Harvard Bioscience, Inc. (NASDAQ: HBIO) — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise. The company develops, manufactures and sells scientific instruments, systems, software and services for life-science research and related markets.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $27.4 | $28.6 | $85.2 | $86.9 |
| Gross profit / margin | $15.0 / 54.6% | $15.8 / 55.2% | $47.1 / 55.3% | $44.4 / 51.1% |
| Operating income (loss) | $(1.4) | $0.9 | $(1.3) | $(0.8) |
| Net loss | $(2.6) | $(0.3) | $(5.2) | $(5.8) |
| Loss per share, diluted | $(0.07) | $(0.01) | $(0.14) | $(0.16) |
| Cash provided by operating activities | Not stated separately | Not stated separately | $5.8 | $0.3 |
At September 30, cash was $6.8, total current assets $52.3 and current liabilities $21.7. Debt carrying value, net of financing costs, was $54.3; reported debt less cash was $47.5. The company had $9.4 of available revolving-credit capacity. Its effective borrowing rate after the interest-rate swap was 8.69%. Operating lease liabilities totaled $10.8. Nine-month capital expenditures were $0.8.
Material changes versus comparable periods
- Q3 revenue fell 4.3%, primarily reflecting timing of large European equipment orders and lower contract research organization (CRO) sales against an unusually strong prior-year quarter. Currency translation reduced Q3 revenue by about $0.4.
- Nine-month revenue declined 2.0%, with lower Europe and CRO sales partly offset by North American growth in cellular and molecular discovery technologies. Currency reduced revenue by about $1.6.
- Q3 gross margin declined to 54.6%, reflecting lower fixed-cost absorption and higher inventory reserves, including write-offs associated with the North Carolina facility consolidation. Nine-month margin rose to 55.3% from 51.1%; the prior-year period included $3.8 of DSI inventory step-up amortization. Excluding that step-up, management attributed weaker gross profit to lower-volume absorption and product mix.
- Q3 general and administrative expense increased 41.9% to $6.6, mainly due to employee severance costs, including costs related to the former CEO’s departure. Q3 included $0.5 of impairment charges; nine-month impairment charges totaled $1.4.
- Nine-month operating cash flow improved to $5.8 from $0.3, primarily because the 2018 period included DSI acquisition, integration and divestiture-related payments. Cash declined by $1.3 during the first nine months of 2019.
Outlook, management commentary and risks
- Following the July 2019 CEO and CFO appointments, management began evaluating actions to improve profitability, cash flow and internal capabilities. Plans were expected to be finalized in Q4 2019 and could include site consolidations, headcount reductions and program-management costs. The company could not reliably estimate total restructuring costs; substantially all were expected to require cash and continue through fiscal 2020.
- In Q3, the company decided to discontinue a product line and cease operations at its North Carolina facility, recording restructuring charges of approximately $0.9, including impairment and severance-related costs.
- On November 4, 2019, after quarter-end, the company amended its credit agreement. The amendment changed leverage and fixed-charge covenant terms, permitted additional restructuring-cost exclusions and adjusted interest margins based on leverage. Before the amendment, the company exceeded the maximum leverage covenant; the amendment applied to the September 30 covenant calculation, and the company reported compliance after the amendment. Management expected compliance for at least the next 12 months.
- Management stated available cash, operating cash generation and debt capacity were expected to fund operations, restructuring and capital expenditures for the next 12 months and beyond. This is forward-looking and subject to risks. The filing provides no quantified revenue or earnings guidance.
- Key risks include substantial debt and covenant compliance, execution and cash costs of restructuring, customer research-budget and government-funding changes, foreign-exchange movements, international and economic conditions, competition, acquisition integration, cybersecurity and IT systems, and possible further asset impairments. Foreign-currency translation also reduced comprehensive income in 2019.
Important facts for investors to verify
- Progress and cash costs of the restructuring, including the North Carolina closure, product-line discontinuation and any further site or workforce actions.
- Compliance with amended debt covenants, borrowing availability, interest-rate exposure and the company’s ability to service its debt.
- Whether revenue weakness in Europe and CRO customers persists, and whether North American growth offsets it.
- Drivers of gross-margin performance, including inventory reserves, product mix and fixed-cost absorption.
- Cash conversion and liquidity, including the effect of restructuring outlays and lease obligations.