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Bruker Corporation (BRKR)

Q3 2011 Earnings Conference Call

October 27, 2011 09:00 ET

Executives

Stacey Desrochers – Treasurer and Director, Investor Relations

Frank Laukien – President and Chief Executive Officer

Tom Rosa – Chief Financial Officer

Bill Knight – Chief Financial Officer and Interim Chief Operating Officer

Analysts

Tycho Peterson – JPMorgan

Amanda Murphy – William Blair

Isaac Ro – Goldman Sachs

Peter Lawson – Mizuho Securities

Dan Arias – UBS

Dan Leonard – Leerink Swann

John Wood – Jefferies

Operator

Good day, ladies and gentleman, and welcome to the Bruker Corporation quarterly earnings conference call. My name is (Cathy) and I’ll be operator for today. At this time, all participants are in a listen-only model. Later, we will conduct a question-and-answer session. (Operator Instructions) As a remainder, this conference is recorded for replay purposes.

I would now like to turn the conference over to your host for today’s call, Ms. Stacey Desrochers, Treasurer and Director of Investor Relations. Please proceed, ma’am.

Stacey Desrochers – Treasurer and Director, Investor Relations

Thank you, good morning and welcome to Bruker Corporation’s third quarter 2011 financial results conference call. With me on today’s call are Frank Laukien, Bruker’s President and Chief Executive Officer; Bill Knight, Bruker’s Chief Financial Officer and interim Chief Operating Officer; Brian Monahan, Bruker’s Vice President of Strategic and Financial Planning; and Tom Rosa, the Chief Financial Officer of our Bruker Energy & Supercon Technologies Inc. subsidiary, or BEST.

Before we begin let me briefly cover our Safe Harbor statements. 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 not 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 we measures and forecast the company’s performance, especially when comparing the results to previous periods or forecasts. A reconciliation of our GAAP to adjusted numbers can be found in our press release issued earlier today and is located in the Investor Relations section of our bruker.com website.

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 Bill will discuss the financial results of our Bruker Scientific Instruments segment in more detail.

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

Frank Laukien – President and Chief Executive Officer

Thank you Stacy and good morning everyone. We appreciate you joining us today. Before I provide the business update and discuss additional highlights for the third quarter and the first nine months of 2011. I’d like to welcome our new sell side analysts, Amanda Murphy from William Blair, and Derik De Bruin from Bank of America Merrill Lynch. Welcome.

I believe most of you read our earnings press release issued at 7 A.M. this morning and you are now familiar with the key numbers in the earnings release. In the third quarter of 2011, we continue to deliver excellent top-line growth. Specifically, in the third quarter of 2011, our revenue increased year-over-year by 35% to $418.4 million. Revenue in the third quarter of 2011 increased by 11% organically when we exclude the effects of foreign currency translation and acquisitions.

GAAP net income for the third quarter 2011 was $19.8 million or $0.12 per diluted share compared to GAAP net income of $27.4 million or $0.17 per diluted share in the first share of 2010. Adjusted net income which includes acquisition related restructuring and other charges was $36.2 million in the third quarter of 2011, or $0.22 per diluted share compare with adjusted net income of $35.2 million, or $0.21 per diluted share in the third quarter of 2010.

For the nine months ended September 30, 2011, our revenue was $1.176.6 billion, an increase of 32% over the first nine months of 2010 or 8% organic growth year-over-year. GAAP net income for the nine months ended September 30, 2011 were $53.2 million or $0.32 per diluted share compared to GAAP net income of $56.1 million or $0.40 per diluted share during the nine months ended September 30, 2010.

Adjusted net income for the nine months ended September 30, 2011 was $92.7 million or $0.56 per diluted share compared to adjusted net income of $79.9 million or $0.48 per diluted share during the nine months ended September 30, 2010. As a result of our competitive portfolio of high performance systems and solutions, our new order bookings continued to grow strongly in the third quarter, both year-over-year and sequentially, and our already high contractual backlog has grown even further.

We believe that Bruker can continue to grow considerably faster than our market even in a slowing macro environment. We continue to monitor the academic and government research budget in Europe. The EU Commission scientific research budget is expected to increase by approximately $1.2 billion or 13% in 2012, the German scientific research budget is expected to increase approximately $1.6 million or 10%, which will more than offset the anticipated (indiscernible) France of 1% and Spain of 3.5% and the continued flat budget in UK.

The German budget proposal has a high chance of being adopted because research has been the key investment in the country’s future growth. Also research and infrastructure budget in many and newer European Union member states in Central Europe as well as in Russia and Turkey have grown dramatically.

Moving on to our new Chemical & Applied Markets division, or CAM, which was established on May 19, 2010, when we purchased the three former Varian Inc. product lines, Laboratory GC, GC Mass Spectrometry, GC Triple-Quad Mass Spectrometry, and ICP Mass Spectrometry for $32.5 million at the time. As a reminder, during the first half of 2011, we moved all the manufacturing locations out of the old Varian locations to new Bruker facilities, and the ICT in that factory was move from Australia to Fremont, California.

