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"Mindray has always focused on building a business that yields highprofitability and cash flow, while sustaining high earnings growth." said Mr.Xu Hang, Mindray's chairman and co-chief executive officer. "We havedelivered yet another quarter of strong earnings growth. Our continuous costsavings from our vertically integrated R&D and manufacturing model as well asprudent expense controls have led to operating margin improvement in thecombined business."
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"Mindray continues to execute on its strategy of strengthening anddiversifying our product portfolio and geographic footprint," commented Mr. LiXiting, Mindray's president and co-chief executive officer. "We experiencedanother strong quarter of growth in both domestic and international markets.Our core focus on operating efficiency and margin improvement combined withsuperior product performance and new product development gives Mindray acompetitive advantage with customers. We continue to believe that the long-term trends in our business are strong and we have confidence in our abilityto gain market share by continuing to provide high-quality and affordablemedical devices to doctors and hospitals around the world."
Revenues
Mindray reported net revenues of US$146.5 million for the third quarter2008, a 93.6% increase from US$75.7 million in the third quarter 2007.
Net revenues generated in international markets in the third quarter 2008increased 126.1% to US$85.4 million from US$37.8 million in the same periodlast year, while net revenues generated in China in the third quarter 2008increased 61.3% to US$61.1 million from US$37.9 million in the third quarter2007.
During the quarter, the Company obtained approval for a Value Added Tax("VAT") rebate ("Software VAT rebate") for the sale of embedded softwarepursuant to Notice Cai Shui [2008] No. 92 issued jointly by People's Republicof China's Ministry of Finance and the State Administration of Taxation("SAT"). Mindray anticipates the receipt of such tax rebates for the sale ofembedded software will continue going forward.
Performance by Segment
Patient Monitoring & Life Support Products: Patient monitoring & lifesupport products segment, including DPM revenues, increased 147.2% to US$67.6million from US$27.4 million in the third quarter 2007. The patientmonitoring & life support products segment contributed 46.6% to total netsegment revenues in the third quarter 2008.
In-Vitro Diagnostic Products: In-vitro diagnostic products segmentrevenues increased 41.6% to US$34.8 million from US$24.6 million in the thirdquarter 2007. The in-vitro diagnostic products segment contributed 24.0% tototal net segment revenues in the third quarter 2008.
Medical Imaging Systems: Medical Imaging systems segment revenuesincreased 51.8% to US$32.6 million from US$21.4 million in the third quarter2007. The medical imaging systems segment contributed 22.4% to total netsegment revenues in the third quarter 2008.
Gross Margins
Third quarter 2008 non-GAAP gross profit, as defined below, was US$83.6million, a 97.2% increase from US$42.4 million in the third quarter 2007.Non-GAAP gross margin was 57.0% in the third quarter 2008 compared to 56.0% inthe third quarter 2007 and 54.8% in the second quarter 2008. Third quarter2008 GAAP gross profit was US$79.4 million compared to US$41.7 million in thethird quarter 2007.
Operating Expenses
Non-GAAP selling expenses for the third quarter 2008 were US$21.1 million,or 14.4% of total net revenues, compared to 13.7% in the third quarter 2007and 13.3% in the second quarter 2008. GAAP selling expenses for the thirdquarter 2008 were US$22.0 million.
Non-GAAP general and administrative expenses for the third quarter 2008were US$11.9 million, or 8.1% of total net revenues, compared to 3.0% in thethird quarter 2007 and 6.1% in the second quarter 2008. GAAP general andadministrative expenses for the third quarter 2008 were US$12.6 million.
Non-GAAP research and development expenses for the third quarter 2008 wereUS$13.8 million, or 9.4% of total net revenues, compared to 9.2% of total netrevenues in the third quarter 2007 and 7.9% in the second quarter 2008. GAAPresearch and development expenses for the third quarter 2008 were US$14.6million.
Total share-based compensation expenses, which were allocated to cost ofgoods sold and related operating expenses, were US$2.6 million in the thirdquarter 2008, compared to US$1.8 million in the third quarter 2007 and US$2.4million in the second quarter 2008.
Non-GAAP operating income, as defined below, in the third quarter 2008 wasUS$37.5 million, a 64.4% increase from US$22.8 million in the third quarter2007. Non-GAAP operating margins were 25.6% in the third quarter 2008,compared to 30.1% in the third quarter 2007 and 27.5% in second quarter 2008.GAAP operating profit in the third quarter 2008 was US$30.2 million.
Net Income
Third quarter 2008 non-GAAP net income increased 48.1% year-over-year toUS$33.7 million from US$22.7 million in the third quarter 2007. Non-GAAP netmargins were 23.0% in the third quarter 2008, compared to 30.0% in the thirdquarter 2007 and 24.2% in the second quarter 2008. Third quarter 2008 GAAPnet income was US$28.0 million compared to US$20.4 million in the thirdquarter 2007. Third quarter 2008 income tax expense was US$4.8 million,representing an effective tax rate of 14.7% compared to a 14.0% effective taxrate in the third quarter 2007, or an increase of 45.6% from US$3.3 million inthe third quarter 2007.
Third quarter 2008 basic and diluted non-GAAP earnings per share wereUS$0.31 and US$0.29, respectively. Third quarter 2007 basic and diluted non-GAAP earnings per share were US$0.21 and US$0.20, respectively. Third quarter2008 GAAP basic and diluted earnings per share were US$0.26 and US$0.24,respectively. Third quarter 2007 GAAP basic and diluted earnings per sharewere US$0.19 and US$0.18, respectively. Shares used in the computation ofdiluted earnings per share increased from 113.0 million in the third quarter2007 to 114.6 million in the third quarter 2008 due to grants of share optionsin the past twelve months.
The China Unified Corporate Income Tax Law (the "New Law") becameeffective on January 1, 2008. The New Law established a single unified 25%income tax rate for most companies with some preferential income tax ratesincluding a 15% income tax rate to be applicable to qualified "New and Hi-Tech Enterprises". The related detailed implementation rules and regulationson the definition of various terms and the interpretation and application ofthe provisions of the New Law were promulgated by the State Council inDecember 2007, April 2008 and July 2008. The Company is waiting for theapproval of application for hi-tech enterprise qualification by the relevantgovernment authorities. Before the approval for the qualification to be a hi-tech enterprise, the Company is required to pay income tax in accordance withthe transitional income tax arrangement where the income tax rate is 18% in2008 and 20% in 2009. The Company believes that it meets the criteria of hi-tech enterprise under the New Law. If the Company had received the approvalprior to September 30, 2008, its 2008 first nine months net income would haveincreased by US$0.8 million for deferred tax balances and by US$3.3 millionfor income tax applicable to its Shenzhen subsidiary using the 15% tax rate.This amount of accrued income taxes will be reversed as soon as the Companyreceives official approval for the "New and Hi-Tech Enterprise" status for itsShenzhen-based subsidiary.
Other Select Data
Average accounts receivable days outstanding was 39 days for the thirdquarter 2008 compared to 22 days for the third quarter 2007 and 32 days forthe second quarter 2008. Inventory turnover was 73 days for the third quarter2008 compared to 64 days for the third quarter 2007 and 57 days for the secondquarter 2008. Average accounts payable days outstanding was 55 days for thethird quarter 2008 compared to 57 days for the third quarter 2007 and 50 daysfor the second quarter 2008.
As of September 30, 2008, the Company had US$63.2 million in cash and cashequivalents (excluding restricted cash - short-term of US$51.1 million andshort-term investments of US$58.9 million). Net cash generated from operatingactivities and capital expenditures for the first nine months of 2008 wereUS$53.0 million and US$33.4 million, respectively.
As of September 30, 2008 the Company had 5,487 employees compared to 3,705employees on December 31, 2007.
Revenues
Mindray reported net revenues of US$379.6 million for the first ninemonths of 2008, an 86.9% increase from US$203.2 million in the same period in2007.
Net revenues generated in international markets in the first nine monthsof 2008 increased 113.4% to US$217.9 million from US$102.1 million in the sameperiod last year, while net revenues generated in China in the first ninemonths of 2008 increased 60.1% to US$161.8 million from US$101.1 million inthe first nine months of 2007.
Net Income
2008 nine months non-GAAP net income increased 52.3% year-over-year toUS$96.7 million from US$63.5 million in the same period in 2007. Non-GAAP netmargins were 25.5% in the first nine months of 2008, compared to 31.3% in thesame period in 2007. 2008 nine months GAAP net income was US$77.1 millioncompared to US$56.6 million in the same period in 2007. 2008 nine monthsincome tax expense was US$16.6 million, representing an effective tax rate of17.8% compared to a 14.6% effective tax rate in the same period in 2007, or anincrease of 71.1% from US$9.7 million in the same period in 2007.
2008 nine months basic and diluted non-GAAP earnings per share wereUS$0.90 and US$0.85 respectively. 2007 nine months basic and diluted non-GAAPearnings per share were US$0.60 and US$0.56, respectively. 2008 nine monthsGAAP basic and diluted earnings per share were US$0.72 and US$0.67,respectively. 2007 nine months GAAP basic and diluted earnings per share wereUS$0.53 and US$0.50, respectively. Shares used in the computation of dilutedearnings per share increased from 112.6 million in the first nine months 2007to 114.1 million in the first nine months 2008 due to issuances of new sharesand grants of share options in the past twelve months.
