Welcome to the Q3 2016 Harvard Bioscience Incorporated earnings conference call. My name is Adrienne and I will be your operator for today’s call. At this time all participants are in a listen only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to Corey Manchester, Director of Finance and Investor Relations. Corey Manchester, you may begin.

Thank you, Adrienne, and good afternoon, everyone. Thank you for joining us for the Harvard Bioscience third quarter 2016 earnings conference call. Leading the call today will be Jeffrey Duchemin, President and Chief Executive Officer and Robert Gagnon, Chief Financial Officer of Harvard Bioscience. Before I turn the call over to Jeff, I will read our Safe Harbor statement. In our discussion today, we may make statements that constitute forward-looking statements. Actual results or performance may differ materially from what we have projected due to risks and uncertainties including those detailed in our annual report on Form 10-K for the period ended December 31, 2015 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 date. I will now turn the call over to Jeff Duchemin. Jeff, please go ahead.

Thank you, Corey. Good afternoon everyone. Thank you for joining us for our third quarter 2016 earnings call. I will begin today's call by providing comments on our Q3 results as well as some overall business updates. Then we will turn the call over to our CFO, Rob Gagnon, who will provide more details on our financials and guidance. During the third quarter we produced solid operational results as we continued to experience the benefits of our site consolidation efforts and the cost containment measures. However, the industry continues to experience macroeconomic challenges with pressure from slower than expected NIH funding outlays in the US, currency translation, and softness in the European funding environment. In the face of these challenges, our revenue in Q3 were virtually flat quarter over quarter on a constant currency basis. In considering current trends in the macro environment and the disposition of AHN, we are revising our guidance for 2016 to a revenue range of $105 million to $107 million for the year while maintaining our adjusted EPS guidance range of $0.16 to $0.18. Rob will go into more detail on the puts and takes affecting our guidance in his remarks. From a geographic standpoint, revenues increased approximately 17% and 15% in China and the rest of the world, respectively. We continue to be pleased with our performance in China, one of the fastest-growing lab products and services markets globally. Revenues declined approximately 5% and 12% in the US and Europe, respectively. Europe continues to be a soft end market due to currency translation and weakness in the funding environment. Excluding foreign currency exchange, our European revenues were down approximately 4% quarter over quarter. Although Europe continues to be a challenge, our quarterly results were positively impacted by spectrophotometer sales taken over from GE Healthcare…

Thank you, Jeff. As in previous quarters, much of my focus will be on 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. However, I will briefly review the GAAP results, the differences of which are outlined in the earnings release we issued today which can be found on our website under press releases. Additionally, any material financial or other statistical information presented on the call, which is not included in our press release, will be archived and available in the Investor Relations section of our website. And a replay of this call will also be available for one week at the same location on our website at harvardbioscience.com. Beginning with the top line, revenues in the third quarter were $25 million, a decrease of $724,000 or 2.8% compared with revenues of $25.7 million in the third quarter of last year. The negative impact of currency translation was $689,000 and was due mostly to the weakened British pound sterling, relative to the US dollar. Revenues on a constant currency basis would have been $25.7 million or virtually flat compared to the third quarter of last year. Bookings in Q3 were $26.3 million, a decrease of $975,000 or 3.6% compared with bookings of $27.3 million in the third quarter of last year. And we finished Q3 with backlog of approximately $7.5 million, down 9% compared to backlog of $8.2 million at the end of Q3 last year. On a constant currency basis, bookings and backlog were down 1% and 5%, respectively, compared to Q3 of last year. Now turning to costs and expenses. Costs of revenues were $13.3 million for Q3 compared to $14 million for Q3 of last…

[Operator Instructions] Your first question comes from Paul Knight.

Hi, Rob and Jeff, it’s Paul Knight. How are you? On AHN, that closes what -- sometime during the quarter? It's a done deal so to speak?

The transaction closed as of yesterday. So the signing was yesterday and the money gets wired, but it essentially is done as of this point.

