Good morning, and thank you for standing by. Welcome to the fourth quarter 2021 Harvard Bioscience earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. David Sirois. Please go ahead.
Thank you, Catherine, and good morning, everyone. Thank you for joining the Harvard Bioscience fourth quarter 2021 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 Q4 2021 HBio Quarterly Earnings Presentation and is located in the Investor Overview Events and Presentation section of our website. Leading the call today will be Jim Green, Chairman of the Board, President and Chief Executive Officer, and Mike Rossi, 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, 2020, 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 date. 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 differences between our GAAP and non-GAAP results are outlined in the earnings release in today's presentation.
These two documents, as well as a replay of this call, can be found on our website under Investor Overview, Events and 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.
Thank you, David. Good morning, everybody. Let's move to slide four of the presentation to look at the highlights for the quarter. Revenue was up 7% over a strong Q4 of 2020 and up 7% over pre-COVID Q4 of 2019. Global supply chain continued to delay shipments, driving backlog up to approximately 2 x our pre-COVID levels. Preclinical revenue was up 6% over a record strong prior quarter, year-over-year. Cellular and molecular technology revenue was up 9%, with continuing recovery in spite of European headwinds. Adjusted operating margin came in at 16%, impacted by increased COGS and increased variable compensation and new investments in R&D. Adjusted gross margins came in at 60% in spite of higher COGS. Higher costs of goods were due to global freight costs and material inflation, plus direct labor inefficiencies.
OpEx was up year-over-year, primarily on variable compensation and growth in research and development investments. Let's move to slide five of the presentation and look at the details of the quarter. In spite of global supply headwinds, we had solid revenue growth, with Q4 coming in at $33.1 million. That's up 7% over the same quarter last year. Gross margin on a GAAP basis came in at 59%. That's up 200 basis points from last year, despite higher cost of goods. This quarter had GAAP operating income of $1.7 million, or 5.1% of revenue. Our adjusted operating income was $5.3 million, so our adjusted operating margin measured 16% of revenue. GAAP earnings per share in the quarter was a positive $0.02, up from a negative $0.02 last year.
Our adjusted earnings per share was $0.08, flat to a strong prior year. Our leverage ratio measured 2.7x EBITDA. Now we can move to slide six. Take a quick look at the revenue in the quarter by product family. Starting with the first row of the table, our cellular and molecular technology revenue, which is primarily from academic research labs, was up 9% from last year, with orders and backlog up significantly from last year. Direct sales in Europe was impacted by academic lab closures from the Omicron variant. Backlog is up from last year. However, improving operations kept us stable sequentially over Q3 of this year. CMT product revenue was down about 5% from last year due to shipment headwinds and approximately $1 million in pruning of low value add products from the portfolio.
Looking at the second row of the table, our preclinical product revenue was up 6% over a record strong prior year. That puts us up 18% for the year 2021. We saw strong growth across product lines for our core customer segments of CRO, pharma and academic labs globally. European performance was very strong across customer segments. Asia-Pacific and Americas were impacted by large CRO order timing in Q4, though we see strong growth trends looking forward in 2022. Overall, preclinical is now well above pre-COVID levels, up 28% from Q4 of 2019. Overall reported revenue grew 7% over last year in spite of global supply chain issues, and our backlog is up substantially over pre-COVID levels. Moving to slide seven, we'll look at major activities in the quarter.
Looking first at the operating environment, our productivity stabilized after the 2021 external supply chain and labor impacts. We announced retirement of our Chief Operating Officer in January, and we're moving to a flatter organization structure with new focused leadership in research and development and in global manufacturing operations and supply chain. Pricing actions have been initiated to help combat material inflation over the upcoming quarters. Now looking at new product development, our new Vice President of global R&D is on board, and we are seeing immediate benefits of strong professional product development leadership. We're ramping up investments in key strategic areas, including next-generation telemetry solutions and software systems, to name a few. Brand enhancement is accelerating, and we already see positive responses from customers and employees. Now I'll turn the call over to Mike for a quick look at key financials. Mike?