Additionally, during the year, we have made significant investments in revamping and developing new products, specifically the aurora M90, a new ICP MS system with new levels of sensitivity, dynamic range and productivity, along with the game changing SCION triple-quadruple and single-quadruple mass spectrometer for GC, or gas chromatography detection, designed to enhance data quality and productivity in routine testing for to safety, forensics, doping, environmental, industrial and other applied markets.

We are also continuing to invest in our CAM direct and indirect distribution channels to be able to better addressed the greater than $2 billion of additional market potential for our new CAM products. Due to this very significant investment, our BSI segment’s first nine months adjusted operating margin declined from 14.9% in 2010 to 12.9% in 2011. Excluding the CAM division for a moment, the adjusted operating margin of the remainder of our BSI segment improved slightly to 15.1% for the first nine months of 2011.

For CAM, our financial goal is to leverage these startup investments and reduce the CAM division loss by more than half in 2012, and to be about breakeven in 2013 with significant addressable markets and a considerably strengthened portfolio of product and solutions, we expect continued rapid CAM top-line growth during these periods.

Subsequence to the end of the third quarter on October 12, 2011, we completed the acquisition of Center for Tribology Inc., or CETR, a highly regarded tribology mechanical testing and nano-indenting company with projected fiscal year 2011 revenue greater than $10 million and EBITDA greater than $2 million. With these additional industry-leading systems, Bruker continuing it’s commitment to provide the world’s most innovative (indiscernible) high performance applications enabling instrumentation.

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

Tom Rosa – Chief Financial Officer

Thanks Frank, and good morning. Revenue for the BEST segment during the third quarter of 2011 increased by 24% to $27.7 million compared to $22.4 million in the third quarter of 2010. Excluding the effects of foreign currency translation third quarter 2011 revenue increased by 13% year-over-year. The BEST adjusted operating income in the third quarter of 2011 was $0.4 million compared to a BEST adjusted operating loss of $4.6 million in the third quarter of 2010.

The adjusted loss per share for the third quarter of 2011 for the BEST segment was $0.01 consistent with the BEST loss per share of $0.01 in the third quarter of 2010. Revenue for the BEST segment during the first nine months of 2011 increased by 30% to $79.8 million compared to $61.2 million in the first nine months of 2010. Excluding the effects of foreign currency translation BEST revenue for the first nine months of 2011 increased by 22% compared to prior year.

BEST adjusted operating income during the first nine months of 2011 was $0.5 million compared to an adjusted operating loss of $2.4 million in the first nine months of 2010. Adjusted loss per share for the first nine months of 2011 for the BEST segment was $0.02 consistent with BEST adjusted loss per share of $0.02 in the first nine months of 2010. The BEST external backlog as of September 30, 2011 increased by approximately $20 million or by 13% to $172.2 million from $152.1 million as of September 30, 2010.

Included in BEST backlog was a follow on the order received in the third quarter for two crystal growth magnet or CGM systems for semiconductor applications from a Korean electronic materials company. This order valued at approximately $1.5 million follow the successful factory acceptance testing of the first CGM system, which was shipped in the first quarter of 2011.

During the third quarter 2011, $3.4 million of deferred offering cost related to the proposed initial public offering a BEST were expensed. Although BEST remained in registration we believe this approach is appropriate at this time as the timing of the BEST IPO with uncertain particularly under the current financial market conditions.

I will now turn the call over to the CFO of Bruker Corporation, Bill Knight.

Bill Knight – Chief Financial Officer and Interim Chief Operating Officer

Thanks Tom, and good morning everyone. As Frank has already commented on the overall Bruker financial highlights and Tom provided a summary of our BEST segment. I will focus on the third quarter and first nine months year-to-date results for our Bruker Scientific Instrument or BSI segment.

On the top-line for the BSI segment during the third quarter of 2011, revenue increased by 36% to $294.6 million compared to $290.5 million in the third quarter of 2010. Excluding the effects of foreign currency translation and acquisition BSI revenue in the third quarter includes organically by 11% year-over-year. For the first nine months of 2011, BSI revenue increased by 33% to $1.108.3 billion compared to $835.7 million in the first nine months of 2010.

Excluding the effects of foreign currency translation and acquisitions, BSI revenue in the nine first months of 2011 includes organically by 7% year-over-year. This revenue growth is due to continued strength across all four BSI operating division. Now moving further down the (income) statement, adjusted gross profit margin for BSI in the third quarter of 2011 is 48.2% compared to 51.3% in the third quarter of 2010. The decline primarily driven by still very low growth profit margin in the CAM division, which we do not expect to normalize until CAM is fully settled into its new factories in 2012.

For the first nine months of 2011, adjusted gross profit margins for BSI with 48.0%, compared to 48.5% in the first nine months of 2010. But we continue to make good progress on gross profit margin. Without CAM, the adjusted gross profit margin for the remainder of BSI would have been 50.1% for the first nine months of 2011. Adjusted BSI operating margins in the third quarter of 2011 were 13.3% and 12.9% for the first nine months of 2011 compared to BSI adjusted operating margins of 17.1% and 14.9% for the third and first nine months of 2010 respectively.

