Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollars in thousands, unless specified)
Overview
We are a global leader in the design and manufacture of life sciences tools and critical quality control solutions for regulated applications in the pharmaceutical, healthcare, and medical device industries. We offer products and services to help our customers ensure product integrity, increase patient and worker safety, and improve the quality of life throughout the world. 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 March 31, 2024, 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 are 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 Revenues Growth - Acquisitions
Over the past decade, we have consummated a number of acquisitions as part of our growth strategy. These acquisitions have allowed us to expand our product offerings and the industries we serve, globalize our company, and increase the scale at which we operate. In turn, this growth affords us the ability to improve our operating efficiency, extend our customer base, and further the pursuit of our purpose: Protecting the Vulnerable®.
During fiscal year 2024, we completed the acquisition of GKE. GKE develops, manufactures and sells a highly competitive portfolio of chemical sterilization indicators, biologics, and process challenge devices to protect patient safety across global healthcare markets.
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Improving Our Operating Efficiency
We maximize value in our existing businesses and those we acquire by implementing efficiencies in our manufacturing, commercial, engineering, and administrative operations. We achieve efficiencies using the four pillars that make up the Mesa Way, which is our customer-centric, lean-based system for continuously improving and operating the manufacturing and administrative aspects of our high-margin, niche businesses. The Mesa Way is focused on: Measuring What Matters using our customers' perspective and setting high standards for performance; Empowering Teams to improve operationally and exceed customer expectations; Sustainably Improving using lean-based tools designed to help us identify and prioritize the biggest opportunities; and Always Learning so that performance continuously improves.
Gross profit is affected by many factors including our product mix, manufacturing efficiencies, costs of products and labor, foreign currency rates, and price competition. Historically, as we have integrated our acquisitions and taken advantage of manufacturing efficiencies, our gross profit percentages for some products have improved. There are, however, differences in gross profit percentages between product lines, and ultimately the mix of sales will continue to impact our overall gross profit.
Hire, Develop, and Retain Top Talent
At the center of our organization are talented people who are capable of taking on new challenges using a team approach. It is our exceptionally talented workforce that works together and uses our lean-based tool set to find ways to continuously and sustainably improve our products, our services, and ourselves, resulting in long-term value creation for our stakeholders.
General Trends
We are a global company with multinational operations. During our fiscal year 2024, approximately 51% of our revenues 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.
Overall, supply chain disruptions, labor shortages and resulting manufacturing difficulties that impacted business operations in fiscal year 2023 largely abated during fiscal year 2024, facilitating organic revenues growth in our Sterilization and Disinfection and Calibration Solutions divisions.
During fiscal year 2024, we completed the acquisition of GKE, which develops, manufactures and sells a highly competitive portfolio of chemical sterilization indicators, biologics, and process challenge devices to protect patient safety across global healthcare markets. GKE’s healthcare-focused commercial capabilities in Europe and Asia greatly expand our reach in the healthcare markets in those geographies. We are working to obtain regulatory 510(k) clearance on certain GKE products for sale in the United States, which would further expand organic revenues growth opportunities from the GKE business. We began consolidating the results of GKE's operations into our financial statements in the third quarter of our fiscal year.
Several challenging macroeconomic factors existed during fiscal year 2024:
In response to decreased revenues growth, we took steps to preserve our financial model, implementing reductions in force and other cost savings initiatives in our Clinical Genomics and Biopharmaceutical Development divisions. We expect to realize incremental cost savings of approximately $4,000 from these initiatives in fiscal year 2025, of which approximately $900 will benefit cost of revenues and $3,100 will benefit operating expenses; however, the majority of these savings may be offset by higher performance-based payments such as bonus and sales commissions if we meet internal revenue growth targets. Management's efforts, coupled with the GKE acquisition, have allowed us to slightly increase our consolidated gross profit margin as a percentage of revenues. Overall, excluding impairment, our operating expenses remained flat during fiscal year 2024 compared to fiscal year 2023, despite the acquisition of GKE in fiscal year 2024.
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.
Results of Operations
Our results of operations and year-over-year changes are discussed in the following section. The tables and discussion below should be read in conjunction with the accompanying Consolidated Financial Statements and the notes thereto appearing in Item 8. Financial Statements and Supplementary Data (in thousands, except percent data). Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended March 31, 2023, filed on May 30, 2023, for a comparison of results of operations for the years ended March 31, 2023 and March 31, 2022.
During the fourth quarter of fiscal year 2024 we recorded total impairment losses of $274,533 related to goodwill in our Clinical Genomics and Biopharmaceutical Development divisions and related to intangible assets in our Clinical Genomics division as discussed further in "Impairment" below. In fiscal year 2025, we expect a net decrease in non-cash amortization expense of approximately $3,700 within costs of revenues and $6,800 within operating expenses in the Clinical Genomics division due to impairment losses reducing the carrying values of intangible assets.
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Results by reportable segment are as follows:
Revenues Organic Revenues Growth (non-GAAP) (a) Gross Profit as a % of Revenues
Our consolidated results of operations are as follows:
Year Ended March 31, Percentage Change
Reportable Segments
Sterilization and Disinfection Control
Our Sterilization and Disinfection Control division manufactures and sells biological, chemical and cleaning indicators used to assess the effectiveness of sterilization, decontamination, disinfection and cleaning processes in the pharmaceutical, medical device, and healthcare industries. The division also provides testing and laboratory services, mainly to the dental and pharmaceutical industries. Sterilization and Disinfection Control products are disposable and are used on a routine basis.
Year Ended March 31, Percentage Change
Gross profit as a % of revenues 71 % 72 % 74 % (1 %) (2 %)
Sterilization and Disinfection Control revenues increased 16% for fiscal year 2024 compared to fiscal year 2023. The acquisition of GKE contributed $9,289 of revenues and $5,357 of gross profit to the Sterilization and Disinfection Control division during the year. GKE's gross profit as a percentage of revenues was 58% during fiscal year 2024, including $1,229 of amortization of the non-cash inventory step-up related to purchase accounting.
Excluding GKE, revenues in the Sterilization and Disinfection control division increased 2% in fiscal year 2024 compared to fiscal year 2023. Excluding $1,229 of amortization of the non-cash inventory step-up related to the GKE acquisition during fiscal year 2024, the Sterilization and Disinfection Control division's gross profit margin percentage was 73%. Fiscal year 2024 benefited from price increases and 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 research labs and contract research organizations to perform genomic testing for a broad range of research applications in several therapeutic areas, such as screenings for hereditary diseases, pharmacogenetics, oncology related applications, and toxicology research.
Year Ended March 31, Percentage Change
Gross profit as a % of revenues 51 % 52 % 36 % (1 %) 16 %
Clinical Genomics revenues decreased 16% in fiscal year 2024 compared to fiscal year 2023, largely due to the loss of Sema4 as a customer in the third quarter of fiscal year 2023, as well as China's economic slowdown. Also contributing to the decline was the persistently high cost of capital, which strained our customers' ability to purchase the division's hardware. Excluding the loss of revenues to Sema4, revenues from our Clinical Genomics division would have been 9% lower during fiscal year 2024 compared to fiscal year 2023. We expect revenues in the Clinical Genomics division to remain flat in fiscal year 2025 as we begin executing a new strategy to cultivate sustainable long-term growth.
Gross profit percentage for the Clinical Genomics division decreased one percentage point for fiscal year 2024 compared to fiscal year 2023, primarily due to lower revenues on a partially fixed cost base, and to a lesser extent, unfavorable product mix, particularly decreases in sales of high-margin consumables products, partially offset by a decrease in non-cash amortization expense of $1,227 following the impairment of acquired intangible assets in fiscal 2024. We expect costs of revenues in the Clinical Genomics division to decrease by approximately $3,700 in fiscal year 2025 as a result of lower non-cash amortization expense subsequent to the impairment in fiscal 2024. During the fourth quarter of fiscal 2024, we appointed a new General Manager to oversee the Clinical Genomics division, with a goal of establishing business processes that will support long-term growth.
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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.
Year Ended March 31, Percentage Change
Gross profit as a % of revenues 62 % 64 % 63 % (2 %) 1 %
Biopharmaceutical Development's revenues decreased 14% for fiscal year 2024 compared to fiscal year 2023, primarily due to continued softening demand for capital equipment, including our instruments, in the biopharmaceutical industry, with some abatement during the fourth quarter of fiscal year 2024. The decrease was partially offset by an increase in revenues from consumables and services, as well as price increases. Despite adverse macroeconomic factors, revenues from the division's consumables and services grew 10% compared to the prior year period.
Biopharmaceutical Development's gross profit percentage decreased two percentage points during fiscal year 2024 as a result of lower overall revenues on a partially fixed cost base, partially offset by favorable product mix.
Calibration Solutions
The Calibration Solutions division develops, manufactures and sells quality control products using principles of advanced metrology to enable customers to measure and calibrate critical parameters in applications such as environmental and process monitoring, dialysis, gas flow, air quality and torque testing, primarily in medical device manufacturing, pharmaceutical manufacturing, laboratory, and hospital environments.
Year Ended March 31, Percentage Change
Gross profit as a % of revenues 58 % 54 % 53 % 4 % 1 %
Calibration Solutions revenues increased 7% for fiscal year 2024 compared to fiscal year 2023, largely due to the abatement of production difficulties and supply constraints that limited our ability to manufacture ordered quantities of certain products during the first three quarters of fiscal year 2023. This abatement has allowed us to return to normal operations and growth during fiscal year 2024, driving orders growth, along with a reduction of past due backlog.
The Calibration Solutions division's gross profit percentage increased four percentage points in fiscal year 2024 compared to fiscal year 2023, primarily due to increased revenues on a partially fixed cost base.
Corporate and Other
Corporate and Other consists of unallocated corporate expenses and other business activities. Unallocated corporate expenses were $77, $40, and $165 for fiscal years 2024, 2023, and 2022, respectively, and were recorded in cost of revenues in the Consolidated Statements of Operations.
Operating Expense
Excluding impairment losses of $274,533, operating expenses for fiscal year 2024 were approximately flat compared to fiscal year 2023. Lower costs resulting from decreases in intangible asset amortization expense following impairment losses that reduced asset carrying values, lower bonus accruals, and lower stock compensation expense attributable to both performance outcomes and the timing of award grants during the year were partially offset by operating expenses incurred by GKE during fiscal year 2024, acquisition and integration costs related to GKE, and increased marketing efforts.
SellingExpense
Selling expense is driven primarily by labor costs, including salaries and commissions; accordingly, it may vary with sales levels.
Year Ended March 31, Percentage Change
As a percentage of revenues 18 % 17 % 15 % 1 % 2 %
Selling expense increased 3% for fiscal year 2024, primarily as a result of increased marketing efforts and implementation of a new customer management software in certain divisions, partially offset by lower commissions on lower revenues and lower recruiting and training costs in fiscal 2024. Excluding the GKE acquisition, selling expense would have increased 2% in fiscal year 2024 compared to fiscal year 2023.
