Harvard Bioscience, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unaudited results are compared with Q1 2015; balance-sheet figures are compared with December 31, 2015. The company develops and sells scientific instruments, systems, and laboratory consumables globally.
Key financial results
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Revenue | $27.0 million | $25.8 million; up 4.7% reported, 6.0% excluding currency |
| Gross profit / margin | $12.9 million / 48.0% | $11.5 million / 44.6% |
| Operating loss | $0.2 million | $1.2 million |
| Net loss | $0.6 million; $0.02 per share | $1.4 million; $0.04 per share |
| Operating cash flow | $(0.7) million | $(0.5) million |
| Cash and cash equivalents | $4.2 million | $6.7 million at December 31, 2015 |
| Debt, net of financing costs | $17.1 million | $18.7 million at December 31, 2015 |
| Total assets | $117.9 million | $120.1 million at December 31, 2015 |
Performance, changes, and liquidity
- Revenue growth was led by Cell and Animal Physiology and U.S. and Asia sales. GE Healthcare’s decision to stop selling the company’s spectrophotometers reduced revenue by about $0.5 million; currency translation reduced it by about $0.3 million.
- Gross margin improved by 3.4 percentage points. Management attributed the improvement to revenue, facility consolidation savings, and lower purchase-accounting step-up charges, partly offset by currency effects.
- General and administrative expense rose 23.1% to $5.9 million, primarily due to forensic investigation costs and higher stock compensation. The filing does not state a clear dollar amount for the investigation costs. R&D expense declined 18.5% to $1.4 million.
- Operating cash use increased year over year, primarily due to working-capital movements, including a $2.7 million decrease in trade payables. Investing cash use was $0.2 million, versus $5.6 million in Q1 2015, which included the HEKA acquisition. Debt repayments exceeded new borrowing by $1.6 million.
- At quarter-end, the company reported $4.4 million of available borrowing capacity and compliance with its credit agreement’s financial covenants. Borrowings remain subject to covenant and working-capital restrictions. The revolving-line limit is reduced to $10 million through June 30, 2016, with restoration to $25 million conditional on covenant compliance.
- 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; this could require additional debt or equity financing. The filing gives no numerical earnings or revenue guidance.
Management commentary, risks, and unusual items
- Bookings were $26.1 million versus $26.7 million a year earlier; backlog was approximately $8.0 million, compared with $7.7 million a year earlier. Management cautioned that purchase orders may be cancelled and backlog may not predict future sales.
- From January 1, 2016, the company began selling the NanoVue and SimpliNano spectrophotometers through its own sales force and distribution partners after GE Healthcare discontinued sales. Management described this as a new revenue source with higher gross margins.
- On March 9, 2016, the company amended its credit agreement, changing term-loan and delayed-draw loan amortization to five years and revising the fixed-charge coverage covenant. The loans mature March 29, 2018.
- Cash declined by $2.6 million during the quarter. Approximately $3.0 million of quarter-end cash was held by foreign subsidiaries and was not available for domestic operations unless repatriated. A Q1 repatriation of about $3.2 million from Canada and France incurred an estimated $1.7 million tax liability, offset by foreign tax credits.
- Management reported that disclosure controls and procedures were not effective at March 31, 2016 because material weaknesses in internal control over financial reporting identified in the 2015 Form 10-K remained present. Management nevertheless stated that the financial statements fairly present the company’s position and results in all material respects.
- Other key risks cited include customer research-budget and government-funding reductions, currency and international-market exposure, execution of restructuring and ERP initiatives, acquisition integration, substantial debt and covenant compliance, and possible goodwill or intangible-asset impairment. The company reported an underfunded U.K. pension liability of approximately $2.8 million.
Most important facts for investors to verify
- Whether revenue growth and the gross-margin improvement continue, particularly after the transition of GE-branded spectrophotometer sales.
- Whether operating cash flow improves and whether working-capital outflows, especially payables, recur.
- Compliance with credit covenants, borrowing availability after June 30, 2016, and liquidity needs relative to debt maturities and repayment terms.
- The nature and amount of the forensic investigation costs, and the status and effectiveness of remediation for the disclosed material weaknesses.
- Whether bookings and backlog convert to shipments and revenue, given possible order cancellations.
- Any subsequent changes in foreign cash availability, repatriation taxes, pension funding, or other material contingencies.