If Beckman Coulter Inc.’s latest financial results are a gauge, then Chief Executive Scott Garrett’s efforts to retool the medical testing gear maker seem to be taking hold.
“We are literally right on track to hit the numbers we thought we were going to be able to hit,” Garrett said last week from New York, where he was meeting with analysts.
Beckman’s results have “been very consistent with what we’ve been communicating to our shareholders, to our employees and to our customers,” he said.
Beckman, which makes equipment and supplies for labs running tests for doctors and for medical and drug researchers, earlier this month posted a third-quarter profit of $47 million, up 31% from a year earlier.
An investment sale boosted profits and offset a $27.5 million legal charge. Without those, Beckman earned $42 million, in line with expectations.
Revenue was $631 million, up 6.4% from a year earlier.
Within that: a 14% jump in sales of chemicals used to run tests on Beckman machines, and a 22% jump in immunoassay test sets.
Expanded sales of what Beckman calls “consumables” are a key part of Garrett’s plan. Some 60% of Beckman’s $2.4 billion in yearly sales come from supplies, chemistry kits and services.
Consumables growth, according to Garrett, has “been very steady and positive and actually accelerating for the last, literally five years.”
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Beckman testing supplies: about 60% of sales, included in new leases |
Garrett’s other big change: the way Beckman leases its machines.
Last year, Beckman changed the way it accounts for leases of its instruments. It now logs them as operating leases, where revenue is spread over the life of the lease. Before, the company used a sales lease method, in which the value of the deal was recognized at once.
The result was less money up front. The switch caused sales and profits to dip for a time late last year and early in 2006.
“I knew it would take little over a year to demonstrate the strength we have after this leasing policy change,” Garrett said.
Beckman sought the shift to create a more steady flow of revenue. The new leases also bring the prospect of more sales of chemicals as they include reagent supplies and services from Beckman.
On a conference call with analysts and investors, Garrett said the third quarter was the first one in which the company posted real revenue growth since it changed its lease policy.
Wall Street has weighed in, sending Beckman’s shares up some 15% in the past three months.
Frank Pinkerton, an analyst with Banc of America Securities, said he thinks Beckman’s shares could go higher.
“We believe Beckman Coulter’s stock is undervalued given the conversion to operating leases that has obfuscated its economic growth,” Pinkerton said after Beckman’s investor day presentation last week.
Pinkerton goes as far as to call management “subdued in the company’s potential over the next several years.”
But Beckman isn’t fully past its lease change, according to Pinkerton.
“Our biggest concern is that stronger cash flows will take longer to materialize and investors will become impatient with the turnaround story,” he said.
Beckman had cash flow from operations of $420 million last year, before the change was fully in effect.
“We do not expect it to return to those levels until 2009,” Pinkerton said.
Through the first three quarters of this year, Beckman’s cash flow from operations was $96 million.
“Cash flow is a very significant priority for us and a focus,” Garrett said. “I’m very confident that we’ll see a steady improvement in cash flow over the next couple of years.”
Beckman’s new chief financial officer, Charles Slacik, has some “excellent ideas already on how we can improve our cash flow,” Garrett said.
“The whole team is very well focused on that metric, and we’ll see it make significant progress over the next couple of years,” he said.
Garrett said he’s made a point to talk up the changes. Many of Beckman’s longtime investors are comfortable with the shifts, he said.
“But a lot of other investors may have looked at our company and thought it was a little too complicated right now to jump in and decided to stay on the sidelines,” he said.
Garrett has made his mark elsewhere.
The executive, who came to Beckman in 2002 and became chief executive in early 2005, has retooled some manufacturing and overhauled distribution, combining six small West Coast warehouses into a new, sprawling facility in Chino.
Another part of Garrett’s strategy: deals.
The latest came last month, when Beckman said it would spend $185 million for Lumigen Inc., a Southfield, Mich.-based supplier of chemicals used on Beckman machines.
Lumigen’s customers include Amersham Biosciences, a British unit of GE Healthcare, Tarrytown, N.Y.-based Bayer Diagnostics and Digene Corp. of Gaithersburg, Md.
“We view this as a strategic acquisition that will provide (Beckman) with access to Lumigen’s current and future technology as well as its patent portfolio,” said Quintin Lai and Jason Weiss, analysts with Milwaukee-based R.W. Baird & Co.
Last year, Beckman spent $140 million for Agencourt Bioscience Corp. of Beverly, Mass., a biotechnology services company.
Beckman then formed a separate venture, Agencourt Personal Genomics, in which it sold a $50 million stake to Foster City-based Applera Corp.’s Applied Biosystems Group in the third quarter.
Garrett said he’s not looking to acquisitions as a key driver of Beckman’s growth.
“Our success in the future is driven by our expectations for organic growth,” he said. “If we’re lucky enough to find acquisitions as attractive as the ones that we’ve done recently, we’d certainly continue to be interested in those. But we’re not dependent upon acquisitions for our success.”
