Harvard Bioscience, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited consolidated financial statements; amounts below are in U.S. dollars unless stated otherwise.
Business context
Harvard Bioscience develops, manufactures and markets scientific instruments, systems and laboratory consumables for life-science research, drug discovery, and testing. It sells globally through direct channels and distributors. The company reported operations in the United States, United Kingdom, Germany, Sweden, Spain, France, Canada and China.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $25.1m | $25.0m | $74.4m | $78.1m |
| Gross profit / margin | $11.6m / 46.5% | $11.7m / 46.7% | $34.4m / 46.3% | $36.3m / 46.5% |
| Operating loss | $0.1m | $0.8m | $0.8m | $1.9m |
| Net loss | $0.4m | $1.6m | $1.9m | $3.0m |
| Basic and diluted loss per share | $0.01 | $0.05 | $0.05 | $0.09 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $2.0m | $3.7m |
- For the nine months, cash used in investing was $0.7m, mainly capital expenditures; cash used in financing was $1.4m, including $3.5m of debt repayments and $2.3m of borrowings. Cash increased $0.2m to $5.8m.
- At September 30, cash was $5.8m and debt, net of financing costs, was $12.4m; net debt was $6.6m. The company had $5.5m of available borrowing capacity, subject to covenant and working-capital restrictions, and reported compliance with its financial covenants.
- The credit agreement provides a $14.0m term loan and a $25.0m revolving line, both maturing May 1, 2022. The term loan’s effective rate after the interest-rate swap was 4.61%. Debt is secured by substantially all company and guarantor assets.
- Current assets were $47.4m and current liabilities $13.9m. The underfunded U.K. pension liability was approximately $3.4m. Operating lease commitments totaled $9.2m.
Changes versus comparable periods
- Q3 revenue was nearly flat year over year. Management said revenue excluding AHN’s sale and currency effects grew about 2%, led by the United States and China and partly offset by Europe.
- Nine-month revenue declined 4.7% reported, including a 1.3 percentage-point unfavorable foreign-exchange effect. Excluding currency and the October 2016 AHN disposition, management reported an approximately 1% decline, primarily due to continued European softness.
- Gross margin was broadly stable but slipped 0.2 percentage points in both the quarter and nine-month comparison. Nine-month G&A expense fell 11.5%, partly reflecting forensic investigation costs incurred in 2016; R&D expense was down 2.8% over the nine months but rose 17.5% in Q3 due to product-development and compliance investments.
- Operating loss and net loss improved in both comparisons. The prior-year periods included a $0.7m impairment charge related to AHN, which was sold in October 2016 for $1.7m cash.
- Nine-month operating cash flow fell to $2.0m from $3.7m, primarily reflecting working-capital changes. Foreign-currency translation produced a $4.2m comprehensive-income gain in 2017 versus a $1.4m loss in 2016 for the nine-month periods.
Outlook, risks and unusual items
- Management expected available cash, cash generated from current operations and debt capacity to fund current operations, potential acquisitions and capital expenditures for the next 12 months and beyond. This is forward-looking and may require additional debt or equity financing; no specific revenue or earnings guidance was provided.
- Management expected no material financial-statement impact from adopting the new revenue-recognition standard in 2018, but noted its assessment was preliminary. Adoption of the lease standard is expected to increase recognized assets and liabilities; the impact had not yet been determined.
- Disclosure controls and procedures were reported ineffective at September 30, 2017 because previously identified material weaknesses in internal control over financial reporting remained. Remediation efforts included ERP implementation at MCS, review of reporting authority, and additional income-tax controls.
- Key disclosed risks include customer research-budget and government-funding reductions, international and currency exposure, European market softness and Brexit-related tax uncertainty, competition, acquisition and integration execution, debt and covenant constraints, and possible impairment of goodwill or intangible assets.
- The company used an interest-rate swap to fix the LIBOR component of the term loan; management stated that, on the hedged term-loan balance, interest-rate fluctuations would not affect the next 12 months under the stated assumptions. The swap had a $46,000 liability fair value at quarter-end.
Important facts for investors to verify
- Whether European demand stabilizes and reported revenue trends improve after accounting for AHN’s disposition and foreign-exchange movements.
- Whether operating cash generation strengthens, given the decline from the prior-year nine-month period and the company’s working-capital needs.
- Available borrowing capacity, covenant headroom and debt-repayment requirements under the credit agreement.
- Progress in remediating the material weaknesses and the timing and effects of adopting revenue-recognition and lease accounting standards.
- Potential effects of Brexit, currency movements, the pension deficit and the company’s substantial lease commitments.