Scott Garrett’s ability to restructure and drive profits at Fullerton-based Beckman Coulter Inc. will be put to the test this year.
Garrett, chief executive of the maker of medical testing equipment and supplies since 2005, has a track record of boosting profits with operational changes, from consolidating warehouses to changing the way Beckman accounts for sales of its machines to spur more sales of supplies.
But in years past, he had the help of growing sales. Few, including Garrett, see much revenue growth for Beckman this year.
The company forecasts 2009 sales to be flat with a year earlier at about $3.2 billion.
But Garrett is more ambitious on profits. Beckman projects making $245.7 million to $258.4 million this year, up 6% to 11% from 2008.
The high end of Beckman’s profit outlook tops the $249.5 million average that analysts had been expecting.
“We believe that our revenue outlook is prudently cautious and our spending appropriately gauged to this conservative forecast,” Garrett said on Beckman’s fourth-quarter earnings call last week.
To grow profits amid largely stagnant sales, Beckman is targeting “zero overhead growth” in 2009, Chief Financial Officer Charles Slacik said on the call.
Beckman plans to suspend pay increases this year and reduce employment mostly through attrition, according to Garrett.
The company has 2,125 workers in Orange County and 10,790 companywide.
Beckman is set to cut selling, general and administrative expenses and should gain from the end of research and development projects early this year, Robert W. Baird & Co. analyst Quintin Lai said in a report.
Selling, general and administrative expenses accounted for $823 million, or 27% of Beckman’s $3.1 billion in sales in 2008.
By the fourth quarter, analysts expect to see expenses at around 22%.
Beckman makes machines and supplies that are used by hospitals and laboratories to run diagnostic tests and by medical researchers and drug developers.
The machines can cost $200,000 or more.
About 80% of Beckman’s revenue,and much of its profits,comes from recurring sales of chemicals used to run tests on its machines as well as from lease and service payments.
Tough First Quarter
Beckman’s shares are off about 25% in the past year with a market value of $3.1 billion last week. The stock has been impacted by concerns about hospitals,Beckman’s largest customers,putting off big purchases.
While usually recession-proof, hospitals are nervous in the current downturn because of tougher financing, lost investment income from Wall Street’s meltdown and the risk of treating more patients who don’t have insurance because of layoffs.
Analysts expect to see lower Beckman revenue through September with the biggest decline coming in the first quarter.
Beckman’s first quarter “looks even more challenging than we thought,” analyst Sara Michelmore of Cowen and Co. said in a report.
The company “is heading into several quarters of tough comparisons and unfavorable (foreign exchange) dynamics,” she said.
Last year, Beckman had seen 20%-plus revenue growth in many international markets, fueled by the weak dollar.
But as the dollar has gained strength against the euro and Asian currencies, Beckman expects global growth to temper.
The company also is bracing for a first-half drop among the 20% or so of customers who buy machines with cash.
Beckman doesn’t see revenue growing again until late in the year.
Beyond what profit growth Garrett can squeeze out from cost cutting, “as much as 65% of net earnings are expected to come in the second half of the year,” he said.
Estimates from analysts reflect a late 2009 rebound.
Michelmore projects a big surge in fourth-quarter sales and profits, both from a year earlier and versus preceding quarters.
For now, Beckman is relying on what Garrett called “solid recurring revenue growth.”
Recurring revenue “appears to remain quite strong now, and we do not expect this portion of Beckman’s business to show weakness even in a tough economy,” said David Lewis, an analyst with Morgan Stanley, in a research note.
Customers, Acquisitions
Beckman has about 200,000 machines in place at hospitals, laboratories, universities and other sites. Customers typically sign five-year leases that lock in sales of Beckman supplies.
Once a lease is up, 80% to 95% of customers renew, according to Garrett, since it is more expensive to switch machines and retrain workers.
Acquisitions could be another way of spurring growth.
In the past few years, Beckman spent nearly $500 million to buy four companies, including a portion of the flow cytometry business of Europe’s Dako Denmark AS.
“We continue to be actively screening and of course we can’t comment on any specific situation,” Garrett said.
