MESA LABORATORIES INC /CO/ - Quarter Report: 2023 September (Form 10-Q)

Part I. Financial Information

Item 1. Financial Statements

Mesa Laboratories, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share amounts)

See accompanying notes to Condensed Consolidated Financial Statements.

Mesa Laboratories, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share data)

See accompanying notes to Condensed Consolidated Financial Statements.

Mesa Laboratories, Inc.

Condensed Consolidated Statements of Comprehensive (Loss)

(unaudited)

(in thousands) 

See accompanying notes to Condensed Consolidated Financial Statements.

Mesa Laboratories, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

(dollars in thousands, except per share data)

*Accumulated Other Comprehensive (Loss) Income.

See accompanying notes to Condensed Consolidated Financial Statements.

Mesa Laboratories, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

See accompanying notes to Condensed Consolidated Financial Statements.

Mesa Laboratories, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(dollar and share amounts in thousands, unless otherwise specified)

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 are a multinational manufacturer, developer, and seller of life science tools and critical 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, and by independent distributors in these areas as well as throughout the rest of the world. We prefer markets in which we can establish a strong presence and achieve high gross profit margins.

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

Unallocated corporate expenses are reported within Corporate and Other.

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information. In the opinion of management, such unaudited information includes all adjustments, consisting of normal recurring adjustments necessary for the fair statement 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 year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. We made no material changes to the application of our significant accounting policies that were disclosed in our Form 10-K. 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, 2023.

Our fiscal year ends on March 31. References in this Quarterly Report to a particular “year” or “quarter” refer to our fiscal year or fiscal quarters, respectively.

Prior Period Reclassifications

Certain prior year amounts presented have been reclassified to conform with current presentation. The reclassifications have not resulted in any changes to consolidated or segment amounts reported in the Consolidated Financial Statements for any periods presented in this Form 10-Q.

Risks and Uncertainties

The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the reporting date and revenues and expenses during the reporting periods. These estimates represent management's judgment about the outcome of future events. The global business environment continues to be impacted by cost pressure, the overall effects of economic uncertainty on customers' purchasing patterns, high interest rates, and other factors. It is not possible to accurately predict the future impact of such events and circumstances. Actual results could differ from our estimates.

Recently Issued Accounting Pronouncements

We have reviewed all recently issued accounting pronouncements and have concluded that they are either not applicable to us or are not expected to have a significant impact on our consolidated financial statements.

Note 2. Significant Transactions

Acquisition of GKE

On October 14, 2023, we executed a purchase agreement to acquire 100% of the outstanding shares of GKE GmbH and SAL GmbH, and subject to applicable Chinese regulatory approvals, 100% of the outstanding shares of Beijing GKE Science & Technology Co. Ltd. (together, "GKE" or the "GKE acquisition"). GKE develops, manufactures and sells a highly competitive portfolio of chemical sterilization indicators to protect patient safety across global healthcare markets. GKE’s strength in chemical indicators and our Sterilization and Disinfection Control division’s strength in biologic indictors are complementary, as chemical and biologic indicators are used in the same sterility validation workflows. Additionally, GKE’s healthcare-focused commercial capabilities and geographic coverage greatly expand our reach within the healthcare markets.

Total cash consideration for the GKE acquisition was €85,000, net of cash and debt and subject to customary purchase price adjustments. Of the total acquisition price, €8,500 will be held back for a period of 18 months from the acquisition closing date as security against potential indemnification losses. An additional €5,000 of the acquisition price, net of cash and debt and subject to customary adjustments, specifically related to the purchase of Beijing GKE Science & Technology Co. Ltd., will be paid to the sellers upon satisfaction of applicable Chinese regulatory approvals. We funded the acquisition through a combination of cash on-hand and $65,000 borrowed under our line of credit (See Note 7. "Indebtedness"). We began operating GKE GmbH and SAL GmbH on October 16, 2023, on which date they will also be included as wholly owned subsidiaries in our consolidated financial statements. Due to the recent nature of the acquisition, our initial purchase price accounting is incomplete. 