Thank you, Jim, and good morning, everyone. Our Q4 and full year results reflect the positive outcomes from our investments and focus on the stated 2021 goal to drive long-term profitable growth. We are pleased to be starting another year set up to extend on this trend of profitable organic growth. As we usually do, I'll walk through the full P&L and cash flow in more detail. As a reminder, my discussion will focus on adjusted results for P&L performance, which aligns with measurements we use to internally manage the business. Reconciliations are available in the appendix of this presentation to GAAP results. On gross margin, despite the effects of external factors in the supply chain and inflationary environment, our original September 2019 objective of 60%+ gross margins remains our target.
Our Q4 results speak to this potential, with 60% adjusted gross margin reported. Consistent with past trends, product mix remains our single biggest lever to driving margin expansion, as our higher-margin preclinical and cellular products grew as a percentage of overall sales relative to prior year. This improvement is a direct reflection of our sales effectiveness and product rationalization activities we've been discussing. Also, we have been proactive, as Jim noted, on the price increases in this environment, which has started to positively impact gross margins, though cost of materials and freight remain at similar inflated levels we saw in Q2 and Q3. Adjusted operating income for Q4 was down modestly versus prior year due to operating expense investments in critical R&D programs and higher variable compensation.
We are confident the uptick in each area aligns well with our organic growth and gross margin objectives for 2022 and also supports long-term value creation via innovation and rewarding key talent. In terms of variable compensation, this includes higher commission levels due to sales performance above our internal plans for the year and higher bonus payouts to our overall workforce. Our bonus program is designed to reward both top and bottom-line performance, and the accruals noted reflect full-year 2021 results, where we grew revenue by 16% and increased adjusted operating income by 20%. Our operating expenses outside these areas of investment remain stable to recent run rates.
Jim will speak to 2022 investments we anticipate to drive further sales growth and product development, but I'd note that we see increases in wages aligned with broader market trends as well as travel and trade shows ticking back up as teams look to get back face-to-face interactions after the COVID-driven environment of the last two years. On cash flow and debt, our leverage ratio or total debt to adjusted EBITDA is 2.7 x, down from 3.2 x leverage at the end of 2020 to the higher adjusted earnings. Net debt of $41.6 million is essentially flat to the end of 2020 and up slightly from Q3 2021 due to working capital growth.
We have chosen to increase inventory levels throughout 2021 in response to the strong order growth and ensure a stable order fulfillment during the period of supply chain volatility we've discussed. We currently do not see inventory growth in terms of days on hand as occurred in 2021 on a go-forward basis, as fulfillment operations are stabilizing after increasing stock levels in 2021. AR levels increased in 2021 due to the double-digit revenue growth reported. However, bad debt levels remain very low, and we have isolated areas to bring down DSOs modestly in 2022. Interest expense is down significantly over the prior year due to the December 2022 bank refinancing.
In terms of other uses of cash, capital expenditures in Q4 were $400,000 and $1.2 million for the full year, in line with past annual levels. Additionally, we incurred approximately $1 million of transformation costs in Q4, which are excluded from adjusted earnings consistent with past practice, given these are non-run rate investments in our business infrastructure designed to ensure a solid long-term growth platform. Our CapEx and transformation costs in the second half of 2021 included IT and manufacturing site investments consistent with those noted in Q3 to support growth and scalability in our core manufacturing centers, as well as analytical tools to enable sales effectiveness and overall more efficient operations in the business.
We expect 2022 cash flow from operations to improve versus 2021 based on the earnings growth noted, and we do not expect the level of working capital growth experienced in 2021 as needed that year with the supply chain dynamics discussed. With that, I'll turn it back to Jim to discuss the full year outlook. Jim?
Thanks, Mike. Now moving to our summary on slide 11. Looking forward, our primary goal is sales growth driven by improved sales effectiveness, marketing, and new product introductions. We will continue addressing cost of goods issues resulting from global supply chain disruptions and specifically hone in on freight optimization, material costs, labor inefficiencies, and tuning various overhead costs. As for our outlook for the year 2022, we're expecting to sustain double-digit revenue growth with further improving both gross margins and operating margins, while at the same time increasing our investment in sales coverage and new product introductions. We now expect annual revenue growth on a reported basis to improve to approximately 10%-13% growth versus last year, and that's net of pruning reduced low value add products, product revenues from certain CMT product segments.
