Harvard Bioscience Inc (HBIO) 2009 Q3 法說會逐字稿

Good day, and welcome to the Harvard Bioscience, Inc. third quarter 2009 earnings conference call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Tom McNaughton, Chief Financial Officer. Please go ahead, sir.

Thank you, Jake. Good afternoon. Thank you for joining us to discuss our results for the third quarter of 2009. Chane Graziano, our CEO, and David Green, our President, are also on the call today.

After the Safe Harbor Statement I'll turn the call over to Chane and David, who will present an overview of the third quarter and comment on our outlook for the remainder of this year. Lastly, I'll present some additional financial highlights primarily related to our balance sheet. Following those comments, we will open the call for any questions.

In our discussion today we may make statements that constitute forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from those projected due to risks and uncertainties, including those detailed in our Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2008, and other public filings.

Any forward-looking statements, including those related to our future results, represent our estimates as of today and should not be relied upon as representing our estimates as of any subsequent day. Further information regarding forward-looking statements and risk factors is included in the press release issued earlier today reporting our third quarter results.

Please note that during this call we will discuss non-GAAP financial measures. For each non-GAAP financial measure discussed, we've made available as part of our press release or on our website in the Investor Relations section a reconciliation to the most directly comparable GAAP financial measure.

Additionally, any material financial or other statistical information presented on the call which is not included in our press release will be archived and available on the Investor Relations section of our website. Look on the Investor Relations section and then click on the Investor Presentations or website icon as appropriate. A replay of this call will also be archived at the same location on our website. Our website is located at www.harvardbioscience.com.

Lastly, all financial information presented on this conference call relates to our continuing operations unless otherwise stated.

I'll now turn the call over to Chane.

Thank you, Tom, and good evening, everyone. Despite a foreign exchange headwind of approximately 4%, continued weakness in the economy and little if any impact from the government stimulus program, Harvard Bioscience revenues were up $1 million, or 5% versus Q3 2008, and non-GAAP adjusted diluted EPS was up $0.02 per share, or 33% versus Q3 2008. The impact of the acquisition of Denville Scientific in September, the first month of our ownership, added approximately $1.9 million in revenues and approximately $0.07 to our third quarter 2009 non-GAAP adjusted diluted earnings per share.

We expect the Denville acquisition will have significant impact on Harvard Bioscience's performance going forward. Over the last 10 years, Denville Scientific had an organic annual growth rate of approximately 15%, driven by continued expansion of the sales force, addition of new products and building the Denville brand. Therefore, with the acquisition of Denville we are raising our guidance for the full year for revenues from $77 million to $80 million to $83 million to $84 million, and we are raising our guidance on non-GAAP adjusted diluted earnings per share from $0.27 to $0.31 to non-GAAP adjusted diluted earnings per share to $0.28 to $0.31. In the fourth quarter, we expect revenues in the $25 million to $27 million range and non-GAAP adjusted earnings per share in the $0.08 to $0.11 range.

David will now comment further on third quarter results, the Denville business and our 2009 initiatives.

David?

Thank you, Chane. The 33% growth in EPS in Q3 was an excellent demonstration of the power of our strategy for driving EPS growth through combining organic growth, the tuck-under acquisitions and operational improvements. We have successfully pursued this strategy for 13 years now, and Q3 demonstrates the robustness of this strategy even during a major recession.

The two major drivers of EPS growth in Q3 were the acquisition of Denville and the program of operational improvements. Organic growth was approximately zero in the quarter. Let me address Denville first and then comment on operational improvements and organic growth.

One of the major drivers of the success in Q3 was the acquisition of Denville. The acquisition of Denville was, as we expected, accretive to our EPS in the quarter. Integration of Denville has gone smoothly so far, and Denville performed well in the one month in which we owned it in Q3.

Our plan for Denville is to continue to operate it as a separate subsidiary. We will continue to implement its successful growth strategy of expanding the product line, adding to the sales force and building the Denville brand name. This strategy has delivered organic growth at Denville of approximately 15% a year over the last 10 years. We expect that Denville can continue to grow at that rate, and it will be a significant contributor to our organic growth going forward.

