Harvard Bioscience, Inc. (NASDAQ:HBIO) Q3 2023 Earnings Call Transcript
Harvard Bioscience, Inc. (NASDAQ:HBIO) Q3 2023 Earnings Call Transcript November 7, 2023
Harvard Bioscience, Inc. misses on earnings expectations. Reported EPS is $0.01 EPS, expectations were $0.04.
Operator: Thank you for standing by and welcome to the Harvard Biosciences Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Dave Sirois, Director of SEC Reportings. Please go ahead, sir.
Dave Sirois: Thank you, Jonathan and good morning, everyone. Thank you for joining the Harvard Bioscience third quarter 2023 earnings conference call. Before we begin, I would like to suggest that you take a moment and download a copy of a presentation that will be referred to during this call. The file is entitled Q3 2023 HBIO quarterly earnings presentation and is located in the Investor Overview, Events and Presentations section of our website. Leading the call today will be Jim Green, Chairman of the Board, President and Chief Executive Officer; and Jennifer Cote, Chief Financial Officer. Before I turn the call over to Jim, I will read our Safe Harbor statement. In our discussion today, we may make statements that constitute forward-looking statements.
Our actual results and performance may differ materially from what we have projected due to risks and uncertainties, including those described in our annual report on Form 10-K for the period ended December 31, 2022, our subsequent quarterly reports on Form 10-Q and our other public filings. Any forward-looking statements, including those related to the company's future results and activities, represent our estimates as of today and should not be relied upon as representing our estimates as of any subsequent day. Also, much of today's call will focus on our non-GAAP quarterly results, which we believe better represents the ongoing economics of the business, reflects how we set and measure our incentive compensation plans and how we manage the business internally.
The difference between our GAAP and non-GAAP results are outlined in the earnings release and today's presentation. These 2 documents as well as a replay of this call can be found on our website under Investor Overview, Events & Presentations. Additionally, any material, financial or other statistical information presented on the call, which is not included in our press release and presentation will be archived and available in the Investor Relations section of our website. I will now turn the call over to Jim. Jim, please go ahead.
James Green: Thank you, David. Hello, everybody. Let's start by moving to Slide 3 of the presentation and take a look at the highlights for the quarter. First, I'll say that I'm pleased to see strong growth in North America. However, similar to numerous life cycle tools companies, we did see -- we were impacted by post COVID, lower demand in China and Asia Pacific. Going to the numbers; revenue for the quarter was $25.4 million. That's down 6% from last year on an as-reported basis. This revenue includes a net effect of $1.3 million of discontinued products compared to the prior year period. Q3 revenue saw a net positive FX effect of $700,000. Adjusting for both FX and discontinued products, our underlying core revenue was down roughly 3.5%.
Gross margin improved to $14.7 million or 58% of revenue, up from 45% in the same period of FY '22. However, this prior period included inventory write-down that impacted FY '22 comparable by about 5%. Adjusted operating profit improved $1.8 million or 7.3% of revenue, up from $700,000 last year, an improvement of $1.1 million or nearly 5 percentage points. Adjusted EBITDA measured $2.2 million or 8.9% of revenue, also up 5 percentage points from the prior year. GAAP earnings per share was $0.03 loss, an improvement from an $0.08 loss last year. Adjusted EPS measured a positive $0.01 per share, up from a $0.01 loss last year. Cash flow from operations was $4.4 million versus $600,000 last year. In the appendix, you'll find the bridge from GAAP measurements to adjusted or non-GAAP measurements.
Now let's move to the next slide, Slide 4, I look at the revenue by quarter by product family and with an improved regional view. Starting with the Americas. Revenue was up 5.9% as reported and included 5.2% of net reduction of discontinued products. So considering discontinued, our underlying core revenue grew by about 11%. Pre-clinical had strong growth in our core tech telemetry and Penema enterprise software though somewhat held back by post-COVID lower needs for respiratory products. Cellular molecular products were down primarily on discontinued low-margin products and some slowness in cell-based testing systems. Moving to EMEA. Overall, EMEA revenue was down 1.4% as reported and included a 6.2% net reduction from discontinued products but also had a positive FX impact of 7.7%.
Adjusting for FX and discontinued, EMEA was down roughly 3.5%. Now moving to China and Asia Pacific. Q3 reported revenue was down 30%. And FX and discontinued products had a modest negative effect of approximately 4.5%. The primary impacts were twofold. Preclinical saw a big drop in demand in preclinical respiratory products where during the COVID years, including 2022, China had significantly purchased for COVID research. However, our core telemetry and Pania enterprise software closed close to flat. CMT saw a measurable drop in cellular molecular products where, again, during COVID, China had strong demand in academic research. We move to Slide 5 of the presentation. I would tell you a little bit about some of our exciting new products and new introductions that we'll be showing and showcasing this next week at the Society for Neurology Conference.
As you know, over the last 3 years, we've optimized our product offerings to target key technologies in the drug and therapy development continuum. Our product strategy is to continue to introduce new technologies and applications in leading academic research labs and pharma discovery, while at the same time, adapting these technologies to further penetrate larger industrial applications with our customers in pharma and CROs and biotech. Following the strategy, next, we will be showcasing a number of these offerings and I'll talk a little bit to you about 3 in particular here. First, we'll be highlighting our new mesh microelectrode-eray platform. these new mess MEAs are targeted for use in organoids, which are small tissue segments or cultures that we believe can represent a proxy for many organs such as brain and heart.
