Susan Forman Jeffrey A. Duchemin - Chief Executive Officer, President and Director Robert E.

Gagnon - Chief Financial Officer

Raymond A. Myers - Alere Financial Partners LLC Jack Wallace - Sidoti & Company, LLC Shai Dardashti - Dardashti Capital Management

Thank you, operator; and good morning, everyone. Thank you for joining us for the Harvard Bioscience Fourth Quarter and Year End 2013 Financial Results Conference Call.

Leading the call today will be Jeff Duchemin, CEO and President; and Robert Gagnon, CFO of Harvard Bioscience. Before I turn the call over to management, I will read the company's Safe Harbor statement.

In its discussion today, the company may make statements that constitute forward-looking statements. Its actual results may differ materially from those projected due to risks and uncertainties, including those detailed in its quarterly report on Form 10-Q for the quarter ended September 30, 2013, and its other public filings.

Any forward-looking statements, including those related to its 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. I would now like to turn the call over to the President and CEO of Harvard Bioscience, Jeff Duchemin.

Jeff, please go ahead.

Thank you, Susan. Good morning, everyone; and once again, thank you for calling in to the Harvard Bioscience Q4 and full-year 2013 earnings call.

Today's call will be organized as follows. I will begin by recapping the company's major events of 2013 and continue with a few brief top-line remarks about our financial performance.

I will then offer some insights about our global growth strategy for 2014. At that point, I will turn the call over to our CFO, Rob Gagnon, who will provide a detailed summary of our financials for the quarter and year.

I will then conclude with a few brief closing remarks before we begin taking questions from the audience. As everybody listening is aware, 2013 was an extremely eventful year for Harvard Bioscience.

On November 1, we completed the spinoff of our formerly wholly-owned subsidiary Harvard Apparatus Regenerative Technology. As a result of the spinoff, Harvard Bioscience has became a pure-play developer, manufacturer and marketer of tools for Life Science Research in medicine.

We are now well positioned to increase our industry presence in hospitals and research facilities worldwide. And we are completely devoted to bolstering our core businesses, including our highly regarded research instrument product line.

In addition to the spinoff, there have been several key changes in personnel over the past year. First, I'd like to acknowledge the retirement of our former CEO, Chane Graziano in May.

Chane played an instrumental role in maintaining Harvard BioScience's reputation for 17 years. I personally want to thank him for his service to the company.

As for myself, I was honored to be given the opportunity this past year to begin serving as the President and CEO of Harvard Bioscience. When I arrived in August, after 16 years at Becton Dickinson, I was thrilled to join a company with such a sterling reputation and incredible name.

I am dedicated to leading us to growth through acquisitions, increasing expansion into emerging markets, enhanced sales and marketing efforts and continued internal product development and operational efficiencies. As an early step in accomplishing these goals, I have appointed several new members to the executive team.

On November 1, Rob Gagnon officially began serving as our new CFO. Rob's experience heading global finance operations, his successful completion of acquisitions and his overall business acumen will be and already has been a great asset to us as we continue to implement our growth strategy, which includes expanding our geographic footprint through organic growth and acquisitions and reinvigorated product development.

We've also brought aboard Yoav Sibony as our first Vice President of Global Sales. Expanding our sales initiatives worldwide is crucial to our continued growth.

To meet this challenge, we've created Yoav's position. Having worked with Yoav in the past and knowing first hand of his long, impressive track record of sales leadership, I'm confident that he will help us obtaining the next level of growth.

We are also delighted to welcome Yong Sun as our first Vice President of Strategic Marketing and Business Development. I have worked with Yong in the past as well and can say with the highest level of confidence that he is the right person for this new position.

His impressive career experience in marketing and sales in the life science sector, especially his experience growing business in Asia, along with his distinguished academic background, make him especially qualified to guide us in our move into emerging markets. In addition to the change to our executive team, we took a further positive step in December.

After conducting a thorough review of our operations, we decided to realign our global operations to increase efficiency and better position us for growth. As part of the realignment, we expect to realize overall net annual savings of approximately $2 million pretax beginning in 2014.

