Harvard Bioscience, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The company’s continuing business is Life Science Research Tools; its regenerative medicine business was spun off as HART in November 2013 and is reported as discontinued operations.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $25.4m | $25.1m | $78.3m | $77.3m |
| Gross profit | $11.4m | $11.3m | $35.5m | $35.6m |
| Gross margin | 45.0% | 44.9% | 45.3% | 46.1% |
| Operating income | $1.4m | $0.4m | $4.5m | $2.5m |
| Net income (loss) | $0.6m | $(1.0)m | $2.4m | $(1.1)m |
| Diluted EPS | $0.02 | $(0.03) | $0.07 | $(0.03) |
Revenue growth was 1.2% in Q3 and 1.3% for the nine-month period, but excluding favorable currency translation, revenue was flat in Q3 and down 0.7% year over year for nine months. Q3 continuing-operations income was $0.6m versus a $0.05m loss; prior-year net results also included HART discontinued-operations losses. Nine-month operating cash flow was $3.1m, compared with $2.8m. Capital expenditures were $1.2m; cash used in investing activities was $1.1m.
Balance sheet and liquidity
- Cash and equivalents were $26.7m at September 30, 2014, versus $25.8m at December 31, 2013. Debt was $23.2m, down from $24.8m; cash less debt was $3.5m.
- Current assets totaled $65.0m and current liabilities $15.6m. Inventory increased to $18.1m from $15.8m.
- The credit facility had $20.3m of unused revolving capacity, but the company was subject to a working-capital borrowing restriction. It reported compliance with financial covenants.
- $23.2m of cash was held by foreign subsidiaries and was not available for U.S. operations unless repatriated, which could incur taxes. The company said it did not intend to repatriate these funds.
- Underfunded pension liability was approximately $5.4m, up from $4.9m at year-end 2013.
Material changes and management commentary
- For nine months, gross margin declined 0.8 percentage points. Management attributed the decrease primarily to unexpected third-party and internal costs to analyze, test and remediate product requirements, including rebuilding technical files.
- Operating income improved as lower general and administrative costs and the absence of HART transaction costs more than offset higher R&D and restructuring expenses. Nine-month acquisition-related costs contributed to higher other expense.
- Bookings were $25.7m in Q3, flat year over year; nine-month bookings increased 1.0% excluding currency effects. Backlog was approximately $6.2m, up 40.0% excluding currency effects, which management attributed primarily to order and shipment timing. Orders may be cancelled before shipment.
- The 2013 restructuring plan, including a workforce reduction of approximately 13%, was expected to generate about $2.0m in annual net pretax savings beginning in 2014. Approximately $1.0m of savings was being reinvested, including in emerging-market expansion, key roles and product development.
Outlook, risks and unusual items
- 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; it cautioned that additional debt or equity financing may be needed.
- On October 1, 2014, the company acquired MCS for approximately $9.5m, funded from cash, and TBSI for approximately $1.6m net of acquired cash, funded with credit-facility borrowings. Management expected the acquisitions together to add $7.5m–$8.5m of 2015 revenue and be accretive to 2015 earnings. Purchase-price allocation was still being determined.
- The company expected an additional $1.0m–$1.5m of capital spending for an ERP implementation, beyond its current footprint and excluding potential acquisitions.
- Risks highlighted include foreign-currency movements, international and sector conditions, debt and covenant constraints, acquisition integration and financing, product compliance/remediation costs, and potential tax consequences if HART’s spin-off fails to retain tax-free treatment.
- Foreign-currency translation reduced comprehensive income by $3.2m in Q3 and $2.6m for nine months. The company also wrote down a previously illiquid longevity-fund investment by $0.6m to zero during the nine-month period.
- The filing reported effective disclosure controls and no material change in internal control over financial reporting during the period. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether product testing, remediation and technical-file costs continue, and their effect on gross margin.
- Whether the MCS and TBSI acquisitions achieve the stated 2015 revenue and earnings expectations, and how their funding affects debt and liquidity.
- Domestic cash availability given the concentration of cash in foreign subsidiaries and the working-capital borrowing restriction.
- Progress on ERP spending and restructuring savings, alongside ongoing reinvestment needs.
- Potential exposure to currency movements, pension underfunding, credit covenants and the tax-free status restrictions related to the HART spin-off.