Challenges Continue in Second Quarter

Compared to the first quarter of the calendar year, little changed in the second quarter for a number of major, publicly held analytical instrument and laboratory product companies. However, several companies indicated that they believed the worst effects of the recession were over. In fact, many companies reported sequential improvements in either orders or sales to specific markets.

In the second quarter, industrial spending remained weak, while academic and government spending, as well as Chinese sales, continued to provide sales growth. Food safety and life science consumables also remained strong. But, in most cases, these sales was not enough to overcome adverse currency effects on US companies, tough year-over-year comparisons and continued softness in key markets. For nine of the 11 companies covered on pages 9–11, total sales declined 9.5%. Four of the nine companies reported double-digit sales declines. However, excluding currency, only one of eight companies (currency-neutral sales growth is unavailable for Varian Scientific Instruments [SI]), Bruker, reported a double-digit sales decline. Life Technologies was the only company to post sales growth, while Dionex reported quarterly sales growth excluding currency effects.

Operating profits held up much better in the quarter than sales. In total, the nine companies posted a 3.8% decline in operating profits. Lower sales contributed to the operating losses. Bio-Rad Laboratories Life Science (LS), Varian SI and Waters each posted operating profits.

Soft industrial markets depressed sales for atomic spectroscopy products and GCs, affecting sales growth for Agilent Bio-Analytical Measurement (BAM), Bruker, Varian SI and Thermo Fisher Scientific Analytical Technologies (AT). Advanced MS sales grew for most firms, including Agilent BAM, Bruker and Waters, but Life Technologies’ MS joint venture posted another quarterly sales decline. LC sales were mixed. Agilent BAM, Life Technologies and PerkinElmer benefited from demand for selected life science consumables.

Academic and government sales grew for most companies, although several firms, including Bio-Rad LS and PerkinElmer, noted order delays as labs held off purchases in hopes of funding them with stimulus grants. The pharmaceutical market was mixed, although PerkinElmer, Thermo Fisher Scientific AT and Waters noted stable spending by large pharma. Agilent BAM, Dionex, PerkinElmer and Thermo Fisher Scientific AT benefited from food testing spending, especially in Asia. The new market for H1N1 testing provided sales increases for Life Technologies and Thermo Fisher Scientific AT.

Geographically, Asia remained the leading market, driven by China, which was strong for all companies due in part to stimulus funds. Nonetheless, Thermo Fisher Scientific reported a decline in Asian sales, and Waters reported that Indian sales decreased, but improved sequentially. Life Technologies was unique, posting growth in both the Americas and Europe.

Dionex reported year-end sales grew 2.0%, driven by Asia. However, the company does not expect the economic environment to improve until the third and fourth quarters of fiscal 2010. Indeed, all companies did not expect any uptick in industrial sales this year, but the US stimulus, favorable currency effects for US companies and easier year-over-year comparisons are expected to help second-half sales. On an annual basis, Bruker estimates an additional 20% increase in sales due to worldwide stimulus funding. Thermo Fisher Scientific anticipates $100–$200 million in additional sales related to stimulus funding.

Information on pages 9–11 is based on financial reports, conference calls, slide presentations, and regulatory filings.

Fiscal third-quarter revenues for Agilent Technologies Bio-Analytical Measurement (BAM) fell 8.1%, 4% on a currency-neutral basis, to $496 million to represent 47% of company sales (see page 12). Orders declined 14.0% to $493 million. BAM sales to the Americas and Europe contracted 13% and 22% to account for 35% and 31% of BAM revenues, respectively. Sales to Japan grew 8%, and other Asian sales climbed 19%, including 48% growth in China. Asia made up 34% of BAM sales. BAM adjusted operating profit dropped 10.8% to $91 million, while gross profit margins slipped 100 basis points to 53% of sales.

BAM Life Sciences (LS) revenue fell 5% to $234 million. Pharmaceutical and biotech sales declined 6% and accounted for roughly 77% of LS revenue. Academic and government sales, which accounted for around 23% of LS revenues, were down 2%. Sales of GCs and LCs each dropped in double-digits, but were partially offset by higher LC/MS revenues. Microarrays sales jumped nearly 20% due to strong demand for SurePrint arrays for CGH applications.

