Harvard Bioscience, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial amounts below are in millions of U.S. dollars unless otherwise noted. Harvard Bioscience develops, manufactures and markets life-science research instruments, systems and laboratory consumables, selling in more than 100 countries.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $25.731 | $25.448 | $80.294 | $78.299 |
| Gross profit | $11.726 | $11.442 | $35.799 | $35.481 |
| Gross margin | 45.6% | 45.0% | 44.6% | 45.3% |
| Operating income (loss) | ($0.775) | $1.425 | ($1.826) | $4.497 |
| Net income (loss) | ($0.847) | $0.633 | ($1.899) | $2.374 |
| Diluted EPS | ($0.02) | $0.02 | ($0.06) | $0.07 |
- Revenue and margins: Reported revenue increased 1.1% in Q3 and 2.5% year to date. Excluding currency effects, management reported growth of 3.9% and 6.4%, respectively. Q3 gross margin improved, while the year-to-date margin declined, which management attributed to acquisition-related inventory step-up charges, facility consolidation costs and unfavorable currency effects.
- Expenses: Q3 operating expenses were $12.501 million, up from $10.017 million; nine-month expenses were $37.625 million, up from $30.984 million. Sales and marketing, general and administrative, and R&D expenses rose, primarily due to acquisitions, payroll and consolidation costs. Restructuring charges were $0.376 million in Q3 and $0.487 million year to date.
- Cash flow: Nine-month operating cash flow was negative $1.059 million, versus positive $3.088 million in 2014. Investing used $6.837 million, including $4.545 million for the HEKA acquisition and $2.298 million of capital expenditures. Financing provided $0.621 million. Cash fell by $8.044 million to $6.090 million.
- Liquidity and debt: At September 30, cash was $6.090 million and total debt was $20.150 million, for net debt of approximately $14.1 million. Current assets were $52.324 million and current liabilities $17.270 million. The company reported $5.6 million of borrowing capacity, subject to covenant and working-capital restrictions, and compliance with its financial covenants at quarter-end. Cash held by foreign subsidiaries was $5.0 million and was not intended for repatriation.
- Other measures: Total assets were $133.555 million; stockholders’ equity was $94.286 million. The underfunded U.K. pension liability was approximately $4.5 million. Bookings were $27.3 million for Q3 and $81.6 million year to date; backlog was approximately $8.2 million at quarter-end, but orders may be cancelled.
Material changes and unusual items
- The company acquired HEKA on January 8, 2015, for approximately $5.9 million (or $4.5 million net of cash acquired). Its preliminary purchase-price allocation included $2.061 million of goodwill; the acquired business’s results were not material to consolidated results. MCS and TBSI were acquired in October 2014.
- GE Healthcare decided to discontinue selling its NanoVue and SimpliNano spectrophotometers by the end of 2015. Harvard Bioscience reported approximately $0.9 million of lower Q3 revenue from the change and expected approximately $1.0 million of lower Q4 revenue from sales to GE. The company planned to sell and service the products directly and through distributors beginning in 2016.
- Currency translation reduced nine-month revenue by approximately $3.1 million and reduced expenses by approximately $2.8 million. Foreign-currency translation losses recorded in comprehensive loss were $3.263 million for the nine-month period.
- Acquisition-related costs were $0.9 million for the first nine months of 2015, compared with $0.4 million in the comparable 2014 period. The nine-month tax benefit was $1.388 million; management used a year-to-date approach based on actual results and a revised forecast.
Outlook, management commentary and risks
- Management expected available cash, operating cash generation and debt capacity to fund operations, potential acquisitions and capital expenditures for the next 12 months and beyond, while noting that additional borrowing or equity issuance could be needed and equity financing would dilute shareholders.
- A restructuring plan committed to October 27, 2015, was expected to be completed by year-end. Management expected a fourth-quarter pre-tax charge of approximately $0.4 million and annual savings of $1 million beginning in 2016.
- On November 5, 2015, lenders waived the 2015 fourth-quarter minimum fixed-charge-coverage covenant requirement and reduced the Revolving Line maximum to $10 million through June 30, 2016, with restoration to $25 million conditional on covenant compliance.
- Management cited risks including substantial debt and covenant compliance, foreign exchange and international-market exposure, uncertain government and life-sciences industry spending, acquisition integration and funding, facility consolidation costs, competition, product obsolescence, and the potential need for additional capital. The company reported disclosure controls were effective at September 30, 2015.
Key investor verification points
- Review the post-quarter lender amendment, reduced revolver limit, borrowing availability and covenant requirements.
- Assess cash generation, the decline in cash, foreign cash availability, and the expected funding needs for capital spending and acquisitions.
- Track the GE product transition, including the expected Q4 revenue shortfall and whether direct sales and distribution resume as planned in 2016.
- Verify restructuring execution, the expected $0.4 million charge and the projected $1 million annual savings.
- Examine the drivers of increased operating expenses and the year-to-date gross-margin decline, including acquisition and consolidation impacts.
- Monitor HEKA’s final purchase-price allocation, acquisition integration, backlog conversion and any changes to management’s liquidity outlook.