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Bruker Corporation (NASDAQ:BRKR)

Q1 2012 Results Earnings Call

May 1, 2012 9:00 AM ET

Executives

Stacey Desrochers – Treasurer and Director, Investor Relations

Frank Laukien – President and CEO

Bill Knight – Chief Financial Officer

Mike Knell – Chief Accounting Officer

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

Analysts

Jon Groberg – Macquarie Capital

Derik DeBruin – Bank of America

Amanda Murphy – William Blair & Company

Tycho Peterson – JPMorgan

Dan Leonard – Leerink Swann & Company

Dan Arias – UBS Equities

Isaac Ro – Goldman Sachs

Jon Wood – Jefferies & Co.

Robert Colesen – Analyst

Steve Unger – Lazard Capital Markets

Peter Lawson – Mizuho Securities

Operator

Good day, ladies and gentlemen. And welcome to the Bruker Corporation Quarterly Earnings Call hosted by Stacey Desrochers. Throughout the conference you will remain on listen-only. (Operator Instructions)

I would like to advice all participants this conference is being recorded for replay purposes. So without any further delay, I would like to hand the call over to Stacey to begin. Please go ahead.

Stacey Desrochers

Thank you. Good morning. And welcome to Bruker Corporation’s first quarter 2012 financial results conference call. I’m Stacey Desrochers, Treasurer and Director of Investor Relations. With me on today’s call are Frank Laukien, Bruker’s President and Chief Executive Officer; Bill Knight, Bruker’s Chief Financial Officer; Mike Knell, Bruker’s Chief Accounting Officer; and Tom Rosa, the Chief Financial Officer of our Bruker Energy & Supercon Technologies Inc. or BEST Subsidiary.

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 exclude 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 measure and forecast the company’s performance, especially when comparing such 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 overall Bruker Corporation 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 or BSI segment.

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

Frank Laukien

Thank you, Stacey, and good morning, everyone. We appreciate you joining us today. Before I provide the business update and discuss the financial highlights for the first quarter of 2012, I would like to welcome our new sell side analyst Jon Groberg from Macquarie Capital.

I also would like to introduce all of you to Bruker’s new Chief Accounting Officer and Vice President of Finance Mr. Michael Knell. Mike is a CPA and was a partner at Ernst & Young and joined Bruker here in Massachusetts just a few weeks ago.

Starting now with the financial highlights of Bruker Corporation which most of you may have read in our earnings press release issued earlier this morning. Bruker had a good start to the year 2012.

Bruker revenue in the first quarter of 2012 was $405.6 million, a GAAP increased of 13.6% or a currency adjusted increase of 15.0% when compared year-over-year to the first quarter of 2011, and a 13.7% year-on-year organic growth rate.

GAAP operating income in the first quarter of 2012 was $34.4 million, compared to $25.7 million in the first quarter of 2011, an increase of 33.9%. Our adjusted Bruker operating income in the first quarter of 2012 was $43.6 million, compared to $35.8 million in the first quarter of 2011, an increase of 21.8%.

In the first quarter of 2012, our GAAP net income was $15.1 million or 9 pennies per diluted share, compared to our first quarter 2011 GAAP net income of $11.3 million or 7 pennies per diluted share, a 33.6% increase in net income.

Adjusted net income in the first quarter of 2012 was $23.8 million or $0.14 per diluted share, compared to adjusted net income of $21.3 million or $0.13 per diluted share in the first quarter of 2011, an increase in adjusted net income of 11.7%.

Exceeding our own expectations, our backlog increased yet again in the first quarter of 2012, due to strong new order bookings. We feel that the tone in many of our end markets has improved since the fourth quarter of 2011.

More importantly, most of our products have excellent competitive positioning and we are benefiting from tailwind due to major secular trends, new scientific frontiers and technology transition, which for Bruker just tend to be more significant than macro-economic or geographic trend.

To try to put this into perspective quantitatively for you, please consider the following global life science R&D spend numbers, on which I’ve just got an update yesterday on the -- at the semi-annual ALISSA meeting. ALISSA is the industry association and stands for Analytical & Life Science Systems Association.

So, anyway, the global annual life science R&D spend consisting of all pharma, biotech, CRO, hospital and medical school, and other academic and government R&D spend in the life sciences is estimated as $250 billion per year in total overall -- overall in all countries.