We reduced our global workforce by about 13% to create a leaner, more nimble organization, which resulted in a reduction in personnel-related costs and expenditures of about $3 million. Of that $3 million, $1 million will be invested in China expansion, sales and marketing and product development initiatives in order to drive growth.

Additionally, we've started to implement a new strategy for global growth that will allow us to prosper. Before I go into the details of that strategy, I'd like to provide some top-line observation about our recent financial performance.

Rob will conclude with additional details in a few minutes. Revenues for the full year was $105.2 million compared with $111.2 million a year ago.

This was in line with our guidance given during our third quarter 2013 conference call. Our non-GAAP income from continuing operations for the quarter was $1.7 million or $0.05 per diluted share compared with $2.7 million or $0.09 per diluted share in the year-ago quarter.

For the full year, income from continuing operations was $7.1 million or $0.22 per diluted share compared with income from continuing operations of $10.2 million or $0.34 per diluted share last year. Our balance sheet remains strong with $25.8 million in cash and cash equivalents as of December 31, 2013, compared with $20.7 million as of December 31, 2012.

Now I'd like to discuss our 3 key drivers for growth. Commercial excellence, product development and acquisitions.

Let me start with commercial excellence. As I stated earlier, total revenues declined approximately 5.4% in 2013.

With that, we understand the sense of urgency for organic growth. The first step we took to our growth -- address our growth was hiring of our 2 commercial leaders: Yong Sun, Vice President of Strategic Marketing; and Yoav Sibony, Vice President of Global Sales, who will be instrumental in executing our plans.

The second step we took was to functionally align our sales and marketing teams, which allows us to leverage our premier brands, increase productivity and drive value to our customers. And thirdly are the initiatives we've taken to expand our commercial presence in emerging markets.

Let me continue with product development. Harvard Bioscience has had a rich history of product development and innovation.

Our regenerative technology is a prime example of that. With the spinoff of HART, we plan on reinvigorating our new product development process for our core business.

Aligning our global R&D teams will reduce product redundancies. We've begun the process of prioritizing projects, aligned with our new marketing strategy.

This new initiative will allow us to deliver innovative products that meet the needs of our global customers today and well into the future. So you can expect to see breakthrough technologies, new products and product line extensions from Harvard Bioscience.

Finally, I want to discuss acquisitions. A smart growth through acquisition strategy that can help build our business is part of our plans.

We believe significant opportunities exist to acquire synergistic companies that are growing to add to both the top line and bottom line while also helping to increase market share. Before turning the call over to Rob, I just want to mention one more factor that is and will continue to be instrumental to Harvard Bioscience's future: Our employees.

Since arriving at the company last summer, I have spoken with many of our employees both here in the U.S. and at our subsidiary companies around the world.

And I can truly say I've been delighted and impressed with their dedication and hard work. It is our employees that will continue to make our success possible.

I will now turn the call over to Rob Gagnon. Rob?

Thank you, Jeff. While this was an exciting quarter for Harvard Bioscience, it was also a complicated one from a financial perspective.

I want to point out there are a few events that affected our reported results, including the spinoff of HART in November and the restructuring that we announced in early December. As required by U.S.

accounting standards and for comparative purposes, we had to restate our prior financials to present HART as a discontinued business, separate from the continuing operations of Harvard Bioscience. In order to present as clear financials as possible, much of my focus for this call will be on non-GAAP fourth quarter and full-year results from continuing operations, which we believe better represent the ongoing economics of the business and reflect how we manage the business internally.

However, I will also briefly review GAAP results from continuing operations for the quarter and full year. The differences between our GAAP and non-GAAP financial results and related reconciliations are outlined in the earnings release was issued today, which can be found at our website under Press Releases.

Here is an overview of our GAAP results for the fourth quarter and full year. Loss from continuing operations for the quarter was $255,000 or a $0.01 loss per share compared with income from continuing operations of $1.2 million or $0.04 per diluted share in the year-ago quarter.

