Harvard Bioscience, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Harvard Bioscience develops, manufactures and sells life-science instruments, systems and lab consumables globally. Financial amounts below are in U.S. dollars; millions unless noted.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $24.2 million | $27.0 million; down 10.4% (7.9% excluding currency effects) |
| Gross profit / margin | $11.5 million / 47.6% | $12.9 million / 48.0% |
| Operating loss | $0.6 million | $0.2 million |
| Net loss / diluted loss per share | $1.1 million / $0.03 | $0.6 million / $0.02 |
| Operating cash flow | $(0.6) million | $(0.7) million |
| Cash and cash equivalents | $4.6 million at March 31 | $5.6 million at December 31, 2016 |
| Debt, net of financing costs | $13.7 million | $13.7 million at December 31, 2016 |
Capital expenditures were $0.2 million; investing cash use was $0.2 million and financing cash use was $0.3 million. Net debt was $9.1 million. Current assets were $45.1 million and current liabilities $14.1 million. The company reported $5.2 million of available borrowing capacity under its then-current facility and was in compliance with its financial covenants at quarter-end. The underfunded U.K. pension liability was approximately $3.2 million.
Material changes and management commentary
- Revenue fell $2.8 million year over year. Management attributed the decline to currency translation (2.5 percentage points), weaker European research funding, slower-than-expected NIH budget funding, and approximately $0.7 million of revenue lost following the 2016 sale of AHN.
- Gross margin declined 0.4 percentage points, which management attributed to a higher proportion of fixed charges relative to sales and currency effects. Lower general and administrative expense partly reflected the absence of prior-year forensic investigation costs, offset in part by higher audit-remediation costs.
- Foreign exchange losses increased to $0.1 million from $9,000. Currency translation reduced revenue by approximately $0.7 million but favorably affected expenses by approximately $0.6 million.
- Management said available cash, operating cash generation and debt capacity were expected to support current operations, potential acquisitions and capital expenditures for the next 12 months and beyond. It cautioned that additional borrowing or equity financing may be needed and that equity issuance could dilute shareholders. No cash dividends were anticipated in the near future.
Outlook, risks and unusual items
- Debt refinancing after quarter-end: On May 2, 2017, the company replaced its existing facility with a $14.0 million term loan and a revolving line of up to $25.0 million, both maturing May 1, 2022. The loans remain secured by substantially all company and domestic-subsidiary assets and are subject to financial and other covenants. A new interest-rate swap fixed the term-loan LIBOR component at 1.86%.
- Controls: Management concluded disclosure controls were not effective at March 31, 2017 because material weaknesses in internal control over financial reporting identified in the 2016 Form 10-K remained. Remediation efforts were ongoing.
- Legal contingency: A wrongful-death complaint filed April 14, 2017 seeks unspecified damages concerning products allegedly used in surgeries in 2012 and 2013. The company said it intends to defend the case and had sought insurance defense and indemnification; it could not predict the outcome.
- Other risks: The filing highlights exposure to research-budget and funding changes, international markets and currency movements, substantial debt and covenant requirements, product liability, and possible U.K. exit-from-EU tax and operating effects. No material changes to previously disclosed risk factors were reported.
- Accounting changes: The company adopted ASU 2016-09 in January 2017. It expects to adopt the new revenue-recognition standard in 2018 and is assessing the lease standard, which is expected to increase reported assets and liabilities.
Investor verification points
- Track whether revenue weakness in Europe and slower NIH funding improves, and assess the company’s reported revenue excluding currency and AHN effects.
- Review progress in remediating the material weaknesses and any subsequent changes to control effectiveness.
- Examine the full May 2017 credit agreement, including borrowing availability, covenant thresholds, amortization and compliance after refinancing.
- Monitor cash generation, working capital, foreign-held cash availability, pension funding and the company’s stated liquidity outlook.
- Follow developments in the wrongful-death litigation, including any insurance response, claims exposure or recorded contingency.