Harvard Bioscience, Inc. (Nasdaq:HBIO), a global developer, manufacturer, and marketer of a broad range of tools to advance life science research and regenerative medicine, today reported unaudited financial highlights for the fourth quarter and full year ended December 31, 2010.
Fourth Quarter Reported Results
Revenues from the Company's continuing operations for the three months ended December 31, 2010 were $29.5 million, an increase of $1.9 million, or 6.8%, compared to revenues of $27.6 million for the three months ended December 31, 2009. Currency exchange rates had a negative 2.3% effect on revenues in the fourth quarter of 2010 compared with the fourth quarter of 2009. The Company's acquisition of Coulbourn Instruments in August 2010 had a positive 2.3% effect on revenues in the fourth quarter of 2010 compared to the fourth quarter of 2009. Excluding the effects of currency exchange rates and acquisitions, the Company's organic revenue growth for the fourth quarter of 2010 was 6.8% over the same period in the previous year.
Income from continuing operations, as measured under U.S. generally accepted accounting principles ("GAAP"), was $2.2 million, or $0.08 per diluted share for the three months ended December 31, 2010 compared to $3.7 million, or $0.12 per diluted share, for the same period in 2009. GAAP income from continuing operations for the fourth quarter of 2009 included a $2.6 million, or $0.09 per diluted share gain from adjustment of contingent consideration related to our Denville Scientific acquisition.
Non-GAAP adjusted income from continuing operations was $3.2 million, or $0.11 per diluted share, for the fourth quarter of 2010 compared to $3.0 million, or $0.10 per diluted share, for the fourth quarter of 2009, which represented a 10% year-to-year increase in non-GAAP adjusted diluted earnings per share. The year-to-year increase in the non-GAAP adjusted net income from continuing operations is due to the organic growth in the Harvard Apparatus, Hoefer and Biochrom businesses in the fourth quarter of 2010 over the same period in the previous year.
Full Year Reported Results
Revenues from the Company's continuing operations for the year ended December 31, 2010 were $108.2 million, an increase of $22.4 million, or 26.1%, compared to revenues of $85.8 million for the year ended December 31, 2009. Currency exchange rates had a negative 1.5% effect on revenues for the year ended December 31, 2010 compared with the same period in 2009. The Company's acquisition of Denville Scientific in September 2009 and Coulbourn Instruments in August 2010 had a positive 21.5% effect on revenues. Excluding the effects of currency exchange rates and acquisitions, the Company's organic revenue growth for the year ended December 31, 2010 was 6.1% over the year ended December 31, 2009.
Income from continuing operations, as measured under GAAP, was $19.0 million, or $0.65 per diluted share for the year ended December 31, 2010 compared to $7.1 million, or $0.24 per diluted share for the same period in 2009. GAAP income for the year ended December 31, 2010 included an $11.3 million, or $0.38 per diluted share, benefit from the reversal of valuation allowances on certain deferred income tax assets and a $0.4 million, or $0.01 per diluted share gain from adjustment of the contingent consideration related to our Denville Scientific acquisition. GAAP income for the year ended December 31, 2009 included $2.6 million, or $0.09 per diluted share gain from adjustment of the contingent consideration related to our Denville Scientific acquisition.
Non-GAAP adjusted income from continuing operations was $10.5 million, or $0.36 per diluted share, for the year ended December 31, 2010 compared with $8.9 million, or $0.30 per diluted share, for the same period in 2009, which represented a 20% increase in the non-GAAP adjusted diluted earnings per share. Denville Scientific, acquired in September 2009, contributed an incremental $1.3 million, or $0.04, to the non-GAAP adjusted diluted earnings per share for the year ended December 31, 2010. Organic growth in the Harvard Apparatus, Hoefer and Biochrom businesses in 2010 also contributed to the increase in the non-GAAP adjusted net income over the previous year.
