Harvard Bioscience, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Amounts below are in U.S. dollars; financial amounts are in millions unless noted.
Business context
Harvard Bioscience develops, manufactures and sells scientific instruments, systems and laboratory consumables to research and testing customers in more than 100 countries. Products are sold through direct sales, distributors, websites and catalogs. The company continued to transition sales of NanoVue and SimpliNano spectrophotometers after GE Healthcare discontinued its sales at the end of 2015.
Financial results and liquidity
- Q2 revenue: $26.1 million, down 9.3% year over year; excluding currency translation, down 8.6%. Revenue was $53.1 million for the first half, down 2.7% reported and 1.7% excluding currency.
- Profitability: Q2 gross profit was $11.7 million and gross margin was 44.7%, versus 43.7% a year earlier. The company reported an operating loss of $0.8 million and a net loss of $0.7 million, or $0.02 per diluted share; Q2 2015 net income was $0.3 million. First-half gross margin improved to 46.4% from 44.1%, but the company recorded a $1.1 million operating loss and a $1.3 million net loss, or $0.04 per diluted share.
- Cash flow: First-half operating activities provided $0.2 million, compared with $1.0 million used in the prior-year period. Investing used $0.4 million, versus $6.2 million, including the prior-year HEKA acquisition. Financing used $2.6 million. Cash declined $3.1 million to $3.6 million.
- Debt and liquidity: Net borrowings under the credit agreement were $16.2 million at June 30, down from $18.7 million at year-end; cash less debt was a net debt position of $12.5 million. Available borrowing capacity was $6.3 million, subject to covenant and working-capital restrictions. The facility matures in 2018. The company reported compliance with financial covenants.
- Balance sheet: Total assets were $114.1 million and total liabilities were $37.4 million. Inventory was $22.2 million. The U.K. defined-benefit pension liability was approximately $2.6 million.
Changes versus the comparable period
- Q2 revenue fell primarily because of order timing, GE’s discontinued product sales and currency translation. Management attributed approximately $0.5 million of Q2 revenue decline to the GE change and $0.2 million to currency.
- Gross margin improved in both Q2 and the first half, which management attributed to lower purchase-accounting inventory step-up charges and savings from facility consolidations, partly offset by lower revenue.
- First-half general and administrative expense increased 14.7% to $11.2 million, including forensic investigation costs related to a previously disclosed subsidiary embezzlement and higher stock compensation. Research and development expense declined 15.5% to $2.9 million, primarily reflecting restructuring.
- Bookings declined 10.5% excluding currency in Q2 and 5.7% for the first half. Order backlog was approximately $6.5 million at June 30, 2016, versus $6.6 million a year earlier; orders may be canceled before shipment.
Outlook, risks and unusual items
- Management expected available cash, cash generated from operations and debt capacity to fund current operations, potential acquisitions and capital expenditures for the next 12 months and beyond. It noted that additional debt or equity financing may be needed and that equity issuance could dilute existing holders. No numerical revenue or earnings guidance is provided.
- Management cited reduced research budgets or government funding, international economic and currency exposure, seasonality in Europe, competition, acquisition and integration risks, debt and covenant requirements, and execution of restructuring and ERP initiatives among relevant risks.
- The filing identifies Brexit-related uncertainty as a risk, including currency volatility and potential pressure on U.K. customers’ spending. First-half foreign exchange translation reduced revenue by approximately $0.5 million, partly offset by a similar favorable effect on expenses.
- Disclosure controls and procedures were deemed ineffective at June 30, 2016 because previously reported material weaknesses in internal control over financial reporting remained. Management nevertheless stated that the financial statements fairly presented the company’s financial condition, results and cash flows in all material respects.
- Restructuring charges were immaterial in the first half. The company repatriated approximately $3.2 million from Canada and France; related tax liability was offset by foreign tax credits. No cash dividends were anticipated in the near future.
Investor facts to verify
- Whether revenue and bookings stabilize after the GE channel transition and the Q2 order-timing impact.
- Progress in remediating the disclosed material weaknesses in internal controls and the scope or outcome of the embezzlement-related investigation.
- Available borrowing capacity and covenant headroom, given $3.6 million of cash and $16.2 million of net borrowings.
- Whether gross-margin gains from consolidation persist despite lower sales and product-mix changes.
- Potential effects of Brexit, foreign exchange movements and customer funding constraints on demand and cash flow.