Belyntic GmbH

On November 17, 2022, we acquired substantially all of the assets and certain liabilities of Belyntic GmbH’s peptide purification business (“the Belyntic acquisition”) for $6,450, of which $4,950 was paid on the date of acquisition. The remaining $1,500 will be paid as patent applications are approved. The business complements our existing peptide synthesis business, part of the Biopharmaceutical Development segment, by adding a new consumables line. The new PurePep® EasyClean products are a green chemistry solution to purify peptides.

During fiscal year 2023, we prepared a preliminary analysis of the valuation of net assets acquired in the Belyntic acquisition. During the six months ended September 30, 2023, based on a detailed financial analysis of the financial model, we recorded measurement period adjustments to reclassify amounts from intangible assets into goodwill. Our preliminary purchase price allocation is subject to further revision as more detailed analyses are completed.

Note 3. Revenue

We develop, manufacture, market, sell and maintain life sciences tools and quality control instruments and related consumables, and services. We evaluate revenues internally primarily based on operating segment and the nature of goods and services provided.

Hardware sales include physical products such as instruments used for molecular and genetic analysis, protein synthesizers, medical meters, wireless sensor systems, and data loggers. Hardware sales  may be offered with accompanying perpetual or annual software licenses, which in some cases are required for the hardware to function.

Consumables are typically used on a one-time basis and require frequent replacement in our customers' operating cycles. Consumables such as reagents used for molecular and genetic analysis or solutions used for protein synthesis are critical to the ongoing use of our instruments. Consumables such as biological indicator test strips are used on a standalone basis.

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

Typically, revenue is recognized upon shipment of a product, upon completion of a discrete service, or over a period of time reflective of the performance period in the applicable contract, depending on when our obligation to the customer is satisfied. The significant majority of our revenues and related receivables are generated from contracts with customers that are 12 months or less in duration.

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

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

Other than China, no foreign country exceeded 10% of total revenues for the three and six months ended September 30, 2023 and 2022.

Contract Balances

Our contracts have varying payment terms and conditions. Some customers prepay for products and services, resulting in unearned revenues or customer deposits, called contract liabilities. Short-term contract liabilities are included within unearned revenues in the accompanying Condensed Consolidated Balance Sheets, and long-term contract liabilities are included within other long-term liabilities in the accompanying Condensed Consolidated Balance Sheets.

A summary of contract liabilities is as follows:

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

Note 4. Fair Value Measurements

Our financial instruments consist primarily of cash and cash equivalents, trade accounts receivable, obligations under trade accounts payable, and debt. Due to their short-term nature, the carrying values for cash and cash equivalents, trade accounts receivable, and trade accounts payable approximate fair value; they are classified within Level 1 of the fair value hierarchy. 

Historically, the financial instruments that subject us to the highest concentration of credit risk are cash and cash equivalents and accounts receivable. We maintain relationships and cash deposits at multiple banking institutions across the world in an effort to diversify and reduce risk of loss. Concentration of credit risk with respect to accounts receivable is limited to customers to whom we make significant sales. No customers accounted for more than 10% of total trade receivables as of September 30, 2023.

We record an allowance for potential uncollectible amounts against our accounts receivable using historical collection experience and current and expected future economic and market conditions. To manage credit risk, we consider the creditworthiness of new and existing customers, and we regularly review outstanding balances and payment histories. We  may require pre-payments from customers under certain circumstances and  may limit future purchases until payments are made on past due amounts.

We have outstanding $172,500 aggregate principal amount of 1.375% convertible senior notes due  August 15, 2025 (the "Notes"). We estimate the fair value of the Notes using Level 2 inputs based on the last actively traded price or observable market input preceding the end of the reporting period, and the fair value is approximately correlated to our stock price.