We ended 2010 and 2009, with net cash (cash and cash equivalents, net of debt) totaling $1.7 million and $3.3 million, respectively. As of December 31, 2010 and 2009, we had $18.0 million and $13.3 million, respectively, of borrowings under our credit facility. The increase in borrowings related to our acquisition of Coulbourn Instruments in August 2010, final payment of the Denville Scientific subsidiary acquisition, and stock repurchases. During 2010, we repurchased 1,382,000 of our common shares for $5.0 million. These purchases completed the Company's $10 million stock repurchase program.
Commenting on the Company's performance, Chane Graziano, CEO, stated, "2010 was a landmark year for HBIO, with the development of our new Regenerative Medicine Device business. Therefore, we will now be reporting on two business units.
First, in our core Life Science Research Tools business we grew revenues by 26% compared to 2009. Non-GAAP diluted earnings per share in the core business was 38 cents per share representing growth of 27% compared to 2009. This growth was primarily driven by the acquisition of Denville, 6% organic growth and the acquisition of Coulbourn Instruments. The organic growth was the direct result of the expansion of our direct sales organizations and the introduction of new products.
Second, in our new Regenerative Medicine Device business we introduced and received revenues from three novel products. We also identified a potentially significant growth opportunity for consumables associated with bioreactors for growing organs for human transplant. We believe that this nascent market could potentially grow to be hundreds of millions of dollars. In 2010 we invested approximately $900 thousand or 2 cents per share resulting in non-GAAP diluted earnings per share for the Life Science Research Tools and Regenerative Medicine Device businesses combined of 36 cents per share. In 2011 in order to accelerate our development of these products we will increase our investment to $2.0 to $2.5 million or approximately 5-6 cents per share. Currently we are reviewing strategic alternatives to fund these investments going forward. We will discuss this in more detail on our earnings release conference call."
Mr. Graziano continued, "In 2011 in our core Life Science Research Tools business we expect revenues to grow 4% to 6% to be in the $113-$115 million range and we expect non-GAAP diluted earnings per share to grow 8% to 13% from 38 cents per share to be in the 41-43 cents per share range. If the strategic alternative we choose is for HBIO to fund the Regenerative Medicine Device business spending internally in 2011, then our overall non-GAAP diluted earnings per share will be in the 36-37 cents per share range."
Mr. Graziano added, "We expect the quarterly phasing of revenue and non-GAAP diluted earnings per share to be similar in 2011 to what it was in 2010, hence, we expect the first quarter revenues to be in the $26-$28 million range and non-GAAP diluted earnings per share from our core Life Science Research Tools business to be in the 8-9 cents range. We expect the investment in the Regenerative Medicine Device business in the first quarter to be approximately 1 cent per share. Therefore in the first quarter of 2011 we expect our overall non-GAAP diluted earnings per share to be in the 7-8 cents per share range.
Our 2011 guidance does not include the impact of any future acquisitions."
The non-GAAP adjusted earnings per diluted share from continuing operations guidance excludes amortization of intangible assets, the impact of future acquisitions, acquisition costs, any gain or loss from a revaluation of acquisition contingencies, any future restructuring actions, and stock-based compensation expense recognized under the provisions of FASB ASC Topic 718, "Compensation – Stock Compensation". See the table below for a reconciliation of our estimated non-GAAP adjusted earnings per diluted share from continuing operations to our estimated GAAP earnings per diluted share from continuing operations. See Exhibits 4, 5 and 6 for reconciliations of GAAP to non-GAAP adjusted operating income from continuing operations, GAAP to non-GAAP adjusted income from continuing operations, and US GAAP diluted earnings per common share from continuing operations to non-GAAP adjusted diluted earnings per common share for the three months and year ended December 31, 2010.
