Executives
Amanda Clardy - VP, Investor Relations
Greg Lucier - Chairman & CEO
David Hoffmeister - CFO
Analysts
Quintin Lai - Robert W. Baird
Tycho Peterson - JP Morgan
John Sullivan - Leerink Swann
Jon Wood - Banc of America Securities
Derik De Bruin - UBS
Edward Tenthoff - Piper Jaffray
Bob Ai - Wall Street Access
Jonathan Palmer - Thomas Weisel Partners
Rick Patel - Lehman Brothers
TRANSCRIPT SPONSOR |
Invitrogen Corporation (IVGN) Q4 2006 Earnings Call February 13, 2007 5:00 PM ET
Operator
Good day ladies and gentlemen, we thank you for your patience, and welcome to the Fourth Quarter and Year End 2006 Invitrogen Corporation Earnings Call. My name is Bill and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. However, we will be conducting a question-and- answer session towards the end of today's conference. (Operator Instructions) As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the call over to your host for today's presentation to Ms. Amanda Clardy, Vice President of Investor Relations. Please proceed, ma'am.
Amanda Clardy
Thank you Bill and good afternoon everyone. Welcome to Invitrogen's fourth quarter and fiscal year 2006 earnings conference call. I am Amanda Clardy, Invitrogen's Vice President, Investor Relations, and joining me on the call today are Greg Lucier, our Chairman and CEO; and David Hoffmeister, our Chief Financial Officer. If you haven’t received a copy of today's press release, you may get one from our website at invitrogen.com.
Before we begin, I want to remind our listeners that our discussion today will include forward-looking statements, including but not limited to statements about future expectations, plans, and prospects of the company. We believe that these statements are based on reasonable assumptions, but actual results may differ materially from those indicated. It is our intent that these forward-looking statements be protected under the Safe Harbor created by the Private Securities Litigation Reform Act of 1995.
Additionally, we will be discussing GAAP and non-GAAP measures, a full reconciliation of non-GAAP measures to GAAP can be found in today's press release or on our website. On today's call, we will begin with prepared remarks and then open the lines up for questions as time permits. I will now hand the call over to Greg.
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Greg Lucier
Thank you, Amanda. I would like to start by saying we're encouraged by our fourth quarter results. In Q4, we achieved a record level of revenue and EPS in the company's 20-year history with $330 million in sales and a $1.01 of non-GAAP earnings per share, which represents 12% increase year-over-year. The quarter was stronger than we originally expected due to a combination of favorable market factors including a reversal of trends we experienced in late Q3 currency and a strong performance in our BioProduction media segment.
For the full year, our revenue was $1.26 billion, an increase of 5% over 2005 with non-GAAP EPS of $3.67, which is a 6% increase over the prior year. That said, as most of you know, 2006 had its fair share of challenges for us as a company, and I'd like to address some of those challenges and what we've done to address each one in the last 90 days.
Cyclically down businesses; in the first half of 2006, our Sera business was down 40% year-over-year. And, so we undertook a full review of this segment. Based on the study, we developed an approach that allowed us to more effectively manage the collections and cash generation of the business and still offer a vital product to our customers. We are confident this plan, which is now being executed, will allow us to minimize the wild swing we saw in 2006 in future years.
Our BioProduction media business was also down in the first half of the year. But this was more a result of very difficult comparables and timing of orders from some of our very large clients. As the second half performance of 2006 has shown, this production media business of Cell Culture Systems is very healthy and has returned to positive growth now.
The second area is mix shift. In the second half of the year, volume from some of our lower margin businesses including some products acquired from past acquisitions became a larger piece of the company's total revenue, causing a decline in our historically high gross margins. This shift was most noticeable in the United States. To address this issue, we have taken several actions in the last few months. First, a new global sales leader was named. In the United States, we've implemented programs to improve overall selling time, a new centralized pricing team has been created, and we now have harmonized compensation systems across the product mix in Europe, the USA, and our major markets in Asia. We are confident these actions will restore growth in the Americas to a comparable performance level like we've achieved in Europe and Asia Pacific as well.
Third area is manufacturing and freight costs. In the second half of the year, our costs to manufacturing ship products increased significantly. Several of our plants had declines in productivity either due to integrations or lower than anticipated volume. The integration related issues followed the closure and consolidation of the two antibody plants to our BioSource facility in Southern California. The facility integration is now complete and a reliable delivery stream to our clients is now taking place. But there is still work to be done in order to achieve the full costs synergies we expect. Additionally, we have productivity plans in place at some of our largest plants, from which we expect to see benefits over the course of this year.
Finally, freight logistics continue to be a source of increased costs which we've only partially offset by increased freight revenue.