And so they 105 -- the 107 guidance, that only includes the loss you have said of what, $500,000 of AHN?

That's correct. That's right.

And then back to the organic growth. As you look into Q4 and you look into the 2016 – ‘17 period, where are you on momentum from these cost-cutting events? That along with the -- refresh us on seasonality in 4Q since we expect some momentum from seasonality, product introductions, and then talk about margin trend a little bit.

Paul, this is Jeff. As outlined in my script, we are pretty excited about what we're seeing in Asia right now. The rest of the world has been strong for us. All year long, we expect that to continue. I was in China two weeks ago, and we've got a great team there. I like what I see not only in China, but I think throughout the rest of the region our future looks bright there for us. US and Europe -- really works around funding. Here in the US, it is NIH, and Europe has some funding issues also. I think you are going to probably see consistency in Q4 coming from both of those regions, but we have programs in place with our commercial teams to hopefully offset some of the delayed outlaying of funds coming from the NIH here in the US and, hopefully, things stabilize a bit more in Europe moving forward. But I think what you saw in Q3 is what you will continue to see in Q4. The positive side of this business is -- Rob expressed in his closing statements. Now if you take out the top line, the rest of the business is performing well and it's really indicative of our strategy. We consolidated five sites. We have really cut down on costs, and we're starting to see the benefit of gross margins and operating expenses being reduced and operating income increasing, so we are excited about the financials of the business moving forward.

Can you spell out anything -- would you spell out anything on the op margin improvement in 3Q? Was it the movement of Denville? Was it the ERP system? Anything that stood out to drive that op margin and gross margin improvement in 3Q?

Hi Paul, it's Rob. No, I think it's more a function of just the overall programs that we've had in place for a while now that really started last year with the consolidation of some of the restructurings and really trying to manage the P&L in light of the top line. And I just wanted to add in terms of Q4, you asked about seasonality, so we do tend to experience the highest quarter in Q4. And last year, we had about $28.4 million in sales in the fourth quarter. So there is a fairly healthy step up in the fourth quarter.

And the next question comes from Raymond Myers.

Thank you for taking the questions. Jeff and Rob, I just wanted to clarify your guidance. You gave guidance for the full year but I am computing guidance for the fourth quarter that would suggest pretty strong non-GAAP earnings growth of -- I believe it's $0.05 to -- potentially implied $0.05 to $0.07 EPS for the current quarter. Is that -- am I thinking about that right?

Hi Ray, it's Rob. You are thinking about that correctly. So the third quarter and the business tends to be lowest quarter of the year. The fourth quarter tends to be the highest just because of budget cycles and other effects. But you are looking at that correctly if you back out the year to date performance compared to the guidance, would suggest EPS in that range.

That's great. What is it that gives you confidence in such strong year-over-year and sequential earnings growth?

It is really a continuation of the benefits that we've been experiencing this quarter and earlier in the year around cost reduction programs and higher gross margins. We still expect gross margins to be in that 46% to 47% range. We expect to continue to see improvements in operating expenses and, of course, you tend to experience the step up in budget cycles and top line in the fourth quarter.

Sure. Great. Good news. Can we touch on what Harvard is doing to support the direct sales initiative now for spectrophotometer sales in Europe? I know that's been going on for some time this year and I'm just curious on what progress has been.

Yes Ray, it's Jeff. Thanks for the question. The former GE sales are now direct sales through a network of distributors globally. These are the distributors GE managed when they were selling the SimpliNano and NanoVue. We have a relationship with these distributors on a global basis. The integration from GE to Harvard Bioscience went extremely well, both on direct sales and service. At this point in time, it’s -- we are meeting our expectations around spectrophotometer sales and I don't think there's any more comment other than that. Things are going really well. We have a great relationship with these dealers. And pretty much business is normal now for us.

Sounds good. Jeff, near the beginning of last year, you made three interesting electrophysiology acquisitions. Three small ones in a row. Can you describe the progress with those and what contribution that electrophysiology business is making to the overall effort?