This $250 billion life science annual R&D spend is growing at about 4% CAGR with a 3% CAGR estimated in the developed world and an 8% CAGR in the emerging countries.

For perspective, Bruker’s life science tools revenue are about $1 billion with the remainder of our revenue in other applied materials research, homeland security or industrial market.

So, therefore Bruker accounts for less than 0.4% of the global life science R&D spend i.e. a tiny, tiny fraction. Other numbers that you may wish to consider are that Bruker’s total addressable markets are about $45 billion to $50 billion per annum and our presently served addressable markets are about $8 billion to $10 billion per annum.

So for Bruker, the crucial drivers for profitable growth are whether we have fresh and competitive products and whether we are proactive in serving the life science research, pharma, biotech, CRO and emerging diagnostic technology trend within this $250 billion -- $250 billion annual life science R&D spends.

Examples of the secular life science trend that are benefiting Bruker are post-genomics and systems biology, epigenetics, personalized healthcare and protein, our metabolic biomarkers, more and more differentiated approach to proteomics from quantitative proteomics to post-translational modification, top down proteomics, intact protein analysis, proteomic imaging, et cetera.

Further examples of major life science technology trends benefiting Bruker are the dramatic shift of pharma biotech drug pipeline to biologics, which really plays to our unique capabilities in top down and intact protein mass spectrometry. As well as, the increasing role of pre-clinical imaging or the paradigm shift in clinical microbiology identification to MALDI-TOF, et cetera.

So, if Bruker can for example double its tiny 0.4% fraction of this very large life science R&D budget over time then we can more than double the size of Bruker over time. In comparison, at least for Bruker it is just less important whether or not the overall $250 billion annual spend growth a little bit more slowly or faster overall.

So while overall NIH budget or European macro-economic trends are of some importance, in general they are of limited value trying to predict the key market drivers and growth potential for Bruker.

We are optimistic that Bruker will remain a fast growing company in 2012 and beyond. Our strategy and goal remains to drive innovation, focus on product, fast, profitable organic growth and occasionally we may pursue some selected smaller or mid-size high ROIC acquisition opportunities where they complement one of our core focus areas.

For example in the first quarter of 2012, we acquired an excellent small company called SkyScan in Belgium. They develop, manufacture and distribute advanced high-resolution micro computed tomography or CT systems for three-dimensional X-ray imaging.

These micro CT products fit nicely into our global materials research and pre-clinical imaging distribution channels and complement our other X-ray analysis and pre-clinical MRI or magnetic resonance imaging products.

During the first four months of 2012, we already launched 13 new high performance analytical products, which address an expanding array of life science pharma biotech clinical research, food, petrochem, environmental, homeland security, materials and nanoscience, as well as academic research and educational markets.

At Pittcon our new SCION GC triple quad MS product released in July of 2011 won two awards, the 2012 Laboratory Equipment Readers’ Choice Awards winner and the 2012 Pittcon Editors’ Silver Award.

The SCION triple quadrupole and the SCION single quadrupole mass spectrometers for gas chromatography detection were designed especially to enhance data quality and productivity for analysts working in routine testing and applied markets, and these systems combined performance and value like never before in GC-MS.

At the 53rd ENC or Experimental NMR Conference in Miami in April and at the Analytica 2012 Conference in Munich, Bruker also in April, both Bruker introduced and showcased more than a dozen new products or entire product line, including our AVANCE III HD for high definition next-generation NMR spectrometer platform.

Our XFlash 6 next-generation performance leading EDS detector product line, our SCION next-generation stand-alone high-performance GC product line, which incidentally replaces the last of our legacy Varian Inc. product, and our S1 TITAN next-generation best-in-class handheld XRF or X-ray fluorescence product line for elemental analysis in many applications and industries.

So this is a good start to the year with a large number of important new product introductions already year-to-date and very good first quarter organic revenue growth and solid double-digit increases in GAAP and adjusted operating income and net income year-over-year in the first quarter.

With that, I’ll turn the call over to Tom Rosa, the CFO of our BEST segment.

Tom Rosa

Thanks, Frank. During the first quarter of 2012 revenue for the BEST segment increased by 25% to $30 million, compared to $24 million in the first quarter of 2011, excluding the effects of foreign currency translation first quarter 2012 revenue increased organically by 30.4% year-over-year.

