Harvard Bioscience, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise noted. Amounts are in U.S. dollars; financial statement amounts below are in millions except per-share data.
Business context
Harvard Bioscience develops, manufactures and markets life science research tools (LSRT), with a smaller regenerative medicine device (RMD) business. LSRT is the company’s only reportable segment. The company’s strategy combines organic product development, distribution expansion and acquisitions. Q1 included the acquisition of German laboratory-consumables maker AHN Biotechnologie and the purchase of Actimetrics intellectual property.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $28.322 | $26.312; up 7.6% |
| Gross profit / margin | $13.400 / 47.3% | $12.369 / 47.0% |
| Operating income / margin | $1.229 / 4.3% | $1.950 / 7.4% |
| Net income | $0.529 | $1.676 |
| Diluted earnings per share | $0.02 | $0.06 |
| Operating cash flow | $1.605 | $1.144 |
| Capital expenditures | $0.297 | $0.444 |
| Cash and cash equivalents at quarter-end | $17.237 | $17.916 at Dec. 31, 2011 |
| Credit-facility borrowings at quarter-end | $16.800 | $16.300 at Dec. 31, 2011 |
Gross margin improved slightly, but operating margin and earnings declined as operating expenses rose faster than revenue. Revenue growth included approximately $1.2 million from the CMA and AHN acquisitions; management reported 4.2% growth after adjusting for acquisitions and foreign exchange. A stronger U.S. dollar reduced revenue by approximately $0.3 million. Operating cash flow improved mainly because of more favorable working-capital movements, partially offset by lower net income.
Investing cash outflow was $3.299 million, including $3.005 million for acquisitions. Financing provided $0.767 million, including $0.500 million of additional borrowing and $0.267 million of net stock proceeds. Cash less credit-facility debt was approximately $0.4 million at quarter-end. About $14.5 million of cash was held by foreign subsidiaries and was not available for U.S. operations without repatriation, which could trigger tax. The company reported $3.2 million of unused revolving-credit capacity and compliance with its covenants.
Material changes and notable items
- Sales and marketing expense increased 14.2% to $4.768 million; general and administrative expense rose 11.6% to $4.861 million; research and development expense rose 35.3% to $1.714 million. Higher RMD development activity contributed to the R&D increase.
- Operating income fell 37.0%. Other expense increased to $0.385 million from $0.275 million, including approximately $0.2 million of primarily acquisition-related expense in Q1 2012.
- Q1 2012 income tax expense was $0.315 million, a 37.3% effective rate. Q1 2011 included a $0.5 million tax benefit from reversal of an uncertain tax liability after a statute of limitations expired, making the year-over-year net-income comparison less like-for-like.
- The company acquired AHN on February 3 for approximately $2.635 million, funded from existing cash. The acquisition added $1.383 million of goodwill; its results were included in LSRT from the acquisition date and were considered immaterial for pro forma disclosures. The company also paid approximately $0.370 million for Actimetrics intellectual property.
- A Panlab Spain cost-reduction plan resulted in $0.150 million of severance charges, paid during the quarter; management expected no further charges for that plan. A remaining $0.017 million liability from a 2011 restructuring was expected to be paid in Q2.
- LSRT operating income was $3.634 million versus $3.704 million. The “Other” category, primarily RMD, recorded an operating loss of $1.184 million versus $0.455 million; unallocated operating expenses were $1.221 million.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management expected available cash, operating cash generation and debt capacity to support operations and capital expenditures for at least 12 months. It expected approximately $3.3 million of capital expenditures during the remainder of 2012 and approximately $2.0 million of additional foreign cash use for AHN capital improvements. Management was exploring strategic alternatives to fund RMD; additional debt or equity could be required, and equity issuance could dilute existing shareholders.
Management anticipated submitting the PHD Ultra Nanomite stem-cell injection pump to regulators in 2012 and expected first clinical revenue during 2012, subject to approval and other uncertainties. A patient who received a synthetic tissue-engineered trachea in November 2011 died in March 2012; the filing stated the recorded cause was pneumonia secondary to tracheal cancer and that the company knew of no evidence the scaffold or bioreactor contributed.
Key risks include acquisition integration and costs, product demand and competition, execution and regulatory approval for RMD products, foreign-currency movements, international and economic conditions, customer research-funding levels, intellectual-property claims, goodwill or intangible-asset impairment, and compliance with credit-facility covenants. The $16.8 million revolving facility matures August 7, 2013 and bears interest at LIBOR plus 3.0% (3.24% at quarter-end). A 1% rate increase was estimated to raise annual interest expense by $0.168 million. The filing also disclosed a $0.2 million uncertain-tax-position liability and a $3.6 million after-tax underfunded pension liability; timing of related payments was unclear. Management reported effective disclosure controls and no material Q1 change in internal control over financial reporting.
Important facts for investors to verify
- Whether the company can sustain organic LSRT growth and convert revenue growth into improved operating margins.
- RMD funding needs, regulatory progress, commercialization prospects and the costs and implications of the clinical developments described.
- AHN integration, acquisition performance and planned capital investment, alongside the company’s remaining credit capacity and August 2013 facility maturity.
- Availability and intended use of foreign-held cash, potential tax consequences of repatriation, and exposure to currency and interest-rate changes.
- Resolution and payment timing for uncertain tax positions, pension obligations and restructuring liabilities.