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Bruker Corporation (NASDAQ:BRKR)

Q3 2010 Earnings Call

October 28, 2010 9:00 am ET

Executives

Stacey Desrochers - Director, IR

Frank Laukien - CEO

Brian Monahan - CFO

Tom Rosa - CFO, Bruker Energy & Supercon Technologies Inc.

Bill Knight - COO

Analysts

Vijay - Deutsche Bank Securities

Tycho Peterson - JPMorgan

Isaac Ro - Goldman Sachs

Jon Wood - Jefferies & Co

Derik De Bruin - UBS Equities

Dan Leonard

Jose Haresco - JMP Securities

Operator

Welcome to the Bruker Corporation Quarterly Earnings Call hosted by Stacey Desrochers. My name is Pam and I am your event manager. During the presentation your lines will remain on listen-only. (Operator Instructions). I would like to advise all parties that this call is being recorded for replay purposes.

Now I would like to hand over to Stacey. Please go ahead.

Stacey Desrochers

Good morning and welcome to Bruker Corporation’s third quarter 2010 financial results conference call. I am 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 & Supercon Technologies Inc subsidiaries 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 or GAAP, we will discuss certain non-GAAP financial measures, including adjusted EPS, adjusted operating income and adjusted operating margins, 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

We appreciate you joining us today. Before I provide a business update and discuss the financial highlights for the third quarter and first nine months of 2010, I would like to welcome our new sell-side analyst Jose Haresco from JMP Securities and Isaac Ro from Goldman Sachs. Welcome gentlemen.

During the third quarter of 2010 Bruker reached an important milestone as we celebrated our 50th anniversary by opening the NASDAQ on September 7th. My outstanding Bruker colleagues and I are now looking forward to our next 50 years of profitable growth and shareholder value creation by following our motto, innovation, risk integrity and by focusing on our customers.

I believe most of you have read our earnings press release issued earlier this morning, and you are now presumably familiar with the key numbers in the earnings release.

In the third quarter of 2010, we continue to deliver solid organic top line growth as well as significant margin expansion. Specifically in the third quarter of 2010, our revenue increased year-over-year by 17% to $310.2 million. Revenue in the third quarter still increased by 17% organically, when we exclude the effects of both foreign currency translation and of the Chemical Analysis Division acquisition, which we completed in mid May of 2010.

GAAP net income for the third quarter of 2010 was $27.4 million, or $0.17 per diluted share, compared to GAAP net income of $16.4 million, or $0.10 per diluted share in the third quarter of 2009.

Adjusted net income, which excludes acquisition-related restructuring and other charges increased by 90% year-over-year to $31.5 million in the third quarter of 2010, or $0.19 per diluted share, compared to adjusted net income of $16.8 million, or $0.10 per diluted share in the third quarter of 2009.

For the nine months ended September 30, 2010, our revenue was $888.8 million, an increase of 18% over the first nine months of 2009 or 15% organic growth, when we again exclude acquisitions and the effect of foreign currency translation.

GAAP net income for the nine months ended September 30, 2010 was $66.1 million, or $0.40 per diluted share, compared to GAAP net income of $37.7 million or $0.23 per diluted share during the nine months ended September 30, 2009.

Adjusted net income for the nine months ended September 30, 2010, increased by over 90% to $73.4 million or $0.44 per diluted share, compared to adjusted net income of $38.3 million or $0.23 per diluted share during the nine months ended September 30, 2009.

Moving beyond the numbers as a result of our very competitive portfolio of high performance systems and solutions, our new order bookings continue to be quite healthy and our backlog again was strong at the end of the third quarter of 2010 in both of our segments.

We continue to monitor the academic and government research budgets in Europe, we were satisfied with the outcome of the UK budget debate as it relates to research spending, which now is not expected to be decreased, but rather will be health constants the next few years.

The UK is an important scientific market for us accounting for approximately 5% of our overall revenue. Germany announced the intends to increase their Federal Ministry of Education and Research in German Research Foundation budgets by 7% and 5% respectively for 2011 and also increased the budgets for the (inaudible) Society and the (inaudible) Association and also we will put in place R&D tax incentives for business. Spain’s Ministry for Science and Innovation budget is now expected to increase by 1.2% for 2011. As we discussed previously France announced an increase in French budget for Higher Education and Research by 2.7% each and also put in place R&D tax incentives.

Finally, the European Union announced an increased in the Central Funding Research Fund by 12% for 2011. The US is also planning to growth the NIH budget by over 3% in 2011. This provides further evidence that key countries will continue to invest in academic and government research for their future.

Moving from academic research to our new Chemical Analysis division, which was established on May 19, 2010, when we completed the acquisition of three former Varian Inc. product lines the Laboratory GC and GC triple-quadrupole mass spectrometry, and ICP mass spectrometry system.

Our integration efforts here are on track and in the third quarter of 2010 our new Chemical Analysis division generated revenues of $17.1 million, which exceeded our base line goal of $8 million for the quarter.

We are presently still operating the three Chemical Analysis factories and some of its IT infrastructure and field offices. Under transition services agreement with Agilent at their previous factory or field office sites. We expect to move into our own production and final test facilities in Q1 and Q2 2011.

