Harvard Bioscience, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company develops, manufactures and sells research and preclinical-testing products and services. Financial amounts below are in U.S. dollars; figures are rounded to millions unless noted.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $23.8 million | $28.2 million; down 16% |
| Gross profit / gross margin | $13.0 million / 54.6% | $16.2 million / 57.3% |
| Operating loss | $3.3 million | $0.1 million |
| Net loss / diluted loss per share | $4.5 million / $0.12 | $2.4 million / $0.06 |
| Operating cash flow | $2.9 million provided | $2.0 million provided |
| Cash and cash equivalents | $5.9 million at March 31 | $8.3 million at December 31, 2019 |
| Debt, net of financing costs | $49.1 million | $53.8 million at December 31, 2019 |
| Net debt, using reported borrowings less cash | $44.3 million | $46.7 million at December 31, 2019 |
Revenue weakness, chiefly lower sales to academic laboratories and other institutions affected by COVID-19 closures, reduced gross margin through lower fixed-cost absorption. Operating expenses were broadly flat overall: lower sales and marketing and R&D costs were offset by higher general and administrative expense, including severance and stock compensation. Cash from operations increased partly because of working-capital reductions and improved cash management; cash declined by $2.5 million overall after debt repayments and other financing outflows.
At March 31, current assets were $48.2 million and current liabilities were $23.5 million. The revolving facility had $4.6 million of available borrowing capacity. The weighted effective borrowing rate, after the interest-rate swap, was 8.4%. The company reported compliance with its debt covenants at quarter-end.
Material changes and notable items
- Revenue fell 16% year over year; gross margin declined 2.7 percentage points. Net loss nearly doubled, and loss per share increased from $0.06 to $0.12.
- Debt declined following $4.8 million of repayments, including a $4.0 million excess-cash-flow payment. The company’s leverage cushion narrowed as COVID-19 reduced revenue and covenant EBITDA. The maximum permitted leverage ratio was 3.50 at March 31 and steps down to 3.25 beginning with the June 2020 quarter.
- The 2019 restructuring continued, including site consolidation and workforce reductions. Q1 restructuring charges were $0.9 million; the accrued liability was $0.6 million at quarter-end. The program was expected to be completed by year-end 2020.
- The company reclassified $0.9 million of tradenames from indefinite-lived to amortizing assets, with a four-year estimated life. It reported no COVID-related impairment of goodwill or other tested assets as of March 31.
- Comprehensive loss was $6.2 million, including $1.6 million of foreign-currency translation loss and $0.1 million of net derivative-related loss.
Outlook, risks and contingencies
- Management expected Q2 2020 revenue to decline significantly year over year, with recovery beginning as academic research institutions reopen. No numerical full-year revenue or earnings guidance is provided.
- In April, the company introduced additional COVID-19 cost measures, including reduced work hours and salaries, reductions in force and organizational changes, targeting approximately $3.0 million of expense reductions for Q2.
- Management expected available cash, operating cash generation and debt capacity to fund operations, restructuring and capital expenditures for at least 12 months. A worse-than-expected pandemic impact could threaten future covenant compliance and require lender amendments or waivers, restrict or accelerate facility access, or necessitate alternative financing; availability and terms are uncertain.
- COVID-19 risks include customer closures and weaker demand, supply-chain and delivery disruption, reduced operating capacity, customer payment delays or defaults, and pressure on margins and cash flow. The duration and financial impact were not reasonably estimable.
- A wrongful-death lawsuit involving products allegedly used in 2012–2013 surgeries remained at an early stage. Damages sought were unspecified; the company intended to defend the claim and had requested insurance defense and indemnification. The outcome could not be predicted.
- Subsequent event: the company received a $6.1 million Paycheck Protection Program loan on April 18, 2020, then repaid it in full on May 4 after reassessing its liquidity and eligibility in light of SBA guidance.
Important facts for investors to verify
- How subsequent COVID-19-related closures affected Q2 and later demand, margins, cash generation and the anticipated recovery.
- Actual covenant leverage and headroom after the step-down to a 3.25 maximum, and whether further lender action or financing is needed.
- Progress, cash costs and realized savings from the restructuring and Q2 mitigation measures.
- Cash and debt trends, including the extent to which operating cash flow reflects sustainable operating performance versus working-capital movements.
- Developments in the wrongful-death litigation and the scope of any insurance coverage or potential exposure.