Harvard Bioscience, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Harvard Bioscience develops and sells life-science instruments, systems, software, and services globally. Comparisons are with Q1 2018; Denville’s results are classified as discontinued operations.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $28.2 million | $26.8 million |
| Gross profit / gross margin | $16.2 million / 57.3% | $13.3 million / 49.6% |
| Operating income (loss) | $34,000 | $(1.3) million |
| Net loss | $(2.4) million | $(4.1) million |
| Loss per diluted share | $(0.06) | $(0.11) |
| Cash from operating activities | $2.0 million | $0.4 million |
- Revenue grew 5.4% year over year: organic and DSI-related growth was 8.2%, partly offset by a 2.8% unfavorable foreign-exchange effect. Q1 2019 included three months of DSI revenue versus two months in Q1 2018.
- Gross margin improved primarily because the quarter included a full three months of higher-margin DSI products and Q1 2018 included a $1.5 million DSI inventory fair-value step-up charge.
- Operating expenses increased to $16.1 million from $14.5 million, including higher sales and marketing, R&D, and intangible amortization. Other expense was $1.8 million versus $4.0 million, reflecting lower acquisition/disposition transaction costs, partly offset by higher interest expense.
- Q1 2018 continuing-operations results included approximately $2.8 million of DSI acquisition and Denville disposition transaction costs. Q1 2018 also included $1.8 million of income from discontinued operations, including the Denville sale gain and related tax benefit; Q1 2019 had none.
Cash, debt, and liquidity
- Cash and cash equivalents were $5.0 million at March 31, 2019, down from $8.2 million at December 31, 2018. Operating cash flow was $2.0 million; investing activities used $0.2 million and financing activities used $5.0 million. Cash declined $3.1 million during the quarter.
- Debt, net of deferred financing costs, was $56.3 million, down from $60.8 million at year-end. Net debt after cash was $51.3 million. The company repaid $4.6 million, including about $4.0 million in an excess-cash-flow payment.
- Available borrowing capacity under the senior secured credit facility was $14.5 million; the company reported compliance with its financial covenants, subject to covenant and working-capital borrowing restrictions. The effective term-loan interest rate, after the swap, was 8.87%.
- Management expects available cash, operating cash generation, and debt capacity to fund current operations and capital expenditures for the next 12 months and beyond, but noted that additional debt or equity could be needed. The filing gives no specific revenue or earnings guidance.
- Current assets were $53.6 million and current liabilities $24.1 million. Adoption of lease accounting added $11.7 million of operating lease liabilities and $9.4 million of right-of-use assets at January 1; lease liabilities were $11.4 million at March 31.
Changes, commentary, and risks
- Management’s strategy emphasizes organic growth, commercial execution, operating efficiencies, product development, and strategic acquisitions. DSI, acquired in January 2018 for approximately $71.1 million, broadened exposure to biopharma and contract research customers.
- Foreign exchange reduced reported revenue by approximately $0.8 million and favorably affected expenses by approximately $0.6 million in Q1 2019. A 1% increase in interest rates was estimated to raise annual interest expense by approximately $248,000, assuming no other changes.
- G&A included an approximately $0.4 million long-term receivable write-off. The company also reported $1.4 million of quarterly intangible amortization and an underfunded UK pension liability of approximately $0.9 million.
- The filing disclosed an immaterial prior-period balance-sheet classification error: approximately $4.0 million of debt due within a year had been classified as long-term at December 31, 2018. The correction changed current versus long-term classification, not total debt.
- Principal disclosed risks include research-budget or government-funding reductions, global economic and currency conditions, competition, acquisition integration and execution, substantial debt and covenant constraints, cybersecurity and IT systems, intellectual-property and product-liability exposure, and potential goodwill or intangible-asset impairment. Management reported disclosure controls were effective; DSI systems and processes were still being integrated.
Key facts for investors to verify
- Whether revenue growth and higher gross margin persist after accounting for DSI’s additional reporting month, foreign exchange, and the prior-year inventory step-up.
- Cash generation, debt repayment needs, borrowing availability, covenant headroom, and the ability to service debt at the stated interest rate.
- Whether the receivable write-off signals broader collection risk and how lease and pension obligations affect liquidity.
- Progress integrating DSI and delivering the acquisition’s anticipated revenue and cost benefits.
- Developments in the risks identified by management, particularly customer funding, currency exposure, acquisition integration, and information systems.