Second Quarter Surpasses Expectations

It was a surprisingly strong calendar-year second quarter for major analytical instrument companies. Healthy European and Asian sales, continued robust industrial market sales, and a strengthening of sales to big pharma helped companies generate results that topped a number of companies’ expectations. A stronger US dollar also helped US companies leverage pricing advantages in foreign markets, however, in some cases, manufacturing costs abroad cut into the bottom line.

Seven of the 11 companies discussed on pages 9–11 reported double-digit sales growth for the just-completed quarter. Acquisitions added to sales growth at Agilent (BAM), Bruker BioSciences, PerkinElmer, Thermo Fisher Scientific (AT) and Waters, but excluding acquisitions, revenues for each company still grew in the double digits. In total, the sales for the 10 companies (excluding Mettler-Toledo, which does not separately report fiscal results for its Laboratory business), revenues rose 13.5% for the quarter, led by Bruker BioSciences and Agilent (BAM).

It was also another record quarter for operating profit growth, as six of the 10 companies covered here that report operating profits for their instrument businesses posted double-digit growth. Despite such gains, in their conference call, Bruker BioSciences, Dionex and Varian (SI) discussed a continued focus on operating efficiencies. In total, the operating profits for the 10 companies (excluding Mettler-Toledo) increased 26.5%.

Agilent, Applied Biosystems, Thermo Fisher Scientific and Varian all reported good mass spectrometry sales, while sales for Bruker BioSciences’ Daltonics business declined, excluding currency effects, for the third quarter in a row. Elemental analysis instruments continued to drive sales growth for Bruker AXS, Thermo Fisher Scientific and Varian (SI), and sales of new GC products helped Agilent (BAM) and PerkinElmer (LAS). Based on the quarter’s results, Varian and Thermo Fisher Scientific increased their revenue and EPS guidance for fiscal 2007.

Geographically, sales in Asia and Europe remained strong, while US sales were mixed. Waters reported double-digit growth in the US, but Applied Biosystems’ US sales rose only 1%. Thermo Fisher Scientific and Varian highlighted double-digit growth in “rest of world” regions.

The quarter marked the fiscal year-end for Applied Biosystems and Dionex. Applied Biosystems’ revenues grew 9.4%, or 5.4% on an organic basis, driven by consumables sales. The company noted in its quarterly conference call its growing emphasis on applied markets, investments in China and the return to annual growth for its DNA Sequencing segment. Dionex reported fiscal 2007 revenue growth of 12.4%, or 9.2% organically, to record its highest revenues in its history. Growth was helped by a double-digit rise in sales of ion chromatography products and foreign markets. Both companies forecast mid-single-digit growth for fiscal 2008.

The company information presented here is compiled from financial reports, SEC filings and conference calls.

Affymetrix’s second quarter revenues grew 10.3% to $88.3 million. Product revenue improved 4.8% to $64.0 million. DNA chip sales increased 65%, but were partially offset by a 3% decline in RNA chip sales. Reagents sales climbed 47.0% to $14.2 million due to increased volume and higher average pricing. Probe arrays sales rose 2.1% to $41.0 million, due to strong growth for genotyping. Over 30% of genotyping sales were driven by the new SNP 6.0 genotyping chip. However, this growth was partially offset by lower average selling prices of probe arrays. Instrument revenues declined 21.6% to $8.8 million, of which $1.6 million was a result of lower selling prices of the GeneChip Scanner 3000. Product-related revenue jumped 19.2% to $17.2 million benefiting from the genotyping services business. Consequently, service and other revenue jumped 37% to $12.5 million. License fees and milestone revenue improved 3.3% to $3.7 million, while subscription fees declined 42.3% to $1.0 million. Royalties and other revenue increased 12.9% to $2.7 million primarily due to additional license and grant revenue, while revenue from Perlegen Sciences soared 101.3% to $4.4 million. Pricing pressure for probe arrays, instruments and reagents led gross margins to fall 620 basis points to 58.6% of revenues. The company’s adjusted operating loss benefited from lower R&D and SG&A costs and narrowed to $1.3 million from a loss of $9.1 million. For fiscal 2007, revenues are estimated to be $365–$385 million with gross margins of around 60%.

