Harvard Bioscience, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Figures below are in U.S. dollars; financial amounts are in millions unless noted. The company develops, manufactures and markets life science research tools and regenerative medicine devices.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $26.4 | $26.5 | $79.8 | $78.7 |
| Gross profit / margin | $11.9 / 45.0% | $12.6 / 47.5% | $37.0 / 46.4% | $37.4 / 47.5% |
| Operating income | $0.2 | $1.9 | $4.7 | $7.3 |
| Net income | $0.03 | $12.7 | $3.1 | $16.8 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $4.0 | $8.0 |
- Q3 revenue was essentially flat year over year, but operating income fell to $0.2 million and net income was near break-even. The quarter’s gross margin declined 2.5 percentage points.
- Nine-month revenue rose 1.5%, while operating income declined 35.7%. Nine-month gross margin fell 1.1 percentage points; approximate operating and net margins were 5.9% and 3.8%, respectively.
- Prior-year net income was elevated by a discrete $11.3 million tax benefit from releasing U.S. deferred-tax valuation allowances. This makes reported net-income comparisons less representative of underlying operating trends.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $16.2 million, versus $19.7 million at year-end 2010. Total assets were $127.0 million and stockholders’ equity was $96.0 million.
- Long-term debt was $16.3 million, down from $18.0 million at year-end. Management reported net debt of approximately $0.1 million and $3.7 million of available capacity on its $20 million revolving facility. The company was in compliance with financial covenants.
- The facility amendment extended maturity to August 7, 2013 and set pricing at LIBOR plus 3.0%; the rate was 3.24% at quarter-end. A 1 percentage-point rate increase would raise annual interest expense by approximately $163,000, assuming no other changes.
- Nine-month operating cash flow of $4.0 million was below investing outflows of $6.5 million, including the $5.2 million CMA acquisition. Cash declined $3.5 million over the period. Inventory increased $4.3 million from year-end.
- Management expected available cash, operating cash generation and debt capacity to fund current operations and capital expenditures for 12 months and beyond. It said significant acquisitions or RMD investment could require additional capital.
Material changes and business developments
- Organic revenue, adjusted for acquisitions and currency, declined 6.3% in Q3 and 3.4% for the nine-month period, according to management. Acquisitions and a weaker U.S. dollar offset part of the decline.
- Management attributed weakness to lower GE Healthcare sales of Biochrom and Hoefer products and softer-than-expected U.S. academic and government markets. It also cited lower Nanovue spectrophotometer shipments as a factor in reduced operating cash flow.
- On July 1, the company acquired substantially all of CMA Microdialysis’ preclinical business for approximately $5.2 million, funded from cash. The preliminary allocation included $2.25 million of goodwill and $2.19 million of customer-relationship and tradename intangibles.
- Q3 restructuring charges were $477,000, including $307,000 of fixed-asset write-offs, related to relocating Hoefer’s San Francisco facility and improving Coulbourn operating margins. Approximately $100,000 of additional charges were expected in Q4 2011.
- Goodwill was $35.7 million and net amortizable intangible assets were $22.1 million at quarter-end. The company estimated 2011 amortization expense of $2.7 million.
Outlook, commentary and risks
- Management planned to continue organic-growth efforts through direct marketing and product development, and expected recently launched products and the CMA and CytoPulse acquisitions to support growth. No specific revenue or earnings guidance was provided.
- The company expected approximately $0.4 million of Q4 2011 capital expenditures and approximately $0.4 million of pension contributions for the remainder of 2011.
- Management expected to submit its clinical stem-cell therapy injector pump to regulators by year-end 2011. Regulatory approval was not assured. The company also reported reviewing strategic alternatives to maximize value of its regenerative medicine device business.
- Key disclosed risks include weak research funding and economic conditions, dependence on distributors and GE Healthcare sales, foreign-currency fluctuations, acquisition integration and funding, product-market acceptance, regulatory approvals, intellectual-property issues, covenant compliance, and possible goodwill or intangible-asset impairment.
- A $0.2 million uncertain-tax-position liability and a $2.7 million net underfunded pension liability were disclosed; their payment timing was uncertain. Management reported disclosure controls were effective and no material change to internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its 2010 Form 10-K.
Important facts for investors to verify
- Whether organic sales stabilize, particularly Biochrom and Hoefer sales through GE Healthcare and U.S. academic and government demand.
- Whether gross margins recover from the less favorable product and sales mix, and whether operating cash flow improves as inventory and other working-capital needs evolve.
- Progress integrating CMA and realizing expected commercial benefits, alongside the acquisition-related goodwill and intangible-asset balances.
- Cash availability and covenant headroom under the revolving credit facility, including funding needs for acquisitions or the regenerative medicine business.
- Regulatory progress and commercial prospects for the clinical injector and regenerative medicine products, as well as the outcome of the RMD strategic review.
- Resolution of the uncertain tax position, pension funding requirements, and any future impairment assessment of goodwill or intangible assets.