For the fourth quarter 2010, we expect the CAD revenue of greater than $12 million. This is an increase compared to our prior guidance of $8 million per quarter.

Subsequent to the end of the third quarter on October 7, 2010, we also completed the acquisition of the ASM and SOM instruments businesses from Veeco Instruments for $229.4 million and we used $61.8 million of cash and borrowed $167.6 million at a variable interest rate based on LIBOR which is currently under 1% per annum.

The industry leading ASM scientific instruments business headquartered in Santa Barbara, California, as well as the Stylus & Optical Metrology business based in Tuscon, Arizona, along with the global ASM SOM field sales obligations and support organization became part of the Bruker Nano division which is part of Bruker AXS Group adding more than 350 employees in 11 countries.

We are very excited about the addition of these highly regarded ASM and SOM businesses to Bruker as they complement our focus product and market strategies very well. With these additional high performance and industry leading products, Bruker can now serve its global customers and markets even better.

For these ASM and SOM businesses, we expect fourth quarter revenue of $15 million to $20 million and as we had previously stated fiscal year or full year 2011 revenue of greater than $130 million with an adjusted operating margin of 15% or greater. As we also had previously stated we believe that for the full year 2011 this will be $0.02 to $0.04 accretive to our GAAP EPS and $0.06 to $0.08 accretive to our adjusted EPS for fiscal year 2011.

Moving on, concerning our BEST segment, as you have seen in our earnings release today, BEST grew its revenues to $61.2 million for the first nine months of 2010 surpassing full year 2009 BEST revenues of $59.8 million. We are also pleased about a number of the recently announced BEST new order bookings including the new two European XFEL or x-ray free electron laser order from DESY in Germany and CNRS in France both received in September 2010 and both explained in previous press releases.

In our press release issued earlier today, we talked about the outlook for the fourth quarter and full year 2010 and also provided some color on 2011.

Later on in this call, our Chief Financial Officer, Brian Monahan will provide more detailed information but the key takeaways are: we again expect that fourth quarter of 2010 to be the strongest revenue quarter of the year but not to the extreme extent as in prior year. If you recall in 2009 our Q3 to Q4 revenue jump was about $100 million. Obliviously, it will be less so this year and hopefully in the years going forward.

For the full year 2010 we now expect revenue growth of greater than 12% well above our originally stated 2010 goal of greater than 5% currency adjusted growth. If we grow greater than 12% for the year 2010 this will correspond to organic growth of greater than 9% for the full year 2010.

Through the first nine months of 2010 we have seen significant expansion is BSI segment adjusted operating margin and expect the fourth quarter to be highest operating margin quarter of the year 2010. so, for the full year 2010 this should result in adjusted BSI operating margins of greater than 14%, again above our stated 2010 goal of 125 bps increase compared to BSI adjusted operating margin of 12.7% in the full year 2009.

Based on our very good year-to-date bookings trends and high backlog our two recent acquisitions and our encouraging outlook for funding in most of our key markets we believe that we will be able to deliver total revenues in excess of $1.45 billion in 2011.

Lastly, we have demonstrated our ability to expand operating margins over the past few years and we believe the drivers are in place to continue our steady margin expansion in our BSI segment in 2011 and beyond.

With that, I will now turn the call over to Tom Rosa, the Chief Financial Officer of our BEST subsidiary and segment.

Tom Rosa

Thanks Frank, and good morning. Revenue for the BEST segment during the third quarter of 2010 increased by 57% to $22.4 million compared to $14.2 million in the third quarter of 2009. Excluding the effects of foreign currency translation, third quarter 2010 revenue increased by 74%.

The BEST operating loss in the third quarter 2010 was $0.8 million compared to a BEST operating loss of $1.2 million in the third quarter of 2009. Loss per share for the third quarter for the BEST segment was a penny consistent with BEST loss per share of a penny in the third quarter of 2009 also.

Revenue for the BEST segment during the first nine months of 2010 increased by 70% to $61.2 million, compared to $36 million in the first nine months of 2009. excluding the effects of acquisitions and foreign currency translation BEST revenues for the first nine months of 2010 increased by 58% compared to prior year.

The BEST operating loss during the first nine months of 2010 was $3 million compared to a BEST operating loss of $4.3 million in the first nine months of 2009. Loss per share for the first nine months of 2010 for the BEST segment was $0.03 consistent with BEST loss per share of $0.03 in the first nine months 2009.

As previously RI, Research Instruments, which is a majority-owned subsidiary of BEST was awarded a €24.9 million or approximately $33 million contract from DESY in Hamburg, Germany for the supply of 300 superconducting radio frequency accelerator cavities for the European XFEL facility. BEST expects volume deliveries to 2012 and last until 2014. RI also announced a new contract from CNRS in France for the supply of 670 high power radio frequency couplers for the XFEL project.

This €14.8 million or approximately $20 million contract was awarded to a project consortium of Thales Electron Devices located in France and RI under the leadership of Thales. Each company contributes its specialized technological expertise to the project and RI’s financial share of the total contract is slightly under 50% or just under $10 million. The majority of these RF couplers are expected to be delivered in 2012 and 2013.