Between 2005 and 2006, our portfolio of product offerings exploded in size and the logistic patterns associated with that change overwhelmed the existing approach in place at the company. Seasoned logistic experts have now been recruited in this area and we expect solid improvements in the coming months.
Now, I will just address integration issues as they relate to manufacturing, but as you well know, integrations affect the company in nearly every area. Over the last several years, we accelerated the pace of acquisitions to change the growth profile of this company. We are now 15 companies coming together on top of the Invitrogen and Life Technology's merger. As you know, integrations are difficult. For us, they turned up to be especially challenging when placed on top of an immature infrastructure in organization. So, we paid the price in 2006 through an underperformance that was unacceptable to you as shareholders and to the members of its management team. However, adversity has its purposes and these challenges forced us to confront and fix some fundamental issues in our sales organization and back office operations. It also forced us to ask what businesses we wanted to be in. And, so we undertook a full portfolio review to understand our core competencies and how they could best be leveraged.
As a result of this review, we have made a decision to divest two business units. As we announced in our press release today, we sold the diagnostic subsidiary of BioSource located in Belgium, which was a small component of the BioSource franchise we acquired in 2005. Additionally, we are selling BioReliance to Avista Capital Partners for $210 million. When we purchased this business in 2004, we believed there would be great synergy between Invitrogen's Cell Culture Media business and the testing and development capabilities within BioReliance. Quite frankly, the strategic fit never materialized as clients believed each offering had to stand on its own.
I would also say that we owned this business in a particularly bad period for biologics and their movement through the pipeline. In the end, we bought BioReliance for the right reasons, and we believe we are selling it for the right reasons too. We are moving on. The company is strong and more focused than ever of driving success. We remain committed to the BioProduction space as a partner for advance cell culture products and our PD- Direct services that help companies achieve process scale-up.
Speaking of success, we have not spend much time talking about those ones that we had in 2006, and so let me take this opportunity to highlight a few. Molecular Probes grew in solid double digits again led by dye sales for flow and imaging, as well as continued adoption of the QDot nanocrystals technology.
Desktop devices and flow systems; this is an interesting and emerging area for the company. We are very pleased with the overwhelming success of some of these devices we launched in 2006. These devices provide significant time savings to customers. For example, with the new iBlot system, a Western can now be done in seven minutes down from several hours. And we continue to expand our portfolio products for epigenetics with not only our own developments but also acquisition of key licenses. We expect this to be a growth area for us, and we will be increasing our R&D investment here by over 80% in 2007.
In Q4, sales of BioSource products grew in the double digits led by multiplex assays for cytokine profiling and signal transduction assays. We have seen especially strong growth in the European market. We finished the facility consolidation of Caltag, Zymed, and BioSource. And these companies now have one of the largest portfolios of antibodies on the market. And in fact, we grew over 20% in primary mouse antibodies and 15% in human antibodies for the full year. And finally, we completed the acquisition of Sentigen, adding to our GPCR Drug Discovery capabilities.
In summary, 2006 was a pivotal year in the evolution of our company. We made some hard decisions and some wise investment choices that will set this company up for success in 2007 and beyond. Our people are better and more determined than ever.
Now, let me move into our key focus areas for 2007. There are two things that are never questioned about our company, the value of our brand, which is resoundingly validated by independent surveys and industry awards, and our ability to create transformative products. This year marks our 20th anniversary. For 20 years, we've been providing original high-quality reliable technologies that transformed the way researchers do Science. In 2007, we will continue this investment in our brand and our technology portfolio, but we'll also focus on three specific areas.
First, improving the operating efficiency in both our manufacturing plants, as well as our back office organizations. Our goal is to expand operating margin by 100 basis points. Inside the company, this initiative is all about finding a better way. Second, optimize the mix of product sold that will lead to higher margins and faster growth. I've already mentioned the actions we've taken in late 2006 and early 2007. We will be continually monitoring these programs to ensure they are achieving the right level of improvement that we desire. The third, continue to refine and define the infrastructure that is so necessary to run the company today and into the future. This includes, the global ERP system being implemented, further facility consolidations into our major campuses and increased training of our associates. It is with these key imperatives that we will expect to deliver revenue growth in the lower to mid-single digits and non-GAAP earnings per share grow two to three times that revenue growth.
As I said earlier, adversity has its purposes. 2006 was a painful year for you as shareholders and for us as leaders. However, the company is stronger now, more seasoned, and poised for nice success in 2007.
With that, I will now turn it over to David to talk more specifically about our 2006 results and our expectations for the coming year. David?
David Hoffmeister
Thank you, Greg and good afternoon everyone. I'm happy to be here discussing our financial results for the first time this year. As rewarded in -- as reported in this afternoon's press release, fourth quarter 2006 sales were $330 million. This represents a 6% sequential increase over third quarter 2006. This was above our industry's expectations. Year-over-year revenues for the quarter grew 2% with foreign currency having an impact of 3 points. Adjusting for currency and the divestiture of our BioReliance German manufacturing plant announced earlier this year, we achieved modest organic revenue growth. However, remember we had a record level of sales in the fourth quarter of 2005 with a significant number of large customer orders in both segments, creating a difficult year-to-year comparison.
Additionally, our Sera business unit ended the year down approximately 20% versus 2005. The decline in this business unit had 1.5 points of unfavorable impact growth in the quarter and 2.5 points on the full year. So, without the impact from Sera fourth quarter revenue growth would have been 3% and full-year revenue growth would have been 8%. We are encouraged with the revenue results we achieved in the fourth quarter driven by both segments of our business.
Let me talk a minute about BioDiscovery. BioDiscovery fourth quarter revenue growth was $213 million, up 3% year-over-year. Again recall, we had an exceptional fourth quarter in 2005, with OEM sales in several businesses being at record levels, as well as a few other one-time large customer orders. BioDiscovery ended the year with 12% revenue growth.
In our press release today, we highlighted several areas that contributed to segment revenue results in the fourth quarter, so I won't go over those specifics again. But I will take a moment to elaborate on a few other points as they relate to BioDiscovery revenue. Asia Pacific had double digit growth, driven by high double digit growth in emerging markets, as well as solid single digit growth in Japan, which is the first time in three quarter that this country has been a contributor to our growth.
We're seeing success in Japan based on our new sales and marketing campaigns, as well as the accelerated adoption of our most differentiated technologies such as molecular probes. The success of probes in Japan is one of the reasons that our molecular probes division continues to deliver double digit growth quarter-after-quarter. This team is continually innovating in everything from the products they introduce to the markets they enter, to the marketing campaigns they launch. Additionally, labeling and detection products are one of the most enabling technologies we have. And thus, the molecular probes team is continually partnering with other divisions to combine multiple offerings into one convenient kit.
Let me now turn to Cell Culture systems. Cell Culture systems had another quarter of good revenue growth. Fourth quarter and full-year revenues were a $117 million and $442 million respectively, which represents a decline of 1% and 4% respectively. However, the declines in this segment were impacted by two items. One, the divesture of BioReliance, Germany which happened in April of 2006. This business unit had sales of approximately $2.5 million per quarter. And two, the decline in our Sera business unit. Sera declined 11% in the fourth quarter to $27 million and declined approximately 20% for the full year to $92 million. The declines in the Sera unit had an impact of 3.5 points on the fourth quarter and 4.5 points on the year. And the sale of BioReliance, Germany had an impact of 3 points on the quarter and 2 points on the full year.
So in summary, without the impact of these two items Cell Culture systems would have grown by 5.5% in the fourth quarter and 2.5% for the full year.
Moving on to gross margins. Fourth quarter gross margin on a non-GAAP basis was 58.7%, which represents a 50 basis point improvement over the previous quarter and a 110 basis point decline from year ago. Gross margins quarter-over-quarter improved due to higher volume and lower manufacturing and distribution cost. In the third quarter, we had increased spending required to consolidate several manufacturing sites into one and to create a bicoastal distribution system. These costs did not repeat in the fourth quarter. However in Q4, we did have increased OEM sales. These sales have lower margins than our typical margins and lowered overall gross margin by about 50 basis points. So adjusting for one-time items and OEM sales, gross margin increased by about a 100 basis points.
Gross margin year-over-year declined a 110 basis points due to our higher mix of lower margin products, lower volume in our Carlsbad manufacturing facility and higher distribution costs due to fuel charges and increased packing materials. Full-year gross margins; our margin was 60.2%. SG&A was $96 million, an increase of $9 million from the third quarter. The increase was the result of the one-time benefit recognized in the third quarter from the reduction of the bonus accrual, higher legal and accounting fees, and higher commissions associated with the increased revenue.
R&D was $24 million, a reduction of $2 million sequentially due to specific costs actions taken in the quarter. R&D was 7.4% of revenue in Q4 and 8.2% of revenue for the full year. We feel 7% to 8% of sales is an appropriate level of R&D spending for the next few quarters. We have finally reached critical scale in this group and it is developing leading products while at the same time supporting the productivity improvement efforts in our plants.
Operating income was $73 million, an increase of 7% sequentially. Given that our business has mostly fixed costs over the short term and high gross margins, an additional $20 million in revenue drives a lot of additional income.
In December, we paid off $176 million in convertible debt, resulting in lower interest expense as well as lower interest income. We were able to partially offset the lower interest income resulting from our low cash balances by achieving higher yields on short-term investments. We also had a benefit in taxes this quarter due the passing of the R&D tax credit. This lowered taxes by $2 million for the full year and this reduced our tax rate by 50 basis points, resulting in a year-end tax rate of 30.9%.
