Harvard Bioscience, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited results; dollar amounts are in U.S. dollars. Comparatives reflect Denville Scientific as discontinued operations.
Business context
Harvard Bioscience develops, manufactures and markets scientific instruments and systems for life-sciences research. During the quarter, it acquired Data Sciences International (DSI) and sold substantially all assets of Denville Scientific. Management described DSI as expanding the company’s presence in physiologic monitoring and broadening its customer base in biopharmaceutical and contract research markets.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Revenue | $26.8 million | $18.1 million | Up 48.0%; includes $7.6 million from DSI after acquisition and an approximately $1.0 million favorable currency-translation contribution, according to management. |
| Gross profit / margin | $13.3 million / 49.6% | $9.6 million / 53.0% | Margin declined, primarily due to $1.5 million of DSI inventory fair-value step-up expense. |
| Operating loss | $(1.3) million | $(0.4) million | Higher operating expenses, including acquisition-related increases in sales and marketing, R&D and amortization. |
| Continuing-operations loss | $(5.9) million | $(0.7) million | Includes $4.0 million of net other expense; approximately $2.8 million of transaction costs contributed to the increase. |
| Net loss / loss per share | $(4.1) million / $(0.11) | $(1.1) million / $(0.03) | Q1 2018 includes $1.8 million income from discontinued operations, including a $1.2 million gain on the Denville sale and an income-tax benefit. |
| Cash from operating activities | $0.4 million | $(0.6) million | Improvement was attributed primarily to working-capital changes. |
| Cash and cash equivalents | $6.0 million | $5.2 million at Dec. 31, 2017 | Quarter-end balance. |
| Debt | $63.0 million, net of financing costs | $11.7 million, net of financing costs | Net debt after cash was approximately $57.0 million, versus $6.6 million at year-end. |
Material changes and financing
- DSI was acquired on January 31, 2018 for approximately $70.0 million. Its results contributed about $7.6 million of quarterly revenue and a $0.4 million net loss, including purchase-accounting charges.
- Denville was sold on January 22, 2018 for approximately $20.0 million, including a contingent $3.0 million earn-out; $15.7 million was received at closing. Its results are presented as discontinued operations.
- The company entered a five-year senior secured financing arrangement comprising a $64.0 million term loan and a revolving facility of up to $25.0 million. At quarter-end, reported available borrowing capacity was $14.6 million. The facilities are secured by substantially all assets and include restrictive covenants.
- Borrowings bear interest at the borrower’s option at base rate plus 4.75% or LIBOR plus 6.25%, subject to stated floors. The company hedged $36.0 million of term-loan exposure with an interest-rate swap fixing the relevant LIBOR component at 2.72%. Quarter-end effective rates, net of the swap, were 8.43% on the term loan and 8.13% on the revolver.
- Management stated it was in compliance with financial covenants at March 31, 2018.
Outlook, risks and unusual items
- Management expected available cash, operating cash generation and debt capacity to fund current operations and capital expenditures for the next 12 months and beyond, while noting that additional debt or equity financing might be needed.
- No specific revenue or earnings guidance is stated in the supplied filing text. Management cited potential revenue and cost synergies from DSI but did not quantify them.
- Key risks include substantial debt and covenant restrictions, interest-rate and foreign-exchange exposure, integration and realization of benefits from acquisitions, customer research-budget and government-funding reductions, and international economic, political and tax developments, including Brexit and U.S. tax reform.
- The DSI purchase-price allocation remained preliminary. Its inventory fair-value step-up was estimated at $3.8 million and was expected to flow through cost of revenue over approximately five months. Acquisition and disposition costs, the Denville earn-out and tax-reform accounting are additional items to monitor.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether DSI delivers expected growth and synergies, and how its final purchase-price allocation and amortization affect margins and earnings.
- Debt repayment capacity, revolver availability, interest costs, covenant headroom and sensitivity to rates; the filing estimates a $293,000 increase in annualized interest expense for a 1% rate increase under stated assumptions.
- Whether the contingent Denville earn-out is achieved and collected, and how the divestiture affects ongoing revenue and cash generation.
- Progress in resolving tax-reform accounting estimates and the potential effects of international tax and currency developments.