We see strong order growth and a solid backlog driving double-digit growth in both our preclinical and CMT product revenue segments. Tailwinds in Americas and Asia Pacific, and steps implemented to improve EMEA sales across the portfolio underpin our growth. Portfolio rationalization of pruning low quality revenue of approximately $2 million-$4 million is well more than offset by new growth. Risks do remain with the global supply situation and could be further exacerbated by the hostilities we see in Ukraine. Now, for adjusted operating margin, we expect to be in the 15%-16% range. We expect to improve gross margins by a full percentage point, and we'll continue to invest in research and development for new product development and for sales coverage expansion. Thank you. Now, I'll turn the call over to the operator to open the line for Q&A. Thank you.
Thank you. As a reminder, to ask a question, you'll need to press star one on your telephone. To withdraw your question, press the pound key. Our first question comes from Paul Knight with KeyBanc. Your line is open.
Hi, Paul.
Thank you for taking the call, Jim. As you look at academia, which I know a lot of peers in the industry have been citing slow growth, you seem to be above that growth rate. Could you talk to that portion of your business exposure?
Sure, sure. You know, one of the things we see definitely coming back is, you know, Europe has been really held back all through the year. You know, the Omicron variant really continued to extend, keeping it difficult for us to talk to our customers. It kept the order process slower than it naturally should have been. We see Europe as its own component, continuing to grow and be incremental to our growth. Americas, just in general, has a great outlook, continues to grow.
You know, we look at our you know rolling forecasts you know on a three months six months a yearly view and looking at budgets and where the areas are growing you know we're sitting in the right kinds of positions with our products. China you know got off to a bit of a. It had a great year last year. We expected some slowness in Q1. We saw that in Q1, but we see. You know, the expectation was always that Asia was gonna really start to pick up in Q2. All indications are that that's true, that we'll see an increase in Q2. Again, that's assuming we don't see some kind of a political or other external environment situation.
In general, you know, everything's pushing in the right direction. You know, all of our outlooks are good. You know, people, the budgets look solid. You know, we're confident. When we put those together, you know, we see nice growth. Again, these are products which we know, in some cases, there's wound up demand. In general, it's just growth in some of these technologies.
Jim, you've guided to 10%-13% revenue growth in the year. It looks like at least $200 million headwind due to portfolio rationalization. I guess, you know, it seems to be the highest growth you've guided to. Do you have a long-term thought on what growth could be?
Yeah. You know, our goal is to see a sustained double-digit growth engine, you know, in that kind of low teens kinda range, maybe a little better. You know, again, if I can get above 10 and into the low teens on a sustained basis, and to have that content really be driven by, there's always some pricing power expectations. You know, no question, you'll continue to see improvements in coverage and sales efficiency. You'll see expansion both broader in territories and deeper within customer segments. At the same time now, you're gonna see a ramp-up in our new product introductions. You know, I expect product introductions to be probably the largest component of growth as we go forward, and that's kinda how we're modeling it.
You know, new product introductions combined with sales coverage expansion and deeper product, you know, deeper depth into the customer segments and maybe some pricing along the way too. We'll see how that part goes.
Then lastly, are you complete with your sales force reorg?
Sales force, yes. It's complete, but we're at the point now there will definitely still be some tuning. We're starting to see, you know, based on the territory assignments, where we have opportunities to go a little deeper, maybe expand a territory into two territories and add a rep. We're also there as the product migration. We always felt like a lot of what was developed and typically only sold into academic research had a great opportunity into CRO and pharma, but never really had the exposure to it. Well, now we have the exposure to it with the sales organization.