Moving on, our diluted share count for the quarter was 49.2 million. We continued our buyback program in the quarter by repurchasing approximately 1 million shares for $50 million. With the $50 million spend on share repurchases and the $176 million spend on debt repurchase, our total spending was $226 million on financing activities in the quarter. To date, we've repurchased 5.8 million shares for $350 million. That leaves $150 million left on our share repurchase authorization. And through this vehicle, we remain committed to returning excess cash to our shareholders. Although, the level of buybacks will depend on several factors including share price, other uses of cash and expected cash generation among others.
Non-GAAP earnings per share for the fourth quarter was $1.01, which is an increase of 16% sequentially and 12% over the last year. GAAP earnings per share decreased to a loss of $2.08 per share as compared to $0.87 earnings per share last year. The loss per share was driven by goodwill impairment charge of $121 million or $2.45 per share. The charge was primarily related to goodwill recorded within our Cell Cultures Systems business segment.
In 2006, we recorded a total of $271 million of goodwill impairment charges, resulting from the review of all the business units within this segment. Our portfolio review is now complete and no further writes-offs are expected.
As a reminder, there is a full reconciliation between GAAP and non-GAAP measures in today's press release and on our website. One time that we exclude from our non-GAAP definition is the cost of stock option expensing as a result of FAS 123R, which we adopted in 2006 on a prospective basis. That net expense was $6.6 million for the quarter or $0.13 on a per share basis. In the last couple of years, we have reduced the number of options granted to the employee base and continue to make -- take the impact of this expense into our decision on future grants. Our stock option expense has continued to trend down over the last three years.
Turning our attention to the balance sheet, I will go over just a few highlights. We ended the year with $380 million of cash and short-term investments. With the repurchase of debt in December, we ended the year with $1.2 billion in debt resulting in 2.4 times net debt to EBITDA.
Our return on invested capital based on full-year results was 6.2%, but on a rolling 12-month basis it is trending closer to 7%. Our goal is to ultimately have our return on invested capital above our weighted average cost to capital. We feel the plant we've laid out and the Greg covered earlier will move us in that direction.
Free cash flow for the quarter was $90 million. This represents an increase of $31 million over the previous quarter. The increase was driven by higher net income and a decline in cash taxes as a result of deductions relating to our ERP implementation.
Capital expenditures were $17 million. Full year cash from operating activities was $235 million; capital expenditures were $61 million, resulting in the full year free cash flow of a $174 million.
In our press release today, we provided fiscal year 2007 guidance of low to mid single digit growth in revenue, which assumes current exchange rates and two to three times that for non-GAAP earnings per share. As you know, revenue growth rates may fluctuate quarter-to-quarter due to macro funding developments, large customer orders, and our ERP implementation.
Today, we announced that we entered into an agreement to sell BioReliance and we've already completed the sale of a small division of BioSource. These two business units generated approximately a $117 million in revenue in 2006. So, for starters, you will want to remove that revenue from your estimates. Although these combined business units generated positive income, our goal is to keep the impact of these divestitures neutral to EPS in 2007. Therefore, all the projections I'm going to discuss are from 2006 base revenue of $1.115 billion and the same non-GAAP EPS of $3.67 without stock options expensing or $3.09 with stock option expensing. So with that, here are some additional details on 2007.
We expect that the operating efficiency in mixed management plans we have underway will drive improvements in gross margin. But these plans are a multi-quarter effort and results will not be achieved in the first quarter -- full results will not be achieved in the first quarter. It is with these improvement plans, as well as the divestiture of BioReliance that we expect to achieve our goal of improving operating margins by 100 basis points over the 2006 level.
Our goal is to have SG&A and R&D grow less than the rate of sales with the exception of three items. First, in Q1 2007 we will once again begin accruing for an annual bonus payout. That accrual is approximately $7 million per quarter. Second, our annual review process will be complete; employees will receive merit increases in the second quarter. And third, we will be recognizing $5 million of annual depreciation expense as a result of our ERP implementation and this will start in Q1.
Interest income will be a function of our cash balance as we don't expect our yields or vehicles to differ significantly from those used in 2006. On average, our yield is approximately 4%.
Interest expense will be slightly below Q4 levels as we did not payoff the convertible debt until December. And our tax rate is expected to be 30.9%. Although, we continue -- expect to continue our buyback program, we cannot give an estimation of how the future purchases will affect our share count because it will depend on factors I mentioned earlier. Therefore, you should assume 2007 shares outstanding will be equivalent to Q4 levels.
Capital expenditures are expected to be $60 to $70 million, as we continue our global ERP implementation. Free cash flow will increase at approximately the same rate as net income with the addition of the one-time benefit we will receive in 2007 from having no bonus payments for 2006. That’s approximately $25 million.
