Harvard Bioscience, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless stated otherwise. The company’s continuing business is Life Science Research Tools (LSRT). Its Regenerative Medicine Device business was spun off as HART in November 2013 and is presented as discontinued operations.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $25.9 million | $26.1 million; down 0.7% reported and 2.7% excluding favorable currency effects |
| Gross profit / margin | $11.8 million / 45.4% | $12.3 million / 47.0% |
| Operating income | $1.3 million | $1.3 million |
| Continuing-operations income | $0.7 million; $0.02 diluted EPS | $0.9 million; $0.03 diluted EPS |
| Net income | $0.7 million | $0.1 million, including an $0.8 million after-tax discontinued-operations loss |
| Cash from operations | $1.1 million | $0.6 million |
| Cash and cash equivalents | $25.8 million at March 31 | $25.8 million at December 31, 2013 |
| Total debt | $23.5 million | $24.8 million at December 31, 2013 |
Capital expenditures were $0.3 million. The company repaid $1.3 million of debt and reported $2.3 million of cash net of debt. Gross margin declined primarily because of lower sales volume and less favorable product mix. Interest expense rose to $0.3 million from $0.1 million, mainly reflecting higher average debt balances and rates.
Material changes and management commentary
- Revenue was pressured by fewer U.S. workdays due to winter weather; currency translation contributed a positive 2.0% to reported revenue.
- Q1 2014 included no HART transaction costs, compared with $0.5 million in Q1 2013. Restructuring charges were $0.1 million versus a $0.02 million credit.
- The 2013 restructuring reduced the workforce by approximately 13%. Management expected approximately $2.0 million in annual pretax savings beginning in 2014, with some savings reinvested in emerging markets, key roles and product development. Restructuring payments were expected through 2014.
- Order backlog was $5.6 million versus $3.9 million a year earlier; management cautioned that orders may be cancelled and backlog may not predict subsequent sales.
- Management stated available cash, operating cash generation and debt capacity were expected to fund operations and capital expenditures for 12 months and beyond. It expected approximately $1.3 million of additional capital expenditures during the remainder of 2014. No revenue or earnings guidance was provided.
Liquidity, risks and contingencies
- Of $25.8 million in cash, $24.7 million was held by foreign subsidiaries and was not available for domestic operations unless repatriated, which could trigger U.S. federal and state taxes. The company said it did not plan to repatriate undistributed foreign earnings.
- Credit-facility borrowings totaled $23.5 million; $5.0 million was current. The company was in compliance with financial covenants but subject to a working-capital borrowing restriction. Reported available borrowing capacity was $19.1 million, though management said practical capacity was lower.
- Debt is partly exposed to floating interest rates, with swaps hedging a portion. The filing estimates a 1% rate increase would raise interest expense by $70,000 over the next 12 months, and a 2% increase by $140,000, assuming no other changes.
- The HART spin-off’s intended tax-free treatment depends on compliance with tax-related restrictions. A failure to qualify could create tax exposure for Harvard Bioscience. The filing also identifies HART indemnification, foreign exchange, international operations, market conditions, debt and covenant compliance, competition, product development, acquisitions and restructuring execution as risks.
- The filing added conflict-minerals compliance as a risk, including potential diligence costs and sourcing, supply, pricing, customer and reputational impacts.
- Other notable items: an underfunded pension liability of approximately $4.9 million; and $4.6 million in old Genomic Solutions earn-out promissory notes for which no amounts had been collected and a full valuation allowance was recorded.
Important facts for investors to verify
- Whether revenue and gross-margin trends improved after Q1, including the effects of product mix, volume, weather and currency.
- Whether restructuring delivered the anticipated savings and whether remaining charges and payments stayed within expectations.
- Domestic liquidity and actual borrowing availability given the concentration of cash overseas and the working-capital restriction.
- Debt repayment, interest-rate exposure, covenant compliance and the effect of any future financing needs.
- Whether HART-related tax conditions and indemnification arrangements remain intact, and whether the spin-off’s intended tax treatment is preserved.