Fiscal third quarter revenues for Agilent Technologies’ Bio-Analytical Measurement (BAM) segment grew 19.0%, or 15% excluding Stratagene (see IBO 4/15/07), to $500 million to account for 36.4% of total company revenues. Orders climbed 20.6% to $498 million. Life Sciences revenue improved 22%, or 12% excluding Stratagene, to $209 million, following strong sales of the 1200 Series LC, MS and LC/ MS platforms in the pharmaceutical and biotech markets. Revenue for Chemical Analysis products rose 17% to $291 million due to increased sales of the new GC and GC/MS platforms. BAM sales in environmental, petrochemical and food safety markets grew 20%, 23% and 20%, respectively. Sales in the Americas, Europe and Asia improved 12%, 18% and 5%, respectively. Adjusted operating profits for BAM jumped 39.4% to $92 million, and gross operating margins improved 270 basis points to 18.4%.

Applied Biosystems’ fiscal fourth quarter revenues grew 6.5% to $557.3 million, or 4.5% on a currency-neutral basis. Instrument sales rose 3% to $242.6 million, Consumables sales climbed 11% to $221.4 million and all “other” revenue improved 5% to $93.3 million. Real Time PCR/Applied Genomics sales grew 13%, Mass Spectrometry sales rose 9%, sales of “Other” Product Lines increased 9% and DNA Sequencing sales rose 1%, but Core PCR and DNA Synthesis revenue declined 7%. Adjusted operating income climbed 7.7% to $94.9 million, and gross margin improved 110 basis points to 55.4%.

For fiscal 2007, revenues increased 9.4% to $2.1 billion, primarily due to higher sales of consumables products. Favorable foreign currency transactions accounted for approximately 2.0% of revenue growth, while Ambion sales contributed 2.3% growth. For the year, Consumables revenue grew 15% to $842.0 million, while Instruments and all “other” revenue both grew 6% to $889.3 million and $362.2 million, respectively. Instruments and Consumables revenues were driven by demand in the Mass Spectrometry, Real-Time PCR/Applied Genomics and DNA Sequencing product categories, which grew 13%, 17% and 3%, respectively. For the year, the company shipped DNA sequencers to more than 50 new forensics labs in China and Russia. Revenues from Other sources increased 8%, while Core PCR & DNA Synthesis revenues declined 4%.

Year-end US sales rose 4.6% to $894.3 million, European sales jumped 14.8% (or 10% on a currency-neutral basis) to $738.6 million, Asia Pacific sales rose 9.3% to $371.4 million, and sales to other markets jumped 22.5% to $89.2 million. Adjusted operating income grew 15.9% to $102.1 million, and gross margins improved 63 basis points to 55.3% of total sales. The company anticipates fiscal 2008 revenues to grow in the mid to high single digits, led by growth in the DNA Sequencing, Real-Time PCR/Applied Genomics and Mass Spectrometry segments. Revenues for Core PCR and DNA Synthesis as well as Other Product Lines are expected to decline. Fiscal first quarter sales growth is expected to be lower than the full-year revenue growth rate.

Life Sciences (LS) sales for Bio-Rad Laboratories grew 8.6%, or 5.2% on a currency-neutral basis, to $146.0 million to account for 43.1% of sales. Growth was primarily driven by sales of protein separation and protein function reagents and equipment, as well as by sales of protein discovery products associated with the Ciphergen acquisition (see IBO 8/15/06). Sales in the LS segment continue to be negatively impacted by declining BSE revenue growth. Excluding BSE, LS sales increased 10.6%, or 7.6% on a currency-neutral basis. Adjusted LS segment profits declined 65.1% to $1.5 million, while gross margins declined 125 basis points primarily as a result of declining BSE margins and increased R&D expenses. The company maintains its forecast of mid-single digit top-line growth for 2007.