The new orders contributed to BEST external multiyear backlog increasing by 190% in the last 12 months from $52.5 million as of September 30, 2009 to now $152.1 million as of September 30, 2010. This external backlog figure excludes Bruker inter-company orders.

Some of the backlog will take several years to convert in to revenue specifically the (inaudible) wire and XFEL Cavity contracts, which have delivery schedule to 2013 and ‘14 respectively.

It should be noted that BEST has an S-1 Registration statement on filed with the SEC and is therefore not in the position to provide forecast or forward-looking projections for the fourth quarter or the full year 2010 at this time.

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

Brian Monahan

Since Frank already commented on the overall BRKR financial highlights, and Tom provided a summary of our BEST segment, I will focus on third quarter and first nine months year-to-date results for our Bruker Scientific Instruments, or BSI segment, before providing additional commentary on the fourth quarter of 2010 and full year of 2011.

On the top-line for the BSI segment, during the third quarter of 2010, revenues increased by 15% to $290.5 million, compared to $251.6 million in the third quarter of 2009. Excluding the effects of foreign currency translation and the Chemical Analysis acquisition, BSI revenue in the third quarter increased organically also by 15% year-over-year.

For the first nine months of 2010, BSI revenues increased by 16% to $835.7 million compared to $716.5 million in the first nine months of 2009. Excluding the effects of foreign currency translation and the Chemical Analysis acquisition, BSI revenue in the first nine months of 2010 increased organically by 14% year-over-year. This revenue growth is due continued strength across all four BSI operating divisions.

Now moving further down the income statement, adjusted gross profit margin for BSI in the third quarter of 2010 was 50.1% compared to 45.7% in the third quarter of 2009. For the first nine months of 2010, adjusted gross profit margin for BSI was 48% compared to 45.5% in the first nine months of 2009.

Adjusted BSI operating margins in the third quarter of 2010 expanded by 460 basis points year-over-year to 15.4% and for the first nine months of 2010, BSI adjusted operating margins expanded by 490 basis points to 13.9%. We continue to work very hard to deliver margin expansion and EPS growth at BSI, and our success can be attributed to a number of factors including higher margins associated with revenues high-end, high performance instrumentation, some of which is attributable to the various global stimulus programs. A ramp-up in volume of recently introduced products, which were designed to carry higher gross margins than previous generations of products, continued cost controls, and lastly leveraging our fixed costs with higher revenue volume.

Adjusted GAAP net income for the BSI segment in the third quarter of 2010 was $33.4 million or $0.20 per diluted share compared to adjusted net income of $18.4 million or $0.11 per diluted share in the third quarter of 2009.

Adjusted GAAP net income for the BSI segment during the first nine months of 2010 was $78.6 million or $0.47 per diluted share, compared to net income of $42.6 million or $0.26 per diluted share in the first half of 2009.

Included in GAAP net income for the BSI segment where various charges we do not consider part of normal recurring operational results. These charges are described in the press release issued earlier today and include charges for the sale of Chemical Analysis inventories required to be revalued at the date of acquisition., charges for the amortization of acquisition-related intangible assets and other charges of credit associated with restructuring and business to divestiture activities as well as acquisition related charges the temporary transition services agreement.

We continue to work on balance sheet management and if realized additional improvement in our working capital metrics. We defined working capital as account receivable plus inventories less accounts payable and on a trialing 12 month we improved our BSI working capital to revenue ratio further to $0.50 at September 30, 2010 compared to $0.51 at September 30, 2009.

Operating cash flow for the first nine months of 2010 was $62.7 million compared to $67.3 million in the comparable period of 2009. Free cash flow was $42.2 million during the first nine months of 2010 compared to $58.4 million during the comparable period of 2009. In the third quarter of 2010 our operating cash flow were $10 million compared to $16 million in the third quarter of 2009. Historically, our Q3 cash flow has not been the strongest of the year as built up inventory to meet the challenges and demands of our Q4 revenues.

We ended the third quarter of 2010 with cash, cash equivalents and restricted cash of $190.5 million and net cash of $69.1 million although, as Frank stated earlier, we use cash on hand and assumed additional low interest rate debt in early October when we completed the acquisition of ASM and SOM businesses.

I would now like to provide an outlook for the fourth quarter and full year of 2010 and some initial remarks about the full year 2011. We’ve been successful in reducing our historically very strong seasonality by strengthening our financial performance during the first three quarters of 2010 and becoming less reliant on the fourth quarter to deliver our full year financial goals.

We still expect the fourth quarter of 2010 to be our strongest revenue quarter of the year with anticipated revenue of greater than $360 million which will result in sequential revenue growth of greater than 16% from the third to fourth quarter of 2010. in the fourth quarter of 2010 we expect $0.06 to $0.08 combined GAAP dilution from transition effects associated with our new Chemical Analysis Division acquired in May 2010 and in our new ASM and SOM business units acquired on October 7, 2010. all businesses had inventory valuation step ups at closing operate in part under temporary transition services agreement until we can relocate some of their factories and IT infrastructure, which as Frank talked about earlier, is expected to be completed in the middle of 2011.

