Harvard Bioscience, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Financial statements are unaudited; amounts below are in millions of dollars except per-share data.
Business context
Harvard Bioscience develops, manufactures and sells scientific instruments and systems used in life-science research. In January 2018, it acquired Data Sciences International (DSI), expanding its preclinical physiologic-monitoring business and customer reach in biopharmaceutical and contract research markets. It also sold substantially all Denville Scientific assets, which are reported as discontinued operations.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $31.5 | $19.0 | $58.3 | $37.0 |
| Gross margin | 48.7% | 47.9% | 49.1% | 50.3% |
| Operating loss | $(0.4) | $(0.3) | $(1.6) | $(0.6) |
| Continuing-operations loss | $(1.5) | $(0.6) | $(7.3) | $(1.4) |
| Net loss | $(1.5) | $(0.4) | $(5.5) | $(1.4) |
| Basic and diluted loss per share | $(0.04) | $(0.01) | $(0.15) | $(0.04) |
Q2 continuing-operations revenue grew 66.3%; first-half revenue grew 57.3%. Management attributed the increases mainly to DSI, which contributed about $10.5 million in Q2 and $18.2 million from acquisition through June, and favorable currency translation of about $0.6 million and $1.7 million, respectively. The filing does not separately quantify organic growth excluding DSI.
Q2 gross margin improved year over year, with management citing the acquired business’s higher-margin products, partly offset by $2.2 million of acquired-inventory fair-value step-up charges. First-half margin declined, primarily due to $3.7 million of these charges. Operating expenses increased, including sales and marketing, R&D and intangible amortization, largely reflecting DSI. First-half other expense included higher interest costs and approximately $2.8 million of transaction costs related to the acquisition and divestiture.
Cash flow, debt and liquidity
- Operating cash flow: $1.7 million provided in the first half, compared with $0.1 million used in the prior-year period.
- Investing cash flow: $52.9 million used, including $68.0 million paid for DSI, partly offset by $15.8 million net proceeds from the Denville sale. Capital expenditures were $0.6 million.
- Financing cash flow: $50.7 million provided, including debt proceeds and repayments. Cash declined by $0.1 million to $5.6 million during the half.
- Balance sheet at June 30: Cash $5.6 million; current assets $53.7 million; current liabilities $22.2 million; total assets $165.1 million; stockholders’ equity $77.0 million.
- Debt: $61.4 million net of financing costs, versus $11.7 million at December 31, 2017; management reported net debt of $55.8 million. The new five-year senior secured facility comprises a $64 million term loan and a $25 million revolving line. Available borrowing capacity was $8.6 million, and the company reported compliance with financial covenants.
- The effective term-loan interest rate, net of the swap, was 8.69%. A $36 million interest-rate swap fixed the LIBOR component on part of the borrowing at 2.72%. The company estimated that a 1% rate increase would add approximately $0.28 million to annual interest expense, absent other changes.
Material changes, outlook and risks
The DSI acquisition was completed for approximately $70.6 million on January 31, 2018. DSI contributed $18.2 million of revenue and a $1.7 million net loss for the five months through June; that loss included a $3.7 million purchase-accounting inventory step-up charge and $1.8 million of acquired-intangible amortization. The Denville asset sale closed January 22 for approximately $20.0 million, including a contingent $3.0 million earn-out; $15.7 million was received at closing. Denville generated $1.8 million of discontinued-operations income in the first half, including a $1.3 million disposal gain and a $0.9 million tax benefit.
Management expected available cash, operating cash generation and debt capacity to support operations and capital expenditures for the next 12 months and beyond, based on current plans. It also cautioned that additional debt or equity financing might be needed. The filing provides no specific revenue or earnings guidance.
Key disclosed risks include substantial debt and covenant/borrowing restrictions, integration and execution risks from acquisitions, customer research-budget and government-funding changes, foreign-exchange and international-market exposure, interest-rate changes, tax uncertainty (including U.S. tax reform and Brexit-related developments), cybersecurity and IT risks, competition, and potential goodwill or intangible-asset impairment. The company reported effective disclosure controls and no material change in internal control over financial reporting during the first half.
Important facts for investors to verify
- How much future growth is attributable to DSI versus comparable-business organic growth; the filing does not isolate organic growth from the combined “organic and DSI” measure.
- Whether DSI integration, expected revenue/cost synergies and post-acquisition profitability develop as anticipated, and how quickly the inventory step-up charges run off.
- Debt repayment capacity, revolver availability, covenant headroom and exposure to variable interest rates given the 8.69% effective rate and secured borrowing structure.
- Whether the Denville earn-out is achieved and collected, and the eventual outcome of provisional tax accounting and other tax uncertainties.
- Cash conversion and working-capital trends, including the rise in receivables, inventory and deferred revenue after the acquisition.