As Frank, already stated, our BSI adjusted operating margin without CAM was 15.1% for the first nine months of 2011. Excluding CAM, our adjusted BSI operating margins have remained relatively unchanged year-to-date. As we have stated in Q2 2011 earnings call this is partially due to FX and to the commission expenses being due in part in orders are received, while our bookings have grown considerably faster than revenue in the first nine months of 2011.

Some of the steps we’re taking to reduce SG&A expending include our hiring moratorium, selected staff reduction and reduction in discretionary expending. Adjusted GAAP net income for the BSI statement in the third quarter of 2011 was $38.7 million for $0.24 per diluted share compared to adjusted net income was $36.9 million or $0.22 per diluted share in the third quarter of 2010. Adjusted GAAP net income for the BSI segment during the first nine of months of 2011 was $97.7 million from $0.59 per diluted share, compared the net income of $84.9 million or $0.51 per diluted share in similar period for 2010.

Included GAAP net income for the BSI segment for various charges within that consider part of normal recurring operational result, these charges are described in the press release issued earlier today and include charges for acquisition, charges for the amortization of acquisition related intangible assets, these related to the Bruker Optics China investigation, and expensing of a previously capitalized BEST IPO fee and settlement of a Swiss multiyear tax audit.

Operating cash flow for the third quarter of 2011 was $21.2 million compared to $9.6 million in the comparable period of 2010. Free cash flow was $14.0 million during the third quarter of 2011 compared to use of cash of $1.2 million during the comparable period of 2010. We ended the third quarter of 2011 with cash and cash equivalents and restricted cash of $198.8 million and in net debt of $112.6 million.

So with that, I will turn the call back over to the operator for any question you may have.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And our first question comes from the line of Tycho Peterson of JPMorgan. Please proceed.

Tycho Peterson – JPMorgan

Hey, good morning. First question maybe for Frank, you commented on some of the dynamics in Europe. I think in general you’ve been a little more positive in some of peers in Europe and some of them have commented on particular softness in Europe this year. Can you talk about the dynamics in the market today and what gives you little more confidence that the trends are seeing more continued.

Frank Laukien

Good morning, Tycho, yes as we have stated some of the dynamics we’ve given you, we find – we see Europe continues to be strong. And it’s obviously patchy. There are some countries that are very strong that are some regions that are absolutely surprisingly strong and will be next year as well and other has been usually those are well known or weaker, but that the macro events really is the headlines that really don’t reflect the situation on the ground. It’s not a lot of business, but ironically we are getting higher business out of Greece this year than in any previous year.

There is many out there, we can find it and if we have the right products. Now, the real drivers are Germany, the European research budgets. France has continued to be quite strong. Eastern Europe is astoundingly strong – eastern and central Europe, Turkey and Russia, extremely strong. So if you know you way around Europe and you’re local in enough places business is strong, period.

Tycho Peterson – JPMorgan

And then as we think about the CAM business specifically you’ve obviously touched on some of the investments you’re making there and the business seems to be progressing quite well. Should we be thinking about a phase of kind of complete portfolio overall our expansion here and then talked about this time in aurora products, but are we going to a phase who even rapidly expand the portfolio for that business.

Frank Laukien

Yes, Tycho, I would concede first of all that now that you really understand the CAM business 18 months or so into after the acquisition, we have to concede that it will require more investment that what we have initially soon when we acquired it in May 2010. And the path to break even is taking us about a year longer than what we had initially if estimated in May 2010, I think that’s simply fair to say.

On the other hand, yes can confirm that we are looking at a substantial or nearly substantial is now complete, but substantial overall of the product line and also a significant expansion of the product line, we’re obviously going to move eventually LC triple quads as well, a very large market so, it will be additions and other additions on our product roadmap that has not been even qualitative in the acquired Varian Inc. portfolio and for the distance we did get from Varian Inc. there is very substantial investment to make them to bring our very significant improvements and capabilities in performance has evidenced already by the IC PMS and the SCION GC triple-quad introductions that have occurred already and where the full rollout is underway.

As we get to know CAM better, while we say the reality that will be given by division, but three businesses and three factories that we have to emerge into a division and that required longer and more investment as we have explained in more detail this time. I think we’re becoming even more excited about the total size of the opportunity and where the business could go in terms of revenue and margins although, it is taking us somewhat longer than what we had initially predicted.

Tycho Peterson – JPMorgan

Okay. And then two other just quick ones, can you talk on backlog conversion terms are you happy with where they are today and if not where you think they can go and then the second one, any update on the China group? Thanks.

Frank Laukien

The backlog conversion is improving, I’m not happy with it yet, but it has improved in Q3, I think it will continue to improve in Q4, but with the very significant step up in orders and many of our divisions it has taken as the couple of quarters at least to begin to adjust the very significant order rates, which if you recall for the first half, orders were up by about 50% in the third quarter, we call the CAM was without the full third quarter 2010 so, the third quarter were up about 40%, but that’s comparable really to the first half of the year because CAM again as I said with us for the full quarter – third quarter of 2010.