BEST adjusted operating income in the first quarter of 2012 was $0.3 million, compared to a BEST adjusted operating loss of $0.6 million in the first quarter of 2011. Adjusted EPS for the first quarter of 2012 for the BEST segment was a net loss of $0.01, the same as a net loss of $0.01 in the first quarter of 2011.

During the first quarter 2012, we continue to make progress on the commercialization efforts of our new products. BEST announced the successful completion of a milestone in the development of a novel, shielded inductive superconducting fault current limiter, which is to begin field test operations in Germany in 2013.

During the test, the device functioned as predicted in more than 100 triggered short circuits. Fault current limiters are devices that can protect electrical equipment in the transmission or distribution infrastructure from damaging power surges caused by fault current arising from short circuits, power generation disturbances or lightning strikes.

Backlog in the first quarter of 2012 was $219.4 million, as compared to $172.1 million in the first quarter of 2011, an increase of $47.3 million or 27.5%. The backlog increased as a result of demand for our low temperature superconductors, including new longer term supply orders from major manufacturers of clinical MRI systems, as long -- along with orders for RF cavities, couplers and other superconducting devices from customers across the globe.

BEST made excellent progress over the last three years, consistently beating its internal financial goals and we decided to withdraw our S-1 Registration Statement in March 2012 as a result of current equity market conditions in our industry sectors and in order to say on legal accounting and other costs associated with keeping the S-1 filing current.

BEST is still investing heavily in new product development and marketing for crystal growth magnets, inductive superconducting fault current limiters and next-generation high-temperature superconductor scale-up, as well as in capacity expansion in order to be able to deliver on its already booked orders, which have caused a substantial increase in external backlog from under $10 million back in March 2009 to now approximately $219 million as of March 31, 2012.

BEST revenues over the last three years have increased from $59.8 million in 2009 to $90.5 million in 2010 and to $113.4 million last year in 2011, almost doubling within just two years, if equity market conditions improved in BEST industry sectors of clean-tech and advanced industrial technologies, then Bruker and BEST have not ruled out re-filing the S-1 at some point in the future, but most likely not before 2014, 2015.

As a result of withdrawing the S-1, we can now provide BEST segment guidance for 2012. BEST expects organic revenue growth of 15% near break-even adjusted operating income and an adjusted loss per share of $0.04 for the full year 2012.

BEST plan to spend between $3 million and $4 million in 2012 on relocating its [LTS] and device businesses to new larger facilities designed to provide us with enough additional capacity to be able to deliver on our existing and planned orders, we are committed to the success of BEST as it continues to execute on its growth and emerging profitability strategy.

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

Bill Knight

Thanks, Tom. I would now like to give you further details on our Bruker Scientific Instruments or BSI segment. On the topline during the first quarter of 2012, BSI revenue increased by 12.6% to $378.1 million, compared to $335.8 million in the first quarter of 2011. Excluding the effects of foreign currency translation, BSI revenue increased by 13.7% year-over-year and BSI organic revenue growth was 12.4% year-over-year.

Now, moving down -- further down the income statement, adjusted BSI gross profit margin expanded by 80 basis points in the first quarter of 2012 to 50.1%, compared to 49.3% in the first quarter of 2011.

Please keep in mind that Bruker as of the year 2012 and for all prior year comparison made in 2012 is including all non-cash compensation expenses and adjusted operating income and adjusted EPS, whereas in 2011 we had excluded these non-cash comp expenses from adjusted operating income and adjusted EPS.

With that in mind, BSI adjusted operating income was $43.7 million or 11.6% of revenue in the first quarter of 2012, compared to adjusted operating income of $37.7 million or 11.2% of revenue in the first quarter of 2011, a 40-basis point increase.

BSI operating margins for the first quarter of 2012 without our Chemical & Applied Markets or CAM division were 13.9%, as compared to 13.3% in the first quarter of 2011, a 60-basis point increase.

During the quarter, we invested 12% of revenue on R&D for developing new products, which drives our above average organic revenue growth rate and our continued gross profit margin improvement initiative.

Below the operating income line, adjusted for first quarter 2012 net income for the BSI segment was $25.2 million or 15 pennies per diluted share beating guidance and consensus, compared to adjusted net income of $24 million or 15 pennies per diluted share in the first quarter of 2011.