For the full year, income from continuing operations was $723,000 or $0.02 per diluted share compared with income from continuing operations of $4.5 million or $0.15 per diluted share last year. Now on to the non-GAAP results.

Our non-GAAP income from continuing operations for the quarter was $1.7 million or $0.05 per diluted share compared with $2.7 million or $0.09 per diluted share in the year ago quarter. For the full year, income from continuing operations was $7.1 million or $0.22 per diluted share compared with income from continuing operations of $10.2 million or $0.34 per diluted share last year.

Revenues for the fourth quarter were $27.9 million compared with $28.2 million in the year ago fourth quarter, a decrease of 1.4%. Full-year revenues were $105.2 million compared with $111.2 million in 2002, a 5.4% decrease.

Gross profit for the fourth quarter was $12.1 million compared with $13.4 million in the year-ago fourth quarter. Gross profit margin for the current fourth quarter was 43.4% compared with 47.5% for the year-ago fourth quarter.

The decline in margin was due primarily to onetime inventory adjustments related to discontinued products and obsolete inventory provisions as well as lower sales line and product mix. Research and development expense for the fourth quarter was $1.1 million, approximately the same amount as last year's fourth quarter.

SG&A for the fourth quarter was $8.3 million, approximately the same amount as last year's fourth quarter. Operating income for the quarter was $2.7 million compared with $4.1 million in the year ago quarter.

Operating margin for the quarter was 9.7% compared with 14.5% in the year ago fourth quarter. The decline in operating income and margin for the quarter was largely the result of the lower gross profit.

Our tax rate for the quarter was 28% compared with 30% during last year's fourth quarter. This improvement was primarily the result of a lower tax rate in the U.K.

and higher R&D tax credits. Weighted average shares outstanding for the fourth quarter was $31.1 million compared with $30.1 million in the year-ago fourth quarter.

The higher shares are primarily due to additional equity awards issued related to the HART spinoff. Now turning to the balance sheet.

We ended the year with $25.8 million in cash and cash equivalents compared with $20.7 million at December 31, 2012. Accounts receivable as of December 31, 2013, was $13.9 million compared with $14.4 million in the year-ago fourth quarter.

DSO for days sales outstanding was 48 days at the end of the quarter, a 1-day improvement over the year-ago fourth quarter. Inventory as of December 31, 2013, was $15.8 million compared with $17.8 million in the year-ago fourth quarter.

Inventory turns for the quarter improved to 3.7x compared with 3.3x in the year-ago fourth quarter. CapEx for the year was $1.6 million, and we expect a similar level of capital expense investment in 2014.

Total debt at the end of the quarter was $24.8 million compared with $13 million as of last year's fourth quarter. The increase in debt was due largely to the HART funding that took place at the time of the spinoff, just partially offset by scheduled loan repayments.

Now I'll turn to full-year 2014 guidance. With both the spinoff and restructuring behind us and with our strategic priorities outlined, we have decided to provide financial guidance for 2014.

As discussed, revenues declined 5.4% in 2013. And as Jeff mentioned, organic growth is a critical priority for the company.

There have been a number of changes to improve our commercial organization to address the decline in revenues, and we are starting to see the benefits of those changes. However, it will take some time before the full effect of these changes are realized on the top line.

As a result, in 2014, we expect revenues will be approximately unchanged with 2013, as this year will be a year for us to reverse the decline experienced in 2013. On the bottom line, we expect to report full-year 2014 non-GAAP EPS of $0.26 per diluted share, an improvement of approximately 20% as compared to 2013 non-GAAP EPS from continuing operations.

This improvement is primarily due to the restructuring that was announced back in December. At the time of the restructuring, we announced that we expected to realize overall net annual savings of approximately $2 million pretax.

And I am pleased to report that we are still on track to achieve these savings this year. As a reminder, the differences between our GAAP and non-GAAP financial guidance, including EPS and related reconciliation, are outlined in the earnings release we issued today and can be found on our website under Press Releases.

