Bruker Corp. Q2 2010 Earnings Call Transcript

| About: Bruker Corporation (BRKR)

Bruker Corp. (NASDAQ:BRKR)

Q2 2010 Earnings Conference Call

July 28, 2010 10:00 am ET


Stacey Desrochers - Director of IR

Frank Laukien - Chairman, President & CEO

Tom Rosa - CFO of BEST

Brian Monahan - CFO of Bruker

Bill Knight - COO


Derik De Bruin

Jon Wood

Steve Unger

Tycho Peterson

Ben Rose

John Sullivan

Jon Wood

Jose Haresco


Good day, ladies and gentlemen, and welcome to the Bruker Corporation Quarterly Earnings Call hosted by Stacey Desrochers. My name is Geoff and I'm your event manager. During the presentation your lines will remain on listen-only. (Operator Instructions). I would like to advise all parties that this conference is being recorded for replay purposes.

And now I'd like to hand over to Stacey. Please go ahead.

Stacey Desrochers

Thank you. Good morning and welcome to Bruker Corporation's second quarter and third pass 2010 financial results conference call. I'm Stacey Desrochers, Treasurer and Director of Investor Relations.

With me on today's call are Frank Laukien, Bruker's President and Chief Executive Officer; Brian Monahan, Bruker's Chief Financial Officer; Bill Knight, Bruker's Chief Operating Officer; and Tom Rosa, the Chief Financial Officer of our Bruker Energy and Supercon Technologies business or BEST.

Before we begin, let me briefly cover our Safe Harbor statement. Various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those described in the company's filings with the Securities and Exchange Commission.

While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change and therefore you should no rely upon these forward-looking statements as representing our views as of any date subsequent to today.

In addition to the financial measures prepared in accordance with generally accepted accounting principles, we will discuss certain non-GAAP financial measures, including adjusted EPS, adjusted operating income and adjusted operating margin, which are non-GAAP measures that excludes certain items.

We exclude these items because they are outside of our normal operations and/or, in certain cases, are difficult to forecast accurately for future periods. We believe that the use of non-GAAP measures helps investors gain a better understanding of our core operating results and future prospects, consistent with how management measures and forecasts the company's performance, especially when comparing such results to previous periods or forecasts.

Today, Frank will provide an update on the business and certain financial highlights. Tom will describe the financial results of our BEST segment and then Brian will discuss the financial results of our Bruker Scientific Instruments segment.

I will now turn the call over to our President and CEO, Frank Laukien.

Frank Laukien

Thank you, Stacey and good morning, everyone. We appreciate you joining us today. I believe most of you have read our earnings press release issued earlier this morning, and you are now familiar with the key numbers in the earnings release.

We are off to a great start and during the first half of 2010 we delivered solid organic top-line growth as well as significant margin expansion.

Admittedly, the first half year-over-year comparisons are a bit easier due to the recession in the first half of 2009, but we are still extremely pleased with our strong growth and excellent margin progress year to date.

We are optimistic that 2010 will be a good year for Bruker and that we should be able to exceed our original baseline growth margin and EPS goal for the year, which we communicated in February of 2010.

We are also making very good progress on reducing our working capital to revenue ratio. Specifically, in the second quarter of 2010, our revenue increased year-over-year by 19% to $300.9 million or by 20% when you exclude the effects of foreign currency translation and the Chemical Analysis acquisition which we completed in the middle of the second quarter of 2010.

GAAP net income for the second quarter of 2010 was $22.6 million, or $0.14 per diluted share, compared to GAAP net income of $12.9 million or $0.08 per diluted share in the second quarter of 2009.

Adjusted net income which excludes acquisition-related restructuring and other charges more than doubled year-over-year to $25.0 million in the second quarter of 2010 or $0.15 per diluted share, compared to adjusted net income of $12.3 million or $0.07 per diluted share in the second quarter of 2009.

For the six months ended June 30, 2010, our revenue increased by 20% over the first half 2009, to $578.6 million, or by 15% when you exclude acquisitions and the effects of foreign currency translation.

GAAP net income for the six months ended June 30, 2010 was $38.7 million, or $0.23 per diluted share, compared to GAAP net income of $21.3 million or $0.13 per diluted share during the six months ended June 30, 2009.

Our adjusted net income for the six months ended June 30, 2010, nearly doubled to $41.9 million or $0.25 per diluted share, compared to adjusted net income of $21.5 million or $0.13 per diluted share during the six months ended June 30, 2009.

During the second quarter of 2010, we launched a number of innovative high-performance analytical solutions which fit well into the various markets we serve.

Our mass spectrometry division has been gaining market share and even during the recession in 2009 both our life science mass spectrometry revenues and new order bookings grew in the double digits.

These trends also continued in the first half of 2010, and to add to this momentum we launched several new mass spectrometry products, including the maXis ETD, and the solariX MALDI FTMS System at the ASMS conference in May 2010.

We also had a number of other exciting product introductions during the second quarter, and information on this product is available on our website.

New order bookings for the first half of 2010 continued to be very healthy.

In the first half of 2010, we received more than $30 million in additional US ARRA funded stimulus orders, and we anticipate more during the remainder of this year. In total, we have now received in excess of $100 million in global stimulus related orders over the past 12 months.

We are equally encouraged by dramatic bookings growth in some of our industrial analysis product lines, which in the first half of 2010 increased by more than 50% compared to the first half of 2009 and remarkably, by more than 10% sequentially compared to the second half of 2009, even though the second half of each year is typically seasonally stronger.