During the first quarter of 2012, we had $3.0 million of foreign currency losses, which came primarily from our Swiss manufacturing and distribution entity. Also in the first quarter of 2012, we had $3.5 million of interest expense, an increase of $2.0 million from the first quarter of 2011 and was a result of refinancing our debt.

Our GAAP effective tax rate was 43.9% during the first quarter of 2012, which was in line with our tax rate of 43.5% during the first quarter of 2011. Our tax rate was negatively influenced by the unbenefited losses in CAM in the U.S., and legal and compliance costs. Our adjusted tax rate was approximately 34% during the quarter, which is included in the reconciling tables in our press release issued earlier this morning.

Before we open up the call for questions, I wanted to comment on some balance sheet and cash flow metrics. Cash flow provided by operations was $4.8 million, compared to cash used in operations of $29.4 million in the first quarter of 2011.

In the quarter, our inventory level increased partially due to seasonality and partially due to our strong bookings performance during the first quarter of 2012. In the first quarter of 2012, our BSI working capital to support $1 revenue remained flat at $0.47, as compared to the end of 2011.

Working capital and particularly inventory returns is an area of opportunity and we expect improvements this year, which will positively benefit our operating and free cash flows.

As of March 31, 2012, Bruker had cash, cash equivalents and restricted cash of $233.1 million and net debt of $86.5 million. So, overall, a good and very encouraging start to the year. Given our strong revenue and adjusted operating income momentum, we continue to feel very positive about 2012.

So, with that, I’ll turn the call back over to the operator for any questions you may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Okay. The first question comes from Jon Groberg. Please go ahead.

Jon Groberg – Macquarie Capital

Hi. Thanks a million for taking the question. If I may have missed this, I probably missed the very beginning of the call, I was on another call. But what were the revenues for CAM? I know you gave the BSI margin ex-CAM, I was curious if the revenues and the drag was from CAM?

Mike Knell

Hi. This is Mike. So, total revenue for CAM for the quarter was $22.2 million.

Jon Groberg – Macquarie Capital

Okay. And for the year, you thought that would be around $10 million loss on the operating income line, is that kind of -- are you tracking that?

Frank Laukien

Jon, this is Frank Laukien. We believe we’re approximately tracking that.

Jon Groberg – Macquarie Capital

Okay. So, it looks to me like in the first quarter you’ve got pretty good -- you were higher than I was expecting there on the ex-CAM margins quite a bit. So, Frank, can you obviously, this is like the key cracks to the story that our investors are focused on. Can you maybe qualitatively talk about as you kick-off the year here, how you’re thinking about your progress and what -- kind of how you expect that to continue to play out through the year?

Frank Laukien

Yeah. I think we -- I think it looks as if we are on track to reach our annual goals in -- at this point, I think it’s too early to consider looking at changing our overall guidance, but we generally don’t do that during the year unless something changes dramatically. But I think we had a good start and I think we’re generally on track or even a little bit ahead of schedule.

Jon Groberg – Macquarie Capital

So there’s nothing kind of pull forward or anything about this particular quarter that isn’t likely to repeat as you move throughout the year?

Frank Laukien

No. Especially in view of the strong bookings that indeed, I mean, we were optimistic, but this has exceeded even our somewhat optimistic assumptions. So our bookings were really very good for the Scientific Instruments segment and our back -- our bookings for the Scientific Instruments segment also grew in the teens year-over-year.

And so our backlog grew even further, even though we had originally anticipated in our business plan and I think we had communicated that to the Street that we might use up some of our backlog and quite honestly we still hope to reduce our backlog overall.

But I guess we have not succeeded in that in Q1 because the orders were stronger than we had anticipated. So, we’re very pleased with that and that, set us up on a solid footing for going forward in the year.

Jon Groberg – Macquarie Capital

Okay. And, Frank, I know you got this a lot, but I mean is there any -- are there any comments you could make around the geographic or the industry in terms of the weakness. You’ve heard varying comments from other players in this space, particularly on the instrumentation side, but it sounds like you’re still not -- you’re able to be a little bit more nimble, I know as you’ve talked about, but any broad comments you’d make about what you’re seeing there?

Frank Laukien

I think we definitely do see relatively weