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Momentum grows in third quarter.

The third quarter was another healthy quarter for instrument companies in general, as technology and market trends gained momentum. Sales for the 13 companies (excluding Mettler-Toledo) whose results are detailed on pages 9-11 increased 10.4% in US dollars (including six-month results for Oxford Instruments' Analytical unit). Six companies (Applied Biosystems, Bruker BioSciences, Caliper Life Sciences, Oxford Analytical, Varian SI, Waters) posted double-digit revenue growth. Excluding acquisitions, Applied Biosystems and Bruker BioSciences' sales grew in double digits. Operating profits also stayed strong, increasing 11.4%, and operating margins rose one basis point year over year to 15.3%. Agilent BAM, Applied Biosystems, Caliper Life Sciences, Dionex, OI and Oxford Analytical recorded double-digit gains in operating profit.

Sales to industrial markets and China and India continued to drive growth. Agilent BAM, Molecular Devices, OI, PerkinElmer LAS and Waters each highlighted their revenue growth China. In China, Agilent BAM and Varian SI noted particular strength in environment testing applications, and Agilent and Dionex highlighted sales increases for food and beverage applications. European sales continued to recover with Applied Biosystems and Dionex each noting strong growth. However, Japanese and US sales remained mixed, while Applied Biosysterns and Thermo Electron reported sizable increases in rest of world sales.

Although Agilent BAM and Waters reported positive momentum for sales to big pharma companies in the US, Dionex, Molecular Devices and PerkinElmer LAS reiterated that the sector remains tough. Industrial sales were robust as Agilent and Dionex highlighted sales to the petrochemical industry, and Thermo Electron and Varian noted good growth related to commodities. Growth in the forensics sector was noted by Applied Biosystems and Agilent BAM.

Increased US pharmaceutical spending benefited Waters' LC sales, but sales for Affymetrix and Molecular Devices, companies specializing in life science instruments, were mixed. Mass spectrometry sales were also mixed with Applied Biosystems and Thermo Electron noting robust growth but slower sales for Bruker BioSciences and Waters' MS systems. PerkinElmer LAS, Thermo Electron LLS and Varian SI each reported strong sales for ICP. Also, Service and consumables continued to contribute healthy growth as reported by Bruker BioSciences and Waters.

Company write-ups are based on financial reports and conference calls.

Affymetrix's product and product-related revenue dropped 6.8% to $74.1 million. The drop in product sales combined with an 18% rise in SG&A expenses, primarily due to stock-based compensation expenses, and a 12-point drop in product gross margin to 57.9% led adjusted operating income to fall to a loss of $7.0 million from a profit of $8.5 million. GeneChip array sales dropped 16.1% to account for 67% of the $56.1 million in product revenue, while related reagent sales slipped 4.9% to make up 18% and instrument sales tumbled 38% to represent just 15%. Due to a drop in average selling prices (see IBO 10/31/06), probe array sales fell by $8.2 million. However, product-related revenue jumped 72% to $18.0 million.

Agilent Technologies Bio-Analytical Measurement's (BAM) fourth quarter revenues accounted for 27% of company revenues, and BAM operating margin increased by 290 basis points to 19.9%. Operating profit benefited from increased sales and a three-point improvement in gross margins. Life Sciences sales accounted for 44% of BAM revenues and grew 12%, driven by demand from China and India, sales of the 1200 Series LC system, the biotech market and a slight rebound in large pharmaceutical spending. Chemical Analysis revenue represented 56% of BAM sales and gained 8% due to strong sales in Eastern Europe and Asia for food safety and environment testing, as well as from forensics sales in the Americas. Fiscal year 2006 BAM revenues grew 9.4%, while operating profit rose 21.8% and operating margin gained 150 basis points to 15.4%. Chemical Analysis sales represented 18% of Agilent's fiscal year revenues, with petrochemical and environmental markets each accounting for 6% of total company sales, the food and beverage market representing 4% and the forensics market accounting for 2%. Life Sciences' revenue accounted for 13% of company sales. Within Life Sciences, the academic and government sectors made up a combined 2% of Agilent sales, while the pharmaceutical, biotech, CRO and CMO markets together accounted for 11%.

Applied Biosystems' fiscal first quarter revenues grew 10% organically. Operating profit jumped primarily due to increased sales, a 20 basis-point increase in gross margin and a 30 basis-point reduction in R&D expenses. The company recorded a nonrecurring charge of $114.3 million for the write off of acquired in-process R&D associated with the acquisition of Agencourt (see IBO 5/31/06) and a $9.1 million charge related to the resolution of a legal dispute. Instrument sales improved 15.1% to $196.8 million, Consumables sales gained 16.0% to $192.7 million and "Other Sources" of revenue grew 10.7% to $86.8 million. Real-Time PCR & Applied Genomics product sales jumped 29.9%, or 18% excluding the $14.7 million in Ambion-related sales, to $158.1 million. DNA Sequencing sales gained 5.3% to $131.5 million, benefiting from 4% sales growth for consumables and 6% growth for instruments for forensics, quality assurance and clinical research applications. Mass Spectrometry sales climbed 19.2% to $116.0 million. Core PCR &DNA Synthesis product sales slipped 2.5% to $47.3 million due to lower core-PCR revenue, offset by growth in thermal cycler sales. Sales of "Other Product Lines" inched up 1.2% to $24.5 million. Geographically, US revenue grew 9.4% to account for 46% of revenues, European sales gained 15.7% to make up 31%, Asia Pacific revenue climbed 18.6% to represent 18%, and sales from Latin America and all other countries jumped 75%.

Bruker BioSciences' third quarter organic revenues jumped 17%. Bruker Daltonics' sales, which accounted for 35% of company sales, declined 1.8%. The lower revenue led operating profit to drop 58% to $1.2 million. Daltonics' Aftermarket sales grew 4.7% to make up 21% of revenues, Life Science Systems sales declined 0.7% to make up 73% and CBRN Detection System sales dropped 4.9% to represent 6%. Bruker AXS' sales jumped 38.5% to make up 45% of company revenues, and operating income more than tripled to $2.8 million. Acquisitions represented 14% of AXS' revenue growth. Sales of X-Ray Systems, which accounted for 68% of AXS revenue, jumped 41%, Other Systems (products distributed but not manufactured by Bruker AXS) revenue rose 5.4%, representing 8% of sales, and Aftermarket sales, representing 24% of revenue, climbed 3.2%. Bruker Optics' sales rose 52.4% to account for 23% of total sales, and operating income jumped 153% to $5.1 million. IR Systems made up 76% of Optics' sales and grew 6.3%. Other System sales, which accounted for 6% of sales, declined 1.4%, while Aftermarket sales grew 50% to make up 18% of Optics' revenue.

Caliper Life Sciences' third quarter adjusted operating loss nearly tripled to $8.1 million, reflecting a 35% jump in adjusted R&D expenses and a 56% jump in SG&A expenses. Product revenue improved 17.0% to $18.5 million and service revenue climbed 73% to $5.9 million, while license and contract revenue were flat at $2.1 million. Pro forma revenues slipped 3.1%. Caliper's additional $9.4 million in revenues from acquisitions was partially offset by lower OEM sales to Affymetrix and declining contract revenue. The company anticipates fourth quarter revenues of $34-$38 million and year-end revenues of $107-$111 million, representing growth of approximately 33% and 25%, respectively.

Dionex's operating income benefited from a 60 basis-point improvement in gross margin to 65.7% of sales, as well as from a 27% reduction in stock-based compensation expenses to $1.2 million. Ion Chromatography (IC) sales improved in high single digits due to strength in Japan and higher consumables sales. Analytical Flow HPLC products showed single-digit gains, while sales of Nano Flow products declined slightly. IC and Accelerated Solvent Extraction revenues made up 74% of company sales and HPLC and Nano products accounted for 26%. Total consumables sales rose in the low teens. European sales grew 13%, Asia-Pacific revenue rose 4% and North American sales grew 2%. Excluding currency effects, sales to the three regions gained 9%, 5% and 1%, respectively. North American sales continued to suffer from a difficult pharmaceutical market, while European sales grew in all regions, particularly France and Germany. Asia-Pacific sales grew due to strength in China and high single-digit local currency sales growth in Japan. Sales to the environmental and life science markets, which both account for about 35% of revenues, each grew in the low single digits. Sales to the chemical/petxochemical market made up 15%-20% of revenues and continued to be strong, as did sales to the food and beverage industry, which were up in double digits, helped by a rebound in Asia-Pacific. However, sales to the electronic/power markets were down slightly. Dionex forecasts fiscal second quarter revenues to grow around 5% to $77-$79 million. Fiscal 2007 revenues are estimated to grow approximately 6.5% to $305-$315 million.