We continue to monitor academic and government budgets, particularly in Europe, and we believe for the most part they will continue to be healthy and stable or growing for the majority of our products and markets, at least in most key European countries.

The exception may be our Bruker detection business, which only accounts for about 3% of our revenues, and which sells chemical, biological, radiological, nuclear, and explosive detection, or CBRNE Detection system, primarily to government, defense and homeland security customers.

This detection business indeed has seen signs that European defense and security funding may be reduced or delayed, and we expect slower or no chemical detection budget growth in the next year or two.

However, even this business is launching new explosive detection systems which are expected to reaccelerate its growth in 2011 and beyond. Many of our European governmental and academic research customers are funded either directly or indirectly by various governments.

However, while many European governments intend to reduce overall spending, we see evidence that these reductions will primarily target other government expenditures, such as pensions, public works projects, social services, government payroll, extended retirement ages, et cetera.

In most major European countries, the government's investments in education and research appear to be an important investment in their future and their research budget mostly seem to be protected, and in some cases are even getting increased funding.

For example, we have seen some recent positive trends on research spending in France, which just recently announced a new additional stimulus-type initiative in which France intends to invest EUR11 billion in 2011 on research and an additional EUR8 billion on university budgets, an increase from current budget levels. Similarly, the US is also planning to grow the NIH budget by over 3% in 2011.

Additionally, in Brussels, the European Commissioner announced on July 19, 2010, nearly EUR6.4 billion of European Commission investment in research and innovation. The following is a quote from the background section of this announcement. 'The budget for the Seventh Framework Program calls for proposals in 2011 of EUR6.4 billion, up 12% in comparison to 2010, and it was EUR5.7 billion, and up 30% in comparison to 2009 when it was EUR4.9 billion.

The Seventh Framework Program is the largest single research program in the world with a budget of more than EUR50.5 billion, excluding EURATOM for the years 2007 to 2013. By adopting the Europe 2020 strategy, Europe's political leaders have put research and innovation at the top of the European political agenda, making it the cornerstone of investment in sustainable growth and jobs'. Back to Bruker, we believe this and other announcements in Europe show that the concerns in the US capital market over declines in European research investment in the next few years appear to be exaggerated.

While, overall, the trend of European government is deficit reduction, it appears very likely that most of the key countries will continue to invest in academic and government research for their future. Moreover, the strength and diversity of Bruker's expanding high-performance product portfolio and the diversity of our customers and markets we serve makes Bruker quite dynamic and fairly resilient.

In summary, from what we can see today, we are quite optimistic that Bruker Scientific Instruments or BSI segment can continue on its trajectory of rapid growth and margin expansion also in the years to come.

Moving on to our BEST segment, as you have seen in our earnings release today this business continues to grow its revenues rapidly, and moreover, in the last five years the BEST external backlog under contract has increased by more than 500% from less than 15 million at March 31, 2009 to over 90 million as of June 30, 2010. Some of this BEST backlog will turn into revenue over several years.

Finally, let's now discuss our new Chemical Analysis division which was established on May 19, 2010, when we completed the acquisition of three former Varian, Inc. product lines from Agilent Technologies.

Since the closing, we have been working to integrate the Chemical Analysis division into our Bruker Scientific Instrument segment. The acquired product line, which if you recall, includes Laboratory GC and GC triple-quadrupole mass spectrometry, and ICP mass spectrometry systems are nicely complimentary to our existing Scientific Instruments & Solutions.

To date, our integration is on track, due to the experience and strong commitment of the new Bruker employees who have joined our new Chemical Analysis division, but significant integration work remains ahead of us.

Later on, our CFO, Brian Monahan will provide more specifics on the financial results and expectations for the Chemical Analysis division.

In summary, for the last six weeks of the second quarter of 2010, i.e. since the closing, this newly acquired Chemical Analysis business generated revenues of 3.7 million and incurred a start up operating loss of 2.4 million and a net loss of 1.9 million, which was $0.01 per share dilutive to Bruker's second quarter 2010 results.

Looking to the second half of 2010, we expect the Chemical Analysis business to generate revenues of only about 8 million per quarter in each of the third and fourth quarters and to be $0.01 to $0.02 dilutive to earnings per share in each of these two quarters.

The Chemical Analysis revenues, expected for the second half of 2010 should not be considered a normal run rate, as they will be influenced by the low level of backlog acquired as well as the relocation of the three Chemical Analysis factories. We believe the integration efforts for the Chemical Analysis division will be substantially complete by the end of the first quarter of 2011, and that our Chemical Analysis business will approach normalized revenue run rates in the first half of 2011.

As you know, we acquired the Chemical Analysis product lines at a very reasonable valuation, and has confidence that with the right upfront restructuring and investments, our Chemical Analysis business will become a very significant and positive contributor to the Bruker Scientific Instrument segment over time.

Currently, the Chemical Analysis end markets continue to improve, and our new Chemical Analysis field and sales organization has been rapidly increasing its capabilities as they are being integrated into Bruker.

Moreover, we have plans to further strengthen and expand our Chemical Analysis product portfolio going forward. So, we believe the drivers are in place over the next few years to first return the Chemical Analysis business to its historical pre-divestiture, pre-recession performance level with expected annual revenues of 80 million to 100 million and operating margins of greater than 10%. And then, to continue to grow our Chemical Analysis revenue and margins to higher than historical levels.

As many of you know, for the Bruker Scientific Instruments segment, which includes the Chemical Analysis group, we have communicated clear goal of achieving or exceeding 15% adjusted operating margins in 2012. Given the excellent growth and margin momentum that we have experienced for the last few quarters we do not expect the addition of the Chemical Analysis group into the scientific instrument segment to negatively impact this 15% margin goal for 2012.

In any case our goal is to have the Chemical Analysis business above breakeven in 2011, and to contribute significantly to our EPS in 2012 and beyond.

So with that, I will now turn the call over to Tom Rosa, the Chief Financial Officer of our BEST business.

Tom Rosa

Thanks, Frank. Revenue for the BEST segment during the second quarter of 2010 increased by 32% to $18.1 million compared to $13.7 million in the second quarter of 2009. Excluding the effects of foreign currency translation, second quarter 2010 revenue increased by 41%.

It is important to note that in the second quarter of 2010 this was all organic growth as the acquisition of the excel research instruments business occurred on April 1, 2009. The BEST operating loss in the second quarter 2010 was $1.7 million compared to a BEST operating loss of $0.7 million in the second quarter of 2009.

When BEST recorded a one-time net gain of $1 million related mainly to the acquisition of Excel. Loss per share for second quarter for the BEST segment was a penny compared to a BEST loss per share of zero in the second quarter of 2009.

Revenue for the BEST segment during the first half of 2010 increased by 78% to $38.8 million, compared to $21.8 million in the first half of 2009.

The BEST operating loss during the first half of 2010 was $2.2 million compared to a BEST operating loss of $3.1 million in the first half of 2009. Loss per share for the first half of 2010 for the BEST segment was $0.02 compared to a BEST loss per share of $0.02 in the first half 2009.

On a year-over-year comparison basis for both the second quarter of 2010 and the first half of 2010, revenue from our low-temperature super conductor, or LTS business increased by over 50% as a result of higher shipments to various industrial and medical customers.

During the second quarter of 2010, BEST announced a $7.7 million contract from DoE's Brookhaven National Laboratory for a Linear Accelerator, and BEST continued to see strong order flow from its principal LTS customers as well.

This order contributed to BEST's external backlog under contract increasing by more than 500% over the last five quarters, from less than $15 million as of March 31, 2009, to over $90 million as of June 30, 2010.

On a constant currency basis, our backlog increased by approximately 20% over the last three months. Some of this backlog will take several years to turn into revenue, such as the large ITER Fusion Energy contract which we were rewarded late in 2009. Shipments on ITER are expected to begin in Q4 2010.

BEST also announced further technical progress during the second quarter. In collaboration with the high magnetic field test laboratory at the Karlsruhe Institute of Technology in Germany, we achieved a new record in field high magnetic field test result for our second generation high temperature super conductors demonstrating enhance performance as a result of improvement to our proprietary technology.

I will now turn the call over to the CFO of Bruker Corp, Brian Monahan.

Brian Monahan

Thanks, Tom. Since Frank already commented on the overall BRKR financial highlights, and Tom provided a summary of our BEST segment, I will now focus primarily on our Bruker Scientific Instruments, or BSI segment.

On the top-line for the BSI segment, during the second quarter of 2010, revenues increased by 18% to $284.9 million, compared to $241.3 million in the second quarter of 2009. Excluding the effects of foreign currency translation and the Chemical Analysis acquisition, BSI revenue in the second quarter still increased by 18% year-over-year. What is very encouraging is that all four BSI operating divisions generated double-digit organic top-line growth.

For the first half of 2010, BSI revenues increased by 17% to $545.2 million compared to $464.9 million in the first half of 2009. Excluding the effects of foreign currency translation and the Chemical Analysis acquisition, BSI revenue in the first half of 2010 increased by 14% year-over-year.

Again, solid performance across all of our BSI operating divisions, with all four generating organic top-line growth in excess of 10%.

Now moving further down the income statement, adjusted gross profit margin for BSI in the second quarter of 2010 was 46.9% compared to 45.4% in the second quarter of 2009. For the first half of 2010, adjusted gross profit margin for BSI was 47% compared to 45.4% in the first half of 2009.

Adjusted BSI operating margins in the second quarter of 2010 expanded by 650 basis points year-over-year, and for the first half of 2010, BSI adjusted operating margins expanded by 510 basis points to 13.1%.

We've been working very hard to deliver margin expansion and improve profitability at BSI, and the significant improvements that we were realized in 2009 have not only continued, but accelerated.

This can be attributed to a number of factors including higher margins associated with revenues from high-end, high performance instrumentation, some of which is directly attributable to the various global stimulus programs. A ramp-up in volume of recently introduced products, which were designed to carry higher margins than previous generations of products, continued strict cost controls, and leveraging fixed costs with higher revenue volume.

GAAP net income for the BSI segment in the second quarter of 2010 was $25.1 million or $0.15 per diluted share compared to net income of $13.2 million or $0.08 per diluted share in the second quarter of 2009.

GAAP net income for the BSI segment during the first half 2010 was $42.3 million or $0.26 per diluted share, compared to net income of $23.5 million or $0.14 per diluted share in the first half of 2009. Included in GAAP net income for the BSI segment were various charges we do not consider part of normal recurring operational results. These charges are identified in the press release issued early today and include charges for the sale of Chemical Analysis inventories required to be revalued as of the date of acquisition, charges for the amortization of acquisition-related intangible assets and other charges or credit associated with restructuring and business divesture activities, as well as acquisition-related charges from short-term transition service agreements associated with the acquisition of the Chemical Analysis division and certain professional fees.

The most significant charge incurred in the second quarter of 2010 was for approximately $1 million and was associated with the divestiture of our Latvian manufacturing site. We're also in the process of moving one smaller German manufacturing site in Iraq and Germany which is being moved into our larger Bruker Nano operations in Berlin.

The divestiture or closure of these two sites is consistent with our broader strategy of reducing costs while at the same time consolidating critical know-how and capabilities at the main production and R&D sites.

To expand on some of Frank's earlier comments regarding the Chemical Analysis division, during the last six weeks of the second quarter of 2010, this business generated revenues of $3.7 million and incurred a start-up operating loss of $2.4 million and a net loss of $1.9 million, which was $0.01 per share dilutive to Bruker's second quarter results.

Included in the Chemical Analysis start-up operating loss were charges of $0.5 million associated transition service, provided to Bruker in connection with the Chemical Analysis acquisition, and $0.2 million associated with the revaluation or step-up of acquired inventory. In addition, the operating loss included a non-cash charge of $0.3 million associated with the amortization of acquisition-related intangible assets.

For the second half 2010, we expect the Chemical Analysis business to generate revenues of about $8 million per quarter in both the third and fourth quarters. And we also expect to incur additional charges for transition services, relocation expenses of the three factories and sales force, along with an inventory step-up of approximately $4 million and an additional $1.2 million of non-cash charges associated with the amortization of acquisition-related intangible assets based on the preliminary purchase price allocation.

This is expected to result in the business being approximately $0.01 to $0.02 dilutive to earning per share in each of the third quarter and fourth quarters of 2010.

Before I turn the call back over to the operator for Q&A, I wanted to briefly discuss certain cash flow and balance sheet metrics that relate to overall Bruker Corporation.

Operating cash flow in the second quarter of 2010 was $47.6 million compared to $38.2 million in the second quarter of 2009. Free cash flow was $42.3 million during the second quarter of 2010, compared to $34.3 million during the second quarter of 2009.

In the second quarter of 2010, we paid $37.5 million of cash for the acquisition of the Chemical Analysis business and ended the second quarter of 2010 with cash, cash equivalents and restricted cash of 190.1 million and net cash of $63.4 million compared to net debt of $16.4 million at the end of the second quarter of 2009.

Our cash flow generation over the post several quarters has been solid and with this we have been able to reduce debt as well as interest expense.

During the second quarter of 2010 we realized additional improvements in our working capital metrics. We define working capital as accounts receivable, plus inventory, less accounts payable and on a trailing 12-month basis, we reduced our working capital to revenue ratio further to $0.44 at June 30, 2010 compared to $0.51 at June 30, 2009.

So with that, I will turn the call back over to the operator for Q&A.

Question-and-Answer Session


(Operator Instructions) The first question is from the line Derik De Bruin. Please go ahead. Your line is open.

Derik De Bruin

Some of the other companies we are talking about some weakness and softness in the pharma market. I know this isn't a huge chunk of your business but can you just tell what you have kind of been seeing in that end?

Frank Laukien

In the pharma market?

Derik De Bruin

Pharma market, yes.

Frank Laukien

We have not seen any remarkable trends in that area other than the general macro trends people are familiar with already. Obviously more interested in more funding becoming available for research and Q&A for biological. But that's nothing new. Smaller bio-techs are still not spending heavily, and they're still cash constrained. That's nothing new. So we have not seen any remarkable trends.

Derik De Bruin

How do we look at the revenue on a sequential basis or is that on a quarterly basis for the BEST business? I realize it's kind of lumpy depending on the contracts. But what's a good rule of thumb to try and model that on a quarter-to-quarter basis?

Tom Rosa

Talking about BEST revenues, Derik, we expect that to continue to increase over the balance of this year. We expect growth just as overall Bruker does, to be ahead of what we originally put out there as our target growth, which was greater than 25% revenue growth in 2010 compared to '09. We're currently on a year-to-date basis at about $38.8 million of revenue through six months. We expect the second half to be above that.

Derik De Bruin

And I guess when do you feel like you want to start providing EPS guidance? Or is that something you're just not comfortable dealing with at the moment?

Frank Laukien

No, that's a philosophy, that's not comfortable at the moment. We prefer not to give quarterly exact guidance. We spell out annual goals, and I believe that at this point we're on track to exceed our annual baseline goals for the year.


Thank you. Your next question is from the line of Jon Wood. Please go ahead. Your line is open.

Jon Wood

So Frank, on BSI's operating margins, obviously you're basically already at your target for 2012 in the second quarter despite the fact that chemical I'm sure was dilutive. Can you just contextualize into what factors should we understand that would contribute to that margin declining in the second half of 2010 versus the second quarter?

Frank Laukien

We have not made such predictions, Jon. However, the second quarter is just a quarter, a very good quarter. I think it's usually more meaningful to look at the year-to-date range.

Jon Wood

If I look at the gross margins, they were down a little bit sequentially, and I'm sure that's probably all related to the Chemical Analysis dilution. Brian, can you speak to basically the impact of FX? I know there is a lag from the spot rate to basically your cost of goods sold. In the BSI gross margin, did you see any FX impact in the second quarter?

Brian Monahan

We did see some FX impact. And again, to reiterate what Frank said, focusing on a quarter can be a little, not the right way to look at things. But if we look at the first half of this year, the fact that we manufacture probably 80% of our products outside of the US and Europe, the FX rate changes have favorably impacted us on the gross profit margin side modestly. It naturally hurts revenues with the way the FX rates have changed.

And then also where a lot of our operations, manufacturing, research, and ultimately profits are generated in Europe; when you translate those at the weaker euro, that offsets the favorable gross profit margins that we've seen. So really, when you get down to the operating margins, and we had significant improvement for the first half of this year, we're generally naturally hedged there. But FX did favorably modestly impact our gross profit margins.

Jon Wood

On the working capital side, obviously the second quarter was pretty good. You've provided a range or guidance for 5% reduction. You're running significantly ahead of that in the first half. So, just speak to potential for working capital builds. I guess revenue is off the charts, so I'm sure you need some incremental working capital there. Do you expect that progress, if you will, to kind of take a pause in the second half of the year, owing to the revenue momentum, or should we continue to expect more working capital to come out in the second half of the year?

Bill Knight

I think our goal, we focus on this working capital ratio, as Brian mentioned earlier. Our goals are to get to more of a peer group average by the end of 2012. We expect to continue to make steady progress. The first half was very good, was exceptional. I'm not going to say we're going to repeat that in the second half, but we do think that with the operating teams we have in place that we can continue to make steady progress. We still have room to make improvements relative to the peer group, and we think we can achieve those. Some of our divisions are doing extremely well and we still have some significant opportunities in a couple of other divisions. So we will continue to improve there.

Jon Wood

Okay. Thanks a lot for the comments.

Bill Knight

The primary focus for us continues to be inventory. I think our receivables are much better than our peer group when I look at DSOs. So the real focus for us continues to be inventories and we're making, as can you tell, improvements there.

Jon Wood

Okay, great. And one last one for Frank. Frank, you commented on the Varian or the Chemical Analysis revenue run rate exiting one half '11 at normalized levels. Is that $20 million of revenue? Just give us some context on what you mean by normalized in 2011.

Frank Laukien

I don't know what the answer will be yet, because we don't have enough experience with that business and running it at Bruker yet. So we are not in a normalized mode for the remainder of 2010 with integrating all the field organizations and moving the three factories, which would be substantially complete by the end of the first quarter 2011.

So we will obviously give our annual forecast for 2011 in early 2011. By that time we will have two and a half quarters under our belt running that Chemical Analysis division. Keep in mind, the Chemical Analysis division is really three product lines of businesses that we're building into a division.

It's not that we took a ready-made division and just ran with it. So we're really building a division from three product lines that were in three different geographies and so it's a significant integration effort.

We're not at a normalized run rate. I don't think we'll be immediately in fourth gear in 2011 but I think we will be benefiting from the sales and backlog and bookings that, I should say bookings, backlog and sales that we're generating ourselves as opposed to what we acquired.

We'll have our factories in the right locations where we want them with actually some factory consolidation at the same time to get it right upfront and with new products and additional products coming in over the 2011-2012 timeframe.

So I do not think that we'll have a $20 million per quarter run rate in 2011 and I think it will be higher than the $8 million initial run rate we're predicting for Q3 and Q4 each.

Where we will be in 2011 we cannot yet predict based on six weeks or eight weeks of experience. So we'll give an update on what we expect for 2011. We're committed to being breakeven or better in 2011.

We expect to be higher than $8 million. And I don't expect that we will be at $20 million per quarter run rate yet. So that's a pretty broad range, I realize. That I don't mean to hedge here. But it's really a new division that we're creating. It's not simply something where we took over someone else's division as is and just had to put it back into the year.


Thank you. The next question is from the line of Steve Unger. Please go ahead your line is open.

Steve Unger

Hi, good morning. Frank, just to dovetail off that last question, it looks like you got a relatively intact sales organization out of Varian, and I was just wondering how that organization is now fitting into the overall BSI segment in terms of those people who are more focused on industrial accounts and how is the sales group integrating sales with other Bruker products?

Frank Laukien

Yes, Steve, so yes the Chemical Analysis sales force, I think I'd say we've been roughly maybe taking over three quarters of an intact sales and applications group in many locations.

We need to move that sometimes it's just from one Shanghai office to another. In other locations, in Germany or France, sometimes it's from one city to another, so there's some movement there as well.

Not everybody did join us, and we have some gaps that we need to fill for certain sales and applications and service positions.

But substantially, you're correct with 75, 80%, we've been able to take over that organization. And that was one of the very attractive features of that acquisition, not only the product lines themselves.

As you have stated, they will be focused more on industrial customers, environmental customers, applied markets, food, food safety. So the Chemical Analysis sales force will be a sales force focused on these marks, without reiterating them, in parallel to the life science, mass spec sales force, but of course at many conferences or in certain deals, and certain account they'll also work together.

So it's really a second sales force that really focuses on what we so far have not been able to focus on sufficiently with Daltonics Life Science mass spec business, where as you know, we're strong in academia, in clinical research, and proteomics, in a number of other applications, but this is sort of perfectly complimentary, second sales force that more or less ready to go, it needs some tweaking and complimenting some of the existing team as well, but we've taken over a very capable and aggressive and experienced sales force for that Chemical Analysis business.

Stephen Unger

And then, are they being cross-trained then on specific products, and is it mostly on the mass spectrometry side?

Frank Laukien

Presently they are focusing on the three product lines that we have acquired from the old Varian Inc., and over time we will be adding additional product to that Chemical Analysis sales force.

Stephen Unger

And then switching gears to sort of what's happened, I guess with the US dollar relative to other currencies. With 80% of your manufacturing outside of the United States, are you essentially operating as an exporter into United States? And then, can you use these currency changes to your advantage in the United States market?

Frank Laukien

Well, as Brian mentioned earlier, we do see a gross margin or gross profit margin advantage of the weaker euro that's been beneficial to us. At the end of the day, we report operating margins and net income and EPS in dollars, of course, so by the time you get to op income and bottom line, net income and EPS it doesn't make such a big difference.

But overall, we are more comfortable with the euro at $1.30 than at $1.55 or so where it once peaked, or a couple of times it got to those levels. So this is clearly incrementally positive news for us to have a weaker euro. The euro is very strong; it's more of a strain on us.

Stephen Unger

And then in terms of your US performance, could you characterize or give us some color on your US sales performance, excluding the impact of stimulus related orders?

Frank Laukien

Including stimulus and ARRA, which is now coming through at a pretty good rate in orders, at least, it's been very strong. I don't have good data right now where we took out that effect and looked at it. So I'm not certain, but obviously a lot of the incremental strength in the US in the first half of this year is in bookings. But also we expect a lot of that still in the second half, has been related to ARRA. But unfortunately I cannot give you a good answer on what would it be without ARRA in the US. I don't have numbers in front of me.

Stephen Unger

And then in terms of, it's my understanding that the impact of NIH stimulus will start to run off of your business in the second half of 2011. And in your press release and on your comments this morning, you highlighted several other global stimulus programs. Do you think that these other programs then will help you extend the impact of what we're seeing in terms of stimulus through 2011 into 2012 and maybe even further beyond that?

Frank Laukien

No, not really. I think the global stimulus wave for our revenue, because that's delayed from our bookings by typically half a year or so, will abate in the middle of 2011. That's our prediction.

What we have been working on very hard with the products that we've launched, with the Chemical Analysis division that we acquired, with some of the new explosives detection product, a much bigger market than chemical detection for our detection business, and the number of other initiative is to focus more on industrial analysis or applied markets.

So I think, over time you will see a shift at Bruker off the components of our revenue where the applied and industrial as well as pharma biotech markets in relative terms, I think, will be growing as a percentage of the overall revenue pie chart, and our academic government will be reducing.

So, with those initiatives, and it's really quite a consistent picture if you check it what we've done in the last 12 months or so. We believe that while stimulus or global stimulus revenue dollars will come down by the middle of 2011, we hope that we can manage to not have a downturn for the overall business, but continue to grow based on strengthening in our industrial analysis markets, in our competitiveness and products for those markets. I've said some of those are growing at faster than 50%. Some of them are growing at 100%, compared to the first half of 2009, and it's not all just coming back after its session. A lot of these are essentially almost new product lines for us that are now really kicking into volume and gaining market share very rapidly. So that's our plan of not coming into a dip in middle of 2011 but to continue our overall ramp-up.

Stephen Unger

And then, just two quick ones, if I might. Brian, it looks like you've done a great job on the tax rate. Is that level sustainable? I'm coming up with somewhere around 30% to 32%.

Brian Monahan

Yes, I mean, our goal for the year would be in the low 30s, and I think second quarter we were there; first quarter, a little higher. So I think the rate that you've just talked about is achievable and is generally in line with our target for the year.

Stephen Unger

And then, just on the status of the BEST IPO or minority sale is there some update you can give us on that?

Brian Monahan

We continue to be interested in the strategic financing for BEST going forward, and we'll just to have leave it at that.


Thank you. Our next question is from the line of Tycho Peterson, please go ahead. Your line is open.

Tycho Peterson

Frank, in your comments you talked about taking share. Can you just comment a little bit more on that? Has that accelerated in light of some of the consolidation that's happened? Is that a function of traction from new product cycles? Can you just talk about and also maybe by mix? Is it stimulus related orders, where you are taking share? If you can just elaborate that'd be helpful.

Frank Laukien

I'll try, Tycho. I think it's pretty broad based. It's really in a number of product areas and submarkets. And really some of them had no consolidation effect, that one could suspect so, yeah in some areas we are gaining market share where there has been consolidation in the industry in the last year and half, but in other areas we are very rapidly gaining market share in areas that have been stable from the configuration of the competitors. So I think it's more of the strength of our products and the creativity of our sales force and designers.

Tycho Peterson

Okay. I appreciate the color.

Frank Laukien

Product line that we are referring to is not in every single product line probably, but it is in many, many product lines and from industrial to stimulus to clinical there's really many examples of that. It's not just isolated to one identifiable product line or area.

Tycho Peterson

On the Chemical Analysis business, I appreciate some of the color you provided before. Now that you've had that under your belt for about two months, can you just talk a little bit about kind of the go-to-market strategy? And as you talked about kind of your revenue targets, are you projecting revenue synergies with the other divisions for this year and next?

And then lastly, as we think about kind of the portfolio there, you mentioned new product additions. How do we think about R&D spend for that business? Is there a high level of investment that's needed?

Frank Laukien

All good questions. So the go-to-market strategies that this Chemical Analysis division with marketing and packaged deal synergies that occur occasionally, but basically it will have its own strategy and sales force and product lines and so on. So I'd say, as for any of our divisions, I'd say 90% of their strategies they are owned and 10%, 5% to 10%, they get synergies from the brand and the packaged deals, and going to pick on and so on together.

Having said that, yes, we do not so much, we don't define the Chemical Analysis division so much by its product line, but really more by its markets, petrochem, food, food safety, industrial, environmental. So you will see additional products from its own R&D, but from R&D elsewhere at Bruker Scientific Instruments business that will target analytical solutions and applied solutions that will be channeled through that Chemical Analysis sales capability and distribution capability, which is both direct as well as distributors. We have also acquired, so to speak, some not acquired traditional sense, we have retained some very capable distributors for the chemically analysis business, I should say. Did I skip parts of your question? Did I address my…

Tycho Peterson

I guess as we think about the R&D investment for that division, I mean, are you able to leverage R&D dollars? It sounds like you are able to leverage R&D dollars from your traditional BSI business, but do you need to kind of step up the level of investment in the near term for that division given that it's only a couple of products that you have acquired?

Frank Laukien

Yes, we will certainly invest in R&D. I can't give you granularity yet, but I think the R&D levels in that division or in other divisions, but then going into that sales channel, that's a bit of a mix here, all within the Scientific Instruments, it will be more consistent with traditional Bruker R&D spending than, let's say, the levels that Variant, Inc. had previously.

However, we don't expect that our R&D expenses as a percentage of revenue in the Scientific Instruments business are all of a sudden going to go up. In fact, we expect them to modestly decline as our revenue grows,. So you'll see higher levels of R&D spending consistent with what you are typically used to from our Scientific Instruments business, which tends to be more in the 10% plus range than in the 5% -6% range.

Tycho Peterson

Okay. That's helpful.

Frank Laukien

Nothing extraordinary that we think will stick out or. Maybe those comments are helpful yeah.

Tycho Peterson

Okay. On the footprints for the broader business, you've obviously got the integration of the C-80 business, and then Brian you talked about kind of divestiture, closure of couple of sites. How much more blocking and tackling is there left on kind of the operations side? As we think about kind of the margin potential here, understanding you've obviously got leverage from new products and higher volumes as well, but how do we think about the Op side and leveraging your global footprint?

Frank Laukien

I think we're doing a good job at pruning that, and we will always take a look at that. So in the recessionary year we took some more extraordinary steps, but in a good year, 2010, we're now reporting to you, of course, we started that six, nine months ago that we've also eliminated two additional site, and as part of the CAD restructuring that will also reduce the number of acquired sites, manufacturing sites by one, R&D sites will stay the same.

And there's a lot more to be done on the operational side from may be its maybe not the factory closings, but there's lots of other opportunities. And I better turn that one over to Bill.

Bill Knight

Hi, Tycho, it's Bill Knight. I think as Frank said, we certainly look at our brick and mortar and we will continue to rationalize that where it makes sense. We will continue to and we're as an example, continue to look at our internal machine shop operations and we've done some consolidating there.

We will continue to take hard look at that. As far as margin opportunities, as you can see we've had some improved trends this year. That's reflective of significant reflecting the new product introductions last year that carried a better cost structure.

We will continue those efforts in our R&D. We also are really focusing on the basic cost of our materials. Where can we, for our ongoing product lines, where can we source to get a better overall cost structure on existing products.

So between rationalizing brick and mortar through product design, through sourcing of components, we are still very optimistic that we will achieve these margin targets both in profit, gross profit margin and operating income. And the other thing that certainly helps this effort is these products typically carry improved applications, which certainly we can get improved pricing on.

Frank Laukien

So maybe one example, as part of the Chemical Analysis acquisition we also acquired a purchasing group in Shanghai of four or five people that will support the Chemical Analysis business, but also really the other Bruker divisions in more Asia Pacific and Southeast Asia sourcing.

You'll see a bigger push in that, and we believe that some of these acquired skills and capabilities and the teams that we have there, I think will also make a contribution to many other elements of overall operational excellence initiative to bring down cost of goods sold.

Tycho Peterson

Okay. And that's helpful. And then just one last one on capital deployment, can you just kind of do you have enough on your plate now with the variant integration and other things or are you look at additional M&A, and how do you balance that with debt pay down?

Frank Laukien

I think we have capacity for additional M&A. But we all look at M&A if it's a good strategic fit, we'll consider it probably at any time. And we're not that adventurous. We don't feel that we have to deliver an M&A transaction every so often.

So we're very focused in what we have. We have outstanding opportunities in for growth and margin expansion, and we will, however, at all times look for or keep our eyes open for good strategic bolt-on fits on the M&A side, without wanting to get caught in, okay, we now to have do an M&A transaction because I'll asked about at the next quarterly call.

So we will not become a serial acquirer. But from time-to-time, I think we really have a good track record of having some what I would consider very smart acquisitions that provide a good return on investments over the years and that will happen from time-to-time.


Thank you. The next question is from the line of Ben Rose. Please go ahead.

Ben Rose

Yes. Hi. Good morning and congratulations on a solid quarter in a tough environment. Couple questions within the Industrial Analysis division, can you speak about specific industries from which you saw strength in the quarter? And then I have a follow-up regarding BEST.

Frank Laukien

Hey, Ben. I believe it's pretty broad-based. I mean, any type of electronic semiconductor data storage, but also metals and cement, scrap metal industry, maybe not sexy its come back from almost no investment to significant investment. So I believe the industrial recovery is pretty broad-based, and I couldn't name right now an industrial segment that wasn't participating in that. I think it's pretty broad based.

Ben Rose

Okay. And within the BEST segment, could you talk about interest that you may be seeing for applications for BEST with regard to energy management and perhaps within the solar industry?

Tom Rosa

Yeah, hi, Ben this is Tom Rosa. There is certainly two keys areas we're pursuing. We're work on a prototype CGM, or crystal growth magnet application right now for the solar photovoltaic market that's expected to be available in the early part of next year. We're also pursuing very aggressively in terms of R&D spending, a FCL development or Fault Current Limiter for the smart grid and also for other energy infrastructure type applications. So, those are two are focuses of our future. The revenue growth that we've been seeing off late has not been influenced by either one of those yet, because they're both still in development, however.


The next question is from the line of John Sullivan. Please go ahead.

John Sullivan

Hey, good morning guys. Just a little bit of a broader question. As you think about your life sciences business, we've seen companies in this space leverage their franchise and their relationships by moving from individual products to integrated solutions. Is that something you view as important, given your product lines and your place in your customers' business, is that something that you're specifically working on?

Frank Laukien

John, it's probably something we've been working on for over a decade. We think it is important. We think it's not in every sale. I mean, sometimes it's still one system at a time. In other cases, it is more of a solution of a hardware system, a scientific instrument, with specialized libraries or software or algorithms and maybe a consumable stream. Where that makes sense and where those customers' buying pattern is that they want to buy it that way. We pursue that. So I don't really think that.

But sometimes everything is the solution rather than a product or a system is also a little bit exaggerated sometimes. And so we do it where it makes sense, and we've really been doing that for a very long time. We do not think that we need to go from mass specs to lab wear, and sell everything in between. We just don't see that that buying pattern, some in the industry may predict that that's really where the industry is going.


Thank you. The next call is from the line of Jon Wood. Please go ahead, Jon, your line is open.

Jon Wood

Can you comment on, Frank, just if you have got the data in front of you, the major geographies, the growth rates you saw in the second quarter?

Frank Laukien

We do that annually, so I don't really have that in front of me nor does Brian. I think it's been consistent with prior patterns, nothing really all that remarkable. We did have still slightly higher revenue in Japan and the first half of this year than we normally would because of their special supplementary budget and some of the revenue acceptance is coming in, in Q1 and Q2. So other than Japan having been somewhat stronger in the first half of this year than it normally would, I don't know there is anything remarkable compared to, if you looked at our 2009 and 2008 numbers.

2009, 2008, obviously 2009 has been an ongoing evolution with the Americas and Asia Pacific gaining as a percentage of revenue from, you know, of our overall pie chart, so to speak. So nothing remarkable other than Japan revenue-wise has been strong in the first half.

Jon Wood

One last one. I know it's only been closed for a short period at this point, but have you seen any change in the competitive behavior from the core variant operation now that it's part of Agilent?

Frank Laukien

It's very early days. And they make statements. And we can let them speak for themselves. I don't see any need to comment, but it's really too early to comment. I think we also have a considerable integration work ahead of them, but as do we, with the Chemical Analysis group. So, no comment, nothing. There are certain intentions and objectives that they have spelled out, and I think they speak for themselves. But I prefer not to comment on that.


The next question is from the line of Jose Haresco. Please go ahead. Your line is open.

Jose Haresco

Question, you guys have been working on the integration of the various R&D efforts to find ways to use, if nothing else, parts from one division and other product lines. One is that still an ongoing efforts and what is the longer term implication for that on the cadence of new product and introductions from the business as a whole? Then I have a follow-up for Brian.

Frank Laukien

R&D, I'll take that one, Jose. I think it's not so much between divisions but more within a division. Really nothing new here, but let's say in the AXS division, we have combined the X-ray Diffraction and the single crystal diffraction and put that on the same basic platform in mass spectrometry. We have consolidated on to one compact software family for the life sciences mass spectrometers. And we have also integrated source and electronics and firmware technologies to where maybe years ago we had three or different Islands, one for each product line, and now we really have shared modules, and in many cases a combined base electronics firmware and software; so this platform strategy, and then deriving more things from a somewhat modular platform.

We've done that, and then marked by honestly 20 years ago very successfully. And I bet could I continue with the examples, but these are some recent examples. This is something we've been doing for a long time and we continue to do. That always makes sense and gives you better volume leverage and better margins and better quality and everything. And you can also do more in the future and derive new products with less R&D efforts. So, I hope that it's the first part of question.

Jose Haresco

But we can still expect in the longer run your R&D as a percentage of sales would still be around 9%, 10%, but we should just expect that to be a lot more efficient use of that dollar?

Frank Laukien

I think our R&D is incredibly efficient today, which is why we're bringing out so many new products and have very good organic growth. And we believe in many areas are gaining market share. But over time, as our revenue grows, we intend to keep R&D close to constant while acquiring new division, of course, it will have some of its own R&D, but that's why over time we are expecting leveraging of our scientific instruments R&D percentages from traditionally, maybe 12%, 13%, down towards 10%. And at that range, we probably want to keep it because we want to continue to be an innovation and growth leader in the industry.

Jose Haresco

Brian, on the tax rate, I know this is kind of a multi-year process, so where in the long run can you see the tax rate go?

Brian Monahan

Yes, we're still looking at opportunities and initiatives so we only talked about our goals for this year, which was to get the tax rate down into the low 30%. It was higher last year. I think next year when we come out with goals for 2011 we'll articulate what we believe the tax rate can be then. But there are certainly opportunities, and we want to reduce that rate below 30%. Exactly when we can do that, I'm not sure, but we're going do it as quickly as we can.

Frank Laukien

We are not on the other hand planning any very aggressive tax strategy because some of those strategies with moving your IP to low tax countries abroad and so on. We'll see how they will do politically, but they clearly are a target, and so we have not and do not plan any very aggressive tax moves going forward.


Thank you. There are no more questions in the queue at the moment.

Frank Laukien

Okay, excellent. Well, we would like to thank you once again for joining us, and this concludes our earnings call. We'll speak to you next quarter, or at various conferences. And good-bye and thank you very much again. Have a good day.


Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Good day and thank you for joining us.

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