Harvard Bioscience, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The company develops, manufactures and markets life-science research tools; it also has a smaller regenerative medicine device business. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $27.1 | $25.9 | $53.5 | $52.2 |
| Gross profit / margin | $12.8 / 47.1% | $12.1 / 46.6% | $25.2 / 47.1% | $24.8 / 47.6% |
| Operating income | $2.5 | $2.4 | $4.5 | $5.3 |
| Net income | $1.4 | $1.9 | $3.0 | $4.1 |
| Diluted EPS | $0.05 | $0.06 | $0.10 | $0.14 |
| Operating cash flow | Not presented quarterly | $2.8 | $6.2 |
- Q2 revenue rose 4.8%, but excluding the Coulbourn acquisition and favorable currency effects, revenue declined 1.6%. For the first half, reported revenue rose 2.4%; excluding those effects, it fell 1.9%.
- Q2 gross margin improved year over year, attributed to operating improvements and sales mix. First-half gross margin declined 0.5 percentage points, mainly due to mix.
- First-half operating income and net income declined despite higher revenue. Results included increased operating expenses and higher other expense; the 2010 comparison included a $0.4 million gain from an adjustment to Denville acquisition contingencies.
Financial position and liquidity
- At June 30, cash and cash equivalents were $21.7 million, versus $19.7 million at December 31, 2010. Total debt under the revolving credit facility was $17.1 million, down from $18.0 million; reported cash net of debt was $4.6 million.
- Current assets were $62.9 million and current liabilities $10.3 million. Inventory increased to $19.0 million from $15.8 million at year-end.
- First-half operating cash flow was $2.8 million, down from $6.2 million, primarily because of working-capital movements, including higher inventory and lower accrued expenses. Investing activities used $1.0 million; financing activities used $0.6 million. Cash increased by $2.0 million, including a positive $0.8 million effect from exchange rates.
- The $20 million revolving facility matures August 7, 2012, bears interest at LIBOR plus 4.0% (4.19% at June 30), and had $2.9 million of available borrowing capacity. The company reported compliance with financial covenants at quarter-end.
Management commentary, outlook and notable items
- Management expected available cash, operating cash generation and debt capacity to support current operations and capital expenditures for 12 months and beyond, while noting significant acquisitions may require additional capital. Planned second-half 2011 capital expenditures were approximately $0.9 million.
- Management cited a planned 2011 reduction of approximately $5.0 million in Nanovue revenue versus 2010, following distributor GE Healthcare’s prior inventory build; it expected shipments to return to a normal run rate later in 2011.
- On July 1, 2011, after quarter-end, the company acquired substantially all assets of CMA Microdialysis AB’s preclinical business unit for approximately $5.4 million, funded from existing cash. Purchase-price allocation was ongoing. The company stated that acquisition-related borrowing restrictions and lender approval requirements may apply to acquisitions above specified thresholds.
- Management described continued investment in new research products and regenerative medicine devices. It anticipated submitting a clinical stem-cell therapy injection pump to regulators by the end of 2011; approval and commercialization were not assured.
- Other notable items: first-half income tax expense benefited from reversal of a previously recorded uncertain tax liability after the relevant statute of limitations expired. The company also reported a $0.2 million uncertain-tax-position liability at June 30, with timing and ultimate resolution unknown, and a $2.7 million after-tax underfunded pension liability.
- Key risks discussed include foreign-exchange and economic exposure, customer demand and research funding, product competition and development, regulatory approval, acquisition integration, covenant compliance, and the ability to raise capital. Management reported no material changes to the risk factors in its 2010 Form 10-K and stated disclosure controls were effective.
Important facts for investors to verify
- Whether underlying revenue trends improve after excluding currency effects and the Coulbourn acquisition, particularly as Nanovue shipments normalize.
- The cash-flow and working-capital drivers, especially inventory growth, and whether operating cash generation recovers.
- The CMA acquisition’s final purchase-price allocation, integration costs, and effect on cash, borrowing capacity and covenant headroom.
- Progress, regulatory requirements and funding needs for the regenerative medicine product pipeline, including the planned injector submission.
- The timing and resolution of the uncertain tax position, and the company’s ability to meet debt obligations as the credit facility approaches its 2012 maturity.