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General and Administrative Expense
Labor costs, non-cash stock-based compensation and amortization of intangible assets drive the substantial majority of general and administrative expense.
Year Ended March 31, Percentage Change
As a percentage of revenues 34 % 33 % 33 % 1 % - %
General and administrative expense related to GKE operations 3,416 - - NA NA
General and administrative expenses, other than impairment of finite-lived intangible assets and goodwill, increased 1% for the year ended March 31, 2024; excluding amounts impacting comparability as presented in the table above, expense would have decreased approximately 3% in fiscal 2024 compared to fiscal 2023, largely due to the effect of our ongoing cost containment efforts which reduced personnel related costs, as well as lower bonus expense due to performance, and lower stock-based compensation expense attributable to both performance outcomes and the timing of award grants during fiscal year 2024.
Impairment
Year Ended March 31, Percentage Change
Impairment of finite-lived intangible assets $ 117,641 $ - $ - NA NA
Impairment of goodwill 156,892 - - NA NA
Total impairment losses $ 274,533 $ - $ -
As a percentage of revenues 127 % - % - % 127 % 0 %
Impairment losses were recorded in our Clinical Genomics and Biopharmaceutical Development divisions in fiscal year 2024. The impairment losses are primarily the result of higher weighted average cost of capital, which decreases the fair value of businesses, as well as downward revisions of expected future performance compared to the expectations that existed at the time of our most-recent quantitative impairment analyses, specifically due to the effects of:
● persistent economic uncertainty in China throughout our fiscal year 2024;
We also appointed a new general manager to lead the Clinical Genomics division. Immediately, new division management began restructuring the division, eliminating 17 positions, and began to implement an updated business strategy, which resulted in a downward revision of financial expectations for the coming years, particularly the next 1.5 – 2 years as we adjust our business strategy to better support long-term growth. See Note 6. "Goodwill and Intangible Assets, Net" in Item 8. Financial Statements and Supplementary Datafor further information.
Research and Development Expense
Research and development expense is predominantly comprised of labor costs and third-party consultants.
Year Ended March 31, Percentage Change
As a percentage of revenues 9 % 9 % 9 % - % - %
Research and development expenses for fiscal year 2024 decreased 6% compared to fiscal year 2023, primarily due to our cost containment efforts in fiscal year 2024, including a reduction in force related to our Biopharmaceutical Development division during the second quarter of fiscal year 2024, lower third-party consulting costs, and lower bonus accruals in fiscal year 2024.
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Nonoperating Expense, Net
Year Ended March 31, Percentage Change
Nonoperating expense, net for fiscal year 2024 is composed primarily of interest expense and amortization of the debt issuance costs associated with the 2025 Notes and the Credit Facility. Interest expense related to the Credit Facility was approximately $909 higher in fiscal year 2024 compared to fiscal year 2023 due to higher outstanding balances for a portion of fiscal year 2024 related to borrowings used to fund the GKE acquisition, as well as higher interest rates. Increases in interest expense were partially offset by net unrealized foreign currency gains of approximately $1,440 resulting from the movement of the euro against the U.S. dollar related to a U.S. dollar denominated intercompany loan we issued to our wholly owned subsidiary, Mesa Germany GmbH, during fiscal year 2024 to fund the purchase of GKE.
Income Taxes
Year Ended March 31, Percentage Change
Our income tax rate varies based upon many factors, but in general we anticipate that on a go-forward basis, our effective tax rate will be approximately 25%, plus or minus the impact of excess tax benefits and deficiencies associated with share-based payment awards to employees (please see Note 12. “Income Taxes” within Item 8. Financial Statements and Supplementary Data) and purchase price accounting for any future acquisitions. The change in our effective tax rate during fiscal year 2024 is primarily due to impairment losses recorded in fiscal year 2024 and the related tax impacts and resulting valuation allowance established. Tax benefits and deficiencies associated with share-based payment awards to our employees have caused and, in the future, may cause large fluctuations in our realized effective tax rate based on timing, volume, and the nature of stock options exercised under our share-based payment program.
Net (Loss) Income
Net (loss) income varies with the changes in revenues, gross profit, and operating expenses. Net loss in fiscal year 2024 reflects, respectively, $274,533, $27,341, $4,233, and $11,936 of non-cash impairment losses on goodwill and finite-lived intangible assets, non-cash amortization of intangible assets acquired in a business combination, non-cash depreciation, and non-cash stock-based compensation expense.
Non-GAAP Reconciliations
Adjusted operating income (which excludes the non-cash impact of amortization of finite-lived intangible assets acquired in a business combination, depreciation, stock-based compensation, and impairment of goodwill and finite-lived intangible assets) and organic revenues growth (reported revenues growth excluding the impact of revenues growth from recent acquisitions) are used by management as supplemental performance measures in order to compare current financial performance to historical performance, to assess the ability of our assets to generate cash, and to evaluate potential acquisitions.
Adjusted operating income and organic revenues growth should not be considered alternatives to, or more meaningful than, net (loss) income, operating (loss) income, reported revenues growth, cash flow from operating activities or any other measure of financial performance presented in accordance with GAAP as measures of operating performance or liquidity.
The following table sets forth our reconciliation of operating (loss) income to adjusted operating income, a non-GAAP measure:
Year Ended March 31,
Impairment losses on goodwill and finite-lived intangible assets 274,533 - -
The following table sets forth our reconciliation of total revenues growth to organic revenues growth, a non-GAAP measure:
Total Revenues Growth Impact of Acquisitions Organic Revenues Growth (non-GAAP)
Sterilization and Disinfection Control 16.3 % 9.4 % (14.4 %) - % 1.9 % 9.4 %
Biopharmaceutical Development (14.3 %) 3.9 % - % (0.1 %) (14.3 %) 3.8 %
Calibration Solutions 6.6 % (4.4 %) - % - % 6.6 % (4.4 %)
Liquidity and Capital Resources
Our sources of liquidity include cash generated from operations, cash and cash equivalents on hand, cash available from our Credit Facility and the Open Market Sale AgreementSM described below, and potential additional equity and debt offerings. We believe that cash flows from operating activities and potential cash provided by borrowings from our Credit Facility or funds from our Open Market Sale AgreementSM, when necessary, will be sufficient to meet our ongoing short-term and long-term operating requirements, scheduled principal and interest payments on debt, dividend payments, and anticipated capital expenditures.
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Our more significant uses of resources have historically included acquisitions, payments on debt principal and interest obligations, long-term capital expenditures, and quarterly dividends to shareholders. We had $28,214 and $32,910 of cash and cash equivalents as of March 31, 2024 and 2023, respectively. Working capital is the amount by which current assets exceed current liabilities. We had working capital of $65,040 and $75,616 on March 31, 2024 and 2023, respectively.
As of March 31, 2024, aggregate principal of $172,500 was outstanding under our 2025 Notes and $50,500 was outstanding under the Credit Facility. During the third quarter of fiscal year 2024, we borrowed a total of $71,000 under the Credit Facility to fund the majority of the GKE acquisition, and we repaid $20,500 against that outstanding balance during the third and fourth quarters of fiscal year 2024. Subsequent to March 31, 2024, we repaid an additional $7,500.
Subsequent to our fiscal year end, in April 2024 we amended the terms of the Credit Facility. The amended Credit Facility has been modified to:
(i) Extend the maturity of the Credit Facility to April 2029;
(iv) Make certain changes to the financial covenants.
In April 2024, we used the proceeds from the term loan to fund repurchases of $75,000 in aggregate principal amount of the 2025 Notes for an aggregate cash purchase price of $71,410, including accrued and unpaid interest. We expect to settle the remaining $97,500 aggregate principal amount of the 2025 Notes in cash upon maturity using cash from operations and borrowings under the Credit Facility's revolving line of credit.
We will be required to make quarterly principal payments on the $75,000 term loan borrowings as follows: $938 each quarter from June 30, 2024 to March 31, 2026; $1,406 each quarter from June 30, 2026 to March 31, 2028; and $1,875 each quarter from June 30, 2028 to March 31, 2029. The remaining unpaid balance will be due at maturity in April 2029; however, we anticipate that we will have the ability to refinance outstanding debt at that time, if necessary. We believe cash from operations will be sufficient to make all required quarterly principal payments and interest payments on our outstanding debt obligations.
At the interest rate in effect at the time of borrowing under the term loan, we would expect to incur interest expense of approximately $10,500 per year on borrowings of $50,500 under the revolving credit facility and $75,000 under the term loan. We expect to pay annual cash interest of approximately $1,350 related to the remaining 2025 Notes until maturity.
We maintain relationships and cash deposits at multiple banking institutions across the world in an effort to diversify and reduce risk of loss related to concentrations of cash deposits.
In April 2022, we entered into an Open Market Sale AgreementSM pursuant to which we may issue and sell, from time to time, shares of our common stock with an aggregate value of up to $150,000. We have not sold any shares under this agreement to date.
We routinely evaluate opportunities for strategic acquisitions. Future material acquisitions may require that we obtain additional capital, assume additional third-party debt or incur other long-term obligations. We believe we have the ability to issue more equity or debt in the future in order to finance our acquisition and investment activities; however, additional equity or debt financing, or other transactions, may not be available on acceptable terms, if at all.
We may from time to time repurchase or take other steps to reduce our debt. These actions may include retirements or refinancing of outstanding debt, privately negotiated transactions or otherwise. The amount of debt that may be retired, if any, could be material and would be decided at the sole discretion of our Board of Directors and would depend on market conditions, our cash position, and other considerations.
Dividends
We have paid regular quarterly dividends since 2003. We declared and paid dividends of $0.16 per share each quarter of the years ended March 31, 2024, 2023, and 2022.
In April 2024, our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on June 14, 2024, to shareholders of record at the close of business on May 31, 2024.
Cash Flows
Our cash flows from operating, investing, and financing activities were as follows:
Year Ended March 31,
Cash flows from operating activities for the year ended March 31, 2024 provided $44,133. We generated $23,085 more cash from working capital in fiscal year 2024 than in fiscal year 2023, primarily due to lower purchases of inventories in fiscal year 2024 compared to fiscal year 2023 when we were building safety stock to mitigate potential supply chain issues, and due to collections on receivables that were outstanding during the prior fiscal year. Net (loss) income and non-cash adjustments totaled $38,160 for fiscal year 2024 compared to $45,095 for fiscal year 2023. Cash used in investing activities was higher during fiscal year 2024 compared to fiscal year 2023 due to cash expended on the GKE acquisition, partially offset by corresponding costs related to the acquisition of Belyntic in fiscal year 2023. Cash provided by financing activities primarily resulted from a $71,000 draw on the Credit Facility partially offset by $33,500 repaid on previously outstanding balances and on the drawn amount, compared to $36,000 repaid on the Credit Facility in fiscal year 2023.
