Harvard Bioscience, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Amounts are in U.S. dollars. The company develops and sells life-science instruments, systems, software and services globally. Results exclude Denville, sold in January 2018 and reported as discontinued operations for the 2018 comparisons.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $29.6 million | $31.5 million | $57.8 million | $58.3 million |
| Gross margin | 53.9% | 48.7% | 55.6% | 49.1% |
| Operating income (loss) | $0.2 million | $(0.4) million | $0.1 million | $(1.6) million |
| Continuing-operations net loss | $(0.2) million | $(1.5) million | $(2.6) million | $(7.3) million |
| Net loss | $(0.2) million | $(1.5) million | $(2.6) million | $(5.5) million |
| Basic and diluted loss per share | $(0.01) | $(0.04) | $(0.07) | $(0.15) |
- First-half operating cash flow was $2.7 million, versus $1.7 million a year earlier. Investing activities provided $0.6 million, including a $1.0 million Denville escrow release; capital expenditures were $0.4 million. Financing activities used $6.5 million, and cash declined $3.2 million to $4.9 million.
- At June 30, cash was $4.9 million, current assets $52.5 million and current liabilities $20.9 million. Debt was $54.8 million net of deferred financing costs; debt less cash was $49.9 million. The balance sheet reports $2.4 million of current debt and $52.4 million of long-term debt.
- The company had $9.5 million of borrowing capacity under its senior secured facility, subject to covenant and working-capital borrowing restrictions. It reported compliance with financial covenants. The effective term-loan interest rate, after the swap, was 8.85%.
- Operating lease liabilities totaled $11.0 million at June 30, including $2.3 million current. The company adopted lease accounting guidance in January 2019, recognizing lease assets and liabilities.
Material changes and notable items
- Q2 revenue declined 6.1% year over year; management attributed the decrease mainly to lower European sales and reduced contract research organization volume following customer consolidation. A new DSI product partly offset weakness. Foreign exchange reduced Q2 revenue by approximately $0.5 million.
- First-half revenue fell 0.8% as reported. Management’s reconciliation showed a 4.4% organic decline, a 5.8% contribution from DSI, and a 2.2% adverse foreign-exchange effect. DSI contributed six months of revenue in 2019 versus five months in the comparable 2018 period.
- Higher reported gross margins largely reflect the absence of prior-year DSI inventory fair-value step-up charges: $2.2 million in Q2 2018 and $3.7 million in the first half of 2018. Excluding that effect, Q2 margin declined, which management attributed to weaker fixed-cost absorption and product mix.
- Operating expenses included a $0.9 million impairment charge in Q2 related to in-process research and development intangible assets. First-half interest expense was $2.8 million, compared with $2.4 million a year earlier; prior-year other expense included acquisition and divestiture transaction costs.
- In the first half, the company repaid $8.5 million and borrowed $2.3 million, including a required $4.0 million excess-cash-flow payment and a $1.0 million payment related to the Denville escrow release. Its facility bears a floating rate, with a swap fixing the LIBOR component on a portion of the debt at 2.72% through 2023.
Outlook, risks and contingencies
- Management expects available cash, cash generated from operations and debt capacity to fund operations, capital expenditures and debt principal and interest payments for the next 12 months and beyond. The filing provides no numerical revenue or earnings guidance.
- Key stated risks include customer research-budget and government-funding reductions; international economic, political and currency exposure; European purchasing seasonality and Brexit-related uncertainty; competition; integration and systems implementation; cybersecurity; acquisition execution; substantial debt and covenant compliance; and potential goodwill or intangible-asset impairment.
- The credit facility is secured by substantially all tangible and intangible assets of the borrowers and guarantors and includes restrictions on additional debt, acquisitions, investments, asset sales and dividends, among other matters. Interest-rate sensitivity disclosure estimates annual interest expense would increase by $0.246 million for a 1% rate increase, or $0.492 million for a 2% increase, assuming other factors unchanged.
- The company determined that the potential $2.0 million Denville 2018 earn-out was not earned; up to $1.0 million remains potentially payable to the company, subject to 2019 performance conditions. It also disclosed an immaterial prior-period debt-classification error of approximately $4.0 million, corrected with no effect on total debt.
- Management concluded disclosure controls were effective at quarter-end. It continued integrating DSI business processes and systems; no other material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether organic demand stabilizes, particularly in Europe and among contract research organization customers, and whether DSI’s new product gains persist.
- How much margin improvement is sustainable after adjusting for the prior-year inventory step-up, and the impact of product mix and fixed-cost absorption.
- Cash generation, working-capital needs, scheduled debt repayments, borrowing availability and compliance with facility restrictions.
- The status of the remaining Denville earn-out, the impaired development assets and any further impairment indicators.
- The company’s detailed risk factors and debt terms in the full filing and its 2018 Form 10-K; the filing states that risk factors had not materially changed.