Harvard Bioscience, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unless otherwise noted, financial amounts are in millions of dollars; the filing presents statements in thousands. The company develops and sells life-science research products and, during the reporting period, also operated a regenerative medicine device business (RMD).
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $25.1 | $26.1 | $77.3 | $82.9 |
| Gross profit / margin | $11.3 / 45.0% | $12.0 / 45.9% | $35.7 / 46.1% | $39.0 / 47.0% |
| Operating income (loss) | $(1.1) | $(0.1) | $(2.0) | $2.4 |
| Net income (loss) | $(1.0) | $(0.1) | $(1.1) | $1.2 |
| Diluted earnings (loss) per share | $(0.03) | $0.00 | $(0.04) | $0.04 |
| Operating cash flow | Not presented quarterly | $2.8 | $6.7 |
Q3 revenue fell 3.7%; nine-month revenue fell 6.8%. Lower sales volume and less favorable product mix reduced gross margin. Q3 operating results included LSRT operating income of $2.3 million and an RMD operating loss of $1.9 million; for the nine months, LSRT income was $8.8 million and RMD loss was $6.9 million. Nine-month discontinued operations contributed $0.3 million after tax.
Balance sheet, debt and liquidity
- At September 30, 2013, cash and equivalents were $36.9 million, total assets $148.3 million, and total liabilities $40.5 million.
- Credit-facility borrowings were $23.5 million, up from $13.0 million at December 31, 2012. Cash less debt was $13.4 million, versus $7.7 million at year-end 2012.
- Cash from operations was $2.8 million; investing activities provided $0.6 million, including $1.7 million from the sale of discontinued operations; financing activities provided $12.5 million. Cash increased $16.3 million over the nine months.
- At September 30, the company reported $25.0 million of available borrowing capacity and compliance with financial covenants. The credit facility is secured by substantially all company and guarantor assets and contains financial and restrictive covenants.
- $21.8 million of cash was held by foreign subsidiaries and was not available for domestic operations without repatriation taxes; management said it had no plans to repatriate those funds.
Changes, outlook and management commentary
- Management attributed weaker revenue and bookings to lower GE Healthcare distributor shipments, economic softness in Europe, and U.S. government sequestration affecting research spending. Nine-month bookings declined 6.3% to $77.2 million. Backlog was $4.4 million at September 30, down from $4.6 million a year earlier.
- Management forecast full-year 2013 revenue of $104–$105 million, approximately 6% below 2012. It said available cash, operating cash generation and debt capacity were expected to fund operations and capital expenditures for at least 12 months.
- The quarter was described as transitional following leadership departures associated with the planned RMD separation. Jeffrey Duchemin became CEO; new CFO and sales and marketing leaders were also appointed. Management identified organic growth, expansion in China, stronger channel capabilities and selective acquisitions as priorities.
- On November 1, 2013, after quarter-end, the company completed the HART spin-off, distributing one HART share for every four Harvard Bioscience shares held on the record date and contributing $15.0 million cash to HART. HART became an independent public company. The spin-off’s intended tax-free status depends on representations, covenants and other conditions; failure to qualify could result in significant tax liability to the company.
- In October 2013, the credit agreement was amended: the delayed-draw term loan limit was reduced from $15 million to $10 million, with up to $5 million shifted to revolving-line availability. The filing also warns that post-spin tax rules may constrain certain equity issuances, acquisitions and other transactions.
- Other notable items: a new $15 million interest-rate swap hedged the term loan; the swap’s September 30 fair value was a $69,000 liability. The company initiated a Biochrom cost-reduction plan and recorded $96,000 of Q3 restructuring charges. It expected about $0.2 million of pension contributions in the remainder of 2013; the underfunded pension liability was approximately $5.9 million.
Risks and contingencies
Key risks include declining demand and customer research spending, dependence on distributor activity, foreign-exchange exposure, variable-rate debt and covenant compliance, and the ability to fund operations and growth. The company also noted possible liability claims related to HART despite indemnification arrangements, and potential tax exposure if the spin-off fails to receive tax-free treatment. Management reported disclosure controls were effective at quarter-end and no material third-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue, bookings and margins stabilize after the reported declines, particularly GE Healthcare sales and demand in Europe and North America.
- Post-spin cash, debt, liquidity and borrowing capacity, including the effect of the $15 million HART contribution and amended credit facility.
- Whether the HART spin-off satisfies tax-free requirements and whether separation agreements or indemnities create material obligations.
- Progress toward the $104–$105 million 2013 revenue outlook and the stated cash runway, given lower operating cash flow.
- RMD separation-related costs, leadership transition effects, restructuring outcomes and any impact on continuing LSRT operations.