUs"). During the six months ended September 30, 2019, we awarded PSUs that are subject to both service and performance conditions to eligible employees. The PSUs had a grant date fair value of $202.00 per share and vest based on our achievement of specific performance criteria for the three-year period from April 1, 2019 through March 31, 2022 and on continued service through June 15, 2022. The quantity of shares that will be issued upon vesting will range from 0% to 200% of the targeted number of shares; if the defined minimum targets are not met, then no shares will vest.  

 

 

Note 8. Earnings Per Share

 

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share (“diluted EPS”) is computed similarly to basic earnings per share, except that it includes the potential dilution that could occur if dilutive securities were exercised. Potentially dilutive securities include common shares related to stock options and RSUs (collectively “stock awards”). Stock awards are excluded from the calculation of diluted EPS in the event that they are subject to performance conditions or are antidilutive.

 

The impact of the assumed conversion of the Notes calculated under the if-converted method was anti-dilutive, and as such shares underlying the Notes were excluded from the diluted EPS calculation for the three and six-month periods ended September 30, 2019.

 

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

 

 

 

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

 

 

 

 

Note 9. Income Taxes

 

For interim income tax reporting, we estimate our annual effective tax rate and apply this effective tax rate to our year-to-date pre-tax income. Each quarter, our estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. Additionally, the tax effects of significant unusual or infrequently occurring items are recognized as discrete items in the interim period in which the events occur. The impact of changes in tax laws or rates on deferred tax amounts, impairments of non-deductible goodwill, excess benefits from stock-based compensation, and changes in tax reserves resulting from the finalization of tax audits or reviews are examples of significant unusual or infrequently occurring items that are recognized as discrete items in the interim period in which the event occurs. There is a potential for volatility of the effective tax rate due to several factors, including changes in the mix of the pre-tax income and the jurisdictions to which it relates, changes in tax laws and foreign tax holidays, settlement with taxing authorities, and foreign currency fluctuations.

 

Our effective income tax rate was 16.4% and 23.9% for the three months ended September 30, 2019 and September 30, 2018, respectively and 15.1% and 8.4% for the six months ended September 30, 2019 and September 30, 2018, respectively. The effective tax rate for the three and six months ended September 30, 2019 differed from the statutory federal rate of 21% primarily due to the benefit of share-based payment awards for employees, and research and development tax credits, partially offset by expenses for state income taxes, the limitations imposed by Section 162(m), and the foreign rate differential.

 

Since we are subject to audit by various taxing authorities, it is reasonably possible that the amount of unrecognized tax benefits will change during the next 12 months. However, we do not expect the change, if any, to have a material effect on our financial condition or results of operations within the next 12 months.

 

 

Note 10. Commitments and Contingencies

 

In February 2018, Dr. James L. Orrington II filed a putative civil class action in the United States District Court for the Northern District of Illinois, Eastern Division, alleging that we sent unsolicited advertisements to telephone facsimile machines. The complaint included counts alleging violations of the Telephone Consumer Protection Act (“TCPA”), the Illinois Consumer Fraud Act, Conversion, Nuisance, and Trespass to Chattels.  The plaintiff sought monetary damages, injunctive relief, and attorneys’ fees. In January 2019, we received preliminary court approval of a class action settlement with Dr. James L. Orrington II and the class in the amount of $3,300, and we received final approval on May 28, 2019. We recorded the final settlement amount on our Condensed Consolidated Statements of Income during the year ended March 31, 2019 and a corresponding liability was included as legal liability on our Condensed Consolidated Balance Sheets. The settlement was paid in full during the three months ended September 30, 2019. 

 

 

Note 11. Segment Information

 

As of September 30, 2019, we had four reporting segments: Sterilization and Disinfection Control, Instruments, Cold Chain Monitoring, and Cold Chain Packaging. The following tables set forth our segment information:

 

 

 

 

 

 

 

 

 

(1)

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

(2)

Reconciling items include selling, general and administrative, research and development, legal settlement, and other expenses.

 

The following table sets forth assets by reporting segment: 

 

 

As of September 30, 2019, all long-lived assets are located in the United States except for $5,395, $1,399 and $16,738 which are associated with our French, Canadian, and German subsidiaries, respectively.

 

Revenues from external customers are attributed to individual countries based upon locations to which the product is shipped or exported, as follows:

 

 

No foreign country exceeds 10% of total revenues.

 

 

Note 12. Subsequent Event

 

In October 2019, we announced that our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on December 16, 2019, to shareholders of record at the close of business on November 29, 2019.

 

On October 31, 2019, we completed a business combination (the "GPT Acquisition") whereby we acquired the common stock of Gyros Protein Technologies Holding AB ("GPT"), a company whose business provides Immunoassay and Peptide Synthesis solutions that accelerate the discovery, development and manufacturing of biotherapeutics.  The acquisition price for GPT consisted of cash consideration of $180,000, subject to purchase price adjustments. The acquisition deepens our commitment to biopharmaceutical quality control and is the core of our new division, or segment, Biopharmaceutical Development.  As the acquisition was recently consummated, we have not completed our purchase accounting and are unable to provide the required additional footnote disclosures.

 

 

 

 

 

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We incurred significant indebtedness in the amount of $172,500 in the form of the Notes which mature on August 15, 2025 unless earlier converted.

 

We currently expect to settle future conversions solely in shares of our common stock, which has the effect of including the shares of common stock issuable upon conversion of the Notes in our diluted earnings per share to the extent such shares are not anti-dilutive. We will reevaluate this policy from time to time as conversion notices are received from holders of the Notes. Holders of the Notes also have the right to require us to repurchase all or a portion of their Notes upon the occurrence of a fundamental change (as defined in the applicable indenture governing the Notes) at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest. If the Notes have not previously been converted or repurchased, we will be required to repay the Notes in cash at maturity.

 

Our ability to make required cash payments in connection with conversions of the Notes, repurchase the Notes in the event of a fundamental change, or to repay or refinance the Notes at maturity will depend on market conditions and our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. We also may not use the cash proceeds we raised through the issuance of the Notes in an optimally productive and profitable manner.

 

In addition, our ability to repurchase or to pay cash upon conversion or at maturity of the Notes may be limited by law or regulatory authority. Our failure to repurchase Notes following a fundamental change or at maturity of the Notes as required by the applicable indenture would constitute a default under such indenture. A default under the applicable indenture or agreements governing our future indebtedness could have a material adverse effect on our business, results of operations, and financial condition. If the payment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes or to pay cash upon conversion or at maturity of the Notes.

 

Additional stock issuances could result in significant dilution to our stockholders.

 

We may issue additional equity securities to raise capital, make acquisitions, or for a variety of other purposes. Additional issuances of our stock may be made pursuant to the exercise or conversion of new or existing convertible debt securities, warrants, stock options, or other equity incentive awards. Any such issuances will result in dilution to existing holders of our stock. We rely on equity-based compensation as an important tool in recruiting and retaining employees. The amount of dilution due to equity-based compensation of our employees and other additional issuances could be substantial.

 

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