Operating Results for Continuing Operations
Three months ended December 31, 2010 compared to three months ended December 31, 2009:
Revenues increased $1.9 million, or 6.8%, to $29.5 million for the three months ended December 31, 2010 compared to $27.6 million for the same period in 2009. Our recently acquired Coulbourn Instruments subsidiary contributed approximately $0.6 million to fourth quarter 2010 revenues. The effect of a stronger U.S. dollar decreased the Company's fourth quarter revenues by $0.6 million, or 2.3%, compared with the same period in 2009. Adjusting for the effect of foreign currency fluctuation and excluding the effect of acquisitions, revenues were up $1.9 million, or 6.8%, year-to-year and reflected organic growth in our Harvard Apparatus, Denville Scientific and Biochrom businesses.
Cost of product revenues increased $0.6 million, or 4.1%, to $15.1 million for the three months ended December 31, 2010 compared with $14.5 million for the three months ended December 31, 2009. The increase in cost of product revenues included $0.4 million attributable to our recently acquired Coulbourn Instruments subsidiary. The effect of a stronger U.S. dollar decreased the Company's fourth quarter cost of product revenues by $0.3 million. Adjusting for the effect of foreign currency fluctuation and excluding the effect of acquisitions, cost of product revenues were up $0.5 million, or 3.6%, year-to-year and reflected organic growth in our Harvard Apparatus, Denville Scientific and Biochrom businesses. Gross profit as a percentage of revenues increased to 48.7% for the three months ended December 31, 2010 compared with 47.4% for the same period in 2009. The increase in gross profit as a percentage of revenues was primarily due to the effects of the ongoing operational improvement initiatives, greater sales volume and a more favorable sales mix.
Sales and marketing expenses increased $0.3 million, or 9.8%, to $4.2 million for the three months ended December 31, 2010 compared with $3.9 million for the three months ended December 31, 2009. This increase was primarily due to expenses from our recently acquired Coulbourn Instruments subsidiary of $0.1 million and increased sales and marketing efforts in our Harvard Apparatus and Denville Scientific businesses, which was partially offset by a $0.1 million favorable impact of currency exchange rates.
General and administrative expenses increased $0.8 million, or 18.8%, to $5.2 million for the three months ended December 31, 2010 compared with $4.4 million for the three months ended December 31, 2009. The year-to-year quarterly increase was due to $0.1 million of expenses related to our recently acquired Coulbourn Instruments subsidiary and an increase in bonus expense by $0.8 million, which was partially offset by a $0.1 million favorable impact of currency exchange rates.
Research and development expenses were $1.2 million for the three months ended December 31, 2010 and 2009, respectively, reflecting activity in our regenerative medicine initiative and new product development efforts in our Biochrom business.
Other income (expense), net was $0.2 million expense and $2.6 million income for the three months ended December 31, 2010 and 2009, respectively. Net interest expense was $0.2 million for the three months ended December 31, 2010 compared to $0.1 million for the three months ended December 31, 2009. The increase in the net interest expense was primarily due to higher average debt balances in the fourth quarter of 2010 compared to the fourth quarter of 2009. Other income (expense), net for the three months ended December 31, 2009 includes a $2.6 million gain from adjustment of contingent consideration related to our Denville Scientific acquisition.
Income tax expense from continuing operations was approximately $0.5 million and $1.8 million for the three months ended December 31, 2010 and 2009, respectively. The effective income tax rate for continuing operations was 18.6% for the three months ended December 31, 2010, compared with 33.2% for the same period of 2009. The difference between our effective tax rate and the US statutory tax rate is principally attributable to changes in our valuation allowance, foreign tax rate differential, and increased research and development tax credits. Our non-GAAP adjusted income tax rates were 25.8% and 30.5% for the quarters ended December 31, 2010 and 2009, respectively. Our non-GAAP tax rate estimates income taxes excluding the effect of valuation allowances on the Company's deferred tax assets. The decrease in the non-GAAP income tax rate in the fourth quarter of 2010 compared with the fourth quarter of 2009 was primarily due to recognition of the aforementioned increased research and development tax credits.
