Harvard Bioscience, Inc. — Q1 2023 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2023, compared with Q1 2022. The company sells scientific instruments, equipment, software, accessories, and related services. Unless noted otherwise, amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $30.0 million | $28.8 million |
| Gross profit / margin | $18.3 million / 61.2% | $16.2 million / 56.2% |
| Operating income (loss) | $1.7 million | $(6.7) million |
| Net income (loss) | $0.6 million | $(6.9) million |
| Diluted earnings (loss) per share | $0.01 | $(0.17) |
| Operating cash flow | $1.8 million | $(2.0) million |
- Cash and cash equivalents were $3.8 million at March 31, 2023, versus $4.5 million at year-end 2022. Current assets were $52.4 million and current liabilities $23.2 million.
- Gross borrowings were approximately $44.8 million at quarter-end; the balance-sheet carrying amount of debt, net of unamortized financing costs, was $44.1 million. Unused revolver capacity was $10.5 million. The weighted-average borrowing rate, net of swaps, was 8.0%; the credit facility matures in December 2025.
- Investing cash flow was $0.3 million, including $0.5 million proceeds from the Hoefer product-line sale, partly offset by $0.2 million of capital expenditures. Financing cash flow was $(2.9) million, principally reflecting debt repayments.
Changes versus the prior comparable period
- Revenue rose 4.2%, primarily from preclinical product growth, partly offset by discontinued non-strategic cellular and molecular products and unfavorable currency effects. Preclinical products represented a higher-margin mix.
- Gross margin improved 5.0 percentage points to 61.2%, reflecting product mix and the discontinuation of lower-margin products, as well as higher revenue.
- Operating results improved substantially; Q1 2022 included $5.2 million of litigation-related costs for the Biostage matter, with no such expense in Q1 2023. Lower sales and marketing and R&D expenses also contributed. Interest expense increased by $0.6 million to $1.0 million amid higher rates.
- Operating cash flow improved from an outflow of $2.0 million to an inflow of $1.8 million, which management attributed primarily to improved operating profits.
Outlook, risks, and notable items
- Management expects available cash, operating cash generation, and debt capacity to fund operations, business-improvement costs, and capital expenditures for at least the next 12 months. The filing provides no quantified revenue or earnings guidance.
- Management expects supply-chain and broader economic uncertainties to continue through 2023. Component and labor shortages, freight and materials costs, inflation, rising interest rates, foreign-exchange volatility, and pandemic-related disruption have affected results and could materially affect future results if prolonged or more severe than anticipated.
- The company reported compliance with amended credit-agreement covenants at March 31, 2023. Revolver capacity is limited by the consolidated net leverage ratio. A February 2023 interest-rate swap covered a $31.8 million notional amount, fixing the SOFR component at 4.75% through December 2025; the applicable credit margin remains additional.
- The Hoefer product line was sold for $0.5 million cash in February 2023, producing a $0.4 million gain; its revenue and gross profit were not significant.
- The Biostage litigation settlement resolved the claims in 2022. In April 2023, a Biostage private placement triggered conversion of the company’s remaining Series E preferred shares into approximately 675,000 Biostage common shares. Harvard Bioscience then held about 5% of Biostage; the filing cautions that the investment may fluctuate considerably or become worthless.
- Other matters include three state unclaimed-property audits, for which no loss contingency was accrued, and ordinary-course legal proceedings that management said were not expected to have a material adverse effect. The filing notes that an adverse resolution could nevertheless be material.
- The Q1 2023 effective tax rate was 48.5%, affected primarily by GILTI and valuation allowances against substantially all tax-loss and credit carryforwards.
Important facts for investors to verify
- Whether revenue growth and the improved gross margin persist, particularly given reliance on higher-margin preclinical products and discontinued product lines.
- Cash conversion, working-capital needs, and the assumptions supporting management’s at-least-12-month liquidity assessment.
- Debt repayment capacity, interest expense exposure, covenant headroom, and the effect of variable borrowing margins despite the swap.
- The value and liquidity of the Biostage common-stock investment following conversion, and any future developments in the unclaimed-property audits or other contingencies.
- The impact of continued supply-chain, inflation, interest-rate, currency, and pandemic-related conditions on shipments, costs, and cash flow.