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Critical Accounting Policies and Estimates
Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States, which require management to make estimates, judgments, and assumptions that affect the amounts reported in our Consolidated Financial Statements and accompanying notes. We believe that the following are the more critical judgment areas in the application of accounting policies that currently affect our financial condition and results of operations. Management has discussed the development, selection, and disclosure of critical accounting policies and estimates with the Audit Committee of our Board of Directors. While our estimates and assumptions are based on our knowledge of current events and circumstances and actions we may take in the future, actual results may ultimately differ from these estimates and assumptions. For a discussion of our significant accounting policies, see Note 1. “Description of Business and Summary of Significant Accounting Policies” in Item 8. Financial Statements and Supplementary Data.
Purchase Accounting for Acquisitions
We account for all business combinations in which we obtain control over another entity using the acquisition method of accounting, which requires most assets (both tangible and intangible) and liabilities to be recognized at fair value at the date of acquisition. The excess of the purchase price over the fair value of acquired assets less liabilities is recognized as goodwill. We determine fair value using widely accepted valuation techniques, primarily discounted cash flow and market multiple analyses. These types of analyses require us to make and monitor assumptions and estimates regarding industry and economic factors, the profitability of future business strategies, discount rates and expected cash flow. For all material acquisitions, we engage external valuation specialists to aid management in preparing our fair value models. Certain adjustments to the assessed fair values of acquired assets or liabilities made subsequent to the acquisition date but within a one-year measurement period are recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period are recorded within earnings. We expense all costs as incurred related to an acquisition, such as legal and advisory fees, in general and administrative expenses.
Results of operations of acquired companies are included in our Consolidated Financial Statements from the date of the acquisition forward. If actual results are not consistent with our assumptions and estimates, or if our assumptions and estimates change due to new information, we may be exposed to further impairment losses, as described under "Acquired Intangible Assets, Impairment Testing" below. For the fiscal years ended March 31, 2024, 2023 and 2022, we acquired businesses for total net purchase prices of $87,187, $6,140, and $300,793, respectively.
Acquired Intangible Assets, Impairment Testing
Our business acquisitions typically result in the recognition of goodwill and other intangible assets, which affect the amount of future period amortization expense and impairment losses we may incur. During fiscal year 2024, we recorded impairment losses totaling $274,533 related to goodwill in our Clinical Genomics and Biopharmaceutical Development divisions and to finite-lived intangible assets in our Clinical Genomics division as described in Note 6. "Goodwill and Intangible Assets, Net" in Item 8. Financial Statements and Supplementary Data. Should the fair values of our reporting units or finite-lived intangible assets decline because of reduced operating performance, market declines, or other indicators of impairment, or as a result of changes in the discount rates, additional charges for impairment may be necessary.
Intangible assets with finite lives are amortized over their useful lives using the straight-line method, and amortization expense is recorded within cost of revenues or general and administrative expense in the Consolidated Statements of Operations. Impairment assessments over finite-lived intangibles are conducted if events or conditions indicate that asset carrying amounts may not be recoverable. Events or conditions indicating potential impairment include but are not limited to changes in the competitive landscape, any internal decisions to pursue new or different technology strategies, losses of significant customers, or significant changes in business performance or in the markets and industries we serve, including adverse changes in the prices paid for our products or changes in the size of the markets for our products. If impairment indicators are present, we determine whether the carrying value of the underlying intangible asset or asset group is recoverable through undiscounted estimated future cash flows. If the asset or asset group is not found to be recoverable, we estimate the asset's fair value using Level 3 inputs and discounted cash flow models and recognize impairment losses as necessary. If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life.
Goodwill is not subject to amortization. We test goodwill for impairment on an annual basis during the fourth quarter of each year as of January 1st, or more frequently if events and circumstances indicate it is more likely than not that the fair value of a given goodwill reporting unit is less than its carrying value. Events that would indicate impairment and trigger interim impairment assessments include but are not limited to: adverse current or expected economic, market, or industry-specific conditions, including a decline in our market capitalization; adverse changes or expected changes in business climate or in the operational performance of the business; adverse changes in legal factors; and adverse actions or assessments by a regulator. We monitor for indications of impairment throughout the year and perform qualitative and quantitative impairment tests as necessary based on quarterly preliminary assessments of our performance and any challenging circumstances and events. Our annual impairment tests typically begin with a qualitative assessment, and further quantitative assessments are performed if we determine it is more likely than not that the fair value is greater than the carrying amount. We also perform quantitative assessments of reporting units at least every five years, irrespective of whether any indicators exist that suggest a reporting unit may be impaired. Estimates of fair value require assumptions related to revenue and operating income growth rates, discount rates, weighted average cost of capital, and other factors. Different assumptions from those made in our analysis could materially affect projected cash flows and our evaluation of goodwill and finite-lived intangible assets for impairment.
As detailed in Note 6, "Goodwill and Intangible Assets, Net" within in Item 8, Financial Statements and Supplementary Data, we performed quantitative impairment tests of the Clinical Genomics division and both reporting units within the Biopharmaceutical Development division during fiscal year 2024. As a result, we recorded impairment losses related to goodwill and finite-lived intangible assets in the Clinical Genomics division and impairment losses related to goodwill in the Immunoassays reporting unit of the Biopharmaceutical Development division. Impaired reporting units were written down to their respective fair values, resulting in approximately zero excess fair value over carrying amount as of our testing date on January 1, 2024. The fair value of the Peptides reporting unit within our Biopharmaceutical Development division exceeded carrying value by approximately 36% as of our testing date, and no impairment losses were recorded for this reporting unit. The Clinical Genomics and Biopharmaceutical Development divisions have a heightened risk of future impairment losses if actual results differ significantly from our estimates, including if any changes in assumptions, inputs, market factors and/or increases in the weighted average cost of capital occur in the future. The Clinical Genomics division had $16,940 of goodwill as of March 31, 2024. The Biopharmaceutical Development division had $46,515 of goodwill as of March 31, 2024. The fair values of the Clinical Genomics and Biopharmaceutical Development divisions as a whole were $58,900 and $119,000, respectively, as of the date of our annual impairment testing.
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Stock-based Compensation
We recognize compensation expense for equity awards over the vesting period based on the fair value of the awards at grant date. We use the Black-Scholes-Merton valuation model ("Black-Scholes") to estimate the fair value of our stock options. The Black-Scholes model requires assumptions to be made regarding our stock price volatility, the expected life of awards, and expected dividend rates. The volatility assumption and the expected life assumptions are based on our historical data. Compensation expense related to performance share awards is based in part on the estimated probability of achieving performance goals associated with particular levels of payout. We determine the probability of achievement of future levels of performance by comparing the relevant performance level with our internal estimates of future performance. Those estimates are based on a number of assumptions, and different assumptions may result in different conclusions regarding the probability of achieving future levels of performance relevant to the payout levels for the awards. Valuations for awards containing market conditions are prepared using a lattice model. Had we arrived at different assumptions of stock price volatility or expected lives of our options, or different assumptions regarding the probability of our achieving future levels of performance with respect to performance share awards, our stock-based compensation expense and results of operations could have been different.
Income Taxes
Our provision for income taxes requires the use of estimates in determining the timing and amounts of deductible and taxable items, including impacts on effective tax rates, deferred tax items and valuation allowances based on management’s interpretation and application of complex tax laws and accounting guidance. We establish reserves for uncertain tax positions for material, known tax exposures relating to deductions, transactions and other matters involving uncertainty as to the measurement and recognition of the item. While we believe that our reserves are adequate, issues raised by a tax authority may be finally resolved at an amount different than the related reserve and could materially increase or decrease our income tax provision in the current and/or future periods.
Recent Accounting Standards and Pronouncements
For a discussion of the new accounting standards impacting the Company, refer to Note 1. “Description of Business and Summary of Significant Accounting Policies” in Item 8. Financial Statements and Supplementary Data.
Contractual Obligations
We are party to many contractual obligations that involve commitments to make payments to third parties in the ordinary course of business.
On a consolidated basis, at March 31, 2024, we had contractual obligations for open purchase orders of approximately $18,400 for routine purchases of supplies and inventory, of which the substantial majority are payable in less than one year. See "Liquidity and Capital Resources" for information related to future required debt payments. For a description of our contractual obligations and other commercial commitments as of March 31, 2023, see our Annual Report on Form 10-K for the fiscal year ended March 31, 2023, filed with the Securities and Exchange Commission on May 30, 2023.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We have no derivative instruments and minimal exposure to commodity market risks.
Foreign Currency Exchange Rates
We face exchange rate risk from transactions with customers in countries outside the United States and from intercompany transactions between affiliates. Transactional exchange rate risk arises from the purchase and sale of goods and services in currencies other than our functional currency or the functional currency of the applicable subsidiary. We also face translational exchange rate risk related to the translation of financial statements of our foreign operations into U.S. dollars, our functional currency. Costs incurred and sales recorded by subsidiaries operating outside of the United States are translated into U.S. dollars using exchange rates effective during the respective period. As a result, we are exposed to movements in the exchange rates of various currencies against the U.S. dollar. Our Biopharmaceutical Development division is particularly susceptible to currency exposures since it incurs a substantial portion of its expenses in Swedish Krona, while most revenue contracts are in U.S. dollars and euros. Therefore, when the Swedish Krona strengthens or weakens against the U.S. dollar, operating profits are increased or decreased, respectively. The effect of a change in currency exchange rates on our international subsidiaries' assets and liabilities is reflected in the accumulated other comprehensive income component of stockholders’ equity.
A hypothetical 10 percent increase in currency exchange rates compared to the U.S. dollar (U.S. dollar strengthening) would have resulted in an estimated $410 after tax decrease in net loss over a one-year period, excluding the impact of non-recurring impairment losses recorded in the euro, Swedish krona, and Chinese yuan in fiscal year 2024. Actual changes in market prices or rates may differ from hypothetical changes.
Interest Rates
Our Credit Facility bears interest at either a base rate or a SOFR rate, plus an applicable spread. Based on our interest rate and balances outstanding as of March 31, 2024, we estimate that if interest rates increased 1 percentage point, we would incur approximately $505 of additional interest expense per year. Our risk with respect to interest rates has increased subsequent to the end of fiscal year 2024 due to our additional borrowings under the Credit Facility's term loan of $75,000 as of April 5, 2024, with an interest rate of 8.4% as of the date of the borrowing.
Inflation Risk
Inflation generally impacts us by increasing our costs of labor, materials, and freight. The rates of inflation experienced in recent years have not had a significant direct impact on our financial results, as inflationary cost increases have been offset by annual price increases. However, any price increases imposed may lead to declines in sales volume if competitors do not similarly adjust prices. Additionally, inflationary pressures may impact our customers' ability to purchase our products and services. We cannot reasonably estimate our ability to successfully recover any inflation cost increases into the future.
