2008 Results (all percentage comparisons are to comparable periods in 2007):
CEO's STATEMENT:
Commenting on third quarter performance and future expectations, President and CEO Jai Nagarkatti said: "We are pleased with our performance as we continue to pursue and achieve above market growth. We're in the final quarter of our 2006-2008 strategic plan, with the initiatives that have been key to growth over that period still performing very well. And, we're now finalizing our plans to add new activities as we seek to drive growth above market rates for the next three years. Our organic growth has been at roughly twice the market rate in recent years, but we firmly believe that opportunities exist for further improvement. We'll focus our new efforts in three areas, including:
Nagarkatti continued, "Our overall long-term objective for 10% annual sales growth remains, with new initiatives expected to improve internal growth, supplemented with contributions from technology acquisitions and new opportunities added from a new ventures group and our innovation efforts."
Nagarkatti concluded, "Our 2008 performance demonstrates our ability to take market share while simultaneously growing EPS faster than sales and improving operating margins. We expect this momentum to carry through the final quarter of 2008, enabling us to deliver above market organic sales growth, generate margin expansion and deliver diluted EPS of $2.62 to $2.72 for the full year. Third quarter achievements for our five key growth initiatives included:
SALES RESULTS (all percentage comparisons are to comparable periods in 2007):
A reconciliation of reported and adjusted sales growth and quarterly sales by business unit can be found in tabular form in the Supplemental Financial Information section on page 10.
Reported sales increased 7.4% for the third quarter of 2008 to $540.6 million. Third quarter organic sales growth, excluding currency benefits, was 4.3%. Overall organic sales growth for the three Research-based business units (Research Specialties, Research Essentials and Research Biotech) was 7.0% in Q3 2008, largely matching their performance in the first half of 2008. Other highlights for our four business units included:
Research Specialties (Reported growth- Q3: 11.8%, YTD: 14.1%; Organic growth- Q3: 8.2%, YTD: 7.5%): This unit continued its strong performance in Q3 2008 with run rate growth exceeding its 6% long-term organic growth target for the ninth consecutive quarter. Improved demand from the academic sector in all geographic markets continued and sales to pharmaceutical customers in CAPLA countries rebounded in Q3 2008. Growth also benefited from new service initiatives launched earlier in the year and recent new product introductions of ultrapure proteins and chiral products.
Research Essentials (Reported growth- Q3: 8.6%, YTD: 10.9%; Organic growth- Q3: 5.3%, YTD: 4.6%): Q3 2008 organic sales growth continued the pattern of exceeding expectations in each of the last six quarters. Strong sales gains of research-based cell culture products were helped by continued improvement in sales to academic accounts in all geographic regions.
Research Biotech (Reported growth- Q3: 9.7%, YTD: 14.7%; Organic growth- Q3: 6.5%, YTD: 8.5%): Continued stronger spending by academic customers worldwide enhanced sales growth for molecular biology and cell signaling products. This was partially offset by the discontinuation of selected custom peptide and antisera products to enable us to focus on other more promising business areas, including custom peptide libraries, in an effort to enhance an already strong market position, new genomics and proteomics kits and the continued addition of new antibody products. Average pricing for synthetic DNA products improved in Q3 2008 over that realized in the first half of 2008 as demand for modified products increased.
SAFC (Reported growth- Q3: 0.3%, YTD: 9.4%; Organic growth- Q3: (2.0)%, YTD: 3.6%): Continued strong growth in Hitech products matched with steady growth for Supply Solutions and Biosciences products was offset by reduced demand for custom pharma products as pharmaceutical customers delayed deliveries on existing orders and reduced the number of requests for custom pharmaceutical projects. Overall booked orders for future delivery at September 30, 2008 declined by approximately 10% from the June 30, 2008 level, reflecting changes in pharmaceutical demand.
INCOME ANALYSIS:
A reconciliation of currency adjusted proforma to reported net income and diluted earnings per share can be found in tabular form in the Supplemental Financial Information section on page 11.
Reported diluted EPS for 2008's third quarter of $.64, which includes a $.07 benefit from currency exchange rates, increased 18.5% over the $.54 reported for 2007's third quarter.
Gross profit, S,G&A expenses and operating and pretax income, all expressed as a percentage of sales, and the effective tax rate (income tax expense expressed as a percentage of pretax income), for the third quarters and first nine months of 2008 and 2007, were as follows:
Operating and pretax income margins for Q3 2008 improved over those achieved in Q3 2007. The improved gross profit margins in Q3 2008 compared to Q3 2007 resulted largely from currency, process improvement and global supply chain benefits and the impact of price increases in September 2008, partially offset by higher manufacturing and distribution expenses, including increased freight and maintenance costs. The lower S,G&A expense level reflects modest benefits from the Company's process improvement and supply chain activities and lower insurance and legal and professional expenses. Interest expense for Q3 2008 was $2.3 million below Q3 2007 levels due to lower interest rates partially offset by increased borrowing to support a higher level of share repurchases during the second quarter.
The higher effective tax rate for the first nine months of 2008 compared to the same period in 2007 reflects the absence of U.S. R&D tax credits during the first three quarters of 2008 and a higher level of audit and related contingencies.
OUTLOOK:
2008 Expectations: Ongoing benefits from the programs in place to support our five key strategic initiatives that were expected to enable the Company to meet its 7% long-term organic growth goal for 2008 are likely to be partially offset by the adverse sales impact of current economic conditions, particularly in the pharmaceutical industry. Overall organic sales growth for all of 2008 is expected to be in-line with the 6.0% growth achieved for the first nine months of 2008. Currency benefits could add 3% to 4% to full year organic growth, but reduce otherwise reportable Q4 2008 growth by about 3%, if currency exchange rates remain at September 30, 2008 levels.
Each of the Research-based business units are expected to continue the activities that have driven organic growth over the first nine months of 2008, with recent price gains higher than those realized to date likely to be largely offset by slower volume growth due to overall economic conditions. Research Essentials and Research Specialties are expected to deliver organic sales growth of 4% to 5% and 7% to 8%, respectively, in-line with year-to-date performance. Research Biotech is expected to continue its positive momentum and deliver strong organic growth for 2008, partially offset by the decision to exit less profitable portions of the peptide/antisera business and to focus efforts on more promising opportunities in molecular biology, for an overall expected sales gain of at least 7%.
SAFC's organic growth expectations for 2008 have been moderated to a new range of 4% to 5%, reflecting recent economic and industry conditions that have slowed growth in the past two quarters and that are expected to carry into the fourth quarter. A carryover benefit in Q1 2008 from the February 2007 acquisition of Epichem, an innovator in developing and supplying high performance semiconductor materials, is expected to add modestly to full year organic growth.
Ongoing efforts to identify and pursue desirable acquisition candidates or technology access arrangements may further enhance growth in 2008 as we continue to seek to add additional ongoing revenue streams through the acquisition of strategically important products, services, platform technologies, businesses and facilities.
Our reaffirmed forecast for diluted earnings per share for all of 2008 is a range of $2.62 to $2.72, a 12.0% to 16.2% increase over 2007's $2.34. This expectation is based on our 2008 year-to-date results, the sales expectations described above, currency rates remaining at September 30, 2008 levels, the expected pretax income margin and tax rate described below and other expectations for our business. Pretax income margins for the full year are expected to improve from the 21.5% achieved in 2007 as a result of favorable currency rates for the full year, lower interest rates, modest contributions from the Company's supply chain initiative and other margin improvement initiatives. We believe we have the ability to offset current and anticipated higher input costs with recent selling price increases. The previously forecasted effective tax rate for all of 2008 has been lowered to approximately 31% of pretax income, reflecting the reinstatement of the U.S. R&D tax credit on October 3, 2008 which will provide benefits starting in Q4 2008. Variations to our forecast tax rate and forecast diluted EPS for 2008 are also possible due in part to changes in the status of tax uncertainties pursuant to FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes." Additional share repurchase activity may also benefit EPS growth.
Supply Chain Initiative: The Company's previously announced supply chain project is an ambitious five-year project that is expected to improve service and expand margins through eight separate but complementary supply chain initiatives focused on improving how we procure goods and services, manage inventory and execute other supply chain activities that are key to our customer centric approach. While the project commenced in 2007 and management expects it to be mildly accretive to profitability in 2008, management does not expect significant annual pretax income benefits to result until 2009. Estimated annual pretax benefits of $10 to $15 million, as early as 2009, are expected to increase in roughly ratable amounts to between $35 and $45 million annually by 2012. Based on current shares outstanding, this could increase diluted earnings per share by $.05 to $.08 in 2009, increasing to $.19 to $.25 by 2012, and improve pretax and operating margins by as much as 150 basis points when the full benefits of the project are realized. These benefits, which may be impacted by potential, abnormal inflationary cost increases, are above and beyond our current expectations to continue to generate $15 million in annual pretax savings from process improvements, with the majority of these $15 million in savings expected to be reinvested to support achieving revenue growth targets as they have been in the past.
SHARE REPURCHASE:
Another 1.0 million shares were acquired during Q3 2008 at an average share price of $60.49. Since beginning the program in late 1999, 89.0 million shares have been acquired at an average purchase price of $22.58 per share. There were 125.4 million shares outstanding at September 30, 2008.
In an action taken on October 20, 2008, the Board of Directors approved a ten million share increase in the Company's repurchase authorization, bringing the total authorization to 100 million shares. Shares repurchased are held as treasury shares. These share repurchases have been and are expected to be used to continue to improve the Company's return on equity, to cover the dilutive effect of stock option exercises and performance share awards and for other corporate purposes. The Company expects to repurchase the 11.0 million remaining authorized shares, but the timing and number of shares purchased, if any, depends upon market conditions and other factors.
OTHER INFORMATION:
Return On Equity: Our ROE at September 30, 2008 was 22.2%, continuing to exceed our 20% goal.
Cash Flow, Working Capital and Debt: Cash flow from operations for the first nine months of 2008 compared to 2007 increased by $31.9 million, or 11.9%, to $299.8 million as net income increased and deferred income taxes, the change in accrued income taxes and the growth in inventories declined from 2007 levels. This cash flow, together with a $72.8 million increase in debt, enabled us to fund $291.0 million for share repurchases, pay $64.7 million for property and equipment additions and return $49.5 million to shareholders through a 13% increase in the quarterly dividend. We expect to continue to have adequate cash and borrowing capacity to fund all anticipated requirements for operations and acquisitions over the remainder of 2008.
Short-term borrowings were $413.3 million at a weighted average interest rate of 2.6% and long-term debt was $200.1 million at a weighted average interest rate of 6.4% at September 30, 2008. Our debt to capital ratio at September 30, 2008 was 28.8%. The Company has not experienced any problem in placing its short-term debt in recent weeks.
Accounts receivable days sales outstanding at September 30, 2008 were 51 days, consistent with the level at June 30, 2008. Inventory months on hand were 6.8 months at September 30, 2008, an improvement of 0.5 months compared to a 7.3 month level at year-end 2007.
About Sigma-Aldrich: Sigma-Aldrich is a leading Life Science and High Technology company. Our biochemical and organic chemical products and kits are used in scientific and genomic research, biotechnology, pharmaceutical development, the diagnosis of disease and as key components in pharmaceutical and other high technology manufacturing. We have customers in life science companies, university and government institutions, hospitals and in industry. Over one million scientists and technologists use our products. Sigma-Aldrich operates in 36 countries and has 8,000 employees providing excellent service worldwide. We are committed to accelerating our Customers' success through leadership in Life Science, High Technology and Service. For more information about Sigma-Aldrich, please visit our award winning web site at http://www.sigma-aldrich.com.
Non-GAAP Financial Measures: The Company uses certain non-GAAP financial measures to supplement its GAAP disclosures. The Company does not, and does not suggest investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, GAAP financial information. These non-GAAP measures may not be consistent with the presentation by similar companies in the Company's industry. Whenever the Company uses such non-GAAP measures, it provides a reconciliation of such measures to the most closely applicable GAAP measure.
With over 60% of sales denominated in currencies other than the U.S. dollar, management uses currency adjusted growth, and believes it is useful to investors, to judge the Company's controllable, local currency performance. Organic sales growth data presented in this release is proforma data and excludes currency, and where indicated, acquisition impacts. While we are able to report currency impacts after the fact, we are unable to estimate changes that may occur later in 2008 to applicable exchange rates and are thus unable to reconcile the projected non-GAAP, currency adjusted internal growth rates to reported GAAP growth rates for the year 2008. Any significant changes in currency exchange rates would likely have a significant impact on our reported growth rates due to the volume of our sales denominated in foreign currencies.
Management also reports both GAAP and adjusted sales, income and process improvement savings amounts and comparisons to reflect what it believes is ongoing and/or comparable operating results excluding currency impacts and the sales benefit from acquisitions. Management excludes these other items in judging its historical performance and in assessing its expected future performance and believes this non-GAAP information is useful to investors as well.
Cautionary Statement: This release contains forward-looking statements relating to future performance, goals, strategic actions and initiatives and similar intentions and beliefs, including the "Highlights", "CEO's Statement", "Sales Results", "Income Analysis", "Outlook", and "Other Information-Share Repurchase" sections contained above and other statements regarding the Company's expectations, goals, beliefs, intentions and the like regarding future sales, earnings, share repurchases, acquisitions and other matters. These statements involve assumptions regarding Company operations, investments and acquisitions and conditions in the markets the Company serves. Although the Company believes its expectations are based on reasonable assumptions, such statements are subject to risks and uncertainties, including, among others, certain economic, political and technological factors. Actual results could differ materially from those stated or implied in this news release, due to, but not limited to, such factors as (1) changes in pricing and the competitive environment, (2) fluctuations in foreign currency exchange rates, (3) dependence on uninterrupted manufacturing operations, (4) changes in the regulatory environment in which the Company operates, (5) changes in worldwide tax rates or tax benefits from domestic and international operations, including the matters described in Note 4- Uncertainty in Income Taxes- to the Consolidated Financial Statements in the Company's Form 10-Q report for the quarter ended June 30, 2008, (6) exposure to litigation, including product liability claims, (7) changes in research funding and the success of research and development activities, (8) the ability to maintain adequate quality standards, (9) reliance on third party package delivery services, (10) the impact of acquisitions and success in integrating and obtaining projected results from the acquisitions, (11) other changes in the business environment in which the Company operates, and (12) the outcome of the matters described in Note 13 - Contingent Liabilities and Commitments - to the Consolidated Financial Statements in the Company's Form 10-Q report for the quarter ended June 30, 2008. A further discussion of the Company's risk factors can be found in Item 1A of the Company's Form 10-K report for the year ended December 31, 2007. The Company does not undertake any obligation to update these forward- looking statements.
CONTACT: Kirk A. Richter, Treasurer of Sigma-Aldrich, +1-314-286-8004
Web site: http://www.sigma-aldrich.com/
