Harvard Bioscience, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; filed August 9, 2013. The company reports Life Science Research Tools (LSRT) and Regenerative Medicine Device (RMD) segments. Q2 and first-half revenue came entirely from LSRT; RMD had no revenue.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $26.1 million | $28.5 million | $52.2 million | $56.8 million |
| Gross profit / margin | $12.1 million / 46.4% | $13.6 million / 47.8% | $24.4 million / 46.7% | $27.0 million / 47.5% |
| Operating income (loss) | $(0.8) million | $1.3 million | $(0.9) million | $2.5 million |
| Net income (loss) | $(0.2) million | $0.8 million | $(0.1) million | $1.3 million |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $1.4 million | $4.2 million |
- Q2 revenue fell 8.4%; first-half revenue fell 8.2%. Management cited lower Biochrom shipments to GE Healthcare, U.S. sequestration-related research spending reductions, and European austerity and budget constraints. Adjusted for currency and acquisition effects, first-half revenue declined 8.4%.
- Gross margin declined year over year, which management attributed primarily to lower volume and less favorable sales mix. Q2 operating results also reflected higher general and administrative expense, including an $0.8 million write-off of deferred HART IPO costs.
- First-half net loss from continuing operations was $0.4 million; $0.3 million of after-tax discontinued-operations income brought reported net loss to $0.1 million. The discontinued-operations income related to earn-out consideration from a previously sold business.
- At June 30, cash and equivalents were $34.1 million, current assets $72.8 million, current liabilities $13.3 million, and total assets $146.0 million. Cash less debt was $9.8 million. About $20.3 million of cash was held by foreign subsidiaries and was not available for domestic operations without repatriation and potential U.S. taxes.
- Debt totaled $24.3 million, versus $13.0 million at year-end 2012. The company had $25.0 million of stated available borrowing capacity and reported compliance with financial covenants. Operating cash flow declined from $4.2 million to $1.4 million year over year; financing activities provided $13.3 million, including net debt proceeds and stock-option exercises.
Material changes and management outlook
- Bookings declined 6% to $25.8 million in Q2 and 9% to $51.4 million for the first half. Backlog was $3.7 million at June 30, down 22.4% from a year earlier. Management attributed weakness to GE Healthcare and soft demand in North America and several European markets.
- The March 2013 credit agreement provides a $15 million term loan, a revolving line of up to $25 million, and a delayed-draw term loan of up to $15 million for HART, subject to facility terms. A $15 million interest-rate swap fixed the LIBOR component on that amount at 0.96%; the effective term-loan rate was 3.96% at quarter-end. Management estimated that a 1% or 2% interest-rate increase would add $0.1 million or $0.2 million, respectively, to interest expense over the next 12 months, assuming no other changes.
- HART withdrew its planned IPO registration statement in May. The company said it intended instead to spin off 100% of HART after effectiveness of HART’s Form 10, filed July 31, 2013, and planned to contribute $15.0 million to fund HART’s initial operations. Timing and completion were subject to required steps and applicable securities laws.
- Management expected available cash, operating cash generation, and debt capacity to fund current operations and capital expenditures for at least 12 months. It expected approximately $1.8 million of remaining 2013 capital expenditures and approximately $0.5 million of pension contributions.
- RMD development and commercial prospects remain uncertain. The filing discusses early-stage regenerative-medicine procedures, regulatory pathways, and clinical development; it reports that a pediatric recipient of a regenerated trachea died following complications from a subsequent operation. The filing states that the implanted trachea was not identified as the cause of death.
Risks, contingencies, and unusual items
- Key risks include research-budget and economic weakness, dependence on GE Healthcare shipments, foreign-currency exposure, variable-rate debt and covenant compliance, and the ability to obtain regulatory approvals and commercialize regenerative-medicine products.
- First-half foreign-currency translation produced a $1.9 million comprehensive loss. The filing also identifies the risk of goodwill or intangible-asset impairment and uncertainty around collection of earn-out consideration from disposed businesses.
- The company reported a 72.1% effective income-tax benefit rate for the first half, including foreign tax differences, research credits, and stock-option exercise benefits, partly offset by discrete expenses. The rate materially affected reported results.
- Management concluded disclosure controls were effective as of June 30, 2013 and reported no material second-quarter change in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether LSRT bookings, revenue, and margins stabilize, particularly GE Healthcare orders and demand affected by research-budget constraints.
- HART spin-off timing, required regulatory and listing steps, the planned $15 million contribution, and HART’s funding needs after separation.
- Debt availability and covenant headroom after increased borrowings, including the implications of foreign-held cash and interest-rate exposure.
- Whether the unusually high tax benefit rate is sustainable, and the collectability and timing of discontinued-operations earn-out receipts.
- Regulatory, clinical, and commercial progress for HART’s products, including developments following the reported patient outcomes.