We've already seen, actually two of our product lines have already now moved to be offered through the CRO, through the channel that really focuses on CRO and pharmaceutical companies, that being the behavioral technologies, which are very consistent with, and the need is significant, and we're, you know, we're a well-known provider in the telemetry space, but that's a very good adjunct to add behavioral type products and have it be compatible with, not just with our products, but, you know, these, the products that are used for preclinical, if you wanna get approval through the FDA and regulatory agencies, you have to have a kind of certification that you have to meet with your products.
That's a very nice barrier for us. We're already there with our systems and with our implantables, so as we start to offer our behavioral products, they'll have that same kind of capability and that same kind of high barrier. We've also now added the components that are part of you know, individual organ type of testing. That's also a big opportunity for us and a real need there in the pharma and CRO side. You'll see more of that. There will be more of a migration of these technologies. We'll continue to sell to academic research, but you'll see changes, engineering changes where needed to make them compatible for higher volume and utilization in CRO and pharma customers.
Okay. Thank you.
Thanks, Paul.
Thank you. Our next question comes from Tim Chiang with Northland Securities. Your line is open.
Hi. Thanks.
Hi, Tim.
Jim, could you talk a little bit just about your product mix that you expect? I mean, I know you cited improving product mix as one of the factors for better margins this year. You know, how do you see the product mix evolving as the year rolls out?
Sure. We see, you know, so much of it is driven by the expansion and our exposure now into CROs and pharma, and also the biotech world that's coming out of universities. That's a new space that's growing. You know, building off of what we have on the preclinical space, adding products that will also apply to those customers from more of our development side, you know, from the discovery side. You know, we see much of the growth and a great mix for us is telemetry and systems, and the systems that are used for reducing the data and collecting what it takes to get through the FDA and regulatory agencies.
You know, adding to that, you know, again, expanding the behavioral in that same area, behavior products. You know, the inhalation products have been doing absolutely fabulous. You saw what kind of tremendous growth that's been over the last year and a half since we introduced it. Also, natural growth areas, you know, with what's happening in messenger RNA, those technologies, you know, our electroporation technology, our BTX products for electroporation, electrofusion. We see that having a very strong, solid demand with growth in academia. We expect that's also gonna be more opportunity there as we look into small pharma and biotech. Then at the cellular level, we've had, in the past, it's been, you know, a little difficult to get into to demonstrate some of the cellular products.
That now that we're able to start seeing the customers, we see that also. There's nice pent-up demand and expectation that we'll see more testing done at the cellular level early in the drug development cycle. Those are just some of the key areas. Now, also, there's always the, you know, the, one of the cores of our precision infusion pumps, you know, that's been, you know, one of the foundational products for years and years. There we're working on investing in new areas to be able to apply new applications of that. We think that's not only gonna be a, you know, great continued annuity, business for us, but there's nice new growth as we apply that into new areas.
That's good color, Jim. I mean, I know one thing you mentioned is ramping up investments in next-generation telemetry products. Can you comment on, just on, you know, what the investment level will be and when you think you'll have the next-generation products available?
Sure. What's happening in the market is, you know, given so much, you know, the non-human primates models are having to be used at a younger and younger age, and they're smaller and smaller, so we wanna stay ahead. In this space, you know, we're clearly the market leader. We wanna extend that lead by having the newer technology able to handle much smaller animals, so very small implants. Also have them designed in a way that they live in an environment where you can have multiple animals all in the same housing. You know, so that's gonna be a nice expansion.
Also, you know, just getting to the higher throughput, being able to handle more animal models at the time in parallel, and that also lets, you know, our customers be more flexible with their model populations on how they do that. Telemetry was one of the basics, you know, one of the foundational product technologies for us. With it, they have to use our base systems because the data reduction and how you put your filings together, you know, regulatory agencies, you know, you get used to that, it becomes what you're used to. It becomes the gold standard in many places, you know. I mean, it is the gold standard.
As companies like Charles River and Covance and others start to, you know, make that the core of, you know, the basis of what they use, you know, our plan now is to be able to offer to them some of these other products and have it be compatible and networked, you know, with our base software systems. That really helps tie the whole thing together, makes it very compelling and really lets us not only provide what the customer needs, but really it becomes more of a strategic relationship, you know, with these large customers.
