Harvard Bioscience, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
The company operates Life Science Research Tools (LSRT) and Regenerative Medicine Device (RMD) businesses. LSRT generated all reported revenue. The RMD business remained in development, with no segment revenue and continuing losses. The company’s growth strategy combines product development, distribution expansion and acquisitions.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $28.5 | $27.1 | $56.8 | $53.5 |
| Gross profit / margin | $13.6 / 47.8% | $12.8 / 47.1% | $27.0 / 47.5% | $25.2 / 47.1% |
| Operating income | $1.3 | $2.5 | $2.5 | $4.5 |
| Net income | $0.8 | $1.4 | $1.3 | $3.0 |
| Diluted EPS | $0.03 | $0.05 | $0.04 | $0.10 |
- Revenue increased 5.0% in Q2 and 6.3% in the first half. Acquisitions contributed about $1.3 million in Q2 and $2.5 million in the first half; stronger U.S. currency reduced revenue by $0.6 million and $0.8 million, respectively. Management reported organic, currency-adjusted growth of 2.2% in Q2 and 3.2% in the first half.
- Gross margin improved, primarily from a more favorable product mix. Operating income and net income declined as operating expenses rose; first-half sales and marketing, general and administrative, and R&D costs increased 12.6%, 14.0%, and 54.0%, respectively.
- R&D spending increased partly because of RMD injector and bioreactor development. RMD posted operating losses of $1.6 million in Q2 and $2.8 million in the first half; LSRT operating income was $4.1 million and $7.8 million, respectively.
- First-half operating cash flow was $4.2 million, versus $2.8 million a year earlier. Investing used $3.5 million, including acquisitions; capital expenditures were $0.6 million. Cash increased $0.7 million to $18.7 million.
- At June 30, cash was $18.7 million and outstanding revolving-credit debt was $16.1 million, leaving approximately $2.6 million net cash. Current assets were $58.3 million and current liabilities $9.9 million. The $20 million facility had $3.9 million of available capacity; the company reported covenant compliance.
Material changes and unusual items
- The company acquired German laboratory-consumables manufacturer AHN for approximately $2.0 million and substantially all assets of Modular SFC for approximately $0.5 million. It also acquired Actimetrics intellectual property for approximately $0.4 million. Acquisitions were funded from cash on hand.
- Cash held by foreign subsidiaries was $16.9 million and was considered permanently reinvested; management said it did not intend to repatriate those funds. The company also planned to use about $2.0 million of foreign cash for capital improvements at AHN.
- Foreign-currency translation reduced first-half comprehensive income by $0.5 million, compared with a $2.2 million gain in the prior-year period. The stronger U.S. dollar also weighed on revenue.
- First-half restructuring charges were $0.14 million, relating to severance at the Spanish subsidiary; the balance was paid by June 30. Acquisition-related expenses were included in other expense.
Outlook, commentary and risks
- No specific revenue or earnings guidance was provided. Management expected available cash, operating cash generation and debt capacity to fund current operations and capital expenditures for 12 months and beyond, and expected approximately $1.4 million of capital expenditures in the remainder of 2012.
- Management was exploring strategic alternatives to fund RMD. The filing cautions that additional equity financing could dilute existing shareholders and that favorable financing may not be available.
- The company expected to submit its stem-cell therapy injection pump to regulators in 2012. Regulatory approvals, commercialization, product demand, acquisitions and integration, foreign exchange, competition, intellectual property, and credit-facility covenants were among the disclosed risks. The company said there had been no material changes to the risk factors in its 2011 Form 10-K.
- The filing reported that a patient who received a synthetic trachea transplant in November 2011 died in March 2012; the recorded cause was pneumonia secondary to tracheal cancer. The company stated it knew of no evidence that the scaffold or bioreactor contributed to the death. It also reported two laryngotracheal implants in June 2012, with recipients described as recovering well.
- The credit facility matured August 7, 2013 and bore interest at 3.25% at quarter-end. A 1-percentage-point rate increase was estimated to add $161,000 of annual interest expense on then-outstanding borrowings.
Important facts for investors to verify
- Whether organic growth and gross-margin gains continue after separating acquisition and currency effects.
- Whether expense growth, especially RMD development spending, translates into commercial products, regulatory progress and sustainable profitability.
- Availability and terms of funding for RMD, and the consequences for shareholder dilution or debt capacity.
- Cash accessibility: most reported cash was held by foreign subsidiaries, and the company did not intend to repatriate it.
- Acquisition integration, covenant compliance and refinancing plans ahead of the August 2013 credit-facility maturity.
- Regulatory and clinical developments, including the context of reported regenerative-medicine procedures and any subsequent safety information.