Harvard Bioscience, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report; selected fourth-quarter results are also summarized below. The company develops and sells life-science research instruments, systems, software and services worldwide.
Business context and material changes
- In January 2018, Harvard Bioscience acquired Data Sciences International (DSI) for approximately $71.1 million. DSI contributed about $42.6 million of revenue for the eleven months included in FY2018 and represented 35.2% of company revenue for the year.
- In January 2018, the company sold substantially all Denville Scientific assets for approximately $20.0 million, including a contingent $3.0 million earn-out. Denville is presented as discontinued operations.
- Revenue mix shifted with DSI: continuing-operation sales were 59% direct and 41% through distributors, versus 55% and 45% in 2017. Manufactured products accounted for 85% of revenue, versus 82% in 2017.
Financial results
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $120.8 million | $77.4 million |
| Gross profit / margin | $63.2 million / 52.3% | $39.2 million / 50.6% |
| Operating income (loss) | $1.0 million | $(0.6) million |
| Continuing-operations net loss | $(4.3) million | $(2.0) million |
| Net loss, including discontinued operations | $(2.9) million | $(0.9) million |
| Operating cash flow | $2.9 million | $1.1 million |
| Capital expenditures | $1.0 million | $0.9 million |
| Cash and cash equivalents at year-end | $8.2 million | $5.2 million |
- Revenue rose 56.0%; the company attributed approximately $42.6 million of the increase to DSI and approximately $1.3 million to favorable currency translation.
- Gross margin improved 1.7 percentage points, primarily from DSI’s higher-margin products, partly offset by a $3.8 million purchase-accounting inventory step-up charge.
- Other expense increased to $9.0 million from $2.0 million, including $5.4 million of interest expense and approximately $3.4 million in acquisition and divestiture transaction costs.
- Denville discontinued operations generated $1.4 million of FY2018 income, including a $1.3 million gain on sale.
- Fourth quarter: Revenue was $33.9 million; operating income was $1.7 million; net income was $2.9 million, including discontinued operations. Continuing-operations net income was $3.3 million. The filing says fourth-quarter tax true-ups reflected reassessment of valuation allowances and DSI-related deferred tax attributes.
Debt, liquidity and outlook
- At December 31, 2018, debt principal was $62.4 million; reported debt net of deferred financing costs was $60.8 million. Net debt after cash was approximately $52.6 million. The comparable 2017 net-debt figure was $6.5 million.
- The senior secured facility comprises a $64.0 million term loan and a revolving line of credit of up to $25.0 million. Available borrowing capacity at year-end was $9.8 million, subject to covenant and borrowing-base restrictions. The term loan matures in 2023; $50.4 million of principal is scheduled to mature that year.
- The loans bear interest at LIBOR plus 6.25%, subject to stated floors. A $36.0 million interest-rate swap fixed the LIBOR component on part of the term loan at 2.72%; the reported weighted effective term-loan rate, after the swap, was 8.88%.
- The company reported compliance with financial covenants at year-end. Management expected cash, operating cash generation and borrowing capacity to fund current operations, pension obligations and capital expenditures for at least the next 12 months, while noting additional debt or equity may be needed.
- No numerical revenue or earnings guidance is provided. Management’s stated strategy is to pursue organic growth, operational efficiency, product development and strategic acquisitions.
Risks, contingencies and other notable matters
- Key risks include substantial debt service and restrictive covenants, execution and integration of acquisitions, dependence on research funding and customer R&D budgets, competition and technological change, and exposure to foreign currencies and international markets.
- Debt is secured by substantially all tangible and intangible assets of the company and specified subsidiaries. The floating-rate exposure remains a risk despite the swap.
- Goodwill and intangible assets totaled approximately $103.1 million, or 61% of total assets. The company reported no impairment at year-end.
- A wrongful-death lawsuit related to products associated with former subsidiary Biostage remained at an early stage. Damages sought were unspecified; the company intended to defend the claim and had requested insurance defense and indemnification. The filing says the ultimate outcome cannot be predicted.
- The company reported effective disclosure controls and internal control over financial reporting. The assessment and auditor’s opinion excluded DSI, which accounted for 47.6% of assets and 35.2% of revenue, under the acquired-business transition guidance.
- The company does not anticipate paying cash dividends in the foreseeable future.
Important facts for investors to verify
- Whether DSI delivers the expected revenue and cost synergies, and how much future growth is organic rather than acquisition-related.
- Debt repayment capacity, covenant headroom, borrowing availability and refinancing needs ahead of the 2023 maturity.
- Whether operating cash flow improves sufficiently to support debt service, working capital, investment and any future acquisitions.
- The effect of recurring intangible amortization, acquisition-related costs and tax valuation allowances on reported earnings.
- Developments in the Biostage-related litigation, insurance coverage and the contingent Denville earn-out.
- Progress integrating DSI’s financial controls and systems into the company’s control environment.