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Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Mesa Laboratories, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Mesa Laboratories, Inc. (the Company) as of March 31, 2024, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for the year ended March 31, 2024, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2024, and the results of its operations and its cash flows for the year ended March 31, 2024, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of March 31, 2024, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Our report dated June 28, 2024 expressed an opinion that the Company had not maintained effective internal control over financial reporting as of March 31, 2024, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Intangible Assets Acquired in the GKE Business Combination
As described in Note 4 to the financial statements, the Company acquired 100% of the outstanding shares of GKE for consideration of $87.2M during the year ended March 31, 2024. The transaction was accounted for as a business combination using the acquisition method of accounting. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including intangible assets acquired primarily related to customer relationships and trademarks and trade name. The customer relationships were valued using a multi-period excess earnings income approach (a form of the income approach) that discounted expected future cash flows to fair value which utilize assumptions related to revenue projections, free cash flows and discount rates. The trademarks and trade name were valued using a relief from royalty method which utilizes assumptions related to revenue projections and royalty rates.
We identified the fair value of these intangible assets as a critical audit matter because auditing management's significant assumptions, including revenue projections, free cash flows, royalty rates, attrition rates and discount rates, in developing the estimates required a high degree of auditor judgment and increased audit effort, including the use of valuation specialists to assist in performing related procedures and evaluating the audit evidence obtained.
Our audit procedures related to the significant assumptions used by management in estimating the fair value of certain intangible assets included the following, among others:
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Goodwill and Intangible Asset Impairments
As described in Notes 1 and 6 to the financial statements, the Company recognized impairment losses on goodwill and intangible assets of $156.9M and $117.6M, respectively, during the year ended March 31, 2024.
Management tests for goodwill impairment at the reporting unit level on an annual basis during the last quarter of its fiscal year as of January 1st, or more frequently if facts, events and circumstance indicate it is more likely than not that the fair value of a given reporting unit is less than its carrying value. Management estimates fair values in connection with quantitative impairment evaluations based on discounted cash flow and market multiple models which utilize assumptions related to revenue projections, estimated gross margins, discount rates and market multiples. Based on management’s testing, the Company recognized $118.7M and $38.2M of goodwill impairment within the Company’s Clinical Genomics reporting unit and within reporting units within the Biopharmaceutical Development segment, respectively.
Impairment assessments of finite-lived intangible assets are conducted if events or conditions indicate that the asset groups carrying amounts may not be recoverable. If impairment indicators are present, management determines whether the carrying value of the asset group is recoverable through undiscounted estimated future cash flows. If the asset group is determined not to be recoverable, management estimates the asset groups and individual assets fair value based on discounted cash flow and market multiples which utilize assumptions related to revenue projections, estimated gross margins, discount rates, attrition rates and royalty rates. Based on management’s testing, the Company identified $117.6M of intangible asset impairment within the Clinical Genomics segment.
We identified goodwill and intangible asset impairment assessments as a critical audit matter because auditing management's assessments, including the significant assumptions, involved a high degree of auditor judgment and increased audit effort, including the use of valuation specialists to assist in performing related procedures and evaluating the audit evidence obtained.
Our audit procedures related the goodwill and intangible asset impairment assessments included the following, among others:
/s/ RSM US LLP
We have served as the Company’s auditor since 2023.
Los Angeles, California
June 28, 2024
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Mesa Laboratories, Inc.
Opinion on the Internal Control Over Financial Reporting
We have audited Mesa Laboratories, Inc.’s (the Company) internal control over financial reporting as of March 31, 2024, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, because of the effect of the material weaknesses described below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of March 31, 2024, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the accompanying consolidated balance sheet of Mesa Laboratories, Inc. as of March 31, 2024, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the year ended March 31, 2024, and the related notes to the consolidated financial statements (collectively, the financial statements) of the Company, and our report dated June 28, 2024, expressed an unqualified opinion.
As described in Management's Annual Report on Internal Control Over Financial Reporting, management has excluded GKE GmbH, SAL GmbH, and Beijing GKE Science & Technology Co. Ltd. (together, “GKE”) from its assessment of internal control over financial reporting as of March 31, 2024 because GKE was acquired by the Company in a business combination in the third quarter of fiscal year 2024. We have also excluded GKE from our audit of internal control over financial reporting. GKE consists of wholly owned subsidiaries whose total assets and net income represent approximately 25% and 4%, respectively, of the related consolidated financial statement amounts as of and for the year ended March 31, 2024.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment.
Management did not have adequate supervision and review controls over the complex accounting for significant and unusual transactions. Specifically, the supervision and review of the accounting for goodwill impairment and acquisitions, including the work performed by external advisors, was not designed to operate at a sufficient level of precision.
Management did not have adequate supervision and review controls over the determination of the useful lives of recently acquired intangible assets. Specifically, management selected a useful life for an acquired asset that was not consistent with the economic life used to value the asset.
Certain controls regarding user access and change management to the Company’s enterprise resource planning tool, a part of the information technology general controls (“ITGC”), were not operating effectively. This material weakness extended to automated and manual business process controls across the financial reporting and business transaction cycles which rely upon the affected ITGCs.
These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2024 consolidated financial statements, and this report does not affect our report dated June 28, 2024 on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ RSM US LLP
Los Angeles, California
June 28, 2024
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Mesa Laboratories, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Mesa Laboratories, Inc. (the “Company”) as of March 31, 2023, the related consolidated statements of operations, comprehensive (loss), stockholders' equity, and cash flows for each of the years in the two-year period ended March 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2023, and the results of its operations and its cash flows for each of the years in the two-year period ended March 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Plante & Moran, PLLC
We served as the Company’s auditor from 1986 to 2023.
Denver, Colorado
May 30, 2023
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Mesa Laboratories, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
ASSETS
Current assets
Noncurrent assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Noncurrent liabilities
Acquisition-related holdbacks 8,792 1,537
Convertible senior notes, net of debt issuance costs 171,198 170,272
Stockholders’ equity
(Accumulated deficit) retained earnings (183,494 ) 74,199
Accumulated other comprehensive (loss) (14,755 ) (12,795 )
Total liabilities and stockholders’ equity $ 446,796 $ 661,832
See accompanying notes to consolidated financial statements.
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Mesa Laboratories, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Year Ended March 31,
Revenues
Cost of revenues
Operating expense
Impairment of finite-lived intangible assets 117,641 - -
Impairment of goodwill 156,892 - -
Nonoperating expense
Interest expense and amortization of debt issuance costs 5,697 4,770 3,885
Net (loss) earnings per share
Weighted-average common shares outstanding
See accompanying notes to consolidated financial statements.
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Mesa Laboratories, Inc.
Consolidated Statements of Comprehensive (Loss)
(In thousands)
Year Ended March 31,
Other comprehensive (loss)
See accompanying notes to consolidated financial statements.
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Mesa Laboratories, Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands, except share amounts)
Common Stock
Number of Shares Amount (Accumulated Deficit) Retained Earnings AOCI* Total
Tax withholding on restricted stock units (3,278 ) (875 ) - - (875 )
Stock-based compensation expense - 11,391 - - 11,391
Foreign currency translation - - - (12,450 ) (12,450 )
Tax withholding on restricted stock units (4,898 ) (919 ) - - (919 )
Stock-based compensation expense - 12,538 - - 12,538
Foreign currency translation - - - (16,461 ) (16,461 )
Tax withholding on restricted stock units (5,393 ) (728 ) - - (728 )
Stock-based compensation expense - 11,936 - - 11,936
Foreign currency translation - - - (1,960 ) (1,960 )
*Accumulated Other Comprehensive (Loss) Income.
See accompanying notes to consolidated financial statements.
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Mesa Laboratories, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended March 31,
Cash flows from operating activities:
Depreciation of property, plant and equipment 4,233 4,313 3,262
Impairment loss on goodwill and finite-lived intangible assets 274,533 - -
Non-cash interest and debt amortization 926 907 1,029
Amortization of step-up in inventory basis 1,229 - 7,462
Cash from changes in operating assets and liabilities:
Prepaid expenses and other assets 211 (510 ) (3,606 )
Accrued liabilities and taxes payable (1,236 ) (3,360 ) 255
Cash flows from investing activities:
Purchases of property, plant and equipment (2,567 ) (4,544 ) (4,432 )
Cash flows from financing activities:
Proceeds from the exercise of stock options 358 6,997 8,027
Other financing, net (847 ) - (237 )
Cash paid for:
Supplemental non-cash activity:
Contingent consideration from new acquisitions $ - $ 1,190 $ -
See accompanying notes to consolidated financial statements.
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Mesa Laboratories, Inc.
Notes to Consolidated Financial Statements
(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 Annual Report on Form 10-K, 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 global leader in the design and manufacture of life sciences tools and critical quality control solutions for regulated applications in the pharmaceutical, healthcare, and medical device industries. We offer products and services to help our customers ensure product integrity, increase patient and worker safety, and improve the quality of life throughout the world. 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 March 31, 2024, we managed our operations in four reportable segments, or divisions:
Unallocated corporate expenses and other business activities are reported within Corporate and Other.
Principles of Consolidation and Basis of Presentation
Our Consolidated Financial Statements are 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 (“GAAP”), and include our accounts and those of our wholly owned subsidiaries after elimination of all intercompany accounts and transactions.
Management Estimates
The preparation of our Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our Consolidated Financial Statements and accompanying notes. Actual results could differ from our estimates under different assumptions or conditions.
Summary of Significant Accounting Policies
Foreign Currency
Exchange rate adjustments resulting from foreign currency transactions are recognized in net earnings, whereas effects resulting from the translation of financial statements are reflected as a component of accumulated other comprehensive income within stockholders’ equity. Assets and liabilities of subsidiaries operating outside the United States with a functional currency other than the U.S. dollar are translated into U.S. dollars at period end exchange rates, and revenue and expense accounts are translated at weighted average period rates.
Fair Value Measurements
Fair value is the price we would receive to sell an asset or pay to transfer a liability (exit price) in an orderly transaction between market participants. We determine fair value based on the following input hierarchy:
Level 1: Quoted prices for identical assets or liabilities in active markets.
Level 2: Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or that can be corroborated with observable market data.
Level 3: Unobservable inputs supported by little or no market activity. Pricing models, discounted cash flow methodologies, and other similar techniques involving significant management judgment or estimation typically require unobservable inputs.
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Assets recognized or disclosed at fair value in the Consolidated Financial Statements on a nonrecurring basis are measured at fair value if determined to be impaired or if purchased pursuant to our acquisition of a business, including items such as inventory, property and equipment, operating lease assets, goodwill, and other intangible assets. Fair values assigned to assets acquired and liabilities assumed in acquisitions, except deferred revenues and certain other exceptions as defined by applicable accounting guidance, are measured using Level 3 inputs.