Year ended December 31, 2010 compared to year ended December 31, 2009:
Revenues increased $22.4 million, or 26.1%, to $108.2 million for the year ended December 31, 2010 compared to $85.8 million for the same period in 2009. Our Denville Scientific and Coulbourn Instruments subsidiaries contributed approximately $18.5 million to the revenue increase for the year ended December 31, 2010. The effect of a stronger U.S. dollar decreased the Company's revenues by $1.3 million, or 1.5%, compared with the same period in 2009. Adjusting for the effects of foreign currency fluctuation and acquisitions, revenues were up $5.2 million, or 6.1% year-to-year and reflected organic growth across our Harvard Apparatus and Biochrom businesses.
Cost of product revenues increased $12.3 million, or 27.9%, to $56.4 million for the year ended December 31, 2010 compared with $44.1 million for the year ended December 31, 2009. The increase in cost of product revenues included $11.6 million, or 26.3%, attributable to our Denville Scientific and Coulbourn Instruments acquisitions. A stronger U.S. dollar caused a $0.7 million favorable currency effect on cost of product revenues for the year ended December 31, 2010, compared with the same period in 2009. Adjusting for the effect of foreign currency fluctuation and excluding the effect of acquisitions, cost of product revenues were up $1.4 million, or 3.6%, year-to-year and reflected organic growth in our Harvard Apparatus and Biochrom businesses. Gross profit as a percentage of revenues decreased to 47.9% for the year ended December 31, 2010 compared with 48.6% for the same period in 2009. The decrease in gross profit as a percentage of revenues was primarily due to the impact of Denville Scientific, which because it does not manufacture its products, has lower gross margins than our overall average margin. Gross margin as a percentage of revenues, excluding Denville, was 51.0% for the year ended December 31, 2010, and 49.7% for the year ended December 31, 2009. The year-to-year increase reflected the effects of ongoing operational improvement initiatives, greater sales volume and a more favorable sales mix during 2010.
Sales and marketing expenses increased $4.5 million, or 39.0%, to $16.3 million for the year ended December 31, 2010 compared with $11.8 million for the year ended December 31, 2009. This increase included $3.6 million due to our acquisitions of Denville Scientific and Coulbourn Instruments subsidiaries and reflected increased sales and marketing efforts across our businesses.
General and administrative expenses increased $2.5 million, or 16.8% to $17.6 million for the year ended December 31, 2010 compared with $15.1 million for the year ended December 31, 2009. The year-to-year increase included $0.7 million of expenses at our Denville Scientific and Coulbourn Instruments subsidiaries, a $0.2 million increase in the stock compensation expense, $1.0 million increase in bonus expense, and $0.6 million increase in other general and administrative areas.
Research and development expenses increased $0.3 million, or 7.1% to $4.7 million for the year ended December 31, 2010 compared with $4.4 million for the year ended December 31, 2009. The increase in research and development expenses was primarily due to increased spending in the regenerative medicine device business and new product development efforts in our Biochrom business, partially offset by lower spending in our Harvard Apparatus business.
Other income (expense), net was $0.7 million expense and $1.8 million income for the years ended December 31, 2010 and 2009, respectively. Net interest expense was $0.7 million for the year ended December 31, 2010 compared to $0.3 million for the year ended December 31, 2009. The increase in the net interest expense was primarily due to higher average debt balances in 2010 compared to 2009. Other income (expense), net also included $0.4 million and $2.6 million for the years ended December 31, 2010 and 2009, respectively, from the gain from adjustment of contingent consideration related to our Denville Scientific acquisition.
Income tax (benefit) expense from continuing operations was approximately $9.5 million benefit and $2.7 million expense for the years ended December 31, 2010 and 2009, respectively. The effective income tax rate for continuing operations was 98.8% benefit for the year ended December 31, 2010, compared with 27.2% expense for the same period of 2009. The difference between our effective tax rate and the US statutory tax rate is principally attributable to changes in our valuation allowance which primarily includes an $11.3 million benefit from the reversal of valuation allowances on certain deferred income tax assets during the third quarter of 2010, foreign tax rate differential, and increased research and development tax credits. Our non-GAAP adjusted income tax rates were 30.1% and 29.5% for the year ended December 31, 2010 and 2009, respectively. Our non-GAAP tax rate estimates income taxes excluding the effect of valuation allowances on the Company's deferred tax assets. The increase in the non-GAAP income tax rate for the year ended December 31, 2010 compared with the December 31, 2009 was primarily due to the acquisition of Denville Scientific in September 2009 and Coulbourn Instruments in August 2010 which are located in the United States, a higher tax jurisdiction than our other subsidiaries, partially offset by the recognition of the aforementioned increased research and development tax credits.