Denville's products are mostly consumable products such as pipette tips and reagents used in popular molecular biology applications in almost every life science laboratory. Denville's products address a large market, approximately $1 billion, [and thus] provide a good growth opportunity. However, despite the large addressable market size, the average order size is very low, typically under $500. The low average order size makes the business relatively predictable, and Denville does not have the volatility of a capital equipment business. It's worth noting that Denville has continued its organic growth even during a major recession.

In addition to the acquisition of Denville, we saw the benefit of the previously announced program of operational improvements. In the last year or so, we've undertaken a series of operational improvements, including the closing of two factories, consolidation of administrative functions, reduction in staff levels and outsourcing of parts and subassembly. These improvements added approximately 150 basis points to the gross margin in the business in Q3, excluding Denville.

Although acquisitions and operational improvements are effective ways of growing EPS during difficult economic times, in the long run they must be combined with robust organic growth. Although organic growth was flat in the quarter, there was a significant improvement over Q2, which saw -15% organic growth. The order intake improved slightly in Q3 over Q2. We expect to see the trend continue to improve in Q4 and expect Q4 to show sequential growth over Q3.

We expect the main driver of the organic growth to be expanding distribution channels and new product introductions. Despite the recession, we've maintained our investments in adding field salespeople in both the Harvard Apparatus and Biochrom businesses and in introducing new products. I'm pleased to announce the launch in October of the second new product this year in our syringe pump product line, the KDS [Legato] 200. The KDS [Legato] 200 joins the PHD Ultra syringe pump which we launched in May 2009, and together they significantly improve the performance and ease of use of our syringe pump product line.

We're working on additional new products that we expect will be launched over the coming few quarters. We think these investments will help us increase organic growth as the economy recovers.

As always, we continue to pursue acquisition candidates, and we have a pipeline of potential candidates that could help us to grow into 2010 and beyond.

In short, while facing challenging business conditions in 2009 and significant foreign exchange headwinds, we believe that through the execution of our strategy of organic growth, tuck-under acquisitions and operational improvements, we'll be able to strengthen the Company and position ourselves well for when the economy recovers.

I'll now turn the call over to Tom for some additional comments.

Thank you, David. We entered the third quarter with no outstanding borrowings under our $20 million credit facility. During the quarter, we extended the credit facility for three years. The amended facility bears interest at LIBOR plus 4% and has essentially the same terms and covenants as the previous credit facility.

We paid $12.8 million at the closing of the Denville acquisition on September 2. We drew down $9 million on the credit facility and used $3.8 million in cash on hand to make that payment. There will be two contingent payments to be made as part of the Denville acquisition. We expect to make those payments in the current quarter and in the second quarter of 2010. We expect those two payments to total approximately $12.5 million, based on the total acquisition price estimate of $25.3 million.

We recorded Denville's opening balance sheet using an estimate for the contingent liability related to the future payments. During the fourth quarter we will true up that estimate in accordance with FAS 141(R), a new accounting announcement related to acquisitions. We'll recognize any necessary adjustments to our P&L at that time.

At September 30, 2009, our cash and cash equivalents, net of debt, totaled $5.6 million. During the first two quarters of 2009, we repurchased 812,000 shares of the Company's common stock. We did not repurchase any shares during the third quarter. Since we began repurchasing shares in the last week of the third quarter of 2008, we have repurchased approximately 1.7 million, or 5.5% of the Company's shares. Today there are 29.5 million HBIO common shares outstanding, compared with 31 million shares at the end of the third quarter of 2008.

Our non-GAAP income tax rate for the third quarter of 2009 was 26.7%, compared with 31.9% for Q3 2008. The lower rate was due to the geographic mix of earnings and the recognition in the third quarter of 2009 of a tax credit at our Panlab subsidiary. The Denville acquisition will cause our non-GAAP income tax rate to increase in the fourth quarter due to the fact that Denville operates primarily in the US, which is a high tax rate jurisdiction. We estimate that the Company's non-GAAP income tax rate for Q4 2009 could be 32% to 33%, depending on the geographic mix of earnings for the quarter. The higher tax rate in the fourth quarter could have a negative $0.01 per share impact on non-GAAP EPS compared to the third quarter.

