Harvard Bioscience, Inc. — Q2 2017 Form 10-Q
Business context and period. The company develops, manufactures and markets scientific instruments, systems and laboratory consumables for life-science research and testing. This unaudited filing covers the quarter and six months ended June 30, 2017; financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Three months ended June 30, 2017 | Six months ended June 30, 2017 |
|---|---|---|
| Revenue | $25.2 million | $49.4 million |
| Gross margin | 44.8% | 46.2% |
| Operating income (loss) | $1 thousand | $(638) thousand |
| Net loss | $(381) thousand; $(0.01) per share | $(1.447) million; $(0.04) per share |
- Quarterly revenue declined 3.5% year over year; six-month revenue declined 7.0%. Six-month gross margin was 46.2%, versus 46.4% in 2016.
- Six-month operating cash flow was $(135) thousand, versus $216 thousand provided in the prior-year period. Investing cash use was $476 thousand and financing cash use was $629 thousand. Cash declined $872 thousand to $4.724 million.
- At June 30, current assets were $45.8 million and current liabilities were $13.2 million. Debt, net of financing costs, was $13.2 million; cash-adjusted net debt was approximately $8.5 million. The underfunded UK pension liability was approximately $3.3 million.
Material changes versus the prior comparable period
- Quarter revenue was down $923 thousand. Management attributed the decline to foreign exchange (2.1 percentage points) and the AHN subsidiary sale (approximately $0.6 million of quarterly revenue); excluding those effects, revenue grew approximately 1%, led by the U.S. and China, with continued European softness.
- For the first half, revenue fell $3.730 million. Management cited foreign exchange (2.3 percentage points), the AHN sale (approximately $1.3 million), and an approximately 2% decline excluding those factors, primarily from European softness.
- Quarterly general and administrative costs fell 15.9%, mainly because the 2016 comparison included forensic investigation costs, and consulting costs and stock compensation were lower. Six-month G&A declined 14.1% for similar reasons. Lower R&D expense reflected increased research grants and, for the six-month period, lower payroll-related costs.
- Other expense was $463 thousand in Q2, compared with $73 thousand of other income in Q2 2016, largely reflecting foreign exchange losses. Six-month other expense was $867 thousand versus $149 thousand.
Outlook, financing, risks and unusual items
- Outlook: No specific revenue or earnings guidance is provided. Management expects available cash, operating cash generation and debt capacity to fund current operations, potential acquisitions and capital expenditures for the next 12 months and beyond; this is subject to risks and may require additional debt or equity financing.
- Credit facility: A May 2017 agreement consolidated borrowings into a $14.0 million term loan and provided a $25.0 million revolver, both maturing May 1, 2022. The company reported covenant compliance and $5.3 million of borrowing capacity, subject to covenant and working-capital restrictions. The term loan’s effective rate, including its interest-rate swap, was 4.61%.
- Key risks: Revenue exposure to research budgets and government funding, European demand and currency movements; debt and covenant requirements; acquisition and integration execution; and UK withdrawal from the EU, which could affect tax balances. The company reported $3.0 million of favorable foreign-currency translation in first-half comprehensive income, while currency movements also caused losses in net income.
- Controls: Management concluded disclosure controls were not effective at June 30, 2017 because previously reported material weaknesses in internal control remained. Remediation included ERP implementation at MCS and continued work on reporting-line and income-tax controls.
- Contingency: A wrongful-death lawsuit filed in April 2017 names the company and others and seeks unspecified damages related to products allegedly used in surgeries in 2012 and 2013. The case was at an early stage; the company said it would defend the claim and had sought insurance coverage. The outcome could not be predicted.
- Accounting and other items: The company planned to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method; assessment was ongoing. It expected lease accounting adoption to increase reported assets and liabilities, with the impact not yet determined. A German tax audit settlement resulted in reversal of an uncertain tax position, net of additional tax liability.
Important facts for investors to verify
- Whether revenue trends improve, particularly in Europe, and how much reported performance continues to reflect foreign exchange and the AHN divestiture.
- Whether operating cash flow turns positive and cash, debt and borrowing capacity remain adequate under the credit agreement’s covenants.
- Progress and effectiveness of remediation for the disclosed material weaknesses in internal control.
- Developments and potential insurance coverage or financial exposure from the wrongful-death litigation.
- The eventual effects of revenue-recognition, lease-accounting and UK-related tax changes.