Harvard Bioscience, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. The company now reports one segment, Life Science Research Tools, following the November 2013 spin-off of Harvard Apparatus Regenerative Technology (HART). Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $27.0 | $26.1 | $52.9 | $52.2 |
| Gross profit | $12.3 | $12.1 | $24.0 | $24.4 |
| Gross margin | 45.5% | 46.3% | 45.5% | 46.7% |
| Operating income | $1.7 | $0.7 | $3.1 | $2.1 |
| Net income (loss) | $1.0 | $(0.2) | $1.7 | $(0.1) |
| Diluted EPS | $0.03 | $(0.01) | $0.05 | $0.00 |
- Q2 revenue rose 3.3%; excluding favorable currency translation, it increased 0.7%. First-half revenue rose 1.3% as reported but declined 1.0% excluding currency effects.
- Gross margin fell 0.8 percentage point in Q2 and 1.2 points for the first half. Management attributed the decline mainly to unexpected costs to analyze, test and remediate product requirements and rebuild technical files.
- Operating income improved as HART separation costs fell to zero from $1.0 million in Q2 2013 and $1.5 million in the first half of 2013. First-half operating expenses also included $0.3 million of restructuring charges, versus a $0.05 million credit a year earlier.
- First-half operating cash flow was $2.5 million, compared with $1.4 million in 2013. Investing activities used $0.7 million; financing activities used $1.5 million, including $2.5 million of debt repayments.
Financial position and liquidity
- At June 30, cash and cash equivalents were $26.4 million, versus $25.8 million at year-end 2013. Total debt was $22.3 million, down from $24.8 million; cash net of debt was $4.2 million, compared with $1.0 million.
- Available borrowing capacity under the credit agreement was $21.6 million, subject to a working-capital borrowing restriction. The company reported compliance with its financial covenants.
- Cash held by foreign subsidiaries was $24.6 million and was not available for domestic operations unless repatriated; the company said it did not intend to repatriate undistributed foreign earnings.
- The underfunded pension liability increased to approximately $5.6 million from $4.9 million. Management expected to contribute approximately $0.4 million to defined-benefit plans during the remainder of 2014.
Outlook, commentary and risks
- No specific revenue or earnings guidance was provided. Management expected cash, operating cash generation and debt capacity to fund operations and capital expenditures for the next 12 months and beyond, while noting that additional borrowing or equity financing may be needed.
- The 2013 restructuring was expected to generate about $2.0 million in annual pretax savings beginning in 2014, with approximately $1.0 million reinvested, including in China and other emerging markets, key roles and product development. Remaining restructuring payments were expected through year-end 2014.
- Bookings increased 3.1% year over year excluding currency in Q2 and 2.0% for the first half. Backlog was approximately $6.0 million versus $3.7 million a year earlier; orders may be cancelled, and management cautioned backlog may not predict subsequent sales.
- Risk factors include foreign-exchange exposure, international economic and political conditions, customer and government spending uncertainty, debt and covenant requirements, product competition and obsolescence, execution of acquisitions and expansion, and the potential tax consequences if the HART spin-off fails to retain tax-free status.
- Unusual items: the company wrote down a longevity-fund investment by $0.6 million to zero in Q2, reducing accumulated other comprehensive income by $0.5 million net of tax. The fund had been inactive and illiquid. The company also extended and expanded its headquarters lease through August 2024, with approximately $11.9 million of disclosed future minimum operating-lease payments.
- Subsequent to quarter-end, CEO and CFO employment agreements were extended through August 2016. The CEO amendment included certain accelerated option-vesting provisions upon qualifying termination; the filing stated no financial impact on reported results.
Key facts for investors to verify
- Whether product testing, remediation and technical-file costs persist, and whether gross margins recover.
- Underlying revenue and bookings trends excluding favorable currency effects, and conversion of the larger backlog into shipments.
- Cash availability and borrowing capacity given the concentration of cash overseas and the working-capital borrowing restriction.
- Debt repayment, interest-rate exposure, covenant headroom and pension funding needs.
- Progress on restructuring savings and reinvestment, and the status of the HART spin-off tax-related restrictions and indemnification arrangements.