Harvard Bioscience, Inc. — Q3 2012 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2012. Harvard Bioscience develops and sells life-science research tools (LSRT) and regenerative medicine devices (RMD). Results are unaudited and in U.S. dollars; financial statement amounts below are in millions unless otherwise noted. LSRT generated all reported revenue; RMD remained a development-stage business with operating losses.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $26.1 | $26.4 | $82.9 | $79.8 |
| Gross profit | $12.0 | $11.9 | $39.0 | $37.0 |
| Gross margin | 45.9% | 45.0% | 47.0% | 46.4% |
| Operating income (loss) | ($0.1) | $0.2 | $2.4 | $4.7 |
| Net income (loss) | ($0.1) | $0.03 | $1.2 | $3.1 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $6.7 | $4.0 |
- Q3 operating expenses increased to $12.1 million from $11.7 million. R&D rose 19.8% to $1.9 million, primarily from RMD injector and bioreactor development. Q3 net loss per share is shown as a dash in the filing; diluted common-stock equivalents were excluded as anti-dilutive.
- For the nine months, sales and marketing rose 10.7% to $14.2 million, G&A rose 11.2% to $14.6 million, and R&D rose 40.6% to $5.5 million. Nine-month basic and diluted EPS were both $0.04, versus $0.11 basic and $0.10 diluted in 2011.
- At September 30, cash was $20.3 million, current assets $58.8 million, current liabilities $9.5 million, total assets $130.6 million, and total liabilities $30.2 million. Long-term debt was $15.3 million, down from $16.3 million at year-end 2011. Cash less debt was $5.0 million. The company reported $4.7 million of available revolver capacity and compliance with financial covenants.
- Nine-month investing cash use was $4.0 million, including $2.9 million net acquisition spending and $1.2 million of capital expenditures. Financing cash use was $0.5 million; cash increased $2.4 million over the period.
Material changes and management commentary
- Q3 revenue decreased 1.0%; AHN added approximately $0.4 million, while currency reduced revenue by approximately $0.4 million. Excluding acquisitions and currency, revenue fell 1.2%. Management cited weaker September demand, particularly from university and government research customers amid uncertainty about future funding.
- Nine-month revenue increased 3.9%, including approximately $2.9 million from acquisitions of CMA and AHN. Excluding acquisitions and currency, revenue grew 1.7%, with growth at Biochrom, Denville, and Hoefer. A stronger U.S. dollar reduced nine-month revenue by $1.2 million.
- Gross margin improved in both reported periods, which management attributed primarily to favorable product and sales mix. Despite higher nine-month revenue, operating income fell 47.8% as operating costs—especially R&D and selling and administrative expenses—increased.
- Bookings were $25.8 million in Q3 versus $26.3 million a year earlier. Nine-month bookings were $82.3 million, up 2.5%. Backlog fell 15.2% year over year to $4.7 million.
- The company acquired AHN, a German laboratory-consumables maker, for approximately $2.0 million in February and Modular SFC assets for approximately $0.5 million in May; both were funded from existing cash. Acquisition-related expenses were $0.3 million for the first nine months.
Outlook, risks, and unusual items
- Management expected available cash, operating cash generation, and debt capacity to fund current operations and capital expenditures for 12 months and beyond, based on current plans. It expected approximately $0.4 million of Q4 2012 capital expenditures.
- The company was evaluating strategic alternatives to fund RMD. Management said additional debt or equity might be needed; equity issuance could dilute existing shareholders, and favorable financing was not assured. The filing provides no quantified earnings or revenue guidance.
- RMD products and clinical applications remain subject to development, commercialization, and regulatory risks. The company expected to market a research-application version of a clinical syringe pump in 2012 and submit it to regulators in 2013. A European clinical trial for tracheal-cancer patients was expected to begin in 2014.
- The filing disclosed that a recipient of a 2011 stem-cell-seeded synthetic trachea died in March 2012; the recorded cause was pneumonia secondary to tracheal cancer. The company stated it knew of no evidence that the scaffold or bioreactor contributed to the death. Two reported laryngotracheal implants in Russia were part of a clinical trial supported by a government grant.
- On October 4, 2012, after quarter-end, the company amended its revolving credit facility to extend maturity from August 2013 to August 2014, with no other term changes. The facility bears interest at LIBOR plus 3.0%; the rate at September 30 was 3.22%. A 1% rate increase was estimated to add $153,000 in annual interest expense on then-outstanding borrowings.
- Foreign subsidiaries held $18.8 million of cash, which management considered permanently reinvested and not available for domestic operations without repatriation and potential U.S. taxes. The company cited foreign exchange exposure, uncertain research funding, acquisition integration, RMD commercialization and regulatory approval, and covenant compliance among its risks. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether weak September demand and lower backlog persist, and how university and government funding uncertainty affects bookings and sales.
- Whether organic growth and gross-margin gains continue to offset higher operating expenses, particularly RMD development spending.
- RMD funding needs, product commercialization milestones, regulatory approvals, and clinical developments.
- Availability and domestic usability of foreign-held cash, revolver capacity, covenant headroom, and the effect of interest-rate or currency changes.
- Acquisition integration and performance, and the assumptions supporting goodwill and intangible-asset carrying values.