Harvard Bioscience, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The company develops, manufactures, and markets scientific instruments, systems, and laboratory consumables. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $25.0 | $25.7 | $78.1 | $80.3 |
| Gross profit | $11.7 | $11.7 | $36.3 | $35.8 |
| Gross margin | 46.7% | 45.6% | 46.5% | 44.6% |
| Operating loss | $(0.8) | $(0.8) | $(1.9) | $(1.8) |
| Net loss | $(1.6) | $(0.8) | $(3.0) | $(1.9) |
| Loss per diluted share | $(0.05) | $(0.02) | $(0.09) | $(0.06) |
- Cash flow: Nine-month operating cash flow was $3.7 million, compared with cash use of $1.1 million in 2015. Investing used $1.0 million; financing used $3.7 million. Cash declined $1.4 million from year-end 2015.
- Balance sheet at September 30: Cash and equivalents were $5.3 million; current assets $46.2 million and current liabilities $14.4 million. Total assets were $112.2 million and stockholders’ equity $75.9 million.
- Debt and liquidity: Credit-facility borrowings were $15.0 million, versus $18.7 million at December 31, 2015; debt net of cash was $9.7 million. The company reported $7.8 million of available borrowing capacity and compliance with financial covenants, subject to covenant and working-capital restrictions. The facility matures March 29, 2018.
Changes versus comparable periods
- Q3 revenue fell 2.8%; management attributed nearly all of the reported decline to currency translation, with a 0.1% decline excluding currency. Nine-month revenue fell 2.7%, or 1.2% excluding currency, which management linked mainly to softer European research funding and slower-than-expected NIH budget funding.
- Gross margin improved in both comparisons. Management cited savings from facility consolidations and, for the nine-month period, lower inventory fair-value step-up charges than in 2015.
- Nine-month general and administrative expense increased 8.3% to $16.0 million, primarily due to forensic investigation costs related to a previously disclosed 2015 embezzlement and higher stock compensation. Research and development expense declined 13.3% to $4.2 million.
- Bookings were $26.3 million for Q3 and $77.0 million for nine months, down 1.3% and 4.3%, respectively, excluding currency effects. Backlog was approximately $7.5 million, down 4.8% excluding currency from a year earlier; orders may be cancelled before shipment.
Outlook, management commentary, and notable items
- Management stated that available cash, operating cash generation, and debt capacity are expected to fund current operations, potential acquisitions, and capital expenditures for the next 12 months and beyond. This expectation may require additional debt or equity; no specific revenue or earnings guidance was provided.
- In October 2016, after quarter-end, the company sold AHN Biotechnologie GmbH for $1.7 million in cash. AHN generated $2.5 million of revenue in 2015. The company had recorded a $0.7 million impairment in Q3 and expected a further $0.8–$1.0 million loss on sale in Q4, including goodwill allocation and transaction costs.
- Q3 and nine-month results included a $0.6 million valuation allowance against AHN deferred tax assets; the nine-month income tax expense was $0.9 million, compared with a $1.4 million benefit in 2015.
- Foreign currency translation reduced comprehensive income by $2.0 million in Q3 and $1.4 million for nine months. Foreign-subsidiary cash was $3.1 million; those funds were generally unavailable for U.S. operations unless repatriated, which could trigger tax.
- Management reported disclosure controls were not effective at September 30 because previously identified material weaknesses in internal control over financial reporting remained. It said remediation work was ongoing and that the statements nevertheless fairly presented the company’s financial condition and results in all material respects.
- Key stated risks include research-budget and funding weakness, foreign exchange and international-market exposure, substantial debt and covenant requirements, competition, acquisition and integration risks, possible further asset impairment, and unresolved control weaknesses. The company also carries an underfunded U.K. pension liability of approximately $2.5 million.
Important facts for investors to verify
- Whether AHN’s sale proceeds and the expected Q4 loss on sale were ultimately recorded as anticipated.
- Progress in remediating the material weaknesses and whether disclosure controls became effective.
- Subsequent revenue, bookings, and backlog trends, particularly in Europe and markets dependent on research funding.
- Cash availability, debt reduction, covenant headroom, and the March 2018 credit-facility maturity.
- Actual tax effects of foreign cash repatriation and any further valuation allowances or impairment charges.