Balance Sheet
The Company ended the fourth quarter of 2010 with cash and cash equivalents of $19.7 million compared to $16.6 million at December 31, 2009. As of December 31, 2010 and 2009, the Company had $18.0 million and $13.3 million of borrowings, respectively, outstanding under its credit facility. The increase in borrowings under the credit facility is related to our acquisition of Coulbourn Instruments in August 2010, final payment of the Denville Scientific subsidiary acquisition, and stock repurchase activity. Total cash and equivalents, net of debt, was $1.7 million and $3.3 million at December 31, 2010 and December 31, 2009, respectively.
Trade receivables were $15.4 million and inventories were $15.9 million as of December 31, 2010 compared to trade receivables of $14.4 million and inventories of $14.4 million as of December 31, 2009. DSO were 48 days for the three months ended December 31, 2010 and 2009, respectively. DSO were 53 days for the year ended December 31, 2010 and 63 days for the year ended December 31, 2009. The decrease was primarily due to the full year presence of Denville Scientific in 2010 and due to the fact that Denville has a lower DSO than our other businesses. Inventory turns were 3.7 times for the three months ended December 31, 2010 compared with 3.9 times for the same period of 2009.
The Company spent $5.0 million to repurchase approximately 1,382,000 shares of its common stock during the year ended December 31, 2010 and spent $2.4 million to repurchase approximately 812,000 shares of its common stock during the year ended December 31, 2009. The share repurchases made in 2010 completed the Company's $10.0 million stock repurchase program.
Restructuring
During the quarter ended September 30, 2010, the management of Harvard Bioscience developed a plan to streamline our operations at Panlab, our Harvard Apparatus business in Spain. The plan included workforce reduction in all functions of the organization. During the third quarter of 2010, we recorded restructuring expenses of approximately $0.3 million, representing severance payments to employees. No charges have been incurred beyond the third quarter of 2010.
During the quarter ended December 31, 2010, the management of Harvard Bioscience developed a plan to reduce operating expenses at our Biochrom U.K. subsidiary. During the fourth quarter of 2010, we recorded restructuring expenses of approximately $0.3 million. The charges were comprised of $0.2 million in severance payments and $0.1 million in inventory impairment charges (included in cost of product revenues).
During the quarter ended March 31, 2009, the management of Harvard Bioscience developed a plan to relocate the Scie-Plas operation to Hoefer's San Francisco location and exit the Scie-Plas general fabrication business as part of our ongoing business improvement initiative.
During the year ended December 31, 2009, we recorded restructuring charges in our Scie-Plas, Biochrom and Hoefer businesses related to the 2009 restructuring plan of approximately $0.7 million. These charges were comprised of $0.3 million in severance payments, $0.2 million in inventory impairment charges related to certain product lines (included in cost of product revenues) and $0.2 million in various other costs.
Discontinued Operations
In September 2008, we completed the sale of assets of our Union Biometrica Division including our German subsidiary, Union Biometrica GmbH, representing at that time the remaining portion of our Capital Equipment Business Segment. Accordingly, unless otherwise indicated, the discussion of our business is focused on our continuing operations, which constitute our Apparatus and Instrumentation businesses.
During 2009, we recorded a gain of $0.1 million in our discontinued operations reflecting an adjustment of our estimated net costs associated with the divestiture of our Union Biometrica Division.
Harvard Bioscience files two major patents in regenerative medicine