These acquired businesses also generate increased non-cash intangible amortization charges. Moreover, after the closing of the ASM and SOM businesses had adopted the Bruker revenue recognition policies essentially shifting most ASM and SOM systems revenue back by 6 to 8 weeks which is a one time shift in the fourth quarter of 2010. this implementation of the appropriate but conservative Bruker revenue recognition policy is also expected to result in increased ASM SOM backlog at the end of 2010 compared to pre-acquisition historical level.

Excluding the new acquired chemical analysis division in ASM SOM businesses for the BSI segment we expect an adjusted operating margin of greater than 16% and adjusted EPS of greater than $0.21 in the fourth quarter of 2010, both up sequentially compared to third quarter of 2010. we now estimate total full year 2010 revenue of greater than $1.25 billion which corresponds to greater than 12% revenue growth compared to the full year 2009. this would be well above our stated full year 2010 goal of currency adjusted revenue growth of 5%. Excluding the new acquired Chemical Analysis Division and ASM, SOM businesses, for the BSI segment we expect an adjusted operating margin of greater than 14% and adjusted EPS of greater than $0.68 for the full year 2010.

Based on our solid year-to-date bookings trends and high backlog, our two recent acquisitions and our encouraging outlook for funding in most of our key markets we believe that we will be able to continue to grow revenues significantly next year. we expect that our full year 2011 revenue will exceed $1.45 billion and it is our goal to continue our steady margin expansion and working capital ratio improvements in our BSI segment.

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

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from Ross Muken.

Vijay - Deutsche Bank Securities

Hi, this is Vijay on for Ross and congratulation on the nice quarter, Frank. A quick housekeeping question, could you specifically color what the impact from M&A was in the quarter?

Brian Monahan

The impact from M&A in the quarter was about 5% that obviously helped revenues Fx actually adversely impacted revenues by the same amount of 5%, so the two offset in the third quarter.

Vijay - Deutsche Bank Securities

Maybe Frank, that was great color on EU academic budgets. Now I was just wondering, just given the transformation that the business has undergone over the last few months, given your increased export to cyclical markets industrial customers. Could you tell us, what’s the ramp you are seeing from a new product perspective out there in those new market segments and how this might serve to maybe offset potential weakness later on in 12 and beyond?

Frank Laukien

Yes I would be glad to. If you look at the year 2009, where we have full year data, our overall revenue still is approximately 68% or 69% derived from academic and governments funding. We also are still close to 48% or 49% of our revenue comes from Europe. These are good numbers, but over time we would like to achieve a little bit more balance over several years and maybe get closer to 50% academic government and 50% industrial applied pharma-type customers, and the both of the acquisitions that we did this year, the Chemical Analysis division as well as the acquisition from Veeco of the AFM and SOM businesses as well as the new products that we brought out at Bruker this year are geared more towards applied, industrial and of course pharma-biotech markets including some clinical diagnostic applied products.

Over time you will see a gradual shift over multiple years. That changes our geographical and our end-user customers. We certainly like the academic spending and the government research spending, as we have done very well with that and are very large budgets that are continuing to grow. It will be good for us longer term to be a little bit more balanced in our geographic and in our end-market exposure if you like.

Operator

Our next question comes from Tycho Peterson.

Tycho Peterson - JPMorgan

Actually just want to pickup on that last question, that’s about your mix and Frank I’m just wondering if you can provide us a little bit more color on Veeco, maybe just what the customer mix looks like. How much of their business was expose to the semiconductor industry and other areas and then any color on geographic spread sales footprint and things like that?

Frank Laukien

Again I’ll have to take the 2009 full year data because that is statistically meaningful and by the way this was in our October 7th press release if you want to look it up. They are largest geographically 38% of their revenue in 2009 came for Asia Pacific including Japan, about 31% from the America and 31% from Europe. Obviously stronger in Asia Pacific, stronger in Americas compared to traditional Bruker revenue, geographical revenue mix.

They also received 55%, but not 70%, 55% from academic and government customers, so very similar sales and business model. It’s close to 50% and therefore they had 45% from applied and industrial customers. However, the applied and industrial customers really most of that goes into non-cyclical or not very cyclical industrial research budget.

The part of the AFM and SOM businesses that I would perhaps characterize as the more t cyclical exposure to semiconductor data storage, is probably overall only about 15%. Cyclical you might say 10% to 20% in some year there maybe 20% maybe a little beyond that and in week or years in the cyclical business it maybe 10%. Overall it’s not a very cyclical business. 80% plus of that has the same, not so strong cyclicality or lack of cyclicality that we see in the rest of Bruker.

Tycho Peterson - JPMorgan

For the CAD business, you are guiding for a sequential decline here into the fourth quarter. Can you just comment a little bit more on what’s behind that and then any color where you stand from an integration process on that front.

Frank Laukien

Tycho was that referring to the Chemical Analysis business.

Tycho Peterson - JPMorgan

Yes.

Frank Laukien

Yes, well we’ve only own that division for one and half quarters, so we still lack meaningful and it wasn’t really a division that we took over from Varian Inc, but we bought three separate product lines businesses, three different factories and we are merging them into a division. Hence, not a lot of historical feel for that.

We think there were a couple of effects we may have overshot a little bit in Q3. Hence, greater than $12 million or maybe $12 million to $15 million range is closer to our estimate for Q4, but again a lot of that. In this new business, we are literally shifting from first into second gear characterizes it well. We are ramping up. Obviously our longer term goals for that is $80 million to $100 million per year or $20 million to $25 million per quarter, but until we get there probably we expect with that would be late or in the second half of 2011.