So, there is a further room for improvements, we’re pretty rapidly moving in the right direction there and to the second part that the China – Bruker Optics China investigations by the audit committee is continuing and I think that is driven by the audit committee, it is not my phase to make any comments here at this time. And I think he will make the progress announcement if any at the appropriate time.

Tycho Peterson – JPMorgan

Thanks.

Frank Laukien

But it has not impeded in any significant way our ability to do business in China.

Tycho Peterson – JPMorgan

Okay. Thank you.

Operator

The next question comes from the line of Amanda Murphy of William Blair. Please proceed.

Amanda Murphy – William Blair

Hi thanks, I just have a question on the bookings growth. Could you give us a perspective on the organic bookings growth and then I guess if you could talk to of course all of your products lines where you’re seeing the key strength at this point in terms of orders.

Frank Laukien

We have not quantified the organic bookings growth, but it is higher than our organic revenue growth. So, it is higher than the event that what you’ve seen in the organic revenue growth and our book-to-bill ratio continues to be about one.

Amanda Murphy – William Blair

Okay. And then you had about sort of the various product one that you have, is there any area that’s particularly strong at this point in terms of bookings?

Frank Laukien

It’s really been pretty broad-based, so really for the – in the third quarter the trend for the full year, you have continued Amanda, which means up slide bookings in the up slide markets, industrial market, online security, clinical market, I have seen how this stronger growth compared to bookings in the academic market.

Amanda Murphy – William Blair

Okay and then you mentioned in relation to CAM that you perhaps they are seeing potential for bigger opportunity there – is there are you able to provide any more color and what you meant by that.

Frank Laukien

We – not at this time, we will do so when we give our goals for the full year 2012 in February. But longer term and without being able to give you a year when we would get the receive that the CAM division over several years not next year or not in 2013, yes for sure can grow to its $150 million to $300 million division for us and it eventually even larger, but I think that sort of the multiyear plan and we will try to give more color on that when we give our goals for 2012 in February.

Amanda Murphy – William Blair

Okay, and then just lastly on the margin side. So you’ve talked previously about your off shoring initiatives in terms of your procurement initiatives as well. How far along are you in the effort at this point and do they have a meaningful impact this year?

Frank Laukien

Would you take that one?

Unidentified Company Speaker

Hi, those efforts certainly continue, we continue to focus quite a bit on gross profit margin improvement, which is coming from we say that number of times improved product design over costs and then the off shoring procurement effort remained significant to bring in the higher quality lower cost components for those product. So, I think 2011 versus 2010, we have made significant improvement in bringing in those lower costs component. And I think these efforts will be per share ongoing in the coming years.

Amanda Murphy – William Blair

Okay just go into down other words.

Unidentified Company Speaker

Absolutely.

Amanda Murphy – William Blair

Got it, thank you.

Frank Laukien

Amanda, I think it still – this is Frank, I think it’s still early days on the off shoring. I think we’re further along in re-designs cost, which is being going on for some years. There is further room to go there as well. There is further room in factory efficiency especially the CAM factory, which is just moved altogether into one very efficient new factory and there is more room on the outsourcing and then off shoring there is really still relatively early innings if you like.

Amanda Murphy – William Blair

Okay, very helpful. Thanks.

Operator

Our next question comes from the line of Isaac Ro of Goldman Sachs. Please proceed.

Isaac Ro – Goldman Sachs

Hi good morning, thanks for taking the question. I wanted to spend a minute on the profitability of the business you guys obviously running a lot of great assets over the last year or plus and here in the business is not a good actually from the long-term. But I think the one thing investors has brought to me over the last couple of years has been hope that margins will improve and so, appreciating some of the initiatives you have here. Could you maybe walk us through what do you expect the CAM gross profit to sort of look like on the other end of this consolidation you touched on? And then secondarily, if we think longer term on the margins – operating margins of the business, where can they ultimately go because I think you said from the end of the year about $150 million in revenue with a 12% margin – 12.5% operating margin, I’m sorry, yeah 10% operating margin up to 12, but I think in the past years you talked about of course the 75 basis points a year so, kind of look like – look at what projection would look like over the next few years.

Frank Laukien

Yeah, right. This is Frank. You are right, this year, even without CAM, we are moving sideways that have their modest improvements in operating margins. We have good growth in – reasonable growth in the adjusted EPS overall, which ultimately is even more important, but we are committed to both and we’re committed to resume our margin growth for the company overall, but I think the first part of your question was the CAM business and yes, we are investing and all that where is that going, I don’t see any reason why the CAM business once we really are in fourth year and have all the new products and they ramps up the volume and this will take several years why that business should have – should not have be able to reach the 15% to 18% adjusted operating margins. So, I don’t think that CAM inherently in the medium term will be drag on margin, but is clearly going to be an investment and rents to volume on with new product that have even launched yet – that will launch in the next couple for years and then ramp to volume over the following one or two years.

Over a multiyear period, CAM I think we’ll have similar margins – CAM had similar margins to the rest of our scientific instrument business. And for the scientific instrument business, we remain committed to an adjusted operating margin goal of 18% by 2014, we at a much faster than 75 to 100 basis improvements in 2010 and 2009. This year, we are moving sideways without CAM and with CAM obviously we’re going backwards. We’re aware of that and we will endeavor to get back into the trend of improving margin percentages with a continued focus also in top-line growth and fast adjusted EPS growth. So our goal remains the 18% for the scientific instrument business by 2014.