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

We are obligated to pay contingent consideration of $1,500 cash related to the Belyntic acquisition upon approval of pending patent applications. We estimate the fair value of the contingent consideration using a probability-weighted outcome analysis based on our expectations of patent approval, leveraging our historical experience and expert input, and we adjust the estimated fair value at each reporting period through earnings. The fair value of the contingent consideration was $1,180 as of September 30, 2023 and is recorded in other accrued expenses on the accompanying Condensed Consolidated Balance Sheets. The first subset of patents was granted by the European Patent Office effective October 18, 2023, and we anticipate approval of the remaining pending patents within one year of September 30, 2023.

Amounts recognized or disclosed at fair value in the unaudited condensed consolidated financial statements on a nonrecurring basis include the initial recognition and disclosure of most assets and liabilities purchased in business acquisitions and any related measurement period adjustments. Additionally, assets such as property and equipment, operating lease assets, goodwill, and other intangible assets are adjusted to fair value if determined to be impaired. We recorded no impairments during the three and six months ended September 30, 2023 or 2022. Fair values of such assets and liabilities require measurement using Level 3 inputs.

There were no transfers between the levels of the fair value hierarchy during the three and six months ended September 30, 2023 or 2022.

Note 5. Supplemental Balance Sheets Information

Inventories consisted of the following:

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

Prepaid expenses and other current assets consisted of the following: 

Accrued payroll and benefits consisted of the following:

Other accrued expenses consisted of the following: 

Note 6. Goodwill and Intangible Assets, Net

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

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

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

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

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

Note 7. Indebtedness

Credit Facility

As of  September 30, 2023, we maintained a four-year senior credit facility (the “Credit Facility”) that included 1) a revolving credit facility in an aggregate principal amount of up to $75,000, 2) a swingline loan in an aggregate principal amount not exceeding $5,000, and 3) letters of credit in an aggregate stated amount not exceeding $2,500. The Credit Facility matures in March 2025. The Credit Facility also provides for an incremental term loan or an increase in revolving commitments in an aggregate principal amount of at a minimum $25,000 and at a maximum $75,000, subject to the satisfaction of certain conditions and lender considerations. As of September 30, 2023, we had no outstanding balances under the Credit Facility.

The financial covenants in the Credit Facility include a maximum leverage ratio of 4.5 to 1.0 for the period ended September 30, 2023, except that we  may have a leverage ratio of 5.75 to 1.0 for a period of four consecutive quarters following a permitted acquisition. The Credit Facility also stipulates a minimum fixed charge coverage ratio of 1.25 to 1.0. Other covenants include restrictions on our ability to incur debt, grant liens, make fundamental changes, engage in certain transactions with affiliates, or conduct asset sales. As of  September 30, 2023, we were in compliance with all covenants.

Amounts borrowed under the Credit Facility bear interest at either a base rate or a SOFR rate plus an applicable spread. We are obligated to pay quarterly unused commitment fees of between 0.15% and 0.35% of the Credit Facility’s aggregate principal amount, based on our leverage ratio. 

On October 5, 2023, we amended the terms of the Credit Facility to increase the maximum principal amount available to us from $75,000 to $125,000. On October 11, 2023, we borrowed $65,000 under the facility at a current interest rate of 6.9% to partially fund the acquisition of GKE. See Note 2. "Significant Transactions" for further information.

Convertible Notes 

On August 12, 2019, we issued an aggregate principal amount of $172,500 of Notes. The net proceeds from the Notes, after deducting underwriting discounts and commissions and other related offering expenses payable by us, were approximately $167,056. The Notes mature on August 15, 2025, unless earlier repurchased or converted, and bear interest at a rate of 1.375% payable semi-annually in arrears on February 15 and August 15 each year. The Notes are initially convertible, subject to certain conditions, at a conversion rate of 3.5273 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $283.50 per share of common stock. 

Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election. The circumstances necessary for conversion were not met during the three and six months ended September 30, 2023. As of September 30, 2023, the Notes were classified as a long-term liability on our Condensed Consolidated Balance Sheets. The if-converted value of the Notes did not exceed the principal balance as of  September 30, 2023.

The net carrying amount of the Notes was as follows:

We recognized interest expense on the Notes as follows:

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

Note 8. Stockholders' Equity

Stock-Based Compensation

During the six months ended September 30, 2023, we issued stock options, restricted stock units ("RSUs") and performance-based restricted stock units ("PSUs") pursuant to the Mesa Laboratories, Inc. Amended and Restated 2021 Equity Incentive Plan (the "2021 Equity Plan"), which authorizes the issuance of 660 shares of common stock to eligible participants.

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

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

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

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

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

Outstanding time-based RSUs vest and settle in shares of our common stock on a one-for-one basis. The majority of the RSUs granted to employees during the six months ended September 30, 2023 vest in equal installments on the first, second, and third anniversary of the grant date. RSUs granted to certain executives during the six months ended  September 30, 2023 vest in equal installments on September 1, 2024, June 21, 2025 and June 21, 2026. RSUs granted to non-employee directors during the six months ended September 30, 2023 vest one year from the grant date. We recognize the expense relating to RSUs, net of estimated forfeitures, on a straight-line basis over the vesting period.

We grant PSUs to certain key employees. The number of shares earned is determined at the end of each performance period based on Mesa's achievement of certain pre-defined targets defined in the related award agreement. PSUs vest upon completion of the service period described in the award agreement. We recognize the expense relating to the performance-based RSUs based on the probable outcome of achievement of the performance targets on a straight-line basis over the service period. 

During the six months ended September 30, 2023, the Compensation Committee of the Board of Directors created a plan to award 32 PSUs at target (the "FY24 PSUs") with a grant date fair value of $132.29 that are subject to service, performance, and market conditions to eligible employees. The service period is from April 1, 2023 through June 21, 2026. The company performance conditions will be measured for the period from April 1, 2023 through  March 31, 2024. The quantity of shares that will be earned based upon company performance 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 for performance. In addition, the number of PSUs earned based on company performance will be adjusted up or down by a maximum of 20% pursuant to a market-based measure of performance comparing Mesa’s share price to a peer group over the period from April 1, 2023 until March 31, 2026. 

Note 9. Net (Loss) Earnings Per Share

Basic net (loss) earnings per share is computed by dividing net (loss) income by the weighted-average number of common shares outstanding during the reporting period. Diluted (loss) earnings per share (“diluted EPS”) is computed similarly to basic (loss) earnings per share, except that it includes the potential dilution that could occur if dilutive securities were exercised. Potentially dilutive securities include stock options and both time and performance based RSUs (collectively “stock awards”), as well as common shares underlying our Notes. Stock awards are excluded from the calculation of diluted EPS if they are subject to performance conditions that have not yet been achieved or if they are antidilutive. Diluted EPS does not consider the impact of potentially dilutive in periods in which there is a loss because the inclusion of the potential common shares would have an antidilutive effect in such cases.

The impact of the assumed conversion of the Notes calculated under the if-converted method was antidilutive, and as such, shares underlying the Notes were excluded from the diluted EPS calculation for the three and six months ended September 30, 2023 and September 30, 2022.

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

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

Note 10. 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. There is a potential for volatility in the effective tax rate due to several factors, including changes in the mix of the pre-tax income and the jurisdictions to which they relate, changes in tax laws and foreign tax holidays, settlement with taxing authorities, and foreign currency fluctuations.

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

Note 11. Commitments and Contingencies

We review the adequacy of our legal reserves on a quarterly basis and establish reserves for loss contingencies that are both probable and reasonably estimable. As of September 30, 2023, there were no material legal reserves recorded on the accompanying unaudited Condensed Consolidated Balance Sheets.

As part of the Belyntic acquisition, we have agreed to pay $1,500 to the sellers if contractually specified patents are issued. Effective October 18, 2023, a subset of the patents was issued by the European Patent Office, and we believe it is probable the remaining patents will be issued and we will pay the sellers in full within the next 12 months. 

As part of the GKE acquisition consummated on October 14, 2023, we will pay the sellers €8,500 of the acquisition price 18 months following the acquisition date, pending adjustments for potential indemnification losses that may arise. We will pay the sellers an additional €5,000 of the acquisition price, net of cash and debt and subject to customary adjustments, upon satisfaction of Chinese regulatory approvals for the Beijing GKE Science & Technology Co. Ltd. portion of the acquisition.

Note 12. Segment Information

The following tables set forth our segment information:

The following table sets forth inventories by reportable segment. Our chief operating decision maker is not provided with any other segment asset information.

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; product research and development; 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; 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 and the overall effects of the current high inflation environment on customers’ purchasing patterns; 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, including rising interest rates and potential recessionary 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 September 30, 2023, we managed our operations in four reportable segments, or divisions: Sterilization and Disinfection Control, Clinical Genomics, Biopharmaceutical Development, and Calibration Solutions. Each of our divisions is described further in "Results of Operations" below. 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, 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.

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, globalize our company, and increase the scale at which we operate, which in turn affords us the ability to improve our operating efficiency, extend our customer base, and further the pursuit of our purpose: Protecting the Vulnerable®.

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 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 six months ended September 30, 2023, approximately 49% and 48% of our revenues, respectively, were earned outside of the United States. Since we serve a number of industries across a variety of global markets, we may be affected by world-wide, regional, or industry-specific economic or political factors, trends and costs associated with a global labor force, and increasing regulation. However, our diversity in industry, geography, and product and service offerings may limit the impact of changes in specific industry trends or local economic changes in our consolidated operating results. We actively monitor trends affecting industries we operate in, including by monitoring key competitors and customers and by staying abreast of changes to local economies and how they may affect our operations.  

Several challenging macroeconomic factors persisted during the second quarter of fiscal year 2024, including continued softening of discretionary capital asset purchases across the life sciences tools market, high interest rates, and high inflation, all of which contributed to the decline in our organic revenues growth year to date. On the other hand, supply chain disruptions, labor shortages and resulting manufacturing difficulties that impacted business operations in fiscal year 2023 largely abated during the six months ended September 30, 2023, which allowed us to largely maintain our gross profit margins as a percentage of revenues. Additionally, in response to weaker revenues, we worked to reduce operating expenses, taking steps to preserve our financial model. For example, we incurred approximately $350 in costs related to a reduction in force during the six months ended September 30, 2023; however, the reduction in force is expected to result in annual savings of approximately $2,000 starting in our fiscal third quarter. We continue to invest in growing the company organically and through further acquisitions, which helps us address the rapid pace of technological change in our served markets, further globalize our business, and be responsive to customers throughout the world. To that end, we completed the acquisition of GKE in October 2023. The results of GKE's operations and the benefits of the acquisition will be consolidated into our financial statements beginning in the third quarter of fiscal year 2024. Overall, our operating expenses, which include approximately $505 of one-time GKE acquisition costs, decreased during the three and six months ended September 30, 2023 compared to the same periods in the prior year, demonstrating that adjustments to our operations allowed us to largely preserve our financial model despite challenges in the macroeconomic environment. 

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

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 from our reportable segments for the three and six months ended September 30, 2023 decreased 10% and 5%, respectively, largely due to softening demand for new capital equipment in the pharmaceutical markets, including lower demand for hardware sold by our Biopharmaceutical Development. Revenues also decreased compared to the corresponding prior year periods due to the fiscal year 2023 loss of Sema4, a significant customer in our Clinical Genomics business. 

Although revenues were lower in the first two quarters of fiscal year 2024 compared to the prior year periods, gross profit as a percentage of revenues did not fall significantly due to our proactive cost containment efforts and favorable product mix. Modest gross profit percentage declines of 2% and 1%, respectively, for the three and six months ended September 30, 2023 compared to the same periods in the prior year are primarily due to lower revenues on a partially fixed cost base, offset by our efforts to preserve our financial model. 

Results by reportable segment are as follows:

Our unaudited condensed consolidated results of operations are as follows:

Reportable Segments

Sterilization and Disinfection Control

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

Sterilization and Disinfection Control's revenues increased 1% and 4%, respectively, for the three and six months ended September 30, 2023 compared to the prior year periods. The modest revenue increases for the three and six months ended September 30, 2023 are attributable primarily to price, and to a lesser extent, volume increases against a difficult prior period comparison.

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

Clinical Genomics

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

Clinical Genomics revenues decreased 16% and 12%, respectively, for the three and six months ended September 30, 2023 compared to the prior year periods, primarily as a result of the loss of revenues from Sema4 at the beginning of the third quarter of fiscal year 2023. Excluding the loss of Sema4, revenues from our Clinical Genomics division would have been 3% lower during the three months ended September 30, 2023 compared to the prior year period, primarily due to the fact that China earned unusually high revenues during the three months ended September 30, 2022 upon reopening from COVID lockdowns. Revenues would have been flat for the six months ended September 30, 2023 compared to the prior year period, excluding the loss of Sema4. 

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

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

Biopharmaceutical Development

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. 

Biopharmaceutical Development revenues decreased 24% and 17% for the three and months ended September 30, 2023 compared to the prior year period, primarily due to softening demand for capital equipment, partially offset by an increase in revenues from consumables and services as well as price increases. Given the current economic landscape, we cannot predict whether hardware sales will increase substantially during the third quarter of our fiscal year, as we have seen in the past, as our customers approach the end of their annual budget cycles. Despite adverse macroeconomic factors, revenues from consumables and services have continued to grow during fiscal year 2024. 

Gross profit percentage for the three and six months ended September 30, 2023 decreased 2% and remained flat, respectively, compared to the prior year periods. Revenues from consumables, which have slightly higher gross profit percentages than hardware in our Biopharmaceutical Division, have increased for both the three and six months ended September 30, 2023, and along with favorable product mix, this partially mitigated the impact of decreased hardware revenues.

Calibration Solutions

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

Calibration Solutions revenues increased 1% and 6%, respectively, for the three and six months ended September 30, 2023 compared to the prior year periods, primarily due to the abatement of production difficulties and supply constraints that had limited our ability to manufacture ordered quantities of certain products during the first six months of fiscal year 2023. This abatement has allowed us to return to normal operations during fiscal year 2024, driving increased orders along with a modest reduction of past due backlog. 

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

Operating Expense

Operating expense decreased 1% and 6%, respectively for the three and months ended September 30, 2023 compared to the prior year periods, primarily as a result of lower stock-based compensation expense as the performance-based restricted stock units associated with the fiscal year 2022 acquisition of Agena Bioscience, Inc. were no longer amortizing in fiscal year 2024, along with the timing of award grants in fiscal year 2024. Cost savings from our strategic cost containment activities following the loss of Sema4 also contributed to the decrease in operating expenses, partially offset by regular annual wage increases.

Selling

Selling expense is driven primarily by labor costs, including salaries and commissions; accordingly, it may vary with sales levels.

Selling expense for the three months ended September 30, 2023 increased 5% compared to the prior year period, primarily as a result of our implementation of Salesforce in our Biopharmaceutical Development division and backfilling select open positions in our Biopharmaceutical Division. Selling expense for the six months ended September 30, 2023 decreased 3% compared to the prior year period, primarily as a result of lower commissions on lower revenues in fiscal year 2024, as well as other decreases in personnel costs realized from our proactive cost savings efforts initiated after the loss of Sema4.

General and Administrative

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

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

Research and Development

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