Revenue Recognition
Our revenues come from product sales, which include consumables and hardware, and services, which include discrete and ongoing maintenance, calibration, and testing services. Revenues are recognized when or as we satisfy our performance obligations under the terms of a contract, which occurs when control of the promised products or services transfers to our customers. We recognize the amount of consideration we expect to receive in exchange for transferring products or services to our customers (the transaction price) as revenue. For all revenue contracts, prices are fixed at the time of purchase and no price protections or variables are offered. The significant majority of our revenues and related receivables are generated from contracts with customers that are 12 months or less in duration.
We generally recognize revenues as follows:
Product sales:Our performance obligations related to product sales generally consist of the promise to sell tangible goods to distributors or end users. Control of these goods is typically transferred upon shipment, at which time our obligation to the customer is satisfied and revenue is recognized. Purchase orders typically provide evidence of an arrangement for product sales. Products sold include an assurance-type warranty which is accounted for as part of accrued warranty expense.
Services: We generate service revenues from discrete and ongoing maintenance, calibration, and testing services performed with respect to our physical products. For discrete services, our obligation to complete specified work is satisfied and revenue is recognized upon performance of the service. Obligations arising from ongoing service contracts in which we promise to stand ready to provide maintenance or other services on an as-needed basis for a certain period of time are satisfied by completing any services that are contractually required during the contract period, if requested by the customer, or simply by the passage of time if no services are requested. For ongoing service contracts, revenue is recognized on a straight-line basis over the life of the contract in a faithful depiction of our obligation to provide services over the contract period. Evidence of a service arrangement may be in the form of a formal contract or a purchase order.
Collectability is reasonably assured through our customer review process, and payment is typically due within 60 days or less.
We expense commission costs (typically our only significant incremental cost to obtain a contract) as incurred and to account for shipping and handling costs as fulfillment costs. The substantial majority of our contracts have original durations of one year or less, and we have elected not to disclose the expected timing or allocated transaction prices of future performance obligations such as obligations to perform maintenance and repair services. Additionally, we have elected to not assess whether a significant financing component exists when the period between when we perform our performance obligation and when the customer remits payment is one year or less. None of our contracts contained financing components as of or for the fiscal years ended March 31, 2024 or 2023.
Contracts with customers may contain multiple obligations. For such arrangements, the transaction price is allocated to each obligation based on the estimated relative standalone selling prices of the promised products or services underlying each obligation. Standalone selling prices are based on the price at which the product or service would be sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price considering available information such as market conditions and internally approved pricing guidelines. In limited circumstances, for obligations with highly variable or unobservable standalone selling prices, we may assign standalone prices to obligations based on the residual transaction price after all observable standalone selling prices have been determined. Discounts may be approved at the time of purchase and are included within a contract’s fixed transaction price. Discounts are typically allocated to obligations included in the contract based on the standalone values of such obligations. All expected and actual consideration from customers is included in the transaction price.
Shipping and Handling
Payments made by customers to us for shipping and handling costs are included in revenues on the Consolidated Statements of Operations, and our expenses are included in cost of revenues. We account for shipping and handling costs arising from contracts with customers as fulfillment costs. Shipping and handling for inventory and materials we purchase is included as a component of inventory on the Consolidated Balance Sheets and is expensed to cost of revenues when products are sold.
Unearned Revenues
Certain of our products may be sold with associated time-based service contracts whereby we provide repairs, technical support, parts, and various analytical or maintenance services. In the event these contracts are paid in advance by the customer, the associated amounts are recorded as an unearned revenue liability and recognized as revenue ratably over the term of the service period, generally one year. Prepayments from customers with respect to other products and services are likewise recorded as unearned revenue liabilities and are recognized to revenue when earned.
Accrued Warranty Expense
We typically provide assurance-type limited product warranties on our products and, accordingly, accrue for estimates of related warranty expenses.
Accounts Receivable and Allowance for Credit Losses
All trade accounts receivable are reported at net realizable value on the accompanying Consolidated Balance Sheets, adjusted for any write-offs and net of allowances for credit losses. Allowances for credit losses represent our best estimate and current expectation of future credit losses from trade accounts. We estimate credit losses based on historical information, current and expected future economic and market conditions, and reviews of the current status of customers’ trade accounts receivable. In circumstances in which we become aware of a specific customer’s inability to meet its financial obligations, a specific reserve is recorded against amounts due to reduce the recognized receivable to the amount reasonably expected to be collected. To mitigate credit risk, we consider the creditworthiness of new and existing customers, establish credit limits, and 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 do not believe our trade accounts receivable represent significant concentrations of credit risk due to our diversified portfolio of individual customers and geographical areas.
Differences may arise between estimated and actual losses, which could materially affect the provision for credit losses and, therefore, net earnings. We recorded $790, $736, $304 and of expense associated with credit losses for the years ended March 31, 2024, 2023, and 2022, respectively.
Cash Equivalents
We classify any highly liquid investments with maturities of three months or less at the date of purchase as cash equivalents; no cash equivalents are included on our Consolidated Balance Sheets as of March 31, 2024 or 2023.
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Inventories
Inventories are stated at the lower of cost or net realizable value. Inventory is recorded to cost of products upon sale using a weighted average costing methodology. Inventories purchased as part of a business combination are recorded at fair value. Our work in process and finished goods inventories include the costs of raw materials, labor and overhead, which are estimated based on trailing twelve months of expense and standard labor hours for each product. We evaluate labor and overhead costs annually unless specific circumstances necessitate a mid-year evaluation for specific items.
We monitor inventory costs relative to selling prices and perform physical cycle count procedures on inventories throughout the year to determine if a lower of cost or net realizable value reserve is necessary. We estimate and maintain an inventory reserve as needed for such matters as excess or obsolete inventory, shrinkage, and scrap. This reserve may fluctuate as our assumptions change due to new information, discrete events, or changes in our business such as entering new markets or discontinuing a specific product; however, once inventory is written down, a new cost basis is established that is not subsequently written back up in future fiscal years.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, less accumulated depreciation, except for assets acquired in acquisitions, which are recorded at fair value. Expenditures for major renewals and improvements that extend the life of the asset are capitalized, while expenditures for minor replacements, maintenance, and repairs are expensed as incurred.
Depreciation is calculated using the straight-line method over the assets’ estimated useful lives. Upon asset retirement or disposal, accounts are relieved of cost and accumulated depreciation, and any related gain or loss is reflected in our results of operations. In some cases, particularly with respect to business consolidation or closure activities, accelerated depreciation may be required for the revised remaining useful lives of assets designated to be abandoned in the future.
At least annually, we evaluate and adjust as necessary the estimated useful lives of property, plant and equipment. Any changes in estimated useful lives are recorded prospectively. Estimated useful lives of significant classes of depreciable assets are as follows:
Category Useful Lives in Years
Buildings and building improvements 40 (or less)
Manufacturing equipment 7 (or less)
Office, lab and other equipment, furniture and fixtures 7 (or less)
Computer equipment 3 (or less)
Land is not depreciated and construction in progress is not depreciated until placed in service, at which time it is assigned a useful life consistent with the nature of the asset.
Leases
We determine whether contractual arrangements contain a lease at the inception of the arrangement. If a lease is identified in an arrangement, we recognize a right-of-use asset ("ROU") and liability on our Consolidated Balance Sheets and determine whether the lease should be classified as a finance or operating lease. We do not have any finance leases; our operating leases have remaining terms between two months and twelve years as of March 31, 2024. We do not recognize assets or liabilities for leases with original durations of less than 12 months, and our short-term leases are not material.
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. 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 calculation of 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. 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. When we acquire a business, we generally retain the acquiree's classification of its leases, and we evaluate ROU assets and liabilities in accordance with ASC 842.
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. Lease expense is recorded in cost of revenues or selling, general and administrative, or research and development expense on our Consolidated Statements of Operations, depending on the nature of use of the underlying asset. Many of our leases include one or more renewal or termination options exercisable at our discretion, which are included in the determination of the lease term if we are reasonably certain to exercise the option. Renewal terms typically allow us to extend lease terms between 1 and 3 years. 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 non-lease components are readily identifiable in our lease contract. We account for non-lease components separately from the lease component to which it is related.
Acquired Intangible Assets, Impairment Testing
Our goodwill and other intangible assets result from acquisitions of existing businesses. Intangible assets affect the amount of future amortization expense and possible impairment losses we may incur.
Intangible assets with finite lives are amortized over their useful lives using the straight-line method, and amortization expense is recorded within cost of revenues or general and administrative expense in the Consolidated Statements of Operations. Impairment assessments are conducted if events or conditions indicate that the carrying value of an asset or asset group may not be recoverable. Events or conditions indicating potential impairment include but are not limited to changes in the competitive landscape, any internal decisions to pursue new or different technology strategies, losses of significant customers, or significant changes in business performance or in the markets and industries we serve, including adverse changes in the prices paid for our products or changes in the size of the markets for our products. If impairment indicators are present, we determine whether the carrying value of the underlying intangible asset or asset group is recoverable through undiscounted estimated future cash flows. If the asset or asset group is not found to be recoverable, we estimate the asset's fair value using Level 3 inputs and discounted cash flow models and recognize impairment losses as necessary. If the estimate of an intangible asset’s remaining useful life is changed in response to impairment testing, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life.
Acquired intangible assets deemed to have finite lives are amortized on a straight-line basis over their useful lives, generally ranging from three to fifteen years. We determine the useful lives of finite intangible assets based on the specific facts and circumstances related to each asset, and we evaluate the appropriateness of assigned useful lives at least annually. Factors we consider when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of the asset, our long-term strategy for using the asset, any laws or other local regulations which could impact the useful life of the asset, and economic factors such as competition or specific market conditions.
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Goodwill is not subject to amortization. We test goodwill for impairment as of January 1st each year, or more frequently if events and circumstances indicate it is more likely than not that the fair value of a given goodwill reporting unit is less than its carrying value. Events that could indicate impairment and that would trigger interim impairment testing include but are not limited to: adverse current or expected economic, market, or industry-specific conditions, including a decline in our market capitalization; sustained adverse changes or expected changes in business climate or in the operational performance of the business; adverse changes in legal factors; and adverse actions or assessments by a regulator. We monitor for indications of impairment throughout the year and perform qualitative and quantitative impairment tests as necessary based on quarterly preliminary assessments of our performance. Our annual impairment tests typically begin with a qualitative assessment, and further quantitative assessments are performed if we determine it is more likely than not that the fair value of a reporting unit is greater than the carrying amount. We also perform quantitative assessments of reporting units at least every five years, irrespective of whether any indicators exist that suggest a reporting unit may be impaired.
The fair value measurements used in testing intangible assets for impairment are typically based on discounted cash flow projection and market multiple models, using Level 3 inputs. See “Fair Value Measurements” for a description of input levels. Significant assumptions include, among others, the weighted average cost of capital, expected revenues growth, expected cash outflows, and terminal growth rates. In certain cases, management uses other market information when available to estimate fair value. Impairment losses are recognized through earnings and represent excess carrying value over estimated fair value.
