Harvard Bioscience, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2018. Harvard Bioscience develops and sells scientific instruments, systems, and related services. Results are presented with Denville Scientific classified as discontinued operations following its sale in January 2018.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $28.6m | $18.7m | $86.9m | $55.8m |
| Gross margin | 55.2% | 50.8% | 51.1% | 50.5% |
| Operating income (loss) | $0.9m | ($0.4m) | ($0.8m) | ($1.0m) |
| Net income (loss) | ($0.3m) | ($0.4m) | ($5.8m) | ($1.9m) |
| Operating cash flow | Not separately presented | Not separately presented | $0.3m | $2.0m |
Balance sheet and liquidity: At September 30, 2018, cash was $6.7m, current assets $54.5m, and current liabilities $19.3m. Debt, net of financing costs, was $61.0m, versus $11.7m at year-end 2017; net debt was $54.4m. The company reported $8.5m of available borrowing capacity and compliance with its financial covenants. Management expected cash, operating cash generation, and debt capacity to fund operations and capital expenditures for the next 12 months and beyond.
Material changes and drivers
- Revenue rose 53.0% in Q3 and 55.9% year to date. Management attributed most of the increase to the January acquisition of Data Sciences International (DSI): DSI contributed $11.1m of Q3 revenue and $29.3m from acquisition through September. Nine-month foreign-exchange effects added approximately $1.5m; Q3 currency effects reduced revenue by approximately $0.1m.
- Gross margin improved year over year, which management attributed primarily to DSI’s higher-margin products. Nine-month margin improvement was partly offset by a $3.8m purchase-accounting inventory step-up charge.
- Q3 operating income improved to $0.9m, but nine-month net loss increased to $5.8m. Higher debt drove interest expense to $3.8m for the nine months, compared with $0.5m a year earlier. Other expense also included approximately $3.2m of acquisition and divestiture transaction costs.
- DSI was acquired for approximately $70.6m. Denville was sold for approximately $20.0m, including a contingent $3.0m earn-out; $15.7m was received at closing. Nine-month discontinued-operations income of $1.8m included a $1.3m gain on sale and a $0.9m tax benefit.
- Operating cash flow was $0.3m, down from $2.0m. Investing cash use was $53.2m, principally reflecting the DSI acquisition net of Denville sale proceeds; financing provided $53.4m. Cash increased by $0.9m during the period.
Outlook, risks, and unusual items
- The filing provides no specific revenue or earnings guidance. Management cited growth through acquisitions, commercial execution, operational efficiencies, and product development as strategic priorities.
- Debt is senior secured, variable-rate, and subject to restrictive covenants. The effective term-loan rate, after the interest-rate swap, was 8.76%. A 1% rate increase was estimated to add approximately $0.28m to interest expense, assuming no other changes.
- Other disclosed risks include research-budget and government-funding reductions, acquisition integration and execution, substantial debt and covenant limits, foreign-exchange exposure, cybersecurity and IT risks, and uncertainty related to Brexit and tax changes.
- The company expected adoption of the new lease standard in January 2019 to materially increase balance-sheet assets and liabilities; the impact had not yet been finalized. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Investor verification priorities
- Separate DSI-driven growth from underlying organic growth and assess DSI integration and expected synergies.
- Track recurring operating performance apart from the inventory step-up, acquisition/divestiture costs, and Denville sale and tax effects.
- Review debt service, variable-rate exposure, covenant and borrowing-base restrictions, and the availability of the remaining revolver capacity.
- Assess whether operating cash flow can improve from the reported $0.3m and support investment needs alongside debt obligations.
- Confirm the final DSI purchase-price allocation and lease-accounting impact; the acquisition allocation remained preliminary and lease-standard adoption impact was not yet determined.