The integration on the fields or side sales application service is going quite well. Maybe 80% completed might be a good estimate. The factories are operating, but they are operating as their original ex Varian Inc, now Agilent location and we expect to move two of the factories in Q1 namely the factory in the Netherlands and in California, to our own locations that we are presently getting ready for that purpose.

The third factory, the Australian factory we expect that move to occur in the second quarter of next year. That may go a low bit into the third quarter. At the end of the first half, we think the factory moves will have been substantially complete. We are probably 80%, 90% along on the field organization that’s really working well now and they are generating orders and backlog and revenue.

We are still doing this, as I said in part under the more expensive transition services agreement, where we get the IT infrastructure and the factory infrastructure that is provided to us from by Agilent. We are not in the study state financial or operating margin for that business yet and won’t be really until the second half of next year.

Tycho Peterson - JPMorgan

One last one on stimulus, I’m wondering, how you think about your visibility in post-stimulus environment. As you think about what’s in your sales pipeline now. How do we think about stimulus dollar share in the US wearing off and then also are you still seeing any flow through from stimulus in Asia. You talked a little bit about Europe and I don’t think you talked about Asia.

Frank Laukien

In Asia, our Asian business is quite healthy. I don’t know that any of the orders that we’re receiving now are characterized as stimulus orders in Asia. I believe they’re not, at least I haven’t heard anything like that. We do have orders that have not turned into revenue yet from so called stimulus budgets in Asia so that’s coming into revenue, but the new orders that we receive today. I don’t believe are typically considered stimulus orders from Asia.

Whereas in the US a lot of the big ticket items orders that we’ve received recently and we are expect to continue receive into Q4. Still have partial and then very often the majority is funded by US our funding. It turns out that US stimulus funding a lot of that is turning into orders and since a lot of these are really high end equipment like 900 MHz type equipment, 800 MHz type equipment, large FTMS systems and so on. Most of that actually will go into the second half of 2011 and even into 2012.

Compared to what we had previously expected, I would say, Tycho, that because the stimulus funding globally has been spread out so much with US going relatively late but now coming in at a pretty satisfactory rate that on the revenue side until we recognize that have acceptances and recognize it as in revenue the stimulus funding actually goes beyond the middle of the ‘11 and into the second half of ‘11 and even in to first half of 2012.

There is a new stimulus, in France they call it, if you have done a good research report on that they call it a big loan (inaudible). It is not called stimulus policy but it is essentially the same; it is significant additional investment in scientific and research infrastructure in Spain and we see similar intentions in Germany. Other budgets are more flat in the UK, which was a relief as compared the potential spectra of those budgets being cut.

In short, stimulus revenue is extending further for Bruker than what we had anticipated into the second half and even of 2011 and of even into 2012. As you know of course were from our own products to our some acquisitions were also trying to stitch together a pretty smooth hopefully continued growth and margin expansion trajectory into a late ‘11 and 2012 by growing the other applied industrial pharma/biotech/clinical diagnostic market at a faster phase within Bruker.

Operator

Thank you for that question, and our next question comes from Isaac Ro. Please go ahead.

Isaac Ro - Goldman Sachs

Brian, I was wondering as it may be go to the gross margin pieces obviously nice improvement in quarter and you could may be come in on sort of the impact between the volume level versus may be operational furniture making?

Bill Knight

Sure. Hi Isaac. I am Germany at the moment. Can you hear me okay?

Isaac Ro - Goldman Sachs

Yep.

Bill Knight

Yes, there’s a little bit of factory leverage come into here but the real important contributor the new products that we have been introduced the last 18 to 24 months that have carried significantly higher margins than their predecessor quality footprint is much better. Some of the installation and this is what we have to go through or shorter. Those have been the real drivers.

We continue to have opportunities and we are putting programs in place to continue to pull cost out of our existing product lines with some sourcing activities. We continue to look at our brick and mortar and see where we can leverage and also everything that we have in our R&D product portfolio, our development portfolio is designed for lower cost higher quality. Those were contributors.

Isaac Ro - Goldman Sachs

If I look at your guidance you guys are putting up for 2011 I just want to make sure that I have my math more or less right on the organic side of things. So, if we exclude the impact on acquisitions it looks like your guidance for rest of this year would imply the base business will be more or less $1.2 billion in revenues and if we back out the acquisitions next year it looks like the base, this will be about 1.26. So, 5% growth there.

Assuming my math is right that post currency which should look like it will be a tailwind. That I assume the organic growth for the base is gradually implying would be low single digits and if that is right I mean team pretty conservative given the visibility of having your backlog. Is there something I am doing wrong there or I can just take a conservative out look to the underlined demand?

Frank Laukien

We are going to give our 2011 details financial growth when we report the full year 2010, which we tend to do at the end of February and then we will obviously spell out no only a greater than revenue goal but also margin and a EPS goals and some working capital goals and so on.

So, we just wanted to alert everybody to the pretty significant revenue jump that we expect from 2010 to 2011 and at this point simply indicated that we expect as a baseline greater than $1.45 billion. I do not think we are prepared to discuss any specific organic revenue growth rate for 2011 at this point. We just wanted to give a first outlook for 2011, but not guidance for 2011, we are not prepared for that at this point, but intend to do so of course at the end of February.

I would not agree with that conclusion, it would be premature based on the very limited data we have given you so far to conclude that we are aiming for a low single digit or 5% organic revenue growth rate in 2011. That is not the case, but we just wanted to give you some baseline.

Operator

Thank you for that question and our next question comes from (inaudible).

Unidentified Analyst

Could you please give us enough data on the progress on the BEST offering and indicate when you think the timing of the release of the shares is likely and when do you think you will give a price indication for this underwriting?

Stacey Desrochers

We cannot respond to that as a result of being on the S1 filing. That is all we have to say about that.

Frank Laukien

We regret that we are limited in what we can address here, and we can just not address that question.

Operator

The next question comes from Jon Wood.

Jon Wood - Jefferies & Co

Brian, can you give us some sense on the cash flow outlook in 4Q at least qualitatively because I know you have got lot of probably inventory coming in from the Veeco transaction, just general direction in cash flow would be helpful?

Brian Monahan

As I commented on briefly earlier, our cash flow as you look at the last several years, a vast majority of our operating cash flows, more than 50% have come in the fourth quarter of the year and we expect this year to be comparable. Typically, if you take each quarter in the year our Q1 cash flows are not typically very strong.

That’s when we have a lot of cash, tax payments becoming due, year end commission, bonuses, a lot of those types of things. Q2 we typically have an increase in cash flows over Q1, Q3 has backed down again as we really ramp up to meet the Q4 results. So, that is the way this year is tracking and as we talked about earlier we expect at least a $50 million increase in revenues between Q3 and Q4 that will turn the inventory build up into revenues and profits in cash flow. So, we would expect Q4 to be the strongest revenue cash flow quarter of the year.

Jon Wood - Jefferies & Co

In third quarter did the Chemical Analysis business make money if you take out all the charges?

Frank Laukien

It did not make money. This is frank, I did not make money and I do not know that we can cleanly dissect it yet, what if we were in our own factory already that would be too many assumptions going in. The long and short of it, no we did not make money, it would not make money in Q4 yet either, we hope to get it to break even in 2011 and in fact towards profitability in the second half of 2011. We in 2012 or so aim to be hopefully in the 12% plus operating margin and hopefully higher the following year.

That business is a real significant integration effort. It will take a couple of years of patience as we ramp up, but we are on track, it is going quite well given that we are basically building a new division from different pieces.

Jon Wood - Jefferies & Co

On the Veeco side, you commented on the revenue $15 million to $20 million, what’s the impact from the accounting shift, a ballpark figure?

Brian Monahan

John this is Brian. We have talked about a press release on October 17th obviously, the expenses date all get shifted but the revenue get shifted with this revenue recognition policy. So, we are expecting with that 15 to 20 million revenue contribution that this business will generate a GAAP operating loss between $6.5 million and $7.5 million or GAAP loss of $0.04 to $0.05 per diluted share in the fourth quarter. There are some tangible amortization and other transition services, add up those one-time non-GAAP charges. Those are just under 4 million. It will be certainly dilutive in the fourth quarter.

Jon Wood - Jefferies & Co

Your estimate on the non recurring side is like 4 million bucks on Veeco?

Brian Monahan

Yes, four million, 3.8 million.

Jon Wood - Jefferies & Co

Basically that becomes quickly profitable you know as you wash the backlog, the transition services agreements come off right?

Brian Monahan

Yeah. Absolutely. Q1 on 2011 we expect the entered the 2011 with backlog higher than the historical pre-acquisition levels because of this shift. We are going in and we would not have that any affect from that one time shift in 2011, but we will have certain causes associated with the transition service agreement that not unlike the Chemical Analysis acquisition. They will be present probably the first half of 2011, and then we’ll as quickly as we can remove ourselves from needing to rely on those services and will probably the middle of next year will be out of many of those transition services agreement.

Frank Laukien

We expect that this AFM and SOM business if that it will be added for normalized revenue run rate already in Q1. Yet, there will be some higher expenses due to the transition services agreement due to the need to move. We acquired their Santa Barbara facility, we’ll need to do some renovation but we are staying there we own that building. We did not acquire that their facility if their building in Arizona and, therefore, will need to move that to an another location somewhere near to Tuscon sometimes during 2011.

There is some transition effect but it is a very different story in terms of integration. It does not require a lot of integration and other than the one time revenue shift, this business will be in fourth gear and accelerating hopefully already by Q1. Although you still see some additional expenses in the primarily in the first half of the year, but that is why we have given the non-GAAP adjusted EPS guidance of being it being accretive $0.06 to $0.08 next year with greater than 15% adjusted operating margins and $130 million plus of revenue for the full year 2011. That business should be coming right along except for the one time Q4 that is explained.

Jon Wood - Jefferies & Co

Last one, Frank, just come in on the agreement with Becton on the MALDI Biotyper? Just talk through the rational there, why at did you do the partnership? Basically, any financial characteristics you can offer on that?

Frank Laukien

We did not disclose any financial details but it is not an agreement that is primarily driven by financial or any payments one way or the other. This is really a logical alliance, if you like, with one of the leading microbiology companies in the field. We think they have additional marketing in distribution reach. Their AST systems and also especially their market leading blood culture system combining or integrating that with the output of our MALDI Biotyper for faster times result ID and I should caution this again this is not yet FDA approved in the United States but it has the IVD CE mark.

My comments for the United States should be considered as for research use only. Different elsewhere in the world. We think that this made an awful lot of sense and they are very nicely complimentary technologies by BD (inaudible) by Bruker and they clearly appreciate the value of this disruptive or you could say revolutionary technology for microbiology ID that is presented by the MALDI Biotyper and our very clear market leading position they worldwide. It’s a very sensible alliance to make things more integrated and provides smoother work flows and additional distribution reach for microbiology customers.

Operator

The next question comes from Derik De Bruin.

Derik De Bruin - UBS Equities

A question on the Q4 guidance, it looks like on an apples-to-apples basis that when you compare to Q3 you are guiding some marginally up EPS growth in Q4. Yet you are getting higher volumes, more profitable the operating margins are improving in the BSI business in Q4. Curious is to why there was not a bit more (inaudible) in the EPS line and am I missing something below the line?

Frank Laukien

We gave the adjusted, most of you on the sell-side and most of our other investors we believe at this point are modeling from how did BSI look at the beginning of the year and then how to be compare apples with apples to the previous year. That’s the guidance we provided for Q4. On top of that, we have the impact that we have explained of the two acquired businesses, which in Q4 will be diluted $0.06 to $0.08 we stated.

Derik De Bruin - UBS Equities

Right, but the $0.21 is excluding the $0.06 to $0.08. You $0.19 cents in Q3, you are guiding to $0.21 excluding these items in Q4. That’s your apples-to-apples you got you’re the BSI margins going up, so I’m just curious as to why? There is a more room?

Brian Monahan

We haven’t reported Q4 yet so we saw it would be $0.21 or more. We didn’t say $0.21, but we are not ridiculously low bowling there is something like that. We think $0.21, as stated is a good baseline maybe you can do a little bit better. We think it’s a good baseline and we obviously will endeavor to do slightly better.

Derik De Bruin - UBS Equities

Fair enough. You required the [CAG] and the Veeco business. Can you basically give us just what the new revenue and geographic mix is for customer mix and geographic mix for the new business, just present academic, present Asia. I just wanted to get the numbers out like an update like marking.

Brian Monahan

I don’t have the numbers ready that predict that for 2011. For the ASM and SOM business, the Veeco acquisition if you like, we did provide it is printed in our October 7th press release and there we had 38% Asia Pacific, 31% Americas, 31% Europe, so differential graphic mix and 45% from applied industrial and 55% from academic government customers. I had explained earlier that of the 45% of that business for applied industrial customers only about a third or may be 15% of that business overall tends to be of the more cyclical semiconductor data storage type nature, so that may go up you know, between 10 and 20% as an estimate. It is also a small part of businesses is cyclical.

On CAD we probably can provide some better statistics once we’ve had it for seven and a half months at the end of the fourth quarter. Right now, we do not have statistically meaningful data on that yet. Directionally, it also has a greater revenue percentage of Asia and it is pretty strong in Europe and it is not quite as strong in the America’s, it is strongest market is Asia Pacific.

Asia Pacific, I do not what the number will be but it may be close to 40% for CAD, and obviously caters much, much more to food safety, environmental, industrial petroleum, synthetic chemistry type markets, and has a relatively small academic and non-profit component, but again these are qualitative directional indications rather statistical percentage figures. We hope to give something better than this by February once we observe that business for 7.5 months.

Derik De Bruin - UBS Equities

If I remember correctly the that the ICPMS business that (inaudible), its headquarter in Australia and an varying use again and enormous FX benefit from having that particularly Aussie dollar was a lot stronger and that’s kind of what situation right now, I mean, does it make more sense to basically integrate that operations or to make more sense to kind of keep that out simply the current hedge out there? I am just curious as to you know some of the rational in terms of many manufacturing consolidation?

Frank Laukien

Good question. Right now, it doesn’t move than ethereally at either way because its obviously still relatively small volume and you are right of course the Aussie dollar appreciated quite a bit against the US dollar.

To be honest, we haven’t modeled it because its relatively small number that don’t move the needle. So, I am afraid I don’t have a good quantitative answer for you. Longer term will we will keep the R&D and marketing for that and in Australia and consolidate it with our facility in the Melbourne area in state of Victoria there, and consolidate the manufacturing without Californian GC triple cord manufacturing operation.

Operator

Thank you for that question. Our next question comes from [Dan Leonard].

Dan Leonard

A question on the fourth quarter guidance what why are you presenting a flat to year over year revenue to climb in the fourth quarter?

Frank Laukien

We again have given a greater then number we just have it structured try to plan our business to make it less to have less extreme seasonality. What we may be experiencing this year of $50 million or 16% plus sequential jump between Q3 and Q4. So, getting very good growth rates and margin improvement for the full year, it’s the better way for us to run our business.

Hopefully that will be the new base line for Bruker Scientific Instrument business rather than the so much accepted, in our opinion, seasonality we had last year when from Q3 at above $260 million to Q4 about $360 million, we jumped at around a $100 million, obviously almost a 40% sequential jump. That’s not our preferred way of running the business. Hopefully this quarterly trends of this year within overall very good full year are our preferred way for us to manage the business.

Hopefully also for the Street at least going forward more quarterly sequential, a flow of sequential increases during the year. That’s how we like to plan and execute this year and then hopefully in the future.

Dan Leonard

Frank, when you mentioned that you are managing the business since last seen in seasonality, what does that mean? Does that mean you are you are offering better terms spoke who purchase instrument earlier in the year? What some of the mechanics behind that management of the top line?

Frank Laukien

It really has to do manufacturing and installation and inventory management. It really doesn’t affect customers at all. Forecasting, so there is no impact on customers or how we deal with customers are earlier versus late incentives, actually we should don’t do these. We don’t play these marketing games of special sales action.

We are very consistent to our customers. Because their sale cycle also prolong anyway. Most of these deals have 3 to 6, sometimes 24 months of sales cycle. If you can’t surprise them and say, ‘Hey, we now have the year end special or immediate your clearance’, we don’t do that. It’s really all of our internal operational planning which a lot of people are driving, Bill Knight, in particular our Chief Operating Officer

It’s better for us in the way our cash flows running in the way we balance our capacity, but it clearly is internal it’s not something a customer would see.

Dan Leonard

Just to clarify the 9% organic growth for the full year that includes full PSI and (inaudible)?

Frank Laukien

That’s correct. That is out. Yeah, thank you.

Dan Leonard

The final question the impact of Fx and EPS in the quarter?

Brian Monahan

In the quarter, it did not have an effect in the third quarter of 2010, is your question?

Unidentified Analyst

Yes.

Brian Monahan

The Fx really didn’t have a tremendous impact on the top line, we have had bigger impact. The way we are designed and setup it works its way from revenue through gross margins down the operating income it has offsets in each places, but ultimately they wash out in the third quarter Fx changes didn’t have a meaningful impact in our EPS and for the full year it did not either.

Operator

Our final question comes from Jose Haresco.

Jose Haresco - JMP Securities

Could we talk a little bit about the [long-term] strategic plan with regards to new product rollouts because the margin expansion that we have seen this quarter and probably over the last year has been driven off course partially by volume and also largely by the product you kicked out in the last 18 to 24 months, so where we out of the nine in to game, where we in terms developing a full grown out pipeline and looks that has a still room for margin improvement and how do these acquisition play in to that over the next few years.

Frank Laukien

It’s good question. I mean to be flip in, but I’d say it never end. I mean its not that will be this is an ongoing innovation and new product cycle that really, it’s a continuous processes and I would submit that we have one of the best new product and innovation in R&D in this industry. We got a lot for it not only in terms of growth including organic growth, but also in terms of margin improvements.

That never ends. It’s not that we are half way. I have no idea where we are. We always have to do that. We have to do this next year and the following year end and we intend to do so.

Our margin improvement we set certain goals as you know for 2012, hopefully in adjusted BSI operating margins of 15% depending on how things go, maybe we reach that goal a little bit earlier and then we will look at longer term goals and we will likely raise our operating margin goals for the subsequent three year period beyond the 15%. We are not prepared to do that today. We want to look at the full results and you may hear more about new long-term goals when we report the full year at the end of the February 2011, but its not that we trying to reach 15% and that’s the end of it and how far we are long. That’s one milestone and then we will set new milestones and goals.

Jose Haresco - JMP Securities

Brian just a quick housekeeping issues, as we look forward to 2011, what should we thinking about in terms of the tax rates?

Brian Monahan

For this year we talked about in the low 30% and year-to-date we are at 32% so we are achieving our goals. Third quarter was slightly below the average of the first half of the year its 27% so we are making progress on the tax rate, still other ways to go, but we will provide specific guidance in February. As Frank said that our goal is certainly to bring that 32% rate down close to 30 and more of midterm, bring it below 30%, but we are not prepared to comment on specific 2011 rates just yet. We are making process when delivering on the tax rate that we did set out for 2010.

Jose Haresco - JMP Securities

Will you expect that, again as you are thinking about 2011 that the impact that would be similar to this year because you obviously had a lot of swings up and down. What’s the most conservative assumption to work with in your mind?

Brian Monahan

Just don’t know yet. We will need to see where the yearend and so we will comment further on that in February as well.

Frank Laukien

Maybe directional and again it’s a directional I apologize, but most of the profitability of the new lease the former Veeco businesses, the AFM and SOM businesses its in the United States and you noted its all has been one of our challenges in tax planning is that we were in profitable and could not in the United States.

This will take a big step in helping us towards US profitability, which should have a good positive effect on our tax rate not only for a ‘11, but for several years in to the future. Again a qualitative comment only, but that was one of the attractive features of this acquisition with the two factories being in California and Arizona.

Operator

We have no other question at this time.

Frank Laukien

Okay, great and again thank you very much operator. Thank you very much to all the participants. I appreciate you for joining us today. This concludes our third quarter earnings call. Good bye and see you next time. Thank you.

Operator

Thank you. Ladies and gentlemen, that concludes your conference. You may now disconnect.

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