During the fourth quarter of fiscal 2024, we recorded impairment losses related to goodwill and intangible assets totaling $274,533 in our Clinical Genomics and Biopharmaceutical Development divisions. See Note 6. “Goodwill and Intangible Assets, Net.”
Research & Development Costs
We conduct research and development activities for the purpose of developing new products and enhancing the functionality, effectiveness, reliability, and accuracy of existing products. Research and development costs are expensed as incurred. Research and development expense is predominantly comprised of labor costs and third-party consultants, but we may from time to time purchase in-process research and development with the intention of developing a saleable product.
Convertible Debt
Our convertible 1.375% Convertible Senior Notes due 2025 (the "2025 Notes") do not have material embedded derivatives and are recorded as long-term liabilities in our Consolidated Balance Sheets as of March 31, 2024. When the 2025 Notes are within one year of maturity, or when the criteria necessary for conversion as described in Note 8. “Indebtedness” have been met, the 2025 Notes will be reclassified as short-term liabilities. We may settle the 2025 Notes in shares of common stock or in cash, as the case may be. We apply the if-converted method to calculate the potentially dilutive impact of the 2025 Notes on net (loss) earnings per share. Debt issuance costs are amortized to bring the carrying value of the 2025 Notes to face using the effective interest method over the life of the indenture governing the 2025 Notes.
Stock-based Compensation
We issue shares in the form of stock options and full-value awards as part of employee and non-employee director compensation pursuant the Amended and Restated Mesa Laboratories, Inc. 2021 Equity Incentive Plan (the "2021 Equity Plan"). Our shareholders approved an amendment to the 2021 Equity Plan during fiscal year 2024, increasing the number of shares that can be issued under the plan from 330 shares to 660 shares. Some shares are fully vested and outstanding under our Mesa Laboratories, Inc. 2014 Equity Plan.
The Equity Plans are administered by the Compensation Committee of the Board of Directors, which has the authority to grant equity awards, or to delegate its authority under the plan to make grants (subject to certain legal and regulatory restrictions), including the authority to determine the individuals to whom awards will be granted, the type of awards and when the awards are to be granted, the number of shares to be covered by each award, the vesting schedule, and all other terms and conditions of the awards.
For purposes of counting the shares remaining under the 2021 Equity Plan, each share underlying a stock option or a full value award counts as one share used. We issue new shares of common stock upon the exercise of stock options and the vesting of time-based restricted stock units ("RSUs") and performance-based RSUs ("PSUs").
Stock options and service-based stock awards generally vest equally over a
three year term and stock options generally expire after
six years. Awards granted to non-employee directors generally vest
one year from the grant date. We recognize stock-based compensation expense based on the fair value of stock awards at the grant date and recognize the expense over the related service period using a straight-line vesting expense schedule. The
2021 Equity Plan includes retiree provisions which result in the acceleration of stock-based compensation for expense for retiree-eligible participants. Compensation expense related to employees eligible to retire at grant date or during the award term is recognized on a straight-line basis between the grant date and the date of retirement eligibility, and the applicable retirees retain full rights to the awards upon retirement as per the plan provisions.
Expense for PSUs is recognized, net of estimated forfeitures, over the related service period using a straight-line vesting schedule when it is probable that performance goals will be achieved. Performance goals are determined by the Board of Directors and may include measures such as revenues growth and profitability targets. A portion of the PSUs include a market condition in the form of a relative total shareholder return "TSR" modifier, which adjusts the quantity of shares earned 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 a three year period. Compensation expense on stock awards subject to performance conditions is recognized over the longer of the estimated performance goal attainment period or time vesting period. As of each reporting period, we estimate the number of PSUs expected to vest based on our current estimate of performance compared to the target metrics in the award documents and adjust for the relative TSR percentage, and if necessary, a cumulative-effect adjustment is recorded.
The grant date fair value of the PSUs with a relative TSR modifier is determined using the Monte Carlo simulation valuation model.
The fair value of RSUs and performance-based RSUs without a market condition are based on the closing price of Mesa's common stock on the award date, less the present value of expected dividends
not received during the vesting period. RSUs we issue are equivalent to nonvested shares under the applicable accounting guidance.
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The fair value of each granted stock option is estimated on the grant date using the Black-Scholes option pricing model. The assumptions used to calculate the fair value of granted options reflect market conditions and our historical experience. We estimate expected forfeitures using a dynamic forfeiture model based on company specific historical data when determining the amount of stock-based compensation costs to recognize each period. The expected life of options represents the estimated period of time until exercise and is based on historical experience of similar awards for similar subsets of our employee population, giving consideration to the contractual terms, vesting schedules, and expectations of future employee behavior. Expected stock price volatility is based on the historical volatility of our own stock price over the period of time commensurate with the expected life of the award. The risk-free rate is based on the United States Treasury yield curve in effect at the time of grant for the estimated life of the stock option. The dividend yield assumption is based on our anticipated cash dividend payouts. To date, we have identified
no instances in which an adjustment to our observable market price would be required compared to the closing price of Mesa's common stock on the award date as an input to our fair value calculations.
We allocate stock-based compensation expense to cost of revenues, selling, research and development, and general and administrative expense in the Consolidated Statements of
Operations.
Net (Loss) EarningsPer Share
Basic net (loss) earnings per share (“EPS”) is computed by dividing net 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 EPS, except it includes the effects of potential dilution that could occur if dilutive securities vested, were exercised or converted. Potentially dilutive securities include stock options, RSUs and PSUs (collectively “stock awards”), as well as common shares underlying the 2025 Notes. Potentially dilutive securities are excluded from the calculation of diluted EPS in the event they are subject to performance conditions that have not yet been achieved or if they would otherwise be antidilutive. Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss; in such cases the inclusion of the potential common shares would have an antidilutive effect. See Note 10. “Net (Loss) Earnings per Share” for EPS calculations for the years ended March 31, 2024, 2023 and 2022.
Income Taxes
Income tax expense includes U.S., state, local and international income taxes. Deferred tax assets and liabilities are recognized and reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the tax basis of existing assets and liabilities used for income tax purposes. The tax rate used to determine the deferred tax assets and liabilities is based on the enacted tax rate for the year and the manner in which the differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.
From time to time, we engage in transactions in which the tax consequences may be subject to uncertainty, such as acquisitions. Significant judgment is required in assessing and estimating the tax consequences of these transactions. We prepare and file tax returns based on interpretation of tax laws and regulations. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax, interest and penalty assessments by these taxing authorities. In determining our income tax provision for financial reporting purposes, we establish a reserve for uncertain tax income positions unless we determine it is not more likely than not that such positions would be sustained upon examination, based on their technical merits. That is, for financial reporting purposes, we only recognize tax benefits taken on the tax return that we believe are more likely than not of being sustained. There is considerable judgment involved in determining whether positions taken on the tax return are more likely than not of being sustained. We adjust our tax reserve estimates periodically because of ongoing examinations by, and settlements with, the various taxing authorities, as well as changes in tax laws, regulations and interpretations. The consolidated income tax provision of any given year includes adjustments to prior year income tax accruals that are considered appropriate and any related estimated interest. Our policy is to recognize, when applicable, interest and penalties on uncertain income tax positions as part of general administrative expense. (See Note 12. “Income Taxes”).
Acquisition Related Contingent Consideration Liabilities
Acquisition related contingent consideration liabilities consist of estimated amounts due under various acquisition agreements and may be based on revenues growth, specified profitability growth metrics, or the attainment of milestones such as patent approvals. At each reporting period, we evaluate the expected future payments and any associated discount rates to determine the fair value of the contingent consideration. We adjust contingent consideration to fair value at each reporting period through general and administrative expenses in the Consolidated Statements of Operations. See Note 13. “Commitments and Contingencies” for information regarding existing contingent consideration liabilities as of March 31, 2024.
In addition to contingent consideration liabilities, we may hold back a portion of the purchase price related to an acquisition as security against potential indemnification losses. Such holdbacks relate to circumstances that existed as of the date of acquisition, and as such they are not considered contingencies; however, amounts ultimately paid related to holdbacks may differ from the estimates management makes upon acquisition, depending upon whether pre-acquisition liabilities are identified during the holdback period.
Legal Contingencies
We are party to various claims and legal proceedings that arise in the normal course of business. We record an accrual for legal contingencies when we determine it is probable we have incurred a liability and can reasonably estimate the amount of the loss (See Note 13. “Commitments and Contingencies”).
Purchase Accounting for Acquisitions
We account for all business combinations in which we obtain control over another entity using the acquisition method of accounting, which requires most assets (both tangible and intangible) and liabilities to be recorded at fair value at the date of acquisition. The excess of the purchase price over the fair value of acquired assets less liabilities is recognized as goodwill. We determine fair value using widely accepted valuation techniques, primarily discounted cash flow and market multiple analyses, which rely heavily on Level 3 inputs. These types of analyses require us to make and monitor assumptions and estimates regarding industry and economic factors, the profitability of future business strategies, discount rates and cash flow. For all material acquisitions, we engage external valuation specialists to aid management in preparing our fair value models. Certain adjustments to the assessed fair values of acquired assets or liabilities made subsequent to the acquisition date but within the measurement period are recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period are recorded within earnings. We expense all acquisition related costs, such as legal and advisory fees, as incurred in general, and administrative expenses in the Consolidated Statements of Operations.
Results of operations of acquired companies are included in our Consolidated Financial Statements from the date of the acquisition forward. If actual results are not consistent with our assumptions and estimates, or if our assumptions and estimates change due to new information, we may be exposed to additional losses. For the years ended March 31, 2024, 2023 and 2022, we acquired businesses for total net purchase prices of $87,187, $6,140, and $300,793, respectively.
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Business Consolidation Costs
We estimate liabilities for business closure activities by gathering detailed estimates of costs and, if applicable, asset sale proceeds, for each business consolidation initiative. For a typical business consolidation initiative, we estimate costs of employee severance, impairment of property and equipment and other assets including estimating net realizable value, if necessary, accelerated depreciation, termination payments for contracts and leases, and any other qualifying costs related to an exit plan. Such charges represent our best estimates; however, they require assumptions about plans that may change over time. The estimated costs are grouped by specific projects within the overall exit plan and are monitored at each reporting period. Any subsequent changes to the original estimates are recorded in current earnings.
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. It is not possible to accurately predict the future impact of such events and circumstances. However, we have reviewed the estimates used in preparing the financial statements and have identified the following factors that have a reasonable possibility of being materially affected in the near term:
● Estimates of the net realizable value of inventory.
We do not believe that there are any significant risks that have not already been disclosed in the Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." ASU No.2023-07 requires all annual disclosures currently required by Topic 280 to be included in interim periods and requires disclosure of significant segment expenses regularly provided to the chief operating decision maker ("CODM"), a description of other segment items by reportable segment, and applicable additional measures of segment profit or loss used by the CODM when allocating resources and assessing business performance. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 on a retrospective basis. We are currently assessing the effect the adoption of this standard will have on our consolidated financial statements.
In December 2023, the FASB issued ASU No.2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures." ASU No.2023-09, which enhances the transparency, effectiveness and comparability of income tax disclosures by requiring consistent categories and greater disaggregation of information related to income tax rate reconciliations and the jurisdictions in which income taxes are paid. The guidance is effective for public business entities for fiscal years beginning after December 15, 2024 (our fiscal year 2026), with early adoption permitted. We are currently assessing the effect the adoption of this standard will have on our consolidated financial statements.
We have reviewed all recently issued accounting pronouncements and have concluded that, other than as described above, they are either not applicable to us or are not expected to have a significant impact on our consolidated financial statements.
Recently Adopted Accounting Pronouncements
There have been no accounting pronouncements applicable to us that we were required to adopt or that we have elected to adopt during fiscal year 2024.
Note 2. Revenue
We develop, manufacture, market, sell and maintain life sciences tools and quality control instruments and related consumables.
Hardware sales include physical products such as instruments used for molecular and genetic analysis, protein synthesizers, medical meters, wireless sensor systems, data loggers, and process challenge devices. Hardware 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 sold by our Clinical Genomics and Biopharmaceutical Development divisions, 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 sold by our Sterilization and Disinfection Control division are used on a standalone basis.
Revenues from hardware and consumables are recognized upon transfer to the customer, typically at the point of shipment.
We also offer maintenance, calibration, and testing service contracts. These contracts result in revenues recognized over time, for example, when we are obligated to perform labor and replace parts on an as-needed basis over a contractually specified period, or at a point in time, upon completion of a specific, discrete service. In many cases, our contracts contain both revenues recognized over time and revenues recognized at a point in time.
We evaluate our revenues internally based on business division and the nature of goods and services provided.
The following tables present disaggregated revenues from contracts with customers for the years ended March 31, 2024, 2023 and 2022:
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(1) Beginning October 16, 2023, revenues of $8,214 from GKE GmbH and SAL GmbH are included in the Sterilization and Disinfection Control division. Revenues of $1,075 from GKE China are included in the Sterilization and Disinfection Control division beginning on January 1, 2024.
(2) Revenues in the Clinical Genomics division represent transactions subsequent to the acquisition of Agena Bioscience, Inc. on October 20, 2021.
Contract Balances
Our contracts have varying payment terms and conditions. Some customers prepay for products and services, resulting in either unearned revenues or customer deposits, called contract liabilities. Short-term contract liabilities are included within unearned revenues in the accompanying Consolidated Balance Sheets, and long-term contract liabilities are included within other long-term liabilities in the accompanying Consolidated Balance Sheets. The significant majority of our revenues and related receivables and contract liabilities are generated from contracts with customers with original expected durations of 12 months or less. Contract liabilities will be recognized to revenue as we satisfy our obligations under the terms of the contracts.
A summary of contract liabilities is as follows:
Contract liabilities balance as of March 31, 2024 $ 15,686
Note 3. Fair Value Measurements
Our financial instruments generally consist of cash and cash equivalents, trade accounts receivable, obligations under trade accounts payable, and debt. Due to their short-term nature, the carrying values of 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.
The financial instruments that subject us to the highest concentration of credit risk are cash 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 March 31, 2024.
As of March 31, 2024, we had outstanding $172,500 aggregate principal of 1.375% convertible senior notes due August 15, 2025, which we refer to as our 2025 Notes. We estimate the fair value of the 2025 Notes using Level 2 inputs based on the last actively traded price or observable market input preceding the end of the reporting period. The estimated fair value and carrying value of the 2025 Notes were as follows:
Carrying Value Fair Value (Level 2) Carrying Value Fair Value (Level 2)
See Note 15. "Subsequent Events" for information related to our partial repurchase of the 2025 Notes in April 2024.
The Belyntic acquisition obligates us to pay contingent consideration of up to $1,500 cash upon regulatory approval of certain patent applications (see Note 13. "Commitments and Contingencies"). We estimate the fair value of the remaining contingent consideration using Level 3 inputs and 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 remaining contingent consideration was $571 as of March 31, 2024, of which $436 is recorded in Other accrued expenses and $135 is recorded in acquisition-related holdbacks on the accompanying Consolidated Balance Sheets.
Amounts recognized or disclosed at fair value in the 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 (see Note 4. "Significant Transactions"). 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 $274,533 of non-cash impairment losses to goodwill and other intangible assets during the fiscal year ended March 31, 2024 (see Note 6. "Goodwill and Intangible Assets, Net" for further information); no impairment losses were recorded during the years ended March 31, 2023 or March 31, 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 fiscal years ended March 31, 2024 and 2023.
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Note 4. Significant Transactions
Acquisition of GKE
We acquired 100% of the outstanding shares of GKE GmbH and SAL GmbH effective October 16, 2023, on which date we began including the entities as wholly owned subsidiaries in our consolidated financial statements. Upon approval by applicable Chinese regulators, we acquired 100% of the outstanding shares of Beijing GKE Science & Technology Co. Ltd. (“GKE China,” and, together with GKE GmbH and SAL GmbH, “GKE”), effective December 31, 2023 (the "GKE acquisition"). GKE China is included as a wholly owned subsidiary in our Consolidated Balance Sheets as of December 31, 2023, and we began consolidating the results of its operations on January 1, 2024.
GKE develops, manufactures and sells a highly competitive portfolio of chemical sterilization indicators, biologics, and process challenge devices to protect patient safety across global healthcare markets. GKE is included in our Sterilization and Disinfection Control ("SDC") division, and GKE's strengths in chemical indictors are complementary to SDC's strengths in biologic indicators, as chemical and biologic indicators are used in the same sterility validation workflows. Additionally, GKE’s healthcare-focused commercial capabilities in Europe and Asia greatly expand our reach in the healthcare markets in those geographies. We are working to obtain regulatory 510(k) clearance on certain GKE products for sale in the United States, which would further expand organic revenues growth opportunities from the GKE business.
Total consideration for the GKE acquisition was $87,187, net of cash and financial liabilities and inclusive of working capital adjustments. Of the total acquisition price, approximately $9,300 at March 31, 2024 exchange rates is being held back for a period of 18 months from acquisition closing as security against potential indemnification losses. We funded the acquisition through a combination of cash on-hand and a total of $71,000 borrowed under our line of credit (See Note 8. "Indebtedness").
Allocation of Purchase Price
We accounted for the GKE acquisition as a business combination using the acquisition method of accounting. Under the acquisition method of accounting, the acquiree's identifiable assets acquired and liabilities assumed are recorded at their acquisition date fair values and are consolidated with those of the acquirer. The multi-period excess earnings method, a form of the income approach, was used to value acquired customer relationships, while the relief from royalty method was used to value acquired intellectual property and trade names. The non-compete agreements were valued using a probability-weighted estimate of the expected economic impact that would occur in the absence of the agreements. Significant judgments and estimates are required when performing valuations, including, among other assumptions, internal rates of return, revenue growth rates, customer attrition rates, and royalty rates, all of which are considered Level 3 inputs. We worked with external valuation experts to prepare the valuation using information obtained during due diligence and from professional valuation databases and other sources. These estimates were based on assumptions that we believe to be reasonable; however, actual results may differ from these estimates.
The following table summarizes the allocation of the purchase price as of acquisition:
Life (in years) Amount
Cash and cash equivalents $ 4,191
Accounts receivable (a) 2,252
Inventories (b) 4,730
Other current assets 176
Total current assets 11,349
Property, plant and equipment (c) 3,398
Other noncurrent assets 3,041
Intangible assets:
Customer relationships (d) 12 34,708
Intellectual property (d) 7 3,208
Non-compete agreements (d) 3 743
Total assets acquired $ 110,709
Accounts payable 11
Deferred tax liability 13,901
Other current liabilities 2,746
Long-term liabilities 2,673
Total liabilities assumed 19,331
Total purchase price, net of cash acquired $ 87,187
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Acquisition related costs such as legal and advisory fees were approximately $835 during fiscal year 2024; these costs are not included as a component of consideration transferred, but are expensed in the periods in which the costs are incurred and are reflected on the Consolidated Statements of Operations in general and administrative expenses.
GKE's operations contributed $9,289 to revenues and $1,046 of net income (including $2,271 of non-cash amortization expense related to acquired intangible assets and $1,229 of non-cash inventory step up expense) to our consolidated results during the twelve months ended March 31, 2024.
Supplemental unaudited pro-forma information
Combined revenues from Mesa and GKE for fiscal years 2024 and 2023 would have been approximately $229,260 and $241,360, respectively, had the GKE acquisition occurred at the beginning of our prior fiscal year on April 1, 2022.
It is impracticable for us to disclose pro-forma net earnings information regarding the combined results of the operations of Mesa and GKE as if the acquisition had occurred at an earlier date. Prior to acquisition, GKE was a privately owned company with financial statements prepared on a statutory, rather than GAAP, basis, using a different fiscal year end than Mesa's. Certain financial information cannot be recreated for accurate financial results. For example, prior to Mesa's ownership, GKE accounted for inventory at an unburdened rate and performed only annual inventory counts, such that we cannot accurately estimate cost of goods sold. Additionally, all transactions occurring between the three GKE entities, which are substantial, were accounted for at arms-length prior to acquisition; we eliminated intercompany transactions from a revenue perspective above, but we do not have sufficient historical detail to eliminate intercompany cost of revenues accurately. As presentation of pro-forma net earnings information would require extensive estimation and could not be sourced from sufficiently factual information reasonably aligned with GAAP, it is impracticable for us to disclose pro-forma net earnings information.
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 a total cash price of $6,450, of which $4,950 was paid on the date of acquisition. The remaining $1,500 becomes due to the Belyntic sellers as patent applications are approved (see Note 13. "Commitments and Contingencies"). The business complements our existing peptide synthesis business, part of the Biopharmaceutical Development segment, by adding a new consumables line that can be used with the instruments we sell. The new PurePep® EasyClean products are an environmentally conscious chemistry solution to purify peptides. During the twelve months ended March 31, 2024, we recorded certain measurement period adjustments to reclassify amounts from intangible assets into goodwill. Our preliminary purchase price allocation was finalized as of December 31, 2023.
Agena Bioscience, Inc.
On October 20, 2021, we completed the acquisition of 100% of the outstanding shares of Agena Bioscience, Inc. (“Agena” or “the Agena acquisition”) for adjusted cash consideration of $300,793. Agena is a leading clinical genomics tools company that develops, manufactures, markets and supports proprietary instruments and related consumables that enable genetic analysis for a broad range of research applications. The acquisition of Agena moved our business toward the life sciences tools sector and expanded our market opportunities, particularly in Asia. Agena’s operations comprise our Clinical Genomics segment.