Updated Business Outlook for Full Year 2008
The Company is maintaining Non-GAAP EPS guidance to be in the range ofUS$1.16 to US$1.18 per fully diluted share based on an estimated averagediluted share count of 114 million for the year, representing 47%-49% growthYoY. Its full-year 2008 non-GAAP net income guidance is in the range ofUS$132 million to US$135 million, taking into consideration a 15% effectiveincome tax rate after certain government tax incentives and rebates includingthe favorable tax rate enjoyed by new and high tech enterprise status, as wellas the inclusion of Software VAT rebates.
The Company is updating its full-year 2008 net revenue guidance to be inthe range of US$550 million to US$560 million, including the consolidation ofDPM starting from May 1, 2008. This is revised from the Company's previousguidance of US$560 million to US$580 million. The revised guidance primarilyreflects a change in our previously budgeted foreign exchange rates for theremainder of the year as a result of recent trends in exchange rates. Ourrevised budgeted foreign exchange rates are now 6.84 RMB to the dollar in thesecond half of 2008 and US$1.28 to the euro in the fourth quarter (compared to6.6 RMB to the U.S. dollar in the third quarter 2008, 6.4 RMB to the U.S.dollar in the fourth quarter and US$1.50 to the euro in the second half of2008 budgeted on May 7, 2008 when the 2008 sales guidance including the newlyacquired DPM business was initially announced). In addition, updated guidancereflects the impact of the sales disruption caused by deteriorating foreignexchange fluctuations in the emerging market countries we sell to and theadoption of more stringent credit policies which resulted in reducing ouroutlook for shipments to a limited number of our customers.
The Company estimates total share-based compensation expenses in 2008 willbe approximately US$10 million based on employee share options that have beengranted as of September 30, 2008. The Company expects approximately US$17.9million in acquisition-related intangible amortization expenses in 2008including the April 2006 acquisition of minority interest and DPM, subject tothe finalization of the purchase price allocation for DPM acquisition. Sincethe purchase price allocation process has not been finalized, the Companyrecorded a preliminary purchase price allocation in connection with DPMacquisition.
The Company anticipates capital expenditures and advances for purchase ofplant and equipment for 2008 to be in the range of US$60 million to US$70million.
The Company's practice is to provide guidance on a full year basis only.This forecast reflects Mindray's current and preliminary views, which aresubject to change.
As announced in May 2008, Mindray changed its reporting currency to theU.S. Dollar (USD) from Chinese Renminbi effective April 1, 2008. Accordingly,Mindray presented historical financial results retranslated into USD in orderto allow same currency comparisons to future financial results on August 26,2008. This retranslation does not reflect any change in the underlyinghistorical results and reflects only exchange rate recalculation into USDbased on the accounting guidance for retranslation into a new reportingcurrency.
Results of Annual General Meeting
At Mindray's annual general meeting on October 17, 2008, Mr. Li Xiting,Mr. Wu Qiyao, and Mr. Lin Jixun were elected to serve as directors with theirterms expiring at the 2011 annual meeting of our shareholders or until suchdirectors' successor is elected and duly qualified. The resolution toincrease the number of directors on the board from seven to nine was approved.Mr. Peter Wan and Mr. Kern Lim who were recently appointed by the board tofill vacancies on the expanded board were elected to serve with their termsexpiring at the 2010 annual meeting of our shareholders or until suchdirectors' successors is elected and duly qualified. The appointment byMindray's audit committee of Deloitte Touche Tohmatsu as the independentauditor for the fiscal year 2007 was ratified, and the appointment on October15, 2008 by Mindray's audit committee of the independent auditorPricewaterhouseCoopers for the fiscal year 2008 was approved.
Conference Call Information
Mindray's management will hold an earnings conference call at 8:00 a.m. onNovember 11, 2008 U.S. Eastern Time (9:00 p.m. on November 11, 2008 Beijing/Hong Kong Time) to discuss results with investors.
A replay of the conference call may be accessed by phone at the followingnumbers until November 22, 2008.
Additionally, a live and archived webcast of this conference call will beavailable on the Investor Relations section of Mindray's website athttp://ir.mindray.com .
About Mindray
Mindray is a leading developer, manufacturer and marketer of medicaldevices worldwide. Established in 1991, Mindray offers a broad range ofproducts across three primary business segments: patient monitoring & lifesupport products, in-vitro diagnostic products and medical imaging systems.Mindray is globally headquartered in Shenzhen, China, with U.S. headquartersin Mahwah, New Jersey. Mindray also has another 12 international sales andservice offices in Amsterdam, Frankfurt, Istanbul, London, Mexico City,Moscow, Mumbai, Paris, Sao Paolo, Seattle, Toronto and Vancouver. For moreinformation, please visit http://www.mindray.com .
