In yesterday’s conference call ...
I found that the discussion between Blake Goodner (Bridger Capital) and Phil Ankeny added color to the balance sheet (see below). In particular, the discussion highlights the absence of earnings growth and the decreased operating cash flow relative to last year. Not a message I want to hear, but one that gives me caution regarding hopes of increased stock prices in the near future, absent a surprise announcement of a new product introduction.
<Q> = Blake Goodner with Bridger Capital
<A> = Philip Ankeny (SRDX CFO)
<Q>: Hey guys. I am just trying to reconcile something. I understand over the last couple of quarters we are trying to focus more on cash flow than earnings. But I just want to make sure, I am just looking this quarter, so we reported $0.31. The payment from QLTI, was that just a one quarter payment of 900,000, that’s not going to continue, right?
<A>: Correct. It’s not a recurring quarterly item. There are potential future additional payments in connection with sort of a payout and earnout on that transaction. But it’s not something that would recur in every single quarter basis.
<Q>: Okay. So that means that if I were to adjust out for that, then the GAAP earnings is more like $0.28, which kind of annualizes to about $1.12. And I am just looking at a consensus figure out there at a $1.49. And I am just trying – or $1.46. I am just trying to understand, am I missing something? Is there something in the second, third and fourth quarters of the year that’s going to cause a significant ramp in just the GAAP earnings?
<A >: Blake, unfortunately, because we don’t give actual quarterly guidance or even annual guidance, that’s really something that we really can’t comment on. We don’t – the consensus numbers are published by the analysts that put out their research and we just are not in a position because we don’t give guidance to really comment on their estimate.
<Q>: Okay. And then just on back to free cash flow, so in the quarter we generated 4.4 million of operating cash flow, 1.2 million of CapEx, so 3 million of free cash. And there was a 1.8 million from Merck in there, a 1.8 million payment from Merck?
<A >: That actually doesn’t flow through in cash yet because that’s been billed but not paid yet.
<Q>: Okay. So how much cash was paid for Merck? Was there anything residual from last quarter that was in this quarter?
<A >: Last quarter we had about 1 million, and so there would be some cash there from Merck.
<Q>: So in the 4.4 million this quarter, there is about 1 million from Merck?
<A >: In terms of – yeah, from – carryover from last quarter, yeah. The larger – the largest impact items for the quarter are really the tax payments. Particularly there was – in the first quarter of ‘07 there was actually no tax payment and a lot of the income taxes were paid in January of last year rather than in December and then January. And so effectively, the first quarter ‘07 north of 11 million in cash flow was actually sort of artificially high, if you will, just based on timing. Here we would argue it’s sort of artificially low because of the big cash payments for taxes in connection with the $20 million Merck tax obligation.
<Q>: So what was the tax payment in the quarter then for this quarter? What was the tax payment?
<A >: The net income tax cash reconciliation is a use of cash of 3.3 million. But that’s a boiled down consolidated number. There is also – you would have to look at the specific tax payments which are well in excess of that going out the door in December to pay for the – essentially the tax obligation on the 20 million.
<Q>: Right. I guess I am just trying to get at – I am looking at a $4.4 million operating cash flow. If I add back the 3 million that gets me back to like 7 or 8 million of operating cash flow in the quarter, excluding the tax payments?
<A – Philip Ankeny>: Okay.
<Q>: I’m just trying to get to a run rate free cash flow number for the quarter adjusted for the tax payments?
<A – Philip Ankeny>: Yeah. The other negative cash flow items compared to kind of that $11 million figure from a year ago are accounts receivable, where we had a benefit in the year ago quarter approaching 2 million and we were closer to 90,000 this quarter. And then also on the payables front, we had a use of cash a year ago of about 1 million and this quarter we are closer to 1.8 million use. So when you add up those three items, you are at kind of relative to the year ago quarter, that’s about 8.5 million of kind of negative comparison, if you will.
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As backgound, the statement releasted by SRDX regarding Q1 2008 results, operating cash flow was described in the following way: “Operating cash flow for the quarter was $4.4 million, compared with $11.8 million in the prior year period. The decrease in operating cash flow principally reflects timing of tax payments both in the first quarter of fiscal 2008 and the first quarter of fiscal 2007.” (SEC Form 8-K filed 1/23/08).