Bruker BioSciences’ revenues grew 21.1% to $121.7 million, including favorable currency transaction and acquisition revenue growth of 5% each. Product and Service revenue rose 20.7% and 25.7% to $106.6 and $15.0 million, respectively. Revenue growth benefited from sales of materials research and chemical detection products, as well as expansion into industrial and applied analysis markets. Adjusted operating income rose 7.1% to $7.0 million, but gross profit margins declined 240 basis points to 43.6% of revenues due to higher revenue costs and a one-time charge to upgrade FT-MS systems.

Bruker AXS sales rose 36.3% to $53.3 million, or 33.0% on a currency-neutral basis. Acquisitions accounted for 14.0% of revenue growth. X-Ray System sales grew 40.4% to make up 66.6% of AXS revenues, Aftermarket sales improved 11.8% to account for 24.3% and Other systems revenue gained 152.2% to represent 9.1%. Bruker Daltonics sales grew 2.0% to $40.6 million, but would have declined 2.4% on a currency-neutral basis following lower OEM sales for certain life science systems and reduced grant revenue. Life Science systems sales dropped 7.4% to account for 70.0% of Daltonics revenues, while CBRN Detection and Aftermarket sales improved 103.1% and 16.2% to represent 10.2% and 19.2% of sales, respectively. For the first half of the year, bookings for FT-MS rebounded. Bruker Optics sales improved 28.5% to $30.3 million, or 24.1% on a currency-neutral basis. Sales of Molecular Spectroscopy systems improved 30.5% to account for 79.0% of Optics sales, Aftermarket revenue grew 12.2% to represent 14.2%, and Other systems revenue fell 46.7% to make up 6.8%.

Revenues for Dionex’s fiscal fourth quarter improved 14.3% to $86.0 million, or 11.4% on a currency-neutral basis. Sales in North America, Europe and Asia Pacific grew 8%, 19% (12% in local currency) and 13% (14% in local currency), respectively. Product sales for ion chromatography (IC) rose in the mid-teens driven by strong demand for RFIC instruments and consumables, while HPLC sales grew in the high single digits. Adjusted operating profit soared 59.0% to $19.1 million as a result of improved profit margins and lower operating expenses as a percentage of revenues.

For fiscal 2007, revenues improved 12.4%, or 9.2% on a currency-neutral basis, to $327.3 million. IC and HPLC sales grew 17% and 7%, respectively, while consumables revenues grew 14%–15%. Sales in North America improved 5%, driven primarily by strong sales growth for RFIC products. Sales in Europe increased 17% (9% in local currency), led by the life sciences and environmental markets and HPLC sales. Sales in Asia Pacific grew 14% (15% in local currency) due to continued expansion into China, Korea and India, and growth in the chemical, environmental and food safety markets. Sales outside of North America made up 71% of total revenues. Adjusted operating profits rose 25.4% to $70.0 million, and gross margins improved 98 basis points to 66.7% of sales. For the fiscal first quarter, the company expects sales of $77–$80 million and diluted EPS of $0.47–$0.50. Full-year revenues and EPS are expected to be $350–$358 million and $2.50–$2.60, respectively.

Sales of Mettler-Toledo International’s Laboratory products increased 6% in local currencies for the second quarter to account for 43% of company revenues or approximately $185.0 million. Revenue growth was driven primarily by analytical instruments and laboratory balances.

In the second quarter, revenue for PerkinElmer’s Life and Analytical Sciences (LAS) grew 17.2% to $326.3 million, accounting for 74.6% of total sales. Acquisitions contributed 5.5% to LAS sales, while favorable currency transactions added 3.2%. Genetic Screening, Service and Environmental/Chemical revenues all grew in double digits to account for 15%, 24% and 27% of LAS revenue, respectively. Biopharmaceutical sales showed strong single digit growth to make up 35% of LAS revenue. Adjusted operating profits improved 18.6% to $40.7 million as a result of a one-time gain on the settlement of an insurance claim. The company anticipates both third quarter and full-year revenue growth in the low double digits.