We will now open the call to any questions.

Thank you.

(Operator instructions).

And we'll go to Kelly Cardwell, with Central Square Management.

Hey, guys, how you doing?

Hi, Kelly.

Just one quick question, have you guys seen any activities or quotings from the NIH funding? Could you just talk about that a little bit? Thanks.

Yes, Kelly, this is David. We haven't seen a lot of impact from the stimulus funding. We've seen an order here and there, but it's been fairly small. So we didn't really see any impact on the third quarter results. Our expectation is we probably will see some impact on fourth quarter results, but I think it'll probably still be fairly small. I think the real impact's probably going to be in 2010.

Have you guys thought about how significant it could be next year? I mean, is it something that could add a point or two to organic growth, or are you really thinking it's just on the margin and less than 1%?

Well, we haven't given any guidance for 2010 yet, and I'm not about to do so, but it does remind me a bit of back in the period from 1998 to 2003 when NIH budget doubled, so it was about a 15% increase per year over that period. And during that period, most of our industry, the life science tools industry, was showing double-digit organic growth rates. So that's pretty significant. But I do think once this eventually starts -- once this money eventually starts to flow through, I think it will have a fairly significant impact on the industry. But we haven't baked any of that into our forecast for 2010 at this point.

Got you. Great. Thanks, guys.

(Operator instructions).

And we'll go next to Walter Ramsley, with Walrus Partners.

Good afternoon. Congratulations on the quarter. I've got a couple of questions. The tax rate in the quarter, could you explain why that was as low as it was?

Sure. [When we did the] tax, it's primarily driven, if you compare it to the rate a year ago, some decrease is due to geographic differences in where the money came from that brought the rate down a bit, but most of the dip from the prior year was that during this year we did an R&D tax credit study in Spain, and we came up with a fairly large credit. And so when we found -- by the time we found that, we had to book basically the first, second and third quarter effect in the third quarter.

Oh, I see.

So there was a very large catch-up element there.

Sure. Okay. So, in general, do you have an idea of what the tax rate will be in the future?

Well, I -- what I said in my comments is in the fourth quarter it looks like it's going to be 32%, 33%.

Okay. So that's the normal rate? Okay.

Yes, based on the fact that we now have Denville. Denville's primarily business is US, so it will have a -- it will bring our tax rate up. Traditionally, we've been in the 30%, 31% range. This gets us probably more like 32%, 33%.

Okay.

We'd like to point out that's our non-GAAP tax rate. In the US we have sizable NOLs, and in the GAAP basis you don't see a US revision because of that, so that the -- even though Denville will be taxed at higher statutory rates, we won't make payments for some time. It'll help us use those NOLs, [in fact].

That sounds good. Did you break down the sales by geographic area? I missed that if you did.

We did not. We do not normally do that.

Oh, okay. All right. Sorry. The foreign exchange impact, it seems pretty significant. Is that just the way it goes, or are there steps that you can take to moderate the effect?

Yes, the foreign exchange impact in the quarter was about 4%, and although we don't report on a quarterly basis what split by geography is, roughly 55% of our annual revenue is outside the US and denominated in currencies other than the dollar. And that's one of the reasons why you saw last year and early into this year we had a very significant foreign exchange headwind. It's a little less in the third quarter than it was back in the first quarter and the fourth quarter of last year. But we are relatively exposed on the top line, in fact the entire income statement, to the dollar/pound and the dollar/euro exchange rates.

So you benefit if the dollar goes down against those two?

Yes.

That's correct.

That's the idea? Okay. Well, I guess that's it for me now, anyway. Thanks very much. Appreciate it.

Thank you.

(Operator instructions).

And there appears to be no further questions at this time.

All right. Thank you. I thank everyone for joining our call today. In closing, I'd like to add that we are pleased with our third quarter results, and we're optimistic about our future prospects.

Good night. Thank you.

That does conclude today's conference. We thank you for your participation.