Harvard Bioscience, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results; it is an annual report, not a quarterly filing. Financial comparisons are generally for continuing operations and exclude Denville, which was sold in January 2018.
Business context
The company develops, manufactures and sells life-science research and preclinical testing products and services. Its Cellular and Molecular Technologies business generated approximately 63% of 2019 revenue; Pre-Clinical products generated approximately 37%. No customer represented more than 10% of revenue. CEO James Green and CFO Michael Rossi joined in 2019, after which management announced a profitability, cash-flow and growth improvement plan.
Financial results and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $116.2 million | $120.8 million |
| Gross profit / gross margin | $64.3 million / 55.4% | $63.2 million / 52.3% |
| Operating income | $0.4 million | $1.0 million |
| Net loss | $4.7 million | $2.9 million |
| Operating cash flow | $8.0 million | $2.9 million |
| Capital expenditures | $1.2 million | $1.0 million |
| Cash and cash equivalents at year-end | $8.3 million | $8.2 million |
| Borrowings at year-end | $55.0 million | $62.4 million |
Revenue declined 3.8%, reflecting weaker European sales and lower CRO volume amid customer consolidation, partly offset by North American growth in discovery technologies. Foreign-currency translation reduced revenue by about $1.8 million. Gross margin improved partly because 2018 included $3.8 million of acquisition-related inventory step-up expense; excluding that item, gross profit declined about $2.7 million, primarily from lower fixed-cost absorption and product mix.
Interest expense was $5.4 million. The company recorded $1.5 million of intangible-asset impairment charges and a $0.8 million income-tax benefit. 2018 included $3.4 million of DSI acquisition and Denville divestiture transaction costs and $1.4 million of income from discontinued operations. 2019’s higher net loss therefore reflects continuing-operations results without the 2018 discontinued-operations income.
Net debt (borrowings less cash) was approximately $46.7 million, down from $54.2 million. The company had $8.7 million of available revolving-credit capacity and a weighted effective borrowing rate of 8.48% after its interest-rate swap. Current assets were $53.6 million and current liabilities $25.3 million. Operating cash flow improved largely through inventory reduction and the absence of certain 2018 acquisition-related payments.
Material changes, outlook and risks
- Restructuring: The company began a plan expected to be substantially completed by the end of 2020, including consolidation of Connecticut manufacturing into Massachusetts, downsizing in the U.K. and a workforce reduction of about 10%. It recorded approximately $1.4 million of restructuring costs in 2019; most costs are expected to require future cash outlays. Management expects savings to begin in 2020 and believes the actions can support improved organic revenue growth in 2021. The filing does not provide clear numerical 2020 or 2021 financial targets.
- Debt and covenants: A November 2019 amendment relaxed leverage and fixed-charge covenant terms after the company had exceeded the prior maximum leverage covenant, primarily due to CEO transition and restructuring costs. The company reported compliance at year-end and expected compliance for at least the next 12 months. Debt matures in January 2023 and is secured by substantially all company and guarantor assets.
- Liquidity outlook: Management expected cash, operating cash generation and borrowing capacity to fund operations, restructuring and capital spending for at least the next 12 months. This depends on its operating forecast; debt service and covenant compliance remain significant constraints.
- Notable risks: High leverage, variable-rate debt, dependence on research budgets and pharmaceutical/biotechnology spending, international and currency exposure, competition and technology change, and the ability to execute restructuring. The filing also identified potential COVID-19 effects on employees, supply chains and customers, and uncertainty around Brexit. These were risks described as of the report date, March 16, 2020.
- Contingency and governance: The company is defending a wrongful-death lawsuit relating to products of former subsidiary Biostage; damages sought are unspecified, insurance and Biostage indemnification may not cover all exposure, and the outcome is uncertain. Engine Capital had submitted director nominations, with a proxy contest possible if nominations were not withdrawn.
- Controls and audit: Management and Grant Thornton reported effective internal control over financial reporting as of December 31, 2019. The auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Track revenue trends by geography and product family, particularly Europe and CRO customers, and assess whether organic growth offsets currency effects.
- Verify restructuring savings, implementation costs, cash outlays and progress toward the stated 2021 organic-growth objective.
- Review debt amortization, interest expense, covenant headroom, the 2023 maturity and the availability of refinancing; confirm the assumptions behind management’s liquidity outlook.
- Assess whether cash-flow improvement is sustainable beyond inventory reductions and whether margins hold as product mix and sales channels change.
- Monitor the Biostage-related litigation, insurance response and indemnification capacity, as well as any developments in the proxy contest and COVID-19-related risks.