Thermo Fisher Scientific’s Analytical Technologies’ (AT) revenue grew 13.4% in the second quarter to $1.04 billion, including 2.7% due to favorable currency effects and 2.7% due to acquisitions. Organic revenue growth rose 7.7% driven by sales of new products, MS, spectroscopy and environmental monitoring instruments. Bioscience reagents and diagnostic tools also reported enhanced revenue growth. The biotech and clinical diagnostics markets reported strong growth, while growth in the academia and government markets remained modest. The pharmaceutical markets showed signs of improvement, particularly for services, which grew in the double digits. Operating income grew 32.1% to $205.7 million, and operating margin improved 280 basis points to 19.8% of sales on a pro forma basis. In addition to increased sales volume, operating profits benefited from price increases and productivity improvements. The company increased total revenue guidance to $9.50–$9.55 billion from $9.4–$9.5 billion for 2007 and EPS guidance to $2.50–$2.56 from $2.43–$2.53. During the second quarter the company recorded a noncash after-tax impairment charge of $27 million resulting from the divestiture of GV Instruments (see IBO 5/31/07).

Varian’s Scientific Instruments division (SI) revenue grew 9.8% to $187.0 million in the fiscal third quarter to make up 82.3% of total sales. Growth was primarily attributed to higher analytical instrument sales and strong industrial demand, particularly for environmental and energy applications. Orders were particularly strong for analytical instruments, MS and low-end NMR products. Life Science applications benefited from increased sales of consumables and magnetic resonance systems. The company shipped two 800 MHz NMR systems during the quarter, while demand for the 400 NMR remained strong. Sales in Europe and Latin America both improved over 20%, while Asia/Pacific sales climbed over 10%. US sales continued to decline, but improved sequentially. Adjusted operating profit increased 22.7% to $22.8 million, and adjusted gross margins gained 70 basis points to 9.3%, due to improved operating efficiency and economies of scale. For fiscal 2007, revenues are expected to grow 8.5%–9.5% and diluted EPS are anticipated to be $1.92–$2.03. Sales in Europe and Asia Pacific are expected to remain strong, but to grow at a lower rate than the current quarter, while sales in the US are anticipated to improve.

Waters’s revenues improved 16.8% to $352.6 million in the second quarter, including 2.0% each for favorable currency transactions and acquisitions. Total sales growth benefited from new products, increased spending by pharmaceutical companies and acquisitions. Sales to pharmaceutical customers grew 21%, and sales to government and academic customers improved 26%, while sales to industrial and food safety customers rose 7%. Sales to the US, Europe and Asia (including Japan) increased 18%, 19% and 13%, respectively. Waters’s Product sales climbed 19.1% to $255.4 million, with sales of Instrument systems improving 18.8% to $179.9 million and Chemistry sales increasing 22.5% to $53.6 million, of which approximately 11% growth was attributed to acquisitions. TA Instruments’ sales grew 8.8% to $21.9 million, of which 5% growth was attributed to the acquisition of Thermometric (see IBO 8/31/06). Service revenue climbed 11.3% to $97.2 million. Waters service revenue improved 9.6% to $87.0 million, and TA service revenue grew 27.8% to $10.2 million. Adjusted operating income improved 17.5% to $79.1 million, but gross margins declined 140 basis points to 56.8% as a result of higher manufacturing costs for new products and unfavorable foreign currency transactions related to MS products manufactured in the UK. The company raised its 2007 sales growth forecast to 14% from 12%, and expects sales of instrument systems to grow 12%. For the third quarter, sales are anticipated to grow 14% (all growth forecasts include 2% growth from foreign currency and acquisitions).

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