Regarding our North American ERP implementation, it may have the same affects on cash that it did last year, when we went live in Europe. As you'll recall, inventories increased before and after the implementation, and day sales outstanding also increased. We are on track for implementation in the second quarter of this year.
Finally, one last item I'll give some color on is our FAS 123R expense. In 2006, this expense was $39 million in total, $30 million on a net basis or $0.57 per share. This expense includes not only the accounting for options with grant employees but also the expense related to our employee stock purchase program. This program allows employees to buy the company's stock at a discount, driving increased company across a wide base. The expense for this program was approximately $6 million in 2006 and is included in the FAS123R line.
We expect total stock option expense to decrease by approximately 8% in 2007. However, with the lower share count, it will have approximately the same EPS impact as 2006. In 2007, we will start reporting two non-GAAP EPS figures, one without stock option expense, which will be comparable to how we treated this measure in 2006, and one with the impact of stock option expense. We will continue to have a full reconciliation of these measures to GAAP in our press release and on our website.
That ends the prepared portion of our call. So, we'll now open the lines for questions, and I will turn it over to Amanda.
Amanda Clardy
Thanks, David. As you said, we will now open up the lines for questions. We request that you ask no more than one or two questions at a time. If you have further questions, please get back in the queue and we will answer your questions as time permit. Bill, we are now ready for questions.
Question-and-Answer Session
Operator
Thank you very much, ma'am. (Operator Instructions) And our first question comes from the line Quintin Lai of Robert W. Baird. Please proceed.
Quintin Lai - Robert W. Baird
Good afternoon. Congratulations on a nice end to a very tough 2006. As we take a look now, as you start your anniversary and go against 2006, it looks like that you will be up against some easier comps. So, the low-to mid-single digit growth, does that just take into account any kind of variability that you might have with ERP rollout and the timing for turn around -- turning around some of these other programs, Greg?
Greg Lucier
Quintin, what I would say to you on our revenue guidance is that we really want to stop focusing on forward-looking statements and spend a lot more time and energy on really running this company for faster growth and higher margins and overall better profitability. So, that's the guidance we are giving right now. And obviously if it does better, you will be the first to know.
Quintin Lai - Robert W. Baird
And then as a follow up, any updates like on the vitality index and some of the new products that have come out and like for example, in some of the areas like your protein chip and some of the diagnostics areas for example?
Greg Lucier
Yeah. Great question, Quintin. Actually, we achieved a record level of product vitality. We achieved 9%, And as you know, that's the amount of revenue coming from new products that were introduced in the previous 24 months and we have a number of highlights. One of them I did speak about in my prepared comments, the iBlot, which automates the Western blotting process from, as you know, taking a couple hours down to seven minutes. This is the product that is vastly exceeded our expectations and has proprietary consumables that go with it. This type of low-cost gadget or instrument for the bench-top is something we are spending a lot of time on. And you will see more of those instruments come out this year.
As you mentioned, the ProtoArray, our protein chip, we continue to invest in. This year, we will be having over 10,000 active proteins on a chip which, as we understand, is by far the most densely populated set of proteins known in research tools industry. And we have a number of very close collaborations around the world with this chip on a number of different research processes. I mean this is the year that these collaborations really bring to fruition the full power of the technology. So, we are very committed to protein chips and it's one where -- unfortunately tools just take a long time to mature and get adopted. But we think this is going to be a very promising large opportunity as the year progresses and as we go into 2008.
Quintin Lai - Robert W. Baird
Thank you.
Operator
Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Tycho Peterson of JP Morgan. Please proceed.
Tycho Peterson - JP Morgan
Hi, thanks for taking the call. For starters, Dave, just to be clear, the number that you are using as a base from the guidance was the 309, that's what we should be growing off of it if we back out BioReliance?
David Hoffmeister
On EPS?
Tycho Peterson - JP Morgan
Yeah.
Greg Lucier
Yeah. And with stock option.
David Hoffmeister
With stock option.
Tycho Peterson - JP Morgan
Right. Okay. And then, as we -- if kind of think about R&D spending, I know you talked about 7% to 8% of sales over the next couple of quarters. Greg you've talked longer term about getting back to 9% to 10%. How do we think about the ramp there? And then, also as we think about the portfolio review, did your review include any R&D projects backing out some of the spending there for things like Mayo Clinic and things like that? Were those ongoing?
Greg Lucier
Well, we continue to invest in collaborations, but more broadly, we as part of our overall review process, look through every single project. And as you can imagine with an average product cost of around $500, we have a lot of products and processes being developed. And we really called them back and really got very focused on where we are going to get the biggest payback and that explains the -- let's just call 7% to 8% R&D rate for the next couple of quarters. I still would say to you that the business has the potential to spend more in R&D, but this is where we want to run it for the first few quarters of 2007.
