Harvard Bioscience, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The company develops, manufactures and sells scientific instruments, systems and laboratory consumables for life-science research. Results are unaudited and compared with Q1 2014.
Financial results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $25.8 million | $25.9 million |
| Gross profit / margin | $11.5 million / 44.6% | $11.8 million / 45.4% |
| Operating income (loss) | $(1.2) million | $1.3 million |
| Net income (loss) | $(1.4) million | $0.7 million |
| Diluted earnings (loss) per share | $(0.04) | $0.02 |
| Operating cash flow | $(0.5) million | $1.1 million |
| Capital expenditures | $1.0 million | $0.3 million |
At March 31, 2015, cash and cash equivalents were $8.0 million, versus $14.1 million at year-end 2014. Total debt was $21.9 million, up from $21.5 million at year-end; net debt was $13.9 million. The company reported $6.2 million of borrowing capacity and compliance with its credit-facility financial covenants, subject to borrowing restrictions. Current assets were $52.8 million and current liabilities were $19.8 million. The underfunded U.K. pension liability was approximately $4.3 million.
Changes and drivers
- Reported revenue declined 0.5%. Management attributed a 3.8% growth contribution to business growth, offset by a 4.3% adverse foreign-currency translation effect. Acquisitions contributed, while the company also cited softness in academic and government markets from budget delays and weather.
- Gross margin fell 0.8 percentage points, primarily due to lower revenue and unfavorable currency translation, partly offset by acquired businesses.
- Operating expenses increased to $12.6 million from $10.4 million. Sales and marketing rose 17.3%, general and administrative 13.6%, and research and development 79.7%; management cited acquisitions and, for R&D, prior-year patent-cost reversals.
- Net loss included $0.6 million of acquisition-related costs. Foreign-exchange transaction effects were a gain of approximately $0.2 million, versus a loss of approximately $0.1 million a year earlier; currency translation reduced comprehensive income by $4.5 million.
- Bookings were $26.7 million, compared with $26.4 million; excluding currency effects, management reported 5.5% growth. Backlog was $7.7 million versus $5.6 million a year earlier, but management said the increase reflected acquisitions and order/shipment timing; orders may be cancelled before shipment.
Acquisitions, cash flow and financing
On January 8, 2015, the company acquired HEKA Elektronik for approximately $5.9 million, or $4.5 million net of cash acquired, funded from existing cash. HEKA’s results were included from the acquisition date and were not material. The preliminary allocation included $2.1 million of goodwill; the valuation remained subject to revision. Investing cash outflow was $5.6 million, including the acquisition and capital spending. Cash flow from operations was negative, primarily reflecting lower net income and working-capital movements.
On April 24, 2015, after quarter-end, the company amended its credit agreement: the revolving-line maturity was extended to March 29, 2018, and stated LIBOR margins were reduced to 2.25% for the revolver and 2.75% for the term loan and delayed-draw term loan. Management expected available cash, operating cash generation and debt capacity to fund operations, potential acquisitions and capital expenditures for the next 12 months and beyond, while noting that additional debt or equity might be needed.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management described a strategy centered on organic growth and commercial execution, product development, acquisitions and operating efficiencies.
- Restructuring continued, including plans to consolidate Coulbourn manufacturing at the Holliston headquarters. The company expected further charges through Q3 2015 and related payments through year-end. The 2014 plan also remained in progress.
- Management cited risks including foreign-currency movements, international and end-market conditions, debt and covenant requirements, acquisition integration and costs, restructuring execution, competition, product development, and potential goodwill or intangible-asset impairment.
- Most foreign cash was held by foreign subsidiaries and was not available for domestic operations without repatriation taxes; management said it did not intend to repatriate undistributed foreign earnings.
- The company was assessing the new revenue-recognition standard and had not determined its impact. Disclosure controls were deemed effective; the first live phase of the ERP implementation began during the quarter.
Key facts for investors to verify
- Whether revenue and backlog momentum persists after separating acquisition contributions and currency effects.
- Whether operating expenses, restructuring and integration costs moderate enough to restore operating profitability and cash generation.
- Cash availability, borrowing capacity and covenant headroom, including the practical effect of foreign-held cash and the post-quarter credit amendment.
- Final HEKA purchase-price allocation and the acquired businesses’ contribution to revenue, margins and cash flow.
- Execution and costs of restructuring and ERP implementation, along with foreign-exchange exposure and the pension funding obligation.