Yes, the three acquisitions we made were Multi Channel Systems which is located in Germany, Triangle BioSystems located in North Carolina, the last one is HEKA Electronics also located in Germany. All three acquisitions have been fully integrated into Harvard Bioscience. We are excited with the innovation coming out of these acquisitions. We created a commercial organization basically focused on electrophysiology. And electrophysiology will be a growth driver for this business moving forward. Not only with the current line of products that came with the acquisition but the innovation programs that are in place and future products coming out of these businesses will be very exciting for this business. So we're happy with the progression of all three acquisitions.

Excellent, good. And then can you touch on any other new product development opportunities you might have? I believe on the last call, you were hinting that there might be some new products in the pipeline.

Yes, I think this is a good point for me to maybe lower expectations around new product development. New product developments is an important part of our strategy and it will continue to be. But this is a very diverse and fragmented business as you all know. We have many products. So when we talk about new products, we have new products which were truly new products that drive incremental growth. We have product line expansions, we have deferred maintenance programs that go on constantly with the legacy products of Harvard Bioscience. And then on top of that, if you look at government grants -- government contracts -- we have talked about the DARPA contract with PBSI in the past. These are all the things that incorporate new product development for us. And we're happy with the progression of the business, but a lot of the revenue that comes from our new product development program today is small in numbers. It's not a game changer for our business, so I don't think there's anything I would like to elaborate on today in terms of a major product launch or anything like that. But it is an important part of our strategy and still progresses and we like the direction it's going.

Okay, that's fair enough. Sounds good. Next, you talked on your prepared remarks in mentioning China and if I heard correctly, there was some very strong growth in China. Can you reiterate that and describe what is it that is driving growth in Asia and where do you expect that to lead?

Yes, China, we had a 17% growth for the quarter. We are really excited about that. We have a great team in China. We have five individuals, and they have spread their responsibility outside of China. They are now covering Korea and most recently Japan. So we're excited about not only the future in China, but we really think we can build up sales in Korea and Japan moving forward. And then there's Southeast Asia, too, which is a part of that region. So from a customer standpoint, from a distribution standpoint, from a direct employee standpoint, we're real solid in Asia right now. And I expect Q4 and even into 2017 to continue to progress forward for us.

That's great, thanks. And my last question would be to just take a step backward. We're getting close to the end of 2016 now and if you look back over the last couple of years, you have done a lot of the things that you set out to do. You integrated a lot of facilities, you have lowered the cost structure, that is showing in the margins. You are hit by currency -- knock on wood, that doesn't happen again next year. I think we're getting some more stability -- it appears to be anyway. Can you give us any suggestion of what your outlook would be for 2017 as we are exiting this year?

Ray, I think from a guidance standpoint, obviously we're not going to give guidance for 2017 today but I will say from a strategy standpoint, our strategy is solid. We're going to continue to move forward with the strategy which incorporates commercial excellence, that’s really building up our commercial teams and programs on a global basis and we just talked about China and some of the great things going on there. Operational efficiencies -- we're talking about the benefits today of the site consolidations and the work and effort from our ops teams -- our global op teams, so we're excited about that. Research and development is part of our strategy. We continue to have product line extensions and new product development and all the exciting things that come from R&D. And then acquisitions, one of the things we haven't talked about today, but our acquisition strategy is still in place and we are being very cautious and deliberate with our acquisition strategy. Highly strategic in terms of the types of acquisitions we want to make moving forward. So we continue down the path of the current strategy that's in place. I don't see that changing in 2017.

And the next question comes from Lisa Springer.

I wanted to ask you about AHN. It sounds like you are doing a review of the portfolio. Are you pretty much done with the process or is it possible we're going to see other divestitures in the future?

I think reviewing the portfolio is something that is ongoing. And we felt at this point in time that, strategically, AHN no longer fit into the direction of the company. It's an exciting little business. It's an injection molding facility, but we have highly strategic contracts in place with some of the prominent injection molding life science companies in the world. And so it really made no sense for us to continue down that path. It was very expensive for us to manage, so I think it was time for us to divest and -- but in terms of looking at other businesses within Harvard Bioscience, I think it's something that -- it's an ongoing process. But I don't know if there's anything else to say about that.

And the next question comes from Larry Haimovitch. [Technical Difficulty] And our next question comes from PJ [indiscernible].

Couple of questions. Was AHN profitable pre-corporate or not profitable?

So AHN, it was -- as Jeff mentioned, it was one of the smaller businesses in our portfolio, and at $2.5 million -- the profits vary from year to year. So it was a very very small business, but as you can see, even through divestiture, there is not a significant change in our guidance for the back half of the year.

Okay, all right. I guess one kind of big picture question is -- how do you reconcile or if anybody has the NIH budgets being up yet the spending doesn't seem to be happening? Is there any intel that you have been able to glean from that?

That's a tough question to answer. The information we review on a monthly basis comes from the US Treasury Department. The budget was increased this year 6% to $32 billion. At the end of September, the end of their fiscal year, the outlay of funds was minus 0.1%. So I think really everyone in the industry right now is trying to figure out what's going on with the outlay of funds. But outside of that, I don't think there's any other information we have on that.

Okay and that's not a use it or lose it situation. That money has to come at some point. It's just a matter of timing, right?

I am not sure on that.

I guess lastly as you guys continue to evaluate acquisitions, do you think it makes sense to evaluate those relative to buying your own stock, which in theory is less risky and higher return at these valuations? Is that something that makes sense or does the balance sheet just preclude that at this point?

Yes, so let me try and address that. So we -- the management team here meets with the board of directors on a regular basis and we talk about capital deployment, naturally, as one of those key topics. And as Jeff’s laid out, we have been fairly consistent in terms of strategic priorities and acquisitions -- with rolling out smaller acquisitions and using this business as a platform of growth really a priority. But that being said, it's something that is discussed at that level, and considered, and currently there are no authorizations in place in the history of the company. A few years back there was one, but currently we don't have one in place. But it is a consideration that we look at with the board.

All right. Thanks. You guys are doing a good job on the things you can control other than currency.

And we have Larry back online with the question.

Hey Jeff, hey Rob. I am sorry about that. I am looking forward to seeing you in November, I guess you’re going to be out here, so I look forward to seeing you guys. One question, looking at the balance sheet, the cash is modest. You did -- you are getting cash for the divestiture, I guess. Your stock hit a new low today. I'm sure you are very painfully aware of that. Those of us that on your stock certainly are, too. Have you or the board given any thought at all to considering even a small buyback? I realize you don't have a massive amount of cash but wondering if a buyback is something you've given a little bit of thought to.

Yes, Larry, so that's a little bit like the question we just had. So let me address that. So the cash position is growing. So it grew in the quarter. And I would expect that trend to continue as we continue to tighten working capital and into the fourth quarter which tends to be one of the higher quarters of the business throughout the year. In terms of deploying that capital, we've been focused on acquisitions. They -- acquisitions continue to be a focus. But what you are referring to is a discussion that’s really a management team and board level discussion and it's one that we take seriously and that we consider. And like I said currently, we have no authorizations in place. But over the history of the company from time to time, it has bought back its stock. So we currently don't have an authorization in place. But that’s something that we evaluate with the board.

It's an open and ongoing conversation, internal, Larry.

Okay. And then as far as the Board's approval, would it need to be a Board meeting where you are all physically together or is this something you can do on the telephonic call where you would sit down and just have a call and say, guys, this is something we are thinking about. What do you think?

Yes, Larry, that's really an administrative thing. Things can happen and not necessarily be face-to-face. But I just want to reiterate the focus of the strategy has been acquisitions. And we currently don't have an authorization today to repurchase stock. End of Q&A

And this concludes the question-and-answer session. I will now turn the call back over to Jeff Duchemin for final remarks.

Thank you. Thank you everyone for calling in today. We appreciate it. Thanks for your support of our business and we look forward to talking to you early in 2017. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.