Tycho Peterson - JP Morgan
Okay. And then finally, you talked a little bit about OEM sales being at record levels in BioDiscovery. Can you just clarify what that was and how we should think about that going forward? I know it impact the margins, I think.
Greg Lucier
I'll just broadly say, what it is, and then David can give more particulars but one of our strategies has been to be a private label supplier to molecular diagnostic companies and then also other research tools companies. And those are the OEM sales we are speaking about. And typically, they do fall in the fourth quarter. That’s just contractually how it works. And so that’s what we talk about when we are speaking of OEM sales. David, do you want to elaborate anymore?
David Hoffmeister
No, I think that that pretty much summarizes that the -- we've said all along that we expect higher sales of OEM products in the fourth quarter. Those sales are at lower margins and the only thing that I said in addition to that in the prepared remarks were those sales lower margins in the fourth quarter by about 50 basis points.
Tycho Peterson - JP Morgan
Great. Thank you very much.
Operator
Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of John Sullivan of Leerink Swann. Please proceed.
John Sullivan - Leerink Swann
Hey guys, congratulations on a good fourth quarter.
Greg Lucier
Thank you.
John Sullivan - Leerink Swann
Question about BioReliance. Can you talk about the sort of profitability you are seeing at BioReliance or the contribution margin as we think about the company without BioReliance on a going forward basis?
David Hoffmeister
We really haven’t commented much on the -- given details on the profitability of BioReliance. It had a lower gross margin and high fixed cost, and I think we've said earlier that as volume in there were declined, margins dropped as a result.
John Sullivan - Leerink Swann
Okay. And then Dave, I guess a guidance question. Can you just talk -- can you just clarify what you are expecting again in cash from operations and free cash flow for 2007?
David Hoffmeister
What we said there was that the free cash flow would grow in-line with net income; and we said net income would increase. Our earnings per share would increase two to three times our revenue growth rate.
John Sullivan - Leerink Swann
Okay. Thanks very much and then -- thanks very much for taking my questions.
Operator
Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Jon Wood, Banc of America Securities, please proceed.
Jon Wood - Banc of America Securities
Thanks, can you give us any incremental balance sheet metrics on BioReliance and what's the expected timing on the close of that transaction?
Greg Lucier
I will talk to the last part, and David you can talk to the balance sheet implications. But the agreement to sign -- agreement to sell the business was signed today with Avista Capital Partners for $210 million. We expect the normal approval cycle to take place including Hart-Scott-Rodino Review. However, we believe that transaction should be closing within 60 days. And, as I think we said in our prepared comments that we're going to be putting BioReliance into discontinued operations starting January 1, 2007.
David Hoffmeister
And just on the balance sheet, at that point in time, we will give you more of the balance sheet impact.
Jon Wood - Banc of America Securities
Okay. And then one quick one. You said you had a 150 million left on share repo authorization. Should we assume that the incremental 2010, will you increase your authorization by the $210 million or is that inclusive within that $150 million?
Greg Lucier
The 210 million is cash that will go into our bank account, and the authorization from our Board of Directors was separate from that total of $500 million, of which $150 is remaining.
Jon Wood - Banc of America Securities
Okay, thanks.
Operator
Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Derik De Bruin of UBS. Please proceed.
Derik De Bruin - UBS
Hi. What was going on in the North American market that was causing it to be a little bit weak this quarter, anything -- or is that just tough comps?
David Hoffmeister
I think that was basically tough comps Derik. More broadly on 2006, let me just say a few thoughts. If you look at our performance in Europe, we had good solid growth in 2006. If you look at our growth in Asia-Pacific, it was good double digit growth. Where we had our challenges in 2006 was in the Americas market. We think primarily that was all self-induced. And I try to allude in my prepared comments of a number of changes we've made it now in the last 100 days to our Americas team, new sales leader, new pricing team, new talent, and I think a sales team now that is being very much focused on the right product mix. And I would say we've already start to see very promising results in the first part of 2007.
Derik De Bruin - UBS
This is a follow-up to that, so I guess the question leads into what -- how do you determine the right product mix in that the sales force is doing what they need to do in order to optimize the margin mix?
David Hoffmeister
Well, I would say that, that’s obviously a very complicated process of analyzing and determining what you want an account manager to sell, and then what you a technology specialist to sell. And I would say where that got a little complicated was in 2006 in the Americas due to almost doubling of the product technologies from '05 to '06. And so that leadership team struggled in 2006. I think we've really addressed all those issue in the last 100 days. We've basically mimicked what we did in Europe, which was solid and successful. And we are now and really have already been implementing that in the Americas with, I think, good encouraging results.
