Harvard Bioscience, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Harvard Bioscience develops, manufactures, and markets life-science research tools and is investing in regenerative-medicine devices. Its reportable business is Life Science Research Tools (LSRT); Regenerative Medicine Devices (RMD) is disclosed as “Other.”
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $108.9 million | $108.2 million |
| Gross profit / gross margin | $50.3 million / 46.2% | $51.8 million / 47.9% |
| Operating income / margin | $6.1 million / 5.6% | $10.2 million / 9.4% |
| Income from continuing operations | $3.8 million | $19.0 million |
| Net income per diluted share | $0.13 | $0.65 |
| Operating cash flow | $6.6 million | $12.3 million |
| Cash and cash equivalents at year-end | $17.9 million | $19.7 million |
| Working capital | $48.0 million | $47.3 million |
| Credit-facility debt | $16.3 million | $18.0 million |
FY 2011 revenue was nearly flat, up 0.6%. Acquisitions contributed about $3.2 million and currency about $1.6 million; excluding acquisitions and currency effects, revenue declined about $4.1 million, or 3.8%. Gross margin fell mainly due to a less favorable sales mix. Operating income declined as costs and expenses rose while revenue was flat. FY 2010 net income included an $11.3 million deferred-tax valuation-allowance release; this drove much of the sharp year-over-year decline in reported net income.
Operating cash flow decreased by $5.6 million, with management citing lower net income, lower Nanovue shipments, softer U.S. academic and government research spending, and working-capital changes. Investing used $7.2 million, including acquisitions and capital spending. Cash less debt was approximately $1.6 million. Of year-end cash, $15.9 million was held by foreign subsidiaries and was not available for domestic operations unless repatriated, which could trigger U.S. taxes.
At December 31, 2011, the company had $3.7 million of unused capacity on its $20 million revolving facility. The facility carried interest at LIBOR plus 3.0% (3.29% at year-end), matured August 7, 2013, and was subject to financial and other covenants; the company reported covenant compliance. Management expected available cash, operating cash flow, and borrowing capacity to support operations and capital expenditures for at least 12 months. Contractual obligations included $16.3 million of debt due in 2013 and $4.0 million of operating-lease payments.
Fourth-quarter results and material changes
Fourth-quarter 2011 revenue was $29.0 million, versus $29.5 million in fourth-quarter 2010. Operating income was $1.4 million versus $2.9 million; net income was $0.7 million versus $2.2 million. Fourth-quarter diluted EPS was $0.02 versus $0.08. The filing does not provide a clear explanation for the full quarterly year-over-year change beyond the annual operating discussion.
- GE Healthcare sales fell: Biochrom sales were down $4.1 million for the year, largely following unusually high 2010 Nanovue orders that secured technology exclusivity; Hoefer sales to GE Healthcare declined a further $0.8 million.
- Research and development expense rose 16.4% to $5.4 million, principally due to increased RMD spending; RMD development focuses on bioreactors and a clinical stem-cell injector.
- FY 2011 included approximately $0.5 million of restructuring charges for a Hoefer facility relocation and Coulbourn margin-improvement plan. Total restructuring charges were $0.5 million in 2010 as well.
- In July 2011, the company acquired CMA Microdialysis for approximately $5.2 million. In February 2012, after year-end, it acquired AHN Biotechnologie for approximately $2.6 million.
Outlook, commentary, risks, and unusual items
- Management planned approximately $3.6 million of capital expenditures in 2012 and expected to continue investment in product development. It was evaluating strategic alternatives to fund RMD; additional debt or equity financing could be needed and equity financing would dilute existing holders.
- The company expected to submit its clinical syringe-pump platform to regulatory agencies in 2012. Research-use products are generally not subject to FDA premarket approval, but clinical-use products may require regulatory clearance; approval timing and success are uncertain.
- RMD commercialization and market demand remain uncertain. The filing described a second patient who received a bioreactor-seeded synthetic trachea in November 2011, was discharged in January 2012, and died on March 5, 2012; the cause of death had not been disclosed in the filing.
- Key risks include weak research funding and customer spending, competition and technological obsolescence, reliance on distributors (GE Healthcare represented 6% of FY 2011 revenue), foreign-exchange exposure, acquisition integration, and credit-facility covenants and refinancing needs. Goodwill and intangible assets totaled $57.8 million, or 46% of assets; no impairment was recorded.
- Promissory notes from prior divestitures totaled $5.2 million ($4.6 million from Digilab and $0.6 million from UBIO), but the company had recorded 100% valuation allowances because collection was uncertain.
- The company reported no significant pending legal proceedings. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Most important facts for investors to verify
- Whether underlying organic revenue stabilizes after excluding acquisition and currency effects, especially the Nanovue comparison and GE Healthcare orders.
- Whether operating margins and cash generation recover, given the 2011 declines and unfavorable sales mix.
- How management will fund RMD and meet debt obligations ahead of the August 2013 credit-facility maturity, including covenant headroom and domestic access to cash.
- Regulatory progress, commercial demand, and clinical-development risks for RMD products; clarify any subsequent information about the patient death without assuming causation.
- Integration and performance of CMA and AHN, the collectability of divestiture notes, and the adequacy of assumptions supporting goodwill, intangible assets, and deferred tax assets.