There is no quick fix for quality problems at Beckman Coulter Inc.
That’s the word from H. Lawrence Culp, chief executive of Washington, D.C.-based Danaher Corp., the new owner of the Brea-based maker of medical testing instruments and supplies.
It won’t be easy, either.
“We are making progress—but you have to go to the root cause,” Culp told analysts and investors at a conference Danaher recently hosted.
The fix-up plan calls for a cut of 8% of its work force, or some 1,000 jobs, as part of a bid to trim $250 million in annual expenses.
Initial signals indicate that Orange County will be spared all but slight job cuts.
A filing by the company with the state Employment Development Department shows plans to eliminate 13 of the estimated 1,700 positions at its headquarters in Brea and an office in Fullerton.
Changes in the executive suite came earlier. J. Robert Hurley, who served as Beckman’s interim leader since September, remains chief executive, according to a Securities and Exchange Commission filing.
Several other members of Beckman’s Office of the President—an executive leadership group set up by former chief executive Scott Garrett—left the company after its sale. The departures included: Chief Financial Officer Charles Slacik; Senior Vice President and General Counsel Arnold Pinkston; and Robert Kleinert, executive vice president of worldwide commercial operations.
Scott Atkin, formerly Beckman’s executive vice president of chemistry, discovery and instrument systems development, now is president of the company’s life science division, its largest.
Challenges
Danaher’s $6.8 billion buy of Beckman earlier this year came in the wake of quality-control challenges the company encountered with the Food and Drug Administration. Among them was the recall of a faulty heart disease test in 2010, which led to a hit on earnings and the departure of Garrett.
Danaher is reworking Beckman with a goal of setting a “higher bar” with more discipline, accountability and simplicity at all levels of the operation, Culp said.
Former Beckman executives have said that a slip on quality control triggered the events that ultimately led to the Danaher sale.
“I think we lost some engineering discipline,” said Glenn Schafer, retired vice chairman of Newport Beach-based Pacific Life Insurance Co. and Beckman’s chairman at the time of the sale. “We may have lost our way a little bit.”
Schafer referred to changes made to Beckman’s troponin test used to detect a protein found in the blood after a heart attack. He made the remarks last month at a Forum for Corporate Directors event in Newport Beach.
“Some engineer some place decided that instead of stirring the blood in the test tube continuously while the test was happening, we only needed to stir it one-third of the time,” he said.
• Headquarters: Washington, D.C.<br >• Business: conglomerate with businesses ranging from Craftsman Tools to medical instruments<br >• Founded: 1969<br >• Ticker symbol: DHR (NYSE)<br >• Market value: about $31 billion<br >• Notable: Paid $6.8 billion for Brea-based Beckman Coulter, which plans to cut 1,000 jobs, address recent quality-control problems
Regaining Discipline
Regaining engineering discipline is a key to Danaher’s plan for Beckman, which remained profitable but saw regulatory challenges cut into earnings. Its sales were up slightly to $895.4 million for the first quarter, prior to its sale to Danaher. Earnings fell 73%, to $10.3 million, from a year earlier.
“At the end of the day, rigor and commitment is going to help us get out of the hole we’re in,” Culp said.
Larger Scale
Danaher has done corporate makeovers before, but nothing on Beckman’s scale.
One analyst who follows Danaher described the job cuts as part of a strategy Danaher has used on some of its acquired businesses to good effect, according to some industry watchers.
“If they take $1 of cost out, they would redeploy 25 cents to 50 cents back into the business,” said Richard Eastman of Robert W. Baird & Co. in Milwaukee. “There’s some compliance costs here that really spiraled a bit out of control prior to Danaher’s acquisition, and obviously they are consuming more capital than two years ago.”
Danaher has left some other acquisitions alone, for the most part. That’s been the case since it bought Sybron Dental Specialties Inc., an Orange-based maker of dental products, for $2 billion in 2006.
“This is subjective, but I think Sybron was a very well-run, high-profit margin business, so I think with the Sybron acquisition, much of what they took out from a public company cost standpoint was really redeployed back in the business” for research and development, along with sales and marketing, Eastman said.
Expectations
Danaher executives went beyond current challenges and restructuring plans to outline expectations for Beckman during its recent conference. It’s seen as a key to raising Danaher’s profile in foreign markets, particularly China, which accounted for $300 million of Beckman’s $3.6 billion in revenue last year.
Sales in China have been growing at a compounded annual rate of 17% for several years.
Beckman’s “sales and service network are incredibly good” in China, said James Lico, Danaher’s executive vice president for Asia. “They’re our biggest business there.”
Room to Grow
Analysts see room for increases.
“While Beckman had a great sales and service team in China prior to the (deal), there remains significant room for improvement in Beckman’s overall operation in the region, particularly within research and development,” said Brian Drab, an analyst who covers Danaher for Chicago brokerage William Blair & Co.
The Beckman deal took Danaher’s sales in “emerging markets” to nearly $4 billion, more than its total revenue a decade ago, according to James Lucas, an analyst with Janney Capital Markets, a unit of Philadelphia-based Janney Montgomery Scott LLC, in a recent client note.
“While the macro headlines are giving everyone pause, Danaher’s acquisition of Beckman provides some visibility on sales and earnings growth notwithstanding the challenges that may arise next year,” said Lucas, who has a buy rating on Danaher shares.