Derik De Bruin - UBS
And just one follow-up question. On the fourth quarter reconciliation numbers, there is a $0.09 other that you are including back into the numbers. I'm just curious, if you can elaborate on what that other is?
David Hoffmeister
Now, let me give you just a general answer and if anybody like more details, I would be happy to take them through it after the call. But two primary factors, one is the share reconciliation between GAAP and pro forma numbers. And the second is a tax true-up related to the old Dexter Pension Plan.
Derik De Bruin - UBS
Okay. Thank you.
Operator
Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Edward Tenthoff of Piper Jaffray. Please proceed.
Edward Tenthoff - Piper Jaffray
Great. Thank you very much. So just to make sure I got the guidance clearly -- but revenue growth guidance is based on -- is off of the 2006 base revenues excluding BioReliance?
David Hoffmeister
Yes.
Edward Tenthoff - Piper Jaffray
So that would mean that total revenues in 2007 will actually be down from 2006?
David Hoffmeister
Yes, if you exclude BioReliance. Right.
Edward Tenthoff - Piper Jaffray
Right. And then, as we look into 2007, what should we be thinking for gross margins for these two -- for the two divisions in particular with spin-out of BioReliance?
David Hoffmeister
No, we haven't. I think that you should look at gross margins as they're currently running. We've talked about the improvements that we hope to make over the course of the year, which we think will increase operating margin total by 100 basis points.
Edward Tenthoff - Piper Jaffray
Okay.
David Hoffmeister
But I take the fourth quarter margins and hope that we see some gradual improvement.
Edward Tenthoff - Piper Jaffray
Okay, great. Thank you very much.
Operator
Thank you very much, sir. (Operator Instructions). Our next question comes from the line of Bob Ai of Wall Street Access. Please proceed.
Bob Ai - Wall Street Access
Hi. My question is for Dave. Dave, can you help me or just walk me through again the bonus accrual in '06 and the guidance for '07?
David Hoffmeister
Yeah. Basically, the bonus accrual in '06 was around zero when it was completely reversed. Okay. So, we paid no bonuses in 2006. Alright. In 2007, we expect to have a bonus accrual of about $7 million per quarter.
Bob Ai - Wall Street Access
And what's the impact of the reversal of the bonus accrual in fourth quarter?
David Hoffmeister
There was no reversal in the fourth quarter.
Bob Ai - Wall Street Access
Okay.
David Hoffmeister
The bonus was reversed in the third quarter.
Bob Ai - Wall Street Access
Okay.
David Hoffmeister
So, no impact of any kind in the fourth quarter of 2006.
Greg Lucier
But Dave to reiterate, you expect cash flow from operations, free cash flow to grow inline with our EPS guidance.
David Hoffmeister
Correct.
Bob Ai - Wall Street Access
Okay. Well, thanks a lot.
David Hoffmeister
Well, actually let me clarify it. Let me clarify the guidance. We are saying revenue is going grow in low-to mid-single digits. EPS will grow at two to three times our revenue growth and free cash flow should grow inline with net income. Okay.
Bob Ai - Wall Street Access
Okay. Thanks.
Operator
Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Paul Knight of Thomas Weisel Partners. Please proceed.
Jonathan Palmer - Thomas Weisel Partners
Good evening. This is [Jonathan Palmer] in for Paul Knight. I was wondering if you could take us through the sera business. How that performed sequentially quarter-over-quarter and what dynamics changed at the end of the year?
Greg Lucier
We would be -- I think it's covered in quite of bit of detail in the transcript, which should be available to you and if there are any kind of follow-ups, we would be happy to take that offline.
Jonathan Palmer - Thomas Weisel Partners
Okay. And one last question on the guidance. What was the revenue base number you gave for '06 excluding BioReliance?
David Hoffmeister
It's $1.115 billion.
Jonathan Palmer - Thomas Weisel Partners
Thank you very much.
Greg Lucier
No. 1.15.
David Hoffmeister
Sorry. $1.15 billion.
Jonathan Palmer - Thomas Weisel Partners
Thank you.
Operator
Thank you very much, sir. Ladies and gentlemen, your first follow-up question comes from the line of Quintin Lai of Robert W. Baird. Please proceed.
Quintin Lai - Robert W. Baird
Thanks for taking the follow up. With respect to some of the freight costs, have you been able to look at maybe passing on that to the customers or how is your competition kind of address those freight costs?
Greg Lucier
Yeah. It's a great question, Quintin. Let me explain the issue is that, we had a fairly set process of distribution and freight recovery in '05. When we got into a number of new product launches and the antibody business, obviously our offering really increased in size dramatically. But the one thing that we wanted to provide customers was one box for a consolidated set of shipments to one location if you will. And that's just the offering we are trying to provide clients. And so, that really changed how we had to do warehousing and then ultimately consolidated shipments. That's one factor we had to deal with.