Note 5. Leases
We have operating leases for buildings and office equipment used in manufacturing and distribution, engineering, research and development, sales and marketing, and administration activities. The following table presents the lease balances within the Consolidated Balance Sheets related to our operating leases:
Operating lease ROU asset Other assets $ 9,671 $ 8,693
Current operating lease liabilities Other accrued expenses 2,986 2,868
Noncurrent operating lease liabilities Other long-term liabilities 6,613 5,752
The components of lease costs, the weighted average remaining lease term and the weighted average discount rate were as follows:
Year Ended March 31,
Weighted average remaining lease term in years 4.6 3.3
Weighted average discount rate 4.1 % 2.0 %
Supplemental cash flow information related to leases was as follows:
Year Ended March 31,
Increases in operating lease right of use assets and lease liabilities are primarily due to the acquisition of GKE.
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As of March 31, 2024 maturities of lease liabilities are as follows for future years ending March 31:
Future value of lease liabilities 10,845
Less: imputed interest 1,246
Present value of lease liabilities $ 9,599
The maturity schedule above does not include discounted future minimum lease payments for leases not yet commenced of approximately $7,633 for manufacturing, office and warehouse facilities used by our Biopharmaceutical Development division in Uppsala, Sweden. The lease has a term of 10 years and is expected to commence during the first quarter of fiscal year 2025.
Note 6. Goodwill and IntangibleAssets, Net
Goodwill
Goodwill arises from the excess purchase price of acquired businesses over the fair value of acquired tangible and intangible assets, less assumed liabilities.
Changes in the carrying amount of goodwill were as follows:
Goodwill related to Belyntic acquisition - - 2,973 - 2,973
Measurement period adjustment, Agena acquisition - (152 ) - - (152 )
Effect of foreign currency translation 1,021 (130 ) (32 ) (6 ) 853
Goodwill related to GKE acquisition 48,850 - - - 48,850
Measurement period adjustment, Belyntic Acquisition - - 841 - 841
In the third quarter of fiscal year 2024, we completed the acquisition of GKE. See Note 4. “Significant Transactions” for further information.
During the fourth quarter of our fiscal year ended March 31, 2024, we recorded consolidated goodwill impairment losses of $156,892 related to our Clinical Genomics and Biopharmaceutical Development divisions.
For reporting units associated with our Clinical Genomics and Biopharmaceutical Development divisions, we performed quantitative impairment analyses over goodwill because declining revenues growth in both divisions indicated that the fair values of the businesses might have declined below their carrying values. We also performed quantitative impairment analyses on finite-lived intangible assets within those divisions. More information on the impairment losses is included in the “Impairment Losses” section below. We performed qualitative impairment tests over reporting units in our Sterilization and Disinfection Control and Calibration Solutions divisions and concluded that it was not more likely than not that the fair values of those businesses had declined below their carrying values.
Finite-Lived Intangible Assets
Other intangible assets were as follows:
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Amortization expense for finite-lived intangible assets acquired in a business combination was as follows:
Year Ended March 31,
Other than amortization expense, the changes in finite-lived intangible assets from March 31, 2023 to March 31, 2024 primarily reflect impairment losses totaling $117,641 as further described below, additions of $44,071 related to purchase accounting for GKE as of the acquisition date, and foreign currency impacts. See Note 4. “Significant Transactions” for additional information related to our acquisition of GKE. All impairment losses related to finite-lived intangible assets were recorded in our Clinical Genomics division. Of the $117,641 impairment losses, $79,116 related to customer relationships, $28,531 related to patents and other technology-related propriety information, and $9,994 related to trademarks and trade names.
In addition to testing definite-lived intangible assets for impairment in our Clinical Genomics and Biopharmaceutical Development divisions, we also quantitatively tested trademarks and trade names which were previously identified as indefinite-lived intangible assets in our Biopharmaceutical Development division. We concluded the trademarks and trade names were not impaired; however, as of our impairment testing date on January 1, 2024, we have assigned a useful life of 10 years from the original acquisition date to these assets in response to increased pressures and risks in the biopharmaceutical industry resulting from macroeconomic influences. The trademarks and trade names will now amortize through October 2029, resulting in additional expected non-cash amortization expense of approximately $700 per year. We reassessed the remaining useful lives of our intangible assets in conjunction with our impairment testing and made no further material changes to our expectations of the remaining useful lives of our intangible assets because, while the value of certain assets has diminished since acquisition, the expected duration of their usefulness has not changed in response to the macroeconomic and other factors leading to the impairment losses.
The range of useful lives and weighted-average remaining useful lives of amortizable intangible assets as of March 31, 2024 were as follows:
Approx. Est. Useful Weighted Avg.
Life Remaining Life
Description (Years) (Years)
Customer Relationships 7 - 14 8.0
Intellectual Property 7 - 10 5.9
Other Intangibles 3 - 12 7.9
The following is estimated amortization expense for the years ending March 31:
Amortization
Year Expense
Impairment Losses
In conjunction with our annual impairment testing, we engaged external valuation specialists to aid in performing recoverability tests, and ultimately fair value tests, over intangible assets in our Clinical Genomics division and both reporting units (Immunoassays and Peptides) of our Biopharmaceutical Development division. Fair value testing was performed by weighting Gordon Growth and Exit Multiple discounted cash flow models and guideline public company models (one-year forward multiples), relying on unobservable Level 3 inputs, including but not limited to, discount rates, expected useful lives, applicable competitors, and anticipated revenues growth and margins. Inputs were established through discussions between Management and our valuation specialists and are based on internal expectations for future performance, market indicators, and reputable valuation research resources. Impairment losses are recorded in either Impairment of finite-lived intangible assets or Impairment of goodwill in the accompanying Consolidated Statements of Operations. As of the date of our annual goodwill impairment testing, January 1, 2024, the total fair values of the Clinical Genomics and Biopharmaceutical Development divisions were $58,900 and $119,000, respectively. Impairment losses resulted in a 0% cushion between the fair and carrying values of our Clinical Genomics division and the Immunoassays reporting unit within our Biopharmaceutical Development division as of our January 1, 2024 impairment testing date. The fair value of the Peptides reporting unit within our Biopharmaceutical Development division exceeded carrying value by approximately 36% as of our testing date, and no impairment losses were recorded for this reporting unit. The goodwill associated with each of Clinical Genomics, Immunoassays, and Peptides reporting units as of March 31, 2024 was $16,940, $32,807, and $13,708, respectively. As such, the Clinical Genomics and Biopharmaceutical Development divisions are susceptible to further impairment losses in the future if actual results differ significantly from our estimates. Assumptions used in goodwill and intangible asset impairment tests include unobservable Level 3 inputs and estimates that are subject to uncertainty, such that there is a reasonable possibility that further impairment losses, which could be material to our consolidated financial statements, will occur in the Clinical Genomics and Biopharmaceutical Development divisions in the future.
We monitor each of our divisions for indicators of impairment on a quarterly basis. Several changes to the Clinical Genomics division occurred during the fourth quarter of fiscal year 2024 that were incorporated into our impairment analyses and contributed to the recognized impairment loss. First, we enacted changes in our management structure, whereby a new General Manager was assigned to lead the division. Immediately, the new manager began restructuring the division, eliminating 17 positions. Additionally, new division management began to implement an updated business strategy, which resulted in a downward revision of financial expectations for the coming years, particularly the next 1.5 – 2 years, but which will better position the division to achieve sustainable long-term growth. Additionally, in the fourth quarter of 2024, we lost two individually immaterial customer contracts as continued economic difficulties resulted in their bankruptcy. These internal changes, coupled with difficult macroeconomic conditions described further below ultimately contributed to the impairment losses recorded related to the Clinical Genomics division.
Throughout fiscal year 2024, we performed regular analyses comparing the results of the Biopharmaceutical Development division with our expectations at the time of purchase. Our analyses in the firstthree quarters of fiscal 2024 indicated that reporting units associated with the Biopharmaceutical Development division more likely than not were not impaired, in part because actual operating costs to date had been lower than were expected at acquisition. However, in the fourth quarter of fiscal year 2024, persistent difficult macroeconomic trends resulted in a downward revision of financial expectations for the coming years compared to when the division was acquired, ultimately resulting in a downward revision of previous forecasts of the division’s results, particularly after the division failed to meet our revenue expectations during the fourth quarter.
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Conditions that negatively impacted both the Clinical Genomics and the Biopharmaceutical Development division included:
The nature of our Sterilization and Disinfection Control and Calibration Solutions divisions makes them less sensitive to existing macroeconomic conditions, particularly since the product lines offered by these divisions do not require our customers to initially invest in high-dollar capital equipment to the same degree as in our Clinical Genomics and Biopharmaceutical Development divisions.
Note 7. Supplemental Balance Sheet Information
Significant changes in balance sheet amounts below are primarily attributable to the acquisition of GKE and related step-up amounts under purchase accounting. See Note 4. "Significant Transactions" for details.
Inventories consisted of the following:
In addition to sales of existing inventories, higher non-cash scrap expense in fiscal year 2024 contributed to the overall decrease in inventories, partially offset by the GKE acquisition and inventory purchases to meet current production needs.
Prepaid expenses and other consisted of the following:
Total prepaid expenses and other $ 9,408 $ 8,872
Property, plant and equipment consisted of the following:
Property, plant and equipment, net $ 31,766 $ 28,149
Depreciation expense was as follows:
Year Ended March 31,
Depreciation expense in Cost of revenues $ 3,031 $ 3,163 $ 2,243
Accrued payroll and benefits consisted of the following:
Wages and paid-time-off payable 3,072 2,329
Total accrued payroll and benefits $ 9,935 $ 9,433
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Other accrued expenses consisted of the following:
Current operating lease liabilities 2,986 2,868
Note 8. Indebtedness
Credit Facility
On March 5, 2021, we entered into a four-year senior secured credit agreement that included 1) a revolving credit facility in an aggregate principal amount of up to $75,000 (the "Revolver"), 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 at any time. The agreement also provided 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. On October 5, 2023, we amended the terms of our four-year senior credit facility to increase the maximum principal amount available to us under the Revolver from $75,000 to $125,000. We refer to the agreement in whole as the “Credit Facility.”
Subsequent to the end of fiscal year 2024, on April 5, 2024, we further amended and restated the terms of the Credit Facility. The amended Credit Facility has been modified to:
(i) Extend the maturity of the Credit Facility to April 2029;
(iv) Make certain changes to the financial covenants.
Amounts borrowed under the Credit Facility bear interest at either a base rate or a SOFR rate plus an applicable spread ranging from 1.5% to 3.5%, depending on our total net leverage ratio. The interest rate on borrowings under our line of credit as of March 31, 2024 was 7.2%.
We are obligated to pay quarterly unused commitment fees of between 0.20% and 0.35% of the Revolver’s aggregate principal amount, based on our leverage ratio. We incurred unused commitment fees of $164 and $107 for the years ended March 31, 2024, and March 31, 2023, respectively. The balance of unamortized customary lender fees was $321 and $312 as of March 31, 2024 and 2023, respectively.