BAM Chemical Analysis (CA) revenue fell 11% to $262 million. Environmental, petrochemical and forensics revenues were down 13%, 18% and 33%, to account for 28%, 36% and 8% of CA revenue, respectively. However, water testing and Chinese petrochemical sales were good. In contrast, sales for food safety applications climbed 14% to represent 28% of CA sales.

Based on continuing operations, Analytik Jena AG’s fiscal third-quarter sales jumped 45.9% to €18.6 million ($25.5 million = €0.73 = $1). Acquisitions accounted for 43.8% of the growth. Analytical Solutions sales improved 6.0% to €10.2 million ($14.0 million) to represent 55% of sales. Bio Solutions revenue jumped five fold, 12.9% excluding acquisitions, to €6.8 million ($9.3 million) to account for 37% of sales. Optical Solutions sales declined 23.1% to €1.5 million ($2.1 million) due to the timing of orders in the previous year. Operating profit declined 24.5% to €0.7 million ($0.9 million), while gross profit margins fell 355 basis points to 45.3% of sales. Sales to Germany and abroad accounted for 32% and 73% of revenues, respectively. The company raised its full-year revenue outlook to over €70 million ($95.9 million) from a range of €65–€69 million ($87–$82 million) for growth of roughly 30%, including acquisitions.

Revenues for Bio-Rad Laboratories Life Science (LS) decreased 7.4%, 0.4% on a currency-neutral basis, to $149.7 million to make up 35% of company sales. Excluding the BSE business, currency-neutral sales rose 1.7%. Revenue growth was negatively impacted by lower spending by academic and biopharmaceutical customers in the US and Europe. Sales of real-time PCR instruments and reagents, Bio-Plex system assays and process media were good. LS sales grew in double digits in Asia Pacific. LS adjusted operating profit improved 2.2% to $9.5 million.

Bruker’s revenues plunged 18.9%, down 11.1% on a currency-neutral basis, to $252.5 million. Product and Service revenues declined 20.5% and 6.3% to account for 88% and 11% of sales, respectively, while Other revenue grew 30.0% to make up 0.5%. Adjusted operating income fell 31.4% to $19.2 million. Gross profit margin improved 246 basis points to 44.0% of sales.

Bruker Scientific Instruments (BSI) revenue contracted 20.4%, 13.0% on a currency-neutral basis, to $241.3 million due to weak demand from industrial markets, primarily for magnetic resonance systems, X-ray products and spark-OES spectrometers. BSI reported healthy demand for MS and NMR systems and strong academic, government and clinical sales. BSI operating profit fell 30.8% to $20.4 million, but gross profit margins increased 330 basis points to 45.4% of sales due favorable product mix, positive foreign-exchange rates and cost reductions. Revenue for Bruker Energy and Supercon Technologies (BEST) grew 9.6%, 25.6% on a currency-neutral basis, to $13.7 million, including approximately 40% growth from the acquired research instruments business of ACCEL (see IBO 4/15/09). BEST operating loss was $0.7 million, compared to a loss of $1.3 million a year ago.

Dionex’s fiscal fourth-quarter revenues contracted 4.6% to $94.2 million, but grew 1.9% excluding currency. Life science and environmental sales grew, with the food and beverage market showing the strongest growth. Sales for the chemical/petrochemical and electronic/power markets declined. Ion Chromatography (IC) and HPLC sales slipped 5% and 4%, respectively, but were up in local currency due to demand from Asia Pacific. Total sales in North America and Europe fell 10% and 12%, respectively. Sales to Asia Pacific grew 11% due to demand from China and Korea. South America also reported strong sales growth. In local currency, European sales were flat and sales to Asia Pacific rose 16%. Operating profit fell 16.2% to $17.2 million, leading gross profit margins down 358 basis points to 63.6% of sales.

Full-year revenues for Dionex improved 2.0%, 4.8% on a currency-neutral basis, to $385.0 million. IC sales grew 2%, and HPLC sales improved 1%. Sales in North America and Europe declined 6% and 3%, respectively, while sales to Asia Pacific improved 17%. In local currency, sales to Europe and Asia Pacific grew 2% and 18%, respectively. Fiscal first-quarter revenues are expected to decline 6%–9% to $85–$88 million. Full-year revenues are expected to be flat to up 2% at $385–$393 million.

On an adjusted pro-forma basis, second-quarter sales for Life Technologies grew 2.1% to $839.1 million, including a 5.5% and 0.5% negative impact from currency transactions and the Easter holiday, respectively. Excluding the $6.3 million in deferred service revenue from Applied Biosystems, GAAP revenues were $832.8 million. Instrument sales grew in the mid-teens. Consumables and service revenue grew in the mid single digits. Revenue related to H1N1 accounted for $15 million in revenue, or two percentage point of sales growth. Sales in the Americas and Europe each grew 6%. Sales in Asia Pacific and Japan rose 30% and 1%, respectively. Adjusted operating profits climbed 20.3% to $228.2 million, while adjusted gross profit margins improved 140 basis points to 66.7% of sales. The company increased its expectations for 2009 post-merger synergy savings by $15 million to $95 million. It also raised its forecast second-half organic revenue growth to mid-single digits from low single digits. For the second half, Cell Systems and Molecular Biology Systems revenues are each anticipated to grow in the low to mid-single digits. Genetic Systems sales are expected grow in the mid-single digits. .

Life Technologies’ Molecular Biology Systems unit experienced strong demand for H1N1-related systems, which contributed 4% growth, as well as for next-generation sequencing reagent kits and new products. In Genetic Systems, Applied Markets revenue grew in the mid-teens due to large orders from the Asia Pacific region. However, sales from the CE Research unit, which accounted for 50% of Genetic System sales, declined in the low single digits. Cell Systems recorded strong demand for the Countess system and research cell-culture media and reagents. Offsetting growth were lower sales of bio-production related products, which made up roughly 20% of segment sales. Other non-GAAP revenue, consisting primarily of consumables for discontinued MS systems, was $6.8 million. Sales for the joint-venture MS segment fell 15.5%, 12% organically, to $129 million, and contributed $14.5 million to operating income.

Sales of Mettler-Toledo’s Laboratory-related products declined 11% organically to account for 41% of company revenues, or $165 million. Sales were weak for analytical instruments, laboratory balances and process analytics products in Europe and the Americas. Pipettes and automated chemistry sales were healthy. Industrial sales, which account for approximately 50% of Lab sales, were down.

PerkinElmer’s second-quarter revenues fell 13.9% to $434.6 million, including a 6% decline from currency transactions and 1% growth from acquisitions. Adjusted operating income fell 12.4% to $52.2 million. Gross profit margins improved 50 basis points to 43.1% of sales. Organically, American sales declined in the high single digits, European sales fell in the low double digits, and Asian sales were down in the mid-single digits. China was the only emerging market to report sales growth. The company forecasts organic third-quarter revenues to decline in the high single digits. Full-year revenues are expected to be down in the mid-single digits organically at the low end of the company’s guidance, .

PerkinElmer’s Human Health sales declined 9.3%, down 3% on a currency-neutral basis, to account for 43% of sales. The decline was attributed to budget constraints and project delays in the academic research markets and for medical applications. Diagnostics sales declined in the low single digits, including a drop of over 20% in the Medical Imaging business, partially offset by Screening revenue, which grew in the mid-single digits. The cord blood business grew in the mid-single digits. The Research business declined in the mid-single digits organically as a result of lower academic sales. Adjusted operating profits for the Human Health segment grew 12.4% to $35.0 million.

Sales for PerkinElmer Environmental Health declined 17.0%, down 11% on a currency-neutral basis, to account for 57% of sales. Acquisitions contributed 1% to revenue growth. Lab Service revenue grew in the low single digits organically driven by One Source. Environmental product sales declined roughly 20% organically because of budget constraints and tight credit markets. The bright areas for the Environmental business were UV-Vis technologies and LED products for renewable energy. Sales of Safety and Security products declined in the high single digits organically, and Industrial sales fell over 20%. Adjusted operating profits for Environmental Health decreased 35.2% to $25.8 million.