Use of Non-GAAP Financial Measures
The Company has reported (1) for the third quarter 2008 non-GAAP netincome, operating income, selling expenses, general and administrativeexpenses, R&D expenses and earnings per share on a non-GAAP basis and (2) forthe estimated full year 2008 non-GAAP net income and earnings per share. Eachof the terms as used by the Company is defined as follows:
Non-GAAP gross profit represents gross profit reported in accordance withGAAP, adjusted for the effects of share-based compensation, inventory fairvalue adjustments and amortization of acquired intangible assets.
Non-GAAP operating income represents operating income reported inaccordance with GAAP, adjusted for the effects of share-based compensation,inventory fair value adjustments and amortization of acquired intangibleassets and in-progress research and Development (IPR&D).
Non-GAAP net income represents net income reported in accordance withGAAP, adjusted for the effects of share-based compensation, inventory fairvalue adjustments and amortization of acquired intangible assets and IPR&D,all net of related tax impact.
Non-GAAP earnings per share represents non-GAAP net income divided by thenumber of shares used in computing basic and diluted earnings per share inaccordance with GAAP, and excludes the impact of the deemed dividends for thebasic calculation.
In addition to Mindray's consolidated financial results under GAAP, theCompany also provides non-GAAP financial measures, including non-GAAP grossmargin, non-GAAP operating income, non-GAAP selling expenses, non-GAAP generaland administrative expenses, non-GAAP R&D expenses, non-GAAP net income andnon-GAAP earnings per share on a basic and fully diluted basis. The Companybelieves that both management and investors benefit from referring to thesenon-GAAP financial measures in assessing Mindray's financial performance andliquidity and when planning and forecasting future periods. These non-GAAPoperating measures are useful for understanding and assessing Mindray'sunderlying business performance and operating trends and the Company expectsto report operating income and net income on a non-GAAP basis using aconsistent method on a quarterly basis going forward.
The Company computes its non-GAAP financial measures using the sameconsistent method from quarter to quarter. The Company notes that thesemeasures may not be calculated on the same basis of similar measures used byother companies. Readers are cautioned not to view non-GAAP results on astand-alone basis or as a substitute for results under GAAP, or as beingcomparable to results reported or forecasted by other companies, and shouldrefer to the reconciliation of GAAP results with non-GAAP results for thethree-month periods ended September 30, 2007 and 2008, respectively, in theattached financial information.
Cautionary Note Regarding Forward-Looking Statements
This press release contains "forward-looking statements" including thoserelated to the Company's anticipated operating results for 2008, theanticipated integration of the recently acquired business, the Company'santicipated effective tax rate, applicable exchange rates, software VATrefunds, share based compensation, amortization expenses, and capitalexpenditure. These statements are not historical facts but instead representonly our belief regarding future events, many of which, by their nature, areinherently uncertain and outside of our control. It is possible that ouractual results and financial condition and other circumstances may differ,possibly materially, from the anticipated results and financial conditionindicated in these forward-looking statements. Readers are cautioned thatthese forward-looking statements are only predictions and may differmaterially from actual future events or results due to a variety of factors,including but not limited to: the anticipated integration of the recentlyacquired business, the expected growth of the medical device market in Chinaand internationally; relevant government policies and regulations relating tothe medical device industry; market acceptance of our products; ourexpectations regarding demand for our products; our ability to expand ourproduction, our sales and distribution network and other aspects of ouroperations; our ability to stay abreast of market trends and technologicaladvances; our ability to effectively protect our intellectual property rightsand not infringe on the intellectual property rights of others; competition inthe medical device industry in China and internationally; and general economicand business conditions in the countries in which we operate. The financialinformation contained in this release should be read in conjunction with theconsolidated financial statements and notes thereto included in our publicfilings with the Securities and Exchange Commission. For a discussion ofother important factors that could adversely affect our business, financialcondition, results of operations and prospects, see "Risk Factors" beginningon page 6 of our annual report on Form 20-F, filed on June 30, 2008. Ourresults of operations for the third quarter of 2008 and for fiscal year 2008are not necessarily indicative of our operating results for any futureperiods. Any projections in this release are based on limited informationcurrently available to us, which is subject to change. Although suchprojections and the factors influencing them will likely change, we will notnecessarily update the information. Such information speaks only as of thedate of this release.Highlights for 2008 Third Quarter and Nine months -- Revenue generated in China increased 61.3% while revenue generated in international markets increased 126.1% in the third quarter of 2008 over the same period of 2007 -- Non-GAAP net income, as defined below, in the third quarter of 2008 increased 48.1% over the same period of 2007 -- Non-GAAP diluted EPS, as defined below, in the third quarter 2008 increased 46.1% over the same period of 2007 -- Continue to improve product mix with the introduction of 5 new products year-to-date -- DPM integration ahead of schedule -- Recently renewed major GPO contract with HealthTrust Purchasing Group
SOURCE Mindray Medical International Limited
