Harvard Bioscience, Inc. — Q1 2013 Form 10-Q
Unaudited results for the three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise noted. Financial amounts are in U.S. dollars.
Business context
The company develops, manufactures and markets life science research tools (LSRT) and regenerative medicine devices (RMD). In Q1, LSRT generated all reported revenue; RMD remained in development and incurred operating losses. The filing cautions that quarterly results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $26.1 million | $28.3 million; down 7.9% reported and 8.5% excluding currency and acquisitions |
| Gross profit / margin | $12.3 million / 47.0% | $13.4 million / 47.3% |
| Operating income (loss) | $(0.2) million | $1.2 million |
| Continuing operations income (loss), net | $(0.1) million | $0.5 million |
| Discontinued operations income, net of tax | $0.2 million | None reported |
| Net income | $0.1 million | $0.5 million |
| Operating cash flow | $0.6 million | $1.6 million |
- Lower sales volume and less favorable product mix reduced gross margin. Organic revenue weakness was concentrated in Harvard Apparatus, Biochrom and Hoefer.
- RMD’s operating loss was $2.2 million, compared with $1.2 million in Q1 2012; LSRT operating income was $3.2 million, compared with $3.6 million.
- Cash and cash equivalents were $23.7 million at March 31, 2013, versus $20.7 million at year-end 2012. Total debt was $15.0 million, including $3.0 million current; cash less debt was $8.7 million. Working capital was approximately $48.8 million.
- Cash increased by $3.1 million during the quarter, including $3.6 million of financing cash flow and a $0.8 million adverse currency effect. Capital expenditures were $0.4 million.
- Cash held by foreign subsidiaries was $19.0 million and was not available for domestic operations unless repatriated, which could trigger U.S. taxes. Management said it did not intend to repatriate these earnings.
Material changes, outlook and unusual items
- Bookings fell 12% to $25.6 million; backlog declined 23.9% year over year to $4.5 million. Management attributed weakness to delayed U.S. research spending amid sequestration and softer European business, including lower-than-expected GE Healthcare activity.
- On March 29, the company amended its credit agreement: $15 million of existing advances became a term loan, alongside a $25 million revolving facility and a delayed-draw term loan of up to $15 million for HART funding. The loans mature in 2016 or 2018, carry LIBOR-based rates, and are subject to financial and other covenants. The company reported covenant compliance and $25 million of available revolving capacity at quarter-end.
- Management expected available cash, operating cash flow and debt capacity to fund operations and capital expenditures for at least 12 months. It expected approximately $2.0 million of capital expenditures for the remainder of 2013 and $0.7 million of pension contributions. These are expectations, not guarantees.
- HART postponed and then abandoned its planned IPO; the company said it would pursue a pro-rata, intended tax-free spin-off instead, subject to a Form 10 filing and listing. It planned to contribute $15 million to HART before the spin-off and was exploring alternatives if the separation did not proceed. The $0.7 million of IPO-related costs recorded at March 31 was to be expensed in Q2.
- Q1 net income included $0.2 million of discontinued-operations income related to an earn-out from a previously sold business. The filing also reported a $2.0 million foreign-currency translation loss in comprehensive income, versus a $1.3 million gain in Q1 2012.
- In April 2013, HART’s InBreath system was used in a U.S. pediatric regenerated-trachea transplant. The company said it intended to discuss regulatory pathways with FDA and EU authorities; broader commercialization depends on regulatory and clinical progress.
Risks and contingencies
- Demand is exposed to government and research funding levels, sequestration, customer budget timing, European seasonality, and economic conditions. Currency movements also affect reported results.
- RMD development increases expenses and depends on regulatory approvals, market acceptance, clinical progress, collaborators and financing. The filing disclosed the death of a recipient of an earlier transplant; the company stated it knew of no evidence that the scaffold or bioreactor contributed.
- The company relies on Dr. Paolo Macchiarini for important RMD collaboration and disclosed his ongoing legal case in Italy. It said the allegations did not concern surgeries involving its products.
- The company disclosed correspondence from Nanofiber Solutions alleging possible misuse of confidential information and intellectual-property infringement concerning scaffold development. Outcomes and potential costs were uncertain.
- Other material risks include dependence on GE Healthcare distribution agreements, debt covenants and financing availability, acquisition integration, possible impairment of goodwill and intangible assets, and product-liability and regulatory exposure. Goodwill and other intangible assets totaled $57.2 million, or 42% of assets; the company reported no impairment at quarter-end.
Key facts for investors to verify
- Whether bookings, backlog and organic LSRT revenue recover, particularly in the businesses identified as weak and in European/GE Healthcare sales.
- HART’s spin-off timetable, required approvals and listing, the planned $15 million contribution, and the Q2 treatment of IPO costs.
- Credit-facility availability, covenant headroom, debt repayment terms and interest-rate exposure; a 1% rate increase was estimated to add $150,000 of annual interest expense on quarter-end borrowings.
- RMD regulatory and clinical milestones, commercialization prospects, collaborator continuity, and any developments in the disclosed intellectual-property matter.
- Cash accessibility and tax implications for foreign-held cash, plus the collection and timing of discontinued-business earn-out proceeds.