Harvard Bioscience, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company develops, manufactures, and sells products and services used in life-science research and preclinical drug development. Unless stated otherwise, amounts are in U.S. dollars; financial statement figures below are in millions.
Financial performance
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Revenue | $24.0 | $27.4 | $71.1 | $85.2 |
| Gross profit / margin | $13.5 / 56.1% | $15.0 / 54.6% | $40.3 / 56.7% | $47.1 / 55.3% |
| Operating income (loss) | $0.2 | $(1.4) | $(2.5) | $(1.3) |
| Net loss | $(1.1) | $(2.6) | $(7.2) | $(5.2) |
| Basic and diluted loss per share | $(0.03) | $(0.07) | $(0.19) | $(0.14) |
| Operating cash flow | Not separately presented for the quarter | $6.8 | $5.8 |
- Q3 revenue declined 12.3% year over year; nine-month revenue fell 16.5%. Management attributed the declines mainly to COVID-19-related closures and reduced activity at academic and other research institutions.
- Gross margin improved in both comparison periods, primarily from product mix and cost reductions, partly offset by lower sales volumes.
- Q3 operating results turned positive, while the nine-month operating loss widened. Nine-month net loss also increased, with G&A expense rising 3.6% to $17.8 million, mainly because of severance, restructuring costs, and stock compensation.
- Nine-month interest expense was $3.7 million, down from $4.1 million. Nine-month income tax expense was $0.5 million, compared with a $0.4 million benefit in 2019; management cited jurisdictional income mix, valuation allowances, GILTI, and CARES Act tax changes.
Cash, debt, and liquidity
- Cash and cash equivalents were $2.8 million at September 30, 2020, down from $8.3 million at year-end 2019. Current assets were $43.5 million and current liabilities $21.2 million.
- Nine-month operating cash flow was $6.8 million; investing activities used $1.1 million and financing activities used $11.3 million. Cash declined by $5.5 million over the period. The company said operating cash flow benefited from lower working-capital requirements and improved working-capital management.
- Borrowings under the credit facilities were $44.4 million, versus $55.0 million at December 31, 2019; debt net of cash was $41.6 million. The balance sheet reports $43.5 million of debt net of unamortized financing costs, including $3.2 million in current installments. Revolver availability was $7.3 million.
- The effective borrowing rate, after the interest-rate swap, was 8.9%. The company was compliant with its credit covenants at quarter-end, but said the reduced revenue and EBITDA had narrowed its headroom against the maximum leverage covenant of 3.25.
- Management expects cash, operating cash generation, and available debt capacity to fund operations, restructuring costs, and capital expenditures for at least the next 12 months. This expectation depends on COVID-19 not having a more severe impact than anticipated.
Material developments, outlook, and risks
- COVID-19 disrupted customer laboratory activity, sales and marketing, travel, and operations. Management said revenue could remain affected by delayed or partial reopening of academic research institutions. No goodwill, indefinite-lived intangible, or long-lived asset impairment was identified as of September 30, 2020.
- The 2019 restructuring plan includes consolidating a Connecticut manufacturing site into Massachusetts, reducing U.K. operations, and workforce reductions. The plan was expected to deliver $4.0–$5.0 million in annualized savings; additional organizational changes were expected to add about $1.0 million. Total restructuring and transition costs were estimated at $5.0–$6.0 million, substantially all cash, with about $4.4 million paid through September 30, 2020. Nine-month restructuring charges were $1.9 million.
- The company repaid its $6.1 million Paycheck Protection Program loan in full on May 4, 2020. It also made an additional $4.7 million term-loan principal payment during the first nine months.
- A wrongful-death lawsuit names the company and others in connection with products allegedly used in surgeries in 2012 and 2013. The company says it will defend the case and reports that the insurer accepted it as an insured claim, but the outcome is uncertain. Other ordinary-course claims were not accrued because management considered adverse outcomes not probable and reasonably estimable.
- Management gave no numerical revenue or earnings guidance in the provided filing text. It described the restructuring as intended to improve profitability, cash flow, and organic growth. Foreign exchange, interest rates, COVID-19, customer research funding, and covenant compliance remain among the disclosed risks.
Important facts for investors to verify
- Whether customer activity and revenue recover as research institutions reopen, and whether gross-margin improvement can persist at lower volumes.
- Cash generation, liquidity needs, and available revolver capacity, particularly given the low cash balance and restructuring outlays.
- Credit-agreement covenant headroom and the effect of any further EBITDA decline on borrowing access or repayment requirements.
- Actual restructuring costs, timing, and realized annualized savings compared with management’s estimates.
- Developments in the wrongful-death litigation and any potential uninsured exposure.