At The Motley Fool, we have a Green Gene Investing discussion board, devoted to companies that have so much cash on their balance sheets, and so little debt, that their "net cash" makes up a sizeable portion of -- or even exceeds -- their market cap. As a confirmed "value hound," those are the companies toward which I tend to gravitate. But not today.
Today, I want to look at a little company that's about as far from a Green Gene as the Earth is from the Sun: SpaceHab
SpaceHab, which manufactures space-proof habitat and laboratory modules and provides an array of related support services for space missions, reported its fiscal Q4 and full-year 2006 earnings results yesterday, making this the best time in a year to take a close look at what's going on at the company. Rather than dwell on the quarterly results (profits down 52%, and sales down 23% year over year), let's go right to the big picture.
As already mentioned, SpaceHab is a bottom-heavy beast, with very little shareholder equity balanced against a boatload of debt. The thing about debt, though, is that you have to pay interest on it. Last year, SpaceHab spent $5.5 million on interest payments alone, which was more than the firm's entire gross profit. Even if the firm's 200-odd employees worked for free all year, if the electric company kept the lights on for gratis, and if the company stopped doing R&D entirely, the difference between the cost of SpaceHab's raw materials and the prices they fetch as finished goods wouldn't suffice to pay the interest on the company's debt.
Now, SpaceHab fans will certainly argue that the company has a bright future, as humanity moves into space for business and pleasure. They'll say that this year was exceptionally rough for SpaceHab because of the dearth of space shuttle launches. But this year isn't so great an aberration from the norm as it might seem. In fact, SpaceHab's business has been in decline since 1999, its revenues dwindling a bit more with each successive year. In 2006, sales fell another 15%, and gross profits dropped 68%; regardless, selling, general, and administrative costs and R&D expenditures all increased.
Is there life in SpaceHab? The firm has, on occasion, generated positive free cash flow over short periods of time. But its results are hardly consistent, and the crushing debt load and interest payments it demands continue to drag down the firm's prospects for viability. With interest rates rising and cash reserves dwindling, I expect SpaceHab will have to sell additional shares in the near future in order to remain in business. While that might save the firm, it could also significantly dilute current shares.
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Fool contributor Rich Smith does not have a position, short or long, in SpaceHab.