Third quarter revenues for Mettler-Toledo International improved 8.7% to $397.3 million, with adjusted operating profit climbing 10.2% to $55.8 million leading the operating margin to inch up 10 basis points to 14.0% of sales. Accounting for 43% of total sales, Lab products gained 5% in local currencies due to strong sales growth for process analytics, laboratory balances and analytical instruments. However, Autochem sales showed a slight decline.

Molecular Devices' operating margin dropped 420 basis points to 10.0% of sales. Excluding stock-based compensation expenses, operating profit fell 9.4% to $5.8 million. Operating profit benefited from an 11% reduction in R&D expenses due to reduced headcount and a 150 basis-point improvement in gross margin to 63.0% of sales, which was more than offset by a 23% increase in SG&A expenses due to nearly one million in stock-based compensation expenses. Drug Discovery products accounted for 37% of sales and slipped 4%, due to sales declines for the FLIPR and automated electrophysiology product lines, offset by significant growth in sales of high-throughput imaging products, which exceeded expectations and are now the company's fastest growing product line year to date. Life Science Research sales represented 63% of revenues and gained 4%, driven by 10% growth in sales of the SpectraMax M5, as well as by the LCM business (see IBO 4/15/06), partially offset by a decline in sales of genomic detection products and Meta Imaging software. Consumables made up 17% of sales and grew 14%. North American sales declined slightly to account for 55% of sales, Europe was the fastest growing region and represented 28%, while sales to the rest of the world accounted for 17% and benefited from strong sales to China, partially offset by weaker sales to Japan. The company anticipates fourth quarter revenues of $47-$52 million, slightly lower than a year ago, and full-year revenues of $180-$185 million, virtually flat for the year.

Third quarter OI product revenue slipped 2.7% to account for 83% of sales, while service revenue jumped 59% to make up 17%. Product revenue suffered from lower sales of GC systems, automated chemistry analyzers, microwave digestion products and GPC products, partially offset by increased sales of air monitoring systems and total organic carbon analyzers. Domestic sales slipped, while international sales improved due to strength in Europe, the Middle East and Asia Pacific, which was partially offset by lower sales in Latin America. China was the fastest growing country. Service revenue benefited from increased billings, primarily from an agreement with Wyle Laboratories.

Oxford Instruments reported fiscal half-year revenues ending September 30 of 721 million [pounds sterling] ($133.5 million = 0.54 [pounds sterling] = $1), up 8.1% from restated fiscal 2006 half-year sales of 66.7 million [pounds sterling] ($121.3 million = 0.55 [pounds sterling] = $1). Excluding the discontinued magnet business, sales climbed 19.2%. Analytical sales jumped 23.4% to 43.3 million [pounds sterling] ($80.2 million) due a 20% increase in the NanoAnalysis business. Orders for the industrial analysis business rose 32% due to strong sales of handheld instrumentation in the environmental market. Adjusted operating profit for the Analytical segment nearly doubled to 3.6 million [pounds sterling] ($6.7 million), leading operating margin to improve 260 basis points to 8.3% of sales.

PerkinElmer reported a 7.5% gain in third quarter sales to $386.9 million, but operating income fell 10.3% to $36.5 million due to a 140 basis-point reduction in gross margin to 41.7% of sales and stock-based compensation expenses of $3.1 million. The Americas and Europe accounted for 46% and 36% of sales, respectively, with each gaining in the mid-single digits. Asian revenue represented 18% of total sales and grew in the low single digits, with double-digit growth in China and India partially offset by lower Japanese sales. Life and Analytical Sciences (LAS) represented 73% of company sales and grew 5% on an organic basis. Instruments sales accounted for 51% of LAS sales and grew more than 10%. Genetic Screening sales grew in double digits organically to account for 15% of LAS revenue, and Service revenue improved in high single digits organically to represent 14%. Environmental/Chemical sales grew in the mid-single digits to make up 26%, driven by sales of ICP and GC products and double-digit order growth in both China and India. However, Biopharmaceutical sales, 35% of LAS revenues, were flat on a reported basis and up in low single digits organically, led by double-digit growth for automation and liquid handling products.

Thermo Electron's third quarter sales increased 6.7% to $725.0 million, including 6% organic growth. Adjusted operating income improved 8.8% to $108.7 million, leading operating margin to improve 30 basis points to 15.0% of sales. North American sales grew just slightly, Europe and Asia grew in high single digits, and sales to the rest of the world jumped 30%. Within Asia, Japan performed well and China and India each grew around 15%. Life and Laboratory Sciences (LLS) accounted for 75% of total revenues. The increase in LLS' adjusted operating income lead to a 70 basis-point improvement in adjusted operating margin to 17.8% of sales. Sales growth came from higher demand for MS, the iCAP ICP spectrometer, anatomical pathology products and process instruments, as well as from increased prices. Within life sciences, biotech was the fastest growing market, while the pharmaceutical market showed signs of improvement and academia showed modest growth. Measurement and Control revenues grew 11.1% to $181.5 million, led by online products for commodities markets. Operating profit rose 36.5% to $19.9 million. Prior to the merger with Fisher Scientific (see IBO 11/15/06), Thermo Electron raised its 2006 revenue growth forecast to 9%-10% to $2.88-$2.90 billion.

Fiscal fourth quarter revenues for Varian grew 10.9% to $219.6 million and operating profit increased 8.0% to $25.0 million. For the year, sales grew 8.0% to $834.7 million, with adjusted operating income increasing 7.9% to $86.4 million. Excluding stock-based compensation expenses, operating profit jumped 18.7% for both the quarter and the year to $27.4 million and $95.1 million, respectively. For the year, European sales grew 7%, North American sales were flat and sales to the rest of the world rose 20% due to strength in emerging markets. Scientific Instruments' (SI) fourth quarter revenue accounted for 83% of sales and SI operating margin to inch up 30 basis points to 11.8% of sales. SI's fiscal 2006 sales grew 8.4% and operating profit increased 10.2%. Polymer Laboratories (see IBO 11/15/ 05) added $24 million in fiscal year sales. Sales growth for the quarter was driven by products for environmental, energy and mining applications, NMRs and MRIs. For fiscal 2007, Varian forecasts sales growth of 5.5%-6.5% before acquisitions, with adjusted operating margin of 12.3%-12.8%. Scientific Instruments sales are forecasted to climb 12.3%-13.0%, while Vacuum sales are anticipated to be flat.

Excluding $7.1 million of additional stock-based compensation expenses, Waters' third quarter operating income climbed 16.7% to $74.6 million. Product revenue accounted for 71% of sales and service revenue represented 29%, with sales for each gaining 10.3%. LC sales were up 13%, due to ACQUITY sales as well as from double-digit growth of consumables and service revenues. MS sales inched up 3% due to improved pharmaceutical spending. LC and MS instrument sales grew 10%, while LC and MS service sales also rose 10%. Chemistry consumables sales jumped 21%. TA Instruments experienced flat growth, as shipments could not keep pace with orders, with product sales down 6% but services revenues up 17%. LC and MS sales accounted for 76% of total company revenue, chemistry sales represented 15% and TA Instruments made up 9%. Company sales to pharmaceutical customers improved 9%, while industrial and food safety sales gained 8%. US sales increased 9%, European sales grew 10% and Asian sales rose 16% as Waters Division's Asian sales climbed 16%, driven by India and China. The company forecasts fourth quarter revenue growth of 8% and year-end revenues are anticipated to grow 8%.
Agilent BAM
FY06 Revenues

Asia Pacific 26%
Europe 36%
Americas 38%

Note: Table made from pie chart.

Q3 2006 Revenues Growth ($US)

Oxford Insts. (Analytical) 25.6%
Caliper Life Sciences 24.4%
Bruker BioSciences 22.1%
Applied Biosystems 14.6%
Varian (SI) 11.8%
Waters 10.3%
PerkinElmer (LAS) 9.4%
Agilent (BAM) 9.4%
Dionex 7.0%
Thermo Electron (LLS) 5.3%
OI Corp. 4.4%
Affymetrix 1.5%
Molecular Devices 0.8%

Note: Table made from bar graph.

Q3 2006 Operating Profit ($US)

Oxford Insts. (Analytical) 83.3%
Bruker BioSciences 61.0%
Agilent (BAM) 27.7%
Applied Biosystems 27.2%
OI Corp 22.1%
Varian (SI) 14.7%
Dionex 13.2%
Thermo Electron (LLS) 9.7%
PerkinElmer (LAS) 8.4%
Waters 5.6%
Molecular Devices NM
Caliper Life Sciences NM
Affymetrix NM

Note: Table made from bar graph.
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Title Annotation:instrument industry forecasts
Publication:Instrument Business Outlook
Geographic Code:1USA
Date:Nov 30, 2006
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