These figures represent the organic business only and do not include any potential acquisitions. Now I'll hand the call over to Jeff for his closing comments.

Thank you, Rob. Before taking your questions, I just want to conclude with a few brief observations.

2013 was a great year for Harvard Bioscience with many exciting developments that have left us stronger than ever as a company and well placed to excel going forward. I want to reiterate my thanks to our former CEO, Chane Graziano, for his 17 years of excellent service to the company.

The successful spinoff of our HART subsidiary has led us to transition into a pure-play developer, manufacturer and marketer that is better able to pursue our intended customer base. By focusing on organic growth, acquisitions and product development, we are pursuing a strategy that will let us maximize our growth worldwide.

And finally, once again, it is our dedicated employees who'll make it all work. We'll now open the floor to questions from the audience.

Ben?

Jeff or Rob, I was hoping you might comment on the general business climate and trends in light of expected NIH research spending trends. And also just generally that the last year has been one of the strongest in a decade for biotechnology IPOs.

And I wonder what that portends in terms of base demand for your products?

It's Jeff. Thanks for the question.

I'll start off the first part of your question. I'll let Rob answer the second part.

In regards to what we're seeing, what we're hearing around trends in the industry, I think the NIH will see an increase in their budget in 2014, which will absolutely help us; 37% of our overall business is in the academic space, which is highly funded by the federal government. So I think moving forward for us in 2014, we will be in better position than we were last year with a 5% decline to the NIH budget.

So, overall, I think going into 2014, the trends are more favorable than they were last year, still not where we need them to be. Overall, in the U.S, you're looking at a relatively flat market in the academic space, very similar in Europe.

The majority of the growth for us, and I think for the majority of people in the industry, will come from Asia in 2014.

It's Rob. I just wanted to add.

The question specifically around biotechnology, you're right, thinking it the same way. There's been a number of IPOs over the past year.

The market's red hot; the valuations are up. But keep in mind, it represents today a very small portion of our overall business.

And as Jeff had mentioned, the academic government space is where we play mostly. But it's still an important market for us, and it could provide opportunity down the road for us to expand, but it's a fairly small portion today.

And if I could have a follow-up question. Last quarter, it was mentioned that there was a bit of a supplier issue at the Denville subsidiary.

I'm curious whether that's been resolved and did that contribute to revenue in the fourth quarter?

No, not really an issue for us today, Ray. I'm not sure exactly which supplier issue you're talking about, but it's a norm.

It's a norm to have certain product categories go on back order or something that. But today, there's really no problem.

And did you describe your trends in bookings and backlog?

Ray, it's Rob. We -- what we'll do is we typically disclose bookings and backlog in our SEC filings.

So we intend to do that again, so that would -- we'll have a pretty detailed description in there when we file our 10-K.

On the fourth quarter, can you, I guess comment a little bit on where's some of the revenue came from and what impact sales to China had?

This is Jeff. Thanks for the question.

If you're going to break down our revenue for the fourth quarter, it's basically 54% of our revenue comes from North America; 33% of our revenue comes from Europe, Middle East Africa; and about 13% of our revenue comes from Asia. So it's pretty consistent in the fourth quarter.

Okay. And then looking ahead to '14, what -- I guess we assume that China would go ahead and be a larger percentage of the revenue there.

Can you maybe give us some guidance on how that would shake out for '14?

Yes -- no, I'm not going to give guidance on '14. But I will tell you, and I've stated this many times over the last 6 months, Asia is an important part of our strategy, and we're putting a lot of focus there.

We hired 2 commercial leaders, Yong Sun and Yoav Sibony, to not only lead us here in U.S. and Europe but also they help us expand our commercial operations in Asia.

So you can expect to see, hopefully, stronger results in 2014 coming from Asia.

And then can you, I guess, quantify the impact of the inventories adjustments and discontinuations in the quarter?

It's Rob. Thanks for the question.

So I just would like to highlight for you that the new -- with the new management team in place in the fourth quarter, we took a real hard look at all our inventory on hand, and we decided to make some changes. So we did have this onetime inventory adjustment related to discontinued products.