I see. Then just one last question, Jim. I mean, obviously, your preclinical business did benefit from a lot of the research tied to COVID treatments. You know, do you still see your customers doing more studies in that area, or do you think that ultimately will get reined in some?
You know, I think that certainly anything that goes through the clinical phases and through preclinical and prior to human clinical use has to go through, you know, safety, pharmacology, toxicology type testing and behavioral testing. You know, a lot of, you know, what we've seen happen is a lot of the big CROs, you know, they had to delay other therapies they're working on for, you know, things like Alzheimer's, you know, obesity type therapies and such.
What we think is gonna happen is there's still gonna continue to be, you know, an ongoing set of work on vaccines, but we're gonna start to see more, you know, an ability to go back and look at those therapies, you know, for you know for COVID, of course, and then, you know, for the things that were actually put on delay because they just couldn't do it all. For us, you know, we see that as being a long-term, you know, adjunct to the demand. And then at the end of the day, it's the natural demographics and growing population which really show what's gonna be done and the level of capacity requirements to do all these preclinical level phases.
Okay, great. Thanks for the color, Jim.
Thanks, Tim.
Our next question comes from Lisa Springer with Singular Research. Your line is open.
Good morning, Jim and Mike.
Good morning.
You mentioned the backlog is at twice pre-COVID levels. How long is it gonna take you to work through the backlog?
Well, you know, I expect it to remain somewhat high for a while just because, you know, we're running heavy and, you know, I've asked our operations team to make sure that we've got material to be able to sustain our primary product lines, you know, for up to a year. I don't wanna have a situation where, you know, trying to be lean on supply causes me to potentially, you know, miss customer shipments. So being able to ship when the customer needs it lets me to be, you know, I don't have to be aggressive with bringing the backlog down. Though I do have to be careful that I make sure I'm hitting my aging backlog and that, you know, that I'm not missing, you know, expected delivery times from customers.
You know, we are ramping up capacity. You know, there's no question some of revenue, incremental revenue growth will be helping to bring down the backlog. But having a, you know, a run rate backlog that's, you know, roughly consistent with where you are on orders is the ideal where you wanna be. But yes, we'll certainly. You'll see some of that come down this year, but it's not gonna come down dramatically.
Okay. You mentioned there's gonna be $2 million-$4 million in terms of portfolio rationalization costs or revenues.
Yeah, that's what we're.
Could you-
That's what we're thinking.
Okay. I'm sorry. Go ahead.
You know, yeah, as we look at some of the areas where there's when you really evaluate the market needs and some of the products that might really have gotten older and maybe there's better technologies that we really wanna migrate them to, and often when you see that, these technologies, not only are they older, but they're higher cost to make, they're lower value and price. You know, just not to mention that they may drive a lot of inefficiencies, you know, across your business. You know, looking at the total activity-based cost of products in terms of COGS and the real value of those COGS. I mean, if these products were highly valuable and you could price them well enough, then that's fine.
If they really just don't demand it, then, you know, it's just, it's worth taking them out. You know, kind of eyeballing $2 million-$4 million, you know, could, you know, if I have an opportunity to make it more like $6 million, I think I'd be fine with that. Either way, I see enough, more than enough growth of really good long-term business to offset that. Then, you know, when you adjust for that, I mean, it's almost like, you know, your growth rates really, when you look at your core business, you know, is really another, you know, a few points higher, you know, than what you're reporting.
Okay. In late February, early March, have you seen any impact on your European operations of the Ukraine war?
No, we haven't. We don't have much exposure to Russia. We don't really ship there, and at this point, don't think it makes sense to. The rest of our business is just fine. I guess the biggest concern, I mean, from a business perspective, you know, of course, you know, the whole situation is awful, but you know, we don't see it affecting travel in Europe at this point. If it starts to, you know, I guess we would have to maybe resort back to more, you know, work from home and not be able to maybe see all the customers. At this point, you know, everything's up and running.
I've got no feedback at all that there's been any holdback due to the hostilities there on our business at this point.
