Harvard Bioscience, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed April 29, 2016. The company develops, manufactures and sells life-science research instruments, systems and laboratory consumables internationally. Its three product families are Cell and Animal Physiology, Lab Products and Services, and Molecular Separation and Analysis.
Financial highlights
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $108.7 million | $108.7 million |
| Gross profit / margin | $48.7 million / 44.8% | $49.3 million / 45.4% |
| Operating income (loss) | $(1.7) million | $6.6 million |
| Net income (loss) | $(19.0) million | $2.4 million |
| Operating cash flow | $0.7 million | $4.4 million |
| Cash and cash equivalents | $6.7 million | $14.1 million |
| Working capital | $31.1 million | $39.0 million |
| Debt outstanding | $18.9 million | $21.5 million |
The FY2015 income-tax expense was $15.4 million, primarily reflecting a $16.4 million increase in the valuation allowance on U.S. deferred tax assets. The company reported a $19.0 million net loss, or $(0.57) per diluted share. At year-end, total assets were $120.2 million and stockholders’ equity was $77.6 million. Cash flow figures include continuing and discontinued operations, as presented in the filing.
Material changes versus FY2014
- Revenue was essentially flat as reported. Excluding currency translation, revenue increased approximately 3.7%; unfavorable currency effects reduced revenue by about $4.0 million, and GE Healthcare’s decision to discontinue sales of its branded spectrophotometers reduced 2015 revenue by about $2.1 million.
- Acquisitions of MCS and TBSI in 2014 and HEKA in January 2015 added electrophysiology and neuroscience products and contributed revenue, but did not prevent the reported revenue headwinds.
- Gross margin declined 0.6 percentage points to 44.8%, attributed primarily to currency translation and facility-consolidation costs, partly offset by acquisition contributions.
- Operating expenses rose to $50.4 million from $42.7 million. Sales and marketing, general and administrative, and R&D costs increased; R&D spending was $6.4 million versus $4.9 million.
- Cash from operations fell to $0.7 million from $4.4 million, which management attributed mainly to lower operating income and temporary inventory needs associated with relocations and consolidations.
- Cash decreased by $7.4 million during the year. Debt declined by $2.6 million, but net debt increased to $12.2 million from $7.4 million because cash declined.
Outlook, risks and unusual items
- Management expected available cash, operating cash generation and debt capacity to fund current operations and capital expenditures for at least the next 12 months, while noting that additional financing might be needed. No quantified revenue or earnings guidance is provided.
- From January 1, 2016, Harvard Bioscience began selling NanoVue and SimpliNano spectrophotometers directly and through other distributors after GE Healthcare ended its branded sales. Management expected sales to resume in 2016 and cited potential for higher gross margins and broader customer reach; execution and replacement of former GE-related revenue remain key uncertainties.
- The company completed facility relocations and consolidations and recorded $0.8 million of restructuring charges in 2015. Further benefits are not assured, and additional costs or operational disruption are possible.
- At December 31, 2015, borrowings under the credit agreement were $18.9 million, with only $2.3 million of available borrowing capacity because of covenant and working-capital restrictions. The company was in compliance with financial covenants at year-end. A November 2015 amendment temporarily reduced the revolving-line maximum to $10 million through June 30, 2016, subject to covenant compliance; a March 2016 amendment revised loan amortization and a financial covenant.
- Material weaknesses in internal control over financial reporting led management to conclude disclosure controls were ineffective at year-end. KPMG issued an adverse opinion on internal-control effectiveness, while its separate opinion on the consolidated financial statements was unqualified. The filing describes weaknesses involving risk assessment and monitoring, Denville access and segregation of duties, reconciliations and journal entries, inventory controls, and income-tax accounting. Remediation was planned to continue through 2016.
- The 10-K was delayed; the company disclosed resulting costs and ineligibility to use Form S-3 until it had timely filed all required reports for one year.
- Principal business risks include dependence on research funding and academic customers, international and foreign-exchange exposure, competition and rapid technological change, acquisition integration, ERP implementation, and debt covenant constraints. Academic customers accounted for approximately 70% of revenue; no customer exceeded 10%.
- No material legal proceedings were reported. The U.K. defined-benefit pension plan remained underfunded by approximately $2.8 million, down from $4.4 million.
Most important facts for investors to verify
- Progress and independent validation of remediation for the disclosed material weaknesses, including whether future filings are timely and reliable.
- Cash generation, working-capital needs, covenant headroom, and the impact of the March 2016 credit amendment and June 2016 revolving-line restoration conditions.
- Whether direct and partner sales of NanoVue and SimpliNano replace lost GE-related sales and achieve the expected margin benefits.
- Whether restructuring and facility consolidations produce sustained cost savings without harming supply, service or revenue.
- The assumptions supporting the U.S. deferred-tax-asset valuation allowance and the effects of tax attributes, expirations and planned foreign earnings repatriation.