Isaac Ro – Goldman Sachs

Got it. And then if I could just one follow-up on some of the below line items, tax rate, if you had an update on that that will be helpful just take up this quarter sequentially and then share count, I think in the past you focused on repayment of debt and accumulating some cash rather than buyback just, I was just wondering if that’s still the case?

Brian Monahan

You want me to take the tax rate?

Isaac Ro – Goldman Sachs

Yeah, (indiscernible).

Brian Monahan

Yeah, this is Brian. Tax rate as you said was higher this quarter without the major drivers there at the IPO fee that Tom talk about earlier that we weren’t able to tax benefit; also the settlement of the Swiss tax audit as well. Objecting for those were about 35% and then if you adjust for the losses intent that we didn’t expect were down about 32%. So, those are the reconciling items to get to our normalized tax rate.

Isaac Ro – Goldman Sachs

And then just looking at the balance of the year, how should we think about tax rate, and is the right run rate to look at for next year?

Brian Monahan

Yeah, I think the remainder the year we expect to continue to be about 32%, which is what our – generally was goal was for the full year 2011. I expect that would continue to decrease as CAM becomes more profitable or loses less money next year. Some of the other tax initiatives we put in place. I think we’d expect to be the low 32% next year will be more specific when we come out with goals for 2012.

Isaac Ro – Goldman Sachs

Okay and share count or the share count relative to other uses of cash.

Brian Monahan

We do not anticipate any share buybacks, I wouldn’t grow that our category fee, but as you have seen with two larger acquisitions last year although they were very capital efficient, and a couple of smaller acquisition so far announced this year. I think we have an excellent uses for our cash with much higher return on invested capital. So, that’s what we are focused on. I believe we are in and we can generate a lot of shareholder value with disciplined acquisitions with multiples that are fair for the sellers, but also fair for our shareholders and I think that’s a good additional driver of our if you like, currency-adjusted growth because we are obviously very efficient and deploying our capital in acquisitions.

Isaac Ro – Goldman Sachs

Yep, I’m sorry, okay, thanks very much. I appreciate it.

Operator

Our next question comes from the line of Peter Lawson of Mizuho Securities. Please proceed.

Peter Lawson – Mizuho Securities

Frank, just wondering if you could, just again about this weakness that peers are seeing in academia, is there anything on the periphery that you worried about any deterioration in compensations around higher priced products or is there any delay in the process?

Frank Laukien

Good morning, Peter. Well, I mean it’s not all – not everything is aligned perfectly – clearly there is weakness in U.S. academic spending NIH slightly down, although not as much as many had feared, and probably not going to grow rapidly or so we’re taking that into account. So, the academic spending being the slower growing part of our business, is sort to our assumption for the next 15 months or so and beyond that we just don’t have a crystal ball. So nothing surprising and in some ways, the healthy academic R&D increases in certain parts of Europe and Asia are a part of this surprise in the last three months.

I guess in U.S. it could have gotten – it could have been worse and so for us at the end of day, it’s not so much and the macro trends play a role, but far in more important is our relative product positioning and for us, the NIH budget is still infinitely large and the question is how do they allocate it rather than whether it’s going up or down 1%. And in terms of allocation – in terms of secular trends towards epigenetics and proteomics and more applied research, I think we are extremely well-positioned with many of our product. So, I think we are not just the ship that’s going up and down with the tide. We are not immune to that completely, but far more important are our relative product trends and I feel very good about those.

Peter Lawson – Mizuho Securities

And then follow up on that, the commentary about growing faster than markets, is the more mixed of new products or is it more share gains and when do you think you’re gaining share?

Frank Laukien

These two are very much related. Obviously new products with unique or advanced capabilities very often help you with gross profit margins and profitability. They often also help you expand your market share and we feel that pretty broadly in many of our divisions in product lines. We are actually gaining market share and really it’s a pretty broad phenomenon I think it’s not isolated to one or two product lines or divisions. But pretty broadly I think we are on an excellent track and are growing fast in the markets because we are gaining market share mostly with new products are relatively new is sort of last year’s product introductions and headlines are making a difference in the market this year and this year’s product introduction and headlines are likely to have a positive impact next year. So, that’s the delay until these products ramp to volume as we say after you see the initial product press release.

Peter Lawson – Mizuho Securities

Thank you and just one for Bill. Just around the benefit in that interest or other income lines. Is that FX gains and how we should be think about Q4?

Bill Knight

Perhaps I think we look at any FX effects that we can moderate and we don’t trying consequently trying make money we don’t do active hedges. So, we look at any quarter-to-quarter is getting that near breakeven that’s the trend.

Frank Laukien

So that shift from negative five digits last quarter to in terms of positive to that was really just that was FX is nothings else going on.

Peter Lawson – Mizuho Securities

Primarily.