Okay. My final question. Do you expect the quarterly cadence of revenues to be similar to past years and more backloaded?
I think we'll see, you know, a kind of a similar level of quarter-to-quarter variations. You know, we typically Q2, Q4 are our strongest. You know, we expect Q2, Q4 to be the strongest here too. You know, but with the, you know, additional backlog might help us smooth that out a little bit as we look at Q3. In general, we're, you know, pretty solid with this. I think you, again, for modeling purposes, you probably think about kind of similar levels of variations.
Yeah, I'd say that if you took the growth rates, they're pretty even over the quarters for the year. You know, Q4 is always gonna be higher, Q1 a little bit lower, and in the middle with the other two. I think that's the short story, you know, historical trends are good at planning assumption.
Okay, great. Thank you, guys.
Thanks, Lisa.
We have a question from Bruce Jackson with Benchmark. Your line is open.
Hi.
Hi, Bruce.
Hey, hey, Jim. Getting back to the sales reorganization, last quarter you said it was gonna kick off on January first. Where are we in that process, and what are some of the things that you're doing to rejigger the sales force?
Well, we've rolled out the complete structure of the sales force. The change that took place was we used the philosophy that we first tried about a year and a half ago in the U.S., which worked very, very well to maximize our coverage and exposure across the portfolio. That paid off very handsomely in terms of of organic growth for us. With that, we're even tuning and expecting more growth. We moved that same philosophy to Europe, where we now have an identical type of overlap between the people that call on more large account calls, like things that are, you know, CROs, pharmas, large, very large universities, and have that overlap with the folks that are more, you know, technology specific in terms of the CMT side. It really...
We expect that's gonna give us, you know, a really nice incremental growth type opportunity as we are much better able to handle coverage and depth of showing up our products into the full segment of Europe. China's, you know. There, we're looking at how to best handle Asia. You know, we've had two groups that focus, one more on technology, the other more on, you know, customer relationships and, you know, large accounts. We're doing some tuning there because we think that the way it was set up, similar to the U.S., that there was opportunities on the CRO and academics, or CRO and pharma side, which is a very large part of our business.
We weren't really getting any exposure there with some of our CMT technologies, like some of the electroporation and like our cellular type products. We're gonna see some changes there that are gonna just allow us better offering of the products to a broader range of potential customers there.
Okay. Okay, that's helpful. The other question I had just generally via the respiratory research products have done quite well in the COVID environment. Are you seeing any change in the demand for doing the inhalation research and are there other areas of the business that are picking up? You mentioned the mRNA research and the cellular research. You're also involved in the gene research areas. Tell us a little bit more about, you know, just what you're seeing in terms of the respiratory research and is it being offset by the other businesses in the event that it's declining, which maybe it's not?
Yeah. Look, respiratory has done very, very well. You know, we're about to introduce some breakthrough technologies in that space that are gonna continue to make it, you know, the premier type product. The opportunity in the past, you know, was limited in a way that we really didn't take advantage of all the customer segments. It was kind of a mixed bag of academic research and CRO and pharma companies. What we're seeing is academic research, no question, substantial opportunity there with many more things being tested early on how, you know, various diseases and such are dealt with and how they affect, you know, the inhalation and breathing.
On the CRO and pharma side, there, the opportunity for us is it's exactly the same thing, but it's in higher volume. It's, you know, where they're working with more animal models at a time. You know, both areas look very well for solid, you know, continued growth and expansion across all of the product segments and customer segments that we call on. This is a very interesting product, and it's gonna have legs as we continue to make R&D investment in expanding the capabilities of that product.
All right. That's great. Thank you very much.
Yeah. Thank you.
Thank you. There are no other questions in the queue. I'd like to turn the call back to Mr. Jim Green for closing comments.
Well, thank you for joining us here today, and thank you for your interest in Harvard Bioscience. We look forward to you joining us in May to discuss the results of our fiscal first quarter results. Thank you very much. Have a great day.
This concludes today's conference call. Thank you for participating. You may now disconnect.