A portion of it also related to some of our excess and obsolescence policies. There were some inconsistencies at some of the smaller sites so we -- we're now consistent across the board.

But overall, that represents about half of the decline in gross margin. So it's in the -- for the quarter, so it's in the $0.5 million to $0.75 million amount in the fourth quarter.

And then, I guess, what inning are we in the restructuring and the rightsizing? It sounds like we're pretty far into the game there?

Yes, I mean, we've gone through our initial restructuring. I think the overall organization has responded extremely well to it.

We're executing to our strategy, but we're early in the game. And as we go, if we need to make adjustments, we will.

But so far so good.

Yes, and I think as it relates just to the restructuring component alone, I mean, I think we're fairly late in the game as it relates to that piece of it, but still have a little bit of work to do there.

You touched a little bit on your focus on acquisitions, but I was wondering if you could maybe talk about whether there are any other capital allocation priorities beyond doing accretive acquisitions, whether that be buyback or dividend or whether you would just simply wait for acquisitions to come your way?

It's Rob. Thanks for the question.

No, I mean, at this point, we're thinking the best use of that capital is to put it to work for some good accretive strategic acquisitions. So we're not thinking at the moment any sort of dividend or share repurchase.

Our thinking may evolve down the road, but that's basically where we're at today.

I'm wondering how much capital you have available for acquisition, both cash base and also potential bank line at the moment?

Shai, it's Rob Gagnon. So we -- as we reported, we have just under $26 million of cash as of the end of the year.

And the vast majority of that cash is in accounts outside of the U.S, a small portion of it is in the U.S. In addition to that, as you're aware, we have our credit facilities outstanding.

And we have a line of credit that is up to $25 million. However, based off of our current business and cash flow run rates, it would be a fairly insignificant number that we could draw down in that line.

Something in the range of $2 million to $4 million this year, and of course as the business grows and we expand, that would increase over time. So we're in the -- I would say we're in the $25 million to $30 million range over the next few months.

And are there any rules of thumb of what it cost to acquire revenue, would you be buying at onetime sales or two-time sales, do you have a sense of -- is there a $10 million, $20 million of acquired growth potentially? I mean, how do I convert cash to revenue growth with very conservative estimates.

Yes. So we're going to -- I would say we're going to look at deals that makes sense first based off our strategic fit.

That being said, we're going to be extremely disciplined from a financial standpoint. I wouldn't just assume onetime sales is a good estimate.

I think if it's the right deal and it's a growing business and there are good synergies, it could be higher than that. But I'd hate to lock us into a particular valuation model because it's going to be different depending on the company that we're looking at and where we want to take the business.

But I would assure you that there would be a level of rigor and financial discipline behind any deal that we do.

I'm trying to keep myself conservative, but I have pretty optimistic expectations for a 3- to 5-year horizon. What do you think are appropriate goalposts of what the operating margin could be once you're in the eighth or ninth inning many, many years down the line?

Yes, I don't think -- like we said, in terms of giving financial guidance, what we gave this year for 2014 was an improvement of approximately 20% based off of where we ended this year. I don't think we could sit here today and give you more guidance for like 3 to 5 years out.

There's a lot of things that we're looking at, the things that we want to do with the business. And I just -- I don't think we'd will be in a position to do that.

So what would you say your closest comparable is then, given what you expect to be in the future?

It's difficult because I don't think that there's great comps out there for our business. As you know in the industry, there's a lot of major players that are sort of -- the Thermos and the Beck and Dickinsons.

And then there's a lot of mom and pop smaller type players, and so we fit in the higher side of that smaller category. But there aren't a lot of great comps that we can point to for the core business.

I would encourage you to take a look at that those other companies that are in that $50 million to $200 million range in the life science research tool space. But just a word of caution that it's challenging just to pin it down to a couple of good comps.

That's it for us. We appreciate everyone calling in, and we look forward to next quarter's call.

Thank you.