Frank Laukien

Yes, that was primarily FX. There was certainly some interest income and expense in that line with that sequentially was not required different so the primary driver in that, well, the Peter is actually FX again this quarter versus losses, both last quarter and for the first half of the year.

Peter Lawson – Mizuho Securities

Okay, thank so much.

Operator

Our next question comes from the line of Dan Arias of UBS. Please proceed

Dan Arias – UBS

Yeah, thank you very much. Frank or Bill, I was just wondering if you could separate effects from M&A contributions during the quarter.

Frank Laukien

I think – Dan, hi, this is Frank. Our FX adjusted revenue growth in the quarter was 26% and our year-to-date FX adjusted revenue growth was 24%.

Dan Arias – UBS

Okay, thanks. And Frank, not to harp too heavily on the academic markets, but can you just make a comment on the continuity or phasing of the business you’re seeing in terms of ordering patterns relative to previous periods or stock levels.

Frank Laukien

Orders in the third quarter in some of the divisions that have more of an academic exposure, which we deferred to call opportunity which we prefer to call opportunity, like the BioSpin NMR, MRI division, or the Daltonics division, orders in the third quarter has been excellent.

Dan Arias – UBS

Okay, thanks and I guess Bill, I was just wondering if you can with everything going on with CAM given expectations for CapEx for the year.

Bill Knight

I think here to-date we have spent a little over $40 million versus Q3 year-to-date 2010 was about $22 million. We have made some and are making some investments in brick-and-mortar expansion and obviously increased activity with some of the new acquisitions. So, fourth quarter we’ll add to that significantly, but I think on a linear basis we would see this year would be probably in the $50 million range.

Dan Arias – UBS

$50 million, okay, thanks very much.

Operator

Our next question comes from the line of Ross Muken of Deutsche Bank. Please proceed.

Unidentified Analyst

Yeah, hi, this is (Vijay) in for Ross. Thank you for taking my question. I just had one question. Can you comment on your orders, did you see anything geographically that the U.S. versus you – when it comes to orders for license limitation particularly from the academic segment.

Frank Laukien

Yes, our U.S. academic orders in Q3 have been excellent.

Unidentified Analyst

Perfect, thank you.

Frank Laukien

That is not the answer that he’s looking for, but those are the facts.

Unidentified Analyst

Thank you, thank you very much.

Operator

Our next question comes from the line of Dan Leonard of Leerink Swann. Please proceed.

Dan Leonard – Leerink Swann

Hi, thank you. First one I just to ask you the question, can you give us the revenue contribution of currency in acquisition in the DSI segment.

Frank Laukien

Can you repeat the question one more time, Dan, please?

Dan Leonard – Leerink Swann

Yeah, yes, from the quarter, DSI grew organically 11%, what was about the currency in the acquisition component of the DSI growth?

Brian Monahan

This is Brian, the currency impact was little over 9%, it’s almost 10% for the quarter as you said we grew 11% so the doubt is the benefit from the acquisition. BEST did not have any acquisition related to that revenue this quarter over for the first nine months of this year.

Dan Leonard – Leerink Swann

Okay, thank you. And then also we’ve been talking a lot about academic markets, Frank, can you give us some commentary on what you are seeing in the applied and industrial market you serve?

Frank Laukien

They are generally strong with some weaknesses emerging in semiconductor and data storage, which is a very small part of our business and interestingly since we spent more of a high-end research well, it’s not research tools even for fab line systems, we tend to get orders for instance now from consortia or companies that are going to invest right through the cycle for next generation 16-inch 150 millimeter semicon metrology tool we’ve got some excellent orders there even as if look at the pure semicon metrology tool company that their orders are sequentially declining, but even for the 2% or 3% exposure that we have to those technical semicon data storage LED solar market we see a little bit of softness there, but again it’s a small part for us and we move than make for that with the strength elsewhere.

Dan Leonard – Leerink Swann

Okay, thank you. And my final question, can you give us an update on the COO search in terms of what type of background you are looking for whether you’re looking for, what you’re looking internally, externally anything you could offer?

Frank Laukien

We’re looking for an Executive Vice President of operation is very much focused on production logistics and we’re searching externally.

Dan Leonard – Leerink Swann

Okay thank you.

Operator

Our next question comes from the line of John Wood of Jefferies. Please proceed.

John Wood – Jefferies

Hello, good morning.

Frank Laukien

Hi, John.

John Wood – Jefferies

Hey, so on CAM – is CAM going from I think last quarter you said $5 million operating loss or so. And based on that $0.11 number you’ve included in your press release. Is that number $25 million now in terms of an operating loss for this year?

Frank Laukien

No. (indiscernible).

Unidentified Company Speaker

No, John we’re talking operating losses, I think the $5 million you referred to is correct. But then the net loss is what we’re talking about the $0.11 for the full year. So, you’ve got some other below the line items. But the $0.11 is for the full year and it’s a net loss contribution not the operating loss contribution.

John Wood – Jefferies

Okay. So, what was that number before this update so, you had a $0.11 number was what as of last quarter? I’m just trying to figure out how much your (indiscernible) increasing that loss estimate from prior guidance.

