A Solid Third Quarter for Instrument Firms

A cursory analysis of calendar-year third- quarter results of eight major publicly held instrument and laboratory product companies (Applied Biosystems, Bruker, Dionex, Illumina, Invitrogen, Thermo Fisher Scientific, Waters and Varian) show that the global economic crisis did not significantly affect third-quarter sales of analytical instruments and related products. In their quarterly conference calls, most companies highlighted the immunity of certain end-user markets from macroeconomic cycles, specifically, the pharmaceutical, biotechnology, academic and government markets. However, several companies noted changes in a few specific markets, indicating isolated effects. In addition, most companies emphasized their broad product lines, diverse geographic presences and strong balance sheets, particularly their cash flows, in response to questions about the global economic crisis. Several companies also stated their readiness to rapidly adjust operating expenses in response to a slowdown in sales. “We haven’t seen at this stage any material changes in buying behavior,” stated Invitrogen Chairman and CEO Gregory T. Lucier. “[W]e remain on guard and we remain ready, if we have to, to change our operating model if the volume changes subsequently.” Thermo Fisher Scientific, the largest company among the eight examined, and also the most diverse, stated in its conference call, that it experienced a temporary pause in spending by large industrial and pharmaceutical companies during the third quarter. “We think that as a result of the credit crisis, some of our customers, particularly in large pharma and industrial markets, quickly tightened their belts and held off on their decisions to make big-ticket purchases,” commented Thermo Fisher Scientific President and CEO Marijn E. Dekkers. “The good news is—now that we are a few weeks into the fourth quarter—things seem to be loosening up, and we are definitely seeing increased spending again.” In fact, industrial end-markets appeared to experience few changes, according to the companies’ comments. Thermo Fisher Scientific noted continued sales growth in mining and materials end-markets. Dionex, PerkinElmer and Varian noted no change in demand among their petrochemical customers However, Thermo Fisher Scientific did initiate cost control actions during the quarter and reduced it 2008 revenue guidance from $10.6–$10.7 billion to $10.45–$10.55 billion, citing in part the rapid increase in the value of the dollar against foreign currencies. “This revised guidance reflects the impact of less favorable foreign exchange, along with slightly lower organic growth,” said CFO Peter M. Wilver. In fact, most of the eight companies discussed here indicated that they expect a negative effect on sales in the fourth quarter and next year from currency effects. Currency changes related to the economic crisis also impacted end-markets in the third quarter, according to Dionex and Varian. Both companies noted sales delays in South Korea due to the rapid devaluation of the won in the third quarter. Varian also noted that sales of fusion pumps and of products related to drugs-of-abuse testing had been affected by the financial crisis. Geographically, concerns were evident in specific segments, most prominently, the US. A possible impact on specific markets by the economic crisis was discussed by PerkinElmer President and CEO Robert F. Friel in reference to the company’s analytical instrument business. “[T]he impact will be both company and geographic-region specific,” he said. “We expect to continue to see good growth in the Pac Rim, although moderating slightly. Whereas in North America and Europe, we see customers more cautious about capital spending.” Similarly, Waters noted some macroeconomic effects on its US business in the third quarter. Waters Chairman, President and CEO Douglas A. Berthiaume stated, “I think to be fair we could have had a little bit better of a quarter. I’d say that most of that’s tilted towards the US, where we’re working a lot of interesting opportunities—business that we don’t think we lost, but we think that the financial chaos did at least make some customers wait a little bit.” Specific balance sheet effects included a $2.9 million loss for Applied Biosystems related to investments and a reclassification of more than $100 million in investments due to their illiquidity. Waters used cash to pay down $490 million in debt in order to reduce its exposure to interest-rate risks.

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