In the second quarter, Thermo Fisher Scientific’s Analytical Technologies’ (AT) revenue declined 13.5%, down 8.6% on a currency-neutral basis, to $1,003.3 million to account for 40% of company sales. Acquisitions contributed 4% growth, while the Easter holiday negatively impacted sales by 1%. Sales of environmental and process control instruments to industrial markets were lower, but were partially offset by higher prices and increased sales of specialty diagnostics and biosciences products. Adjusted operating income fell 17.7% to $201.4 million. Operating income margin slipped 100 basis points to 20.1% of sales. The company raised its full-year revenue guidance by 2% to $9.8–$10.1 billion for an expected 4%–7% decline in sales.

Fiscal third-quarter revenue for Varian Scientific Instruments (SI) declined 16.3% to $167.9 million to make up 85% of company sales. Adversely affected sales were the lower demand for analytical instruments and the strengthening of the US dollar. SI adjusted operating profit improved 0.3% to $18.4 million. Adjusted operating margins climbed 180 basis points to 11.0% of sales. Total company sales to North America, Europe and Latin America declined 25.1%, 23.4% and 43.3% to account for 30%, 38% and 5% of sales, respectively, while sale to Asia grew 3.5% to make up 27% of sales.

Waters’ second-quarter revenues dropped 9.0%, down 4% on a currency-neutral basis, to $362.8 million, including 2% growth from acquisitions. Products sales contracted 11.7% to account for 70% of sales, and service revenue slipped 2.1%. Waters Division sales slumped 8.4% to $330.6 million. TA sales dropped 15.2% to $32.3 million, including 2% growth from the acquisition of VTI (see IBO 7/31/08). Pharmaceutical and industrial sales fell 9% and 15%, respectively. Government and academic sales rose 4%. US, European and rest of world sales declined 6%, 17% and 28%, respectively, while sales to Asia (including Japan) grew 2%. Excluding currency effects, sales to Europe and rest of the world fell 4% and 26%, respectively, while sales to Japan and Asia grew 5% and 1%, respectively. Adjusted operating income rose 6.6% to $95.3 million. Gross margins surged 420 basis points to 60.3% of sales. Waters expects full-year revenues to decline 5%–7%, including negative currency effects of 3%.

Chart: Q2 CY09 Adj. Operating Profit Growth ($US)

Bruker -31.4%

Thermo Fisher Scientific (AT) -17.7%

Dionex -16.2%

PerkinElmer -12.4%

Agilent Technologies (BAM) -10.8%

Varian (SI) 0.3%

Bio-Rad (LS) 2.2%

Waters 6.6%

Life Technologies 20.3%

Chart: Q2 CY09 Revenue Growth ($US)

US Dollars

Bruker -18.9%

Varian (SI) -16.3%

PerkinElmer -13.9%

Thermo Fisher Scientific (AT) -13.5%

Waters -9.0%

Agilent Technologies (BAM) -8.1%

Bio-Rad (LS) -7.4%

Dionex -4.6%

Life Technologies 2.1%

Waters FY09 Q2

Waters Div. % Rev. Growth % Segment Rev.

Instrument Systems -13% 52%

Chemistry Consum. -7% 18%

Service -2% 30%

TA Div.

Instrument Systems -18% 73%

Service -8% 27%

Bruker FY09 Q2

% Rev. Growth % Segment Rev.

Scientific Instruments

System -23.4% 79%

Aftermarket -6.4% 21%

Energy and Superconducting Technologies

System and Wire 15.7% 97%

Aftermarket -60.0% 3%

Life Technologies FY09 Q2

Rev. ($M) % Rev. Growth % Rev. Growth Cur. Neutral

Molec. Bio. Sys. $399.1 3.0% 8.0%

Genetic Systems $232.6 5.5% 11.0%

Cell Systems $200.7 -2.0% 4.5%

Dionex FY09

% Rev. Growth % of Rev.

Europe, excl. Germany 1.6% 31%

US 14.4% 29%

China 42.5% 12%

Germany -6.2% 10%

Japan 10.1% 10%

Other -41.1% 8%

PerkinElmer FY09 Q2

Human Health % Total Rev.

Diagnostics 26%

Research 17%

Environmental Health

Lab Services 21%

Environmental 18%

Safety & Security 10%

Industrial 8%

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