Frank Laukien

Yeah, I mean basically the way, the CAM business has been developing is that our original goals or that the loss of during the year were steadily decline as we were integrating factories, moving factories and number of those things. As Frank talked about the challenge we’re happy to take on but just taking a little bit more time than we originally plan. So, essentially in Q4, you not expect increasing losses over Q3, we expect those to be modestly lower and to continue that trend through 2012. So it’s not that we steadily had to make the bunch of investments to increase the losses, they are expected to sequentially go down from what they were for both Q3 and then first nine months of this year.

John Wood – Jefferies

Okay got it, thanks. Just based on you guys commentary on the call, did the retail business do at $43 million it seems like that’s a very big number given what’s going on in the semiconductor market. So, is that math right but that you’ve got over $40 million bucks in revenue in the third quarter in the retail business?

Frank Laukien

That’s about right. Although we don’t break out the exact numbers, but you’re basically very close. And, but keep in mind, I mean there exposure to even though Veeco business had a misnomer for that division by calling it the metrology division. It’s far from a metrology division it’s metrology exposure might be 15% or something like that and again even it’s metrology business with some weakness in data storage which is always the early indicator had some pretty good orders from as I said for the next generation tools for our 450 millimetre that lines, which were some very major players and ind are investing throughout the cycle because that they want to get that ready for the future. So, I think the key part of the answer is our, but at the Veeco business our Bruker Nano Surfaces division 80% plus is not dependent on data storage or semicon cycle.

John Wood – Jefferies

Okay great that was good color.. Thanks Frank, do you expect that business to be up sequentially and it’s seasonably strong in the fourth quarter I know. But do you still expect a sequential uptick there?

Frank Laukien

For that business in particular?

John Wood – Jefferies

Yeah just looking at, yes, sorry.

Frank Laukien

Hi, I don’t have all the numbers at my fingertips. I don’t expect any unusual trends, I mean they tend to, like everyone else at Bruker tend to have a decent fourth quarter. Although this year, we have obviously try to not become so fourth quarter designed and then the best. So nothing unusual in that division – BNS division at Veeco compared to the other, but I can think up right now compared to the other scientific instruments business, which had some seasonality of course.

John Wood – Jefferies

Okay, great, thank you. Last one on cash flow, it looks like the working capital metrics actually got quite a bit better in the quarter. But the cash flow still very weak. So, is that just an FX dynamic on the working capital and I wonder if Bill can give us an update on what do you expect in the fourth quarter in terms of cash conversion and if you want to state in terms of dollars or kind of the working capital commitment relative to your goal that would be great.

Frank Laukien

Sure, we did have improvements in both DSO and the modest improvements again in inventory terms that’s continue to be an area that we relatively work, I would expect to see continued improvements in DSO, we’ve given attention to that because that typically a very quick conversion from the cash. So, they’re working capital at revenue ratio also had improvements in Q3, we would expect that trend to continue again in Q4.

John Wood – Jefferies

Okay. Specifically on a cash flow, we just look at the first quarter, is that number expected to be up year-over-year down year-over-year about the same. Can you give us some direction there?

Frank Laukien

Very difficult to forecast, John. We expect reasonable cash flow in Q4, but quite honestly, it’s not just like were hedging on the answer. Cash flow because of our lumpy payment is difficult to predict to on a quarterly basis.

John Wood – Jefferies

Okay, fair enough. Thank you.

Operator

Our next caller is from the line of Derik De Bruin of (indiscernible). Please proceed.

Unidentified Analyst

Hi good morning.

Frank Laukien

Derik, comeback.

Unidentified Analyst

Thank you. Just what, I mean lot of my questions have been answered so, I won’t try to beat the academic course there. But can you – when you kind work at some of the science projects that are beyond BioMedical research, so like some of the ones where your BEST business areas and some of the high hedges (indiscernible). Are those projects receiving the similar attention as by medical research for are those projects potentially more in the gun side from some of the bean counters?

Frank Laukien

That’s sort of a multiyear trends really rather than. So and this is not something you don’t know. For a number of years with the genomics revolution and sequencing, I think a lot of money has gone into genomics and sequencing. And that has made enormous progress I think people have also realized that our stage genomic sequencing allow get it’s a lot more data as not really given as many medically relevant inside that we have hope, because you probably all overestimated the role of the genome as some sort of blueprint and it turns out that epigenetics and systems biology and then proteomic satellite analysis and then the micro molecular switches basically on the genome what would people call epigenetics are more important, which is going Bruker has been not a generic sequencing company, we think a lot of the funding trends that because of the scientific trends and the therapeutic diagnostic trends and molecular magazine are coming our way very much so, that’s an excellent trend to the really the first part of your question is fundamental research outside of molecular biology, in recent years that has a bit of renaissance if you like.

I think for a few years anything medically oriented or life science oriented soaks up all the budgets and that’s strengths that at lease normalized in the last few years, which again is good for materials research for our big science project as we had mentioned for which BEST is providing some of the infrastructure. So, that’s has been normalization to I think people are not only investing in life sciences, but also non life science fundamental and academic and energy research.