The second factor is that, our online orders have really dramatically increased, and what we saw on online orders is that the average order size is smaller. And so, like you would suggest there is a fairly heavy freight charge with single box or two being shipped out to a client. Both of those factors happened fairly rapidly, and I would say it taken us a couple of quarters to understand the trend in what's going on. And that we are very much on it now and doing a lot of different things, both in terms of freight recovery like you suggest. But then also streamlining the overall distribution process we have around the world. The one thing that we -- I would highlight is in lot of the surveys we do, we are constantly trying to understand how reliable are we with our shipments because we too try to have broadest product range possible on the shelf ready to go for clients without obviously having too much on the shelf because of the cash consumption. And we are doing very well in that regard, but now we got to do it very well at a lower cost point. And that’s the work being undertaken by what I would tell you is a very solid new team of logistic experts on board.
Quintin Lai - Robert W. Baird
Great. Thank you very much for that. And then with respect to specialty media in the BioProduction side, any kind of visibility or has your visibility improved with the order patterns from customers because I know the 2006 you got caught with some lumpiness in quarter-to-quarter variability?
David Hoffmeister
We have seen in the second half the BioProduction media come back very nicely and we are expecting a good year in 2007 in BioProduction media. And so, I think some of this lumpiness and problems we saw in '06 are not going to repeated in 2007.
Quintin Lai - Robert W. Baird
Alright, thanks.
Operator
Thank you very much sir. Ladies and gentlemen your next follow-up question comes from the line of Derik De Bruin of UBS. Please proceed.
Derik De Bruin - UBS
Hi, great. So, you're targeting 100 basis points of operating margin expansion in '07. I guess what's the base resource used in '06 in terms of to calculate that? What's the margin contribution of BioReliance in that?
Greg Lucier
The baseline you should use is 60.2, which was the full year of 2006.
Derik De Bruin - UBS
No, actually it's the gross margin. I want the operating -- you talked -- you guys said 100 bits of operating margin expansion.
Greg Lucier
Right. And then as David said, a 100 basis points improvement of 2006 and your question is, what's the level --
Derik De Bruin - UBS
Yeah, what's the base level assuming that we get rid of -- because it's going to be off of the -- off of the existing in 2006 number or with BioReliance in there or without BioReliance?
Greg Lucier
Our guidance right now is with BioReliance in there for the full year.
Derik De Bruin - UBS
Alright. So, we're going off, we're doing a 100 bits off your current level, okay.
Greg Lucier
Right.
Derik De Bruin - UBS
Alright. And -- I'm sorry, you said using a 47 -- what will be the share count again using for the full year on '07?
Greg Lucier
It's about 49 million.
Derik De Bruin - UBS
49 million. Thanks.
Operator
Thank you very much sir. Ladies and gentlemen your next question comes from the line of John Sullivan of Leerink Swann. Please proceed.
John Sullivan - Leerink Swann
Hi guys. Would you make any comment on the serum business as you look forward to 2007? You've asked us to consider your 2006 results. While backing out that very volatile serum sector, can you give us some guidance as to what you're thinking about for the serum business in 2007?
David Hoffmeister
The overall Sera business will decline by about 10% in 2007. However, that's factored into the guidance that we provided you.
John Sullivan - Leerink Swann
Thank you.
Operator
Thank you very much, sir. (Operator Instructions). Our next question comes as another follow up from Edward Tenthoff of Piper Jaffray. Please proceed.
Edward Tenthoff - Piper Jaffray
Great. Thank you very much and just one other quick housekeeping question. The tax rate, David, that you mentioned was 30.5%?
David Hoffmeister
30.9%.
Edward Tenthoff - Piper Jaffray
30.9%?
David Hoffmeister
That's where we ended this year.
Edward Tenthoff - Piper Jaffray
Yeah, great. Thank you.
Operator
Thank you very much, sir. And our last question comes from the line of Rick Patel of Lehman Brothers. Please proceed.
Rick Patel - Lehman Brothers
Hi. Thanks for taking my question. So, when you talk about low-to mid-single digit revenue growth, could you provide a little bit more granularity as to how you expect BioDiscovery and Cell Culture Systems to play out?
Greg Lucier
We haven't provided that level of granular guidance. We don't want to go into any additional detail at this point. We'll certainly provide more at the end of the first quarter.
Rick Patel - Lehman Brothers
Alright. Thank you.
Amanda Clardy
And Bill, with that we will -- that was the last question, right?
Operator
That is correct, ma'am.
Amanda Clardy
Okay. And that ends our fourth quarter fiscal year 2006 call. Thank you everyone for joining and we look forward to next quarter.
Operator
Thank you very much, ma'am. And thank you ladies and gentlemen for your participation in today's conference call. This concludes the presentation and you may now disconnect. Have a good day.
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