Organized are a promising growth area for academic research and discovery as well as safety pharmacology and toxicology. Our new mesh MEAs build on our recognized leadership position in single well high-density micro electrode arrays used heavily today, enabling precise signal measurement from within the organoid. We're excited to be presenting early research results using this novel technology on brain organoids at next week's Society for Neurology. Next, we'll highlight our new VivaMARS high-capacity behavior monitoring systems. We first announced our initial customer order last April. The VivaMARS system is specifically adapted to high-volume multi-animal model in vivo testing and formal reporting required for preclinical regulatory clearance.
VivaMARS leverages our industry-leading Panema software platform as well as our Panlab activity monitoring expertise. It is an excellent example of how we're able to leverage our expertise across all of Harvard Bioscience family. This system was developed with our CRO and pharma customer needs in mind and also meets their business needs to increase operating efficiencies, lowering costs and more importantly, reducing test cycle times to expand capacity and support their revenue growth. We're expecting our first VivaMARS shipment to a CRO customer later in this year. Finally, we'll be showcasing our new SoHo small animal model telemetry platform. SoHo is based on our industry-leading telemetry and Penema enterprise software platform and extends our leadership position with expanded capabilities such as concurrent multi-model testing in a more natural shared housing environment.
As with VivaMARS, this platform is designed to meet customers' challenging business needs for lowering operating costs and shorter test cycle times to expand test capacity and drive more of their revenue growth. Now I'll turn the call over to Jennifer, our CFO, for a look at key financials. Jennifer?
Jennifer Cote: Thank you, Jim. Let's jump into our Q3 financial results in greater detail. And if you can please refer to Slide 7. As a reminder, in addition to our reported GAAP results, we also include discussion about our adjusted or non-GAAP financial results, which align with information we use to internally manage the business, Our slide deck includes a reconciliation between our adjusted results and the corresponding GAAP financial measures on Slide 11. Jim has already taken you through our revenue performance and I'll take you through some of our other key financial metrics in more detail. If you can please refer to the top middle of the slide, on a reported basis, our Q3 gross margin was 58.1% compared to 45.2% in Q3 FY '22.
I would like to point out 2 factors that impacted our gross margin results for the quarters. A reminder that last quarter, we mentioned that we aligned our global process for capitalizing our inventory overhead costs. This had an unfavorable impact to gross margin during this quarter of approximately 1 percentage point. We do expect the roll-off of that change to complete during the middle of Q4. Additionally, last year, our Q3 gross margin was unusually low as a result of an inventory charge of $1.3 million related to the discontinuance of nonstrategic products, which impacted last year, unfavorably by about 5 percentage points. Taking into account both of these impacts, we are seeing substantial improvement in our gross margins with underlying gross margin improvement by about 9% over the prior year quarter.
Please refer now to the top right graph where we'll discuss operating expenses and adjusted EBITDA. Our adjusted EBITDA during Q3 was $2.2 million compared to $1 million last year. Our reported operating expenses were slightly reduced during the quarter compared to last Q3. We continue managing our overall operating expenses with this year's OpEx reflecting merit increases and bonus accruals for our employees. Please refer to the bottom left where we will show both reported and adjusted loss earnings per share. On a reported basis, we improved our diluted loss per share for the quarter from a loss of $0.08 to a loss of $0.03. On an adjusted basis, Q3 showed diluted earnings per share of $0.01 compared to a loss of $0.01 in Q3 of last year. We saw strong improvements due to the combined flow-through of our stronger margin dollars and lower operating expenses.
When looking at last Q3, our results included a restructuring charge and inventory write-offs, which together were $2 million, which are excluded from our adjusted reporting. Income tax expense during the quarter related to adjusting our provisions for state and foreign jurisdictions, adjustments to our valuation reserves and the normal annualization of our forecasted taxable income by entity. The provision recorded this quarter resulted in an unfavorable impact to our reported EPS of approximately $0.02. Now if we switch gears to highlights on cash flow and liquidity. Please refer to the graph in the middle of the bottom row, where we show another solid quarter with $4.4 million in cash flow from operations as compared to $600,000 last Q3.
This enabled us to pay down an additional $2.8 million against our credit facility during the quarter, bringing our year-to-date pay down to $8.3 million. Net debt at third quarter end compared to prior year is down $11 million. These improvements position us to achieve our targeted debt reduction goals for the year. We have typically run lean on capital investments but we do expect to see increases in CapEx primarily to support investments in tooling and equipment for our new product introductions as we enter 2024. Further details on the above items are available in our 10-Q and non-GAAP reconciliation tables included in our press release and in the appendix to this presentation. And I'm now happy to hand back to Jim to cover 2023 guidance.
James Green: Thank you, Jan. Now moving to our summary on Slide 9. Let's take a look at what we see for the full year 2023. We now expect 2023 full year reported revenue to be roughly flat compared to prior year. and that includes 5 percentage points of discontinued products as compared to prior year. We expect gross margin to remain strong in the 60% range and we expect adjusted EBITDA margins in the 13% to 14% range. We expect our improved EBITDA and cash flow from operations to support significant debt paydown in FY 2023. We continue to reduce net leverage to approximately the 2x level by the end of 2023. I think it's important to note that overall, our core business remains strong and this team continues to focus on exciting new product introductions and expanding service offerings to fuel new growth and a bright future. Thank you. Now, I'll turn the call over to Jonathan, our operator, to open the line for questions. Thank you.
Operator: [Operator Instructions] And our first question comes from the line of Bruce Jackson from Benchmark.
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