So, I think that trends has also been healthy – healthier I should say in the last two or three and perhaps in the seven years before that. That’s all relatively long-term perspective. I don’t to take any change in priorities that effects the last quarter or even the last year except perhaps that I think that people in my opinion are realizing that just doing more genetic sequencing doesn’t give us enough biological and medically relevant information. And one has to look at others as well which again we are very much welcome.

Unidentified Analyst

You actually kind of jump started my memory this morning. So, we go back I mean look at what happened back in the 2000, 2001 timeframe kind of after the initial sequencing orgy, there was a focus more on proteomics, and biomarker search, there are companies that were – instead of setting up farms and DNA sequencers they were talking about farms of mass spectrometers. You had the whole tough where in terms of doing that type of project. I guess when you look at some of the stuff is going on in the sequencing market as people potentially having too much data. Have you seen – are you starting to have conversations with people that may be mass spectrometry and which has been a good market for many, many years, much better than people expected, are you seeing more interested in that, are you talking with people perhaps outside of United States and Asia we’re thinking about setting up larger proteomics efforts to kind of go after the translation of research projects in that sense.

Frank Laukien

There are some places like this, but I think proteomics and systems biology research and mostly we’ll not necessarily be done in these large scale facilities or some factories like what (indiscernible) set up in early last decade, and some other example. In some ways, it’s probably help you and you see many, many sense that you set for fundamental and applied in diagnostic and therapeutic research. And they don’t have (indiscernible), but they may have 3, 5, or 7 depending and I think with a range of different mass spectrometers that can do the traditional bottom up to the functional to the top-down, to perhaps looking at proteins and peptides in distribution, i.e., while the imaging, I think when it’s a much more differentiated picture today that you need multiple tools and you need to go really deep and have – also look at the functional aspects rather than just getting shared sequencing or number of ID in protein. So the picture becoming more differentiated, and but the trend that I am seeing is not sort also high automation refractory, but really the right sets of scientific tools in many, many different fundamentally applied diagnostics and therapeutic groups. So, necessarily the big sequencing farms or sequencing outfits that you see in genomics, I don’t see that trend in our business.

Unidentified Analyst

Great, thank you very much.

Operator

We have a follow-up question from the line of Tycho Peterson from JPMorgan. Please proceed.

Tycho Peterson – JPMorgan

Thanks, you’d mentioned some of the spending controls on the call. Is there any way you can kind of quantify and put some parameters around some of the cost containment initiatives?

Frank Laukien

Well we certainly Tycho some – by looking at headcount. As we said there will be some reductions there, we are looking at discretionary spending there has already been some reduction there and that will be ongoing and we are obviously as we thought we’ve done a pretty good job and growing the top-line, we are continuously a margin improvement, but there is much more focus on how we spend our operating expenses, I think the R&D budget will remain impact, product development is key to Bruker that were taken a very hard look that we do think SG&A expense as far as quantifying it I don’t necessarily want to put numbers yet, but it will move into the fourth quarter in the 2012, operating expenses, there are pretty safe review and control.

Tycho Peterson – JPMorgan

Okay. And then just one follow-up.

Frank Laukien

Follow on answer to that, Tycho, just to give you the smaller effect if you like is absolute expense coming that will be less than $10 million in the aggregate, but as far as we can see right now the bigger effect for us that we do not ramp up our number of people in our expenses in our capacity at the very fast rate at which, our orders and backlog and soon have grown so, I think by since we’re stepping on the break even already a couple of quarters ago and now seeing more of that backlog conversion with continued fast orders. I think you’ll see some very nice leveraging going forward. But we are really not in a position to cut expenses shortly because we are investing in CAM and we also if anything could have made the case of significantly investing in a lot of the other divisions that have very, very significant order increases. And we’re trying not to do that, but tell them , look, guys, you’ve got to do with the productivity, which means expense leveraging.

Tycho Peterson – JPMorgan

Okay. And then one other quick one, Frank you’ve previously talked about maybe the change of a pickup in the back half of the year in Japan as a result of some of the infrastructure being replaced, you are seeing any signs of that at this point?

Frank Laukien

Absolutely, yes. That’s we’re getting significant bookings in Japan has been strong to take Tohoku University and very much damaged in the Sendai area by the earthquakes or dual earthquakes even in follow the month within each other. And we’ve gotten very, very significant orders from many of our divisions NMR, X-ray, mass spectrometry, AFM, I think as well. And they are the most significant major university where I remember we got significant orders, but also in Japan it’s picked up quite a bit. And some of it is reconstruction post earthquakes and some of it is just the normalization in Japan. So, that’s very much not even worse not better than we had predicted. It’s trending to order so far not into revenue yet.

Tycho Peterson – JPMorgan

Okay. Thank you.

Operator

With no further questions in the queue at this time, I will now like to turn the call back over to management for closing remarks.

Frank Laukien – President and Chief Executive Officer

Thank you, (Cathy). And thank you very much to all of you for joining us today. This concludes our Q3 earnings call. Good bye and thank you very much again.

Operator

Ladies and gentlemen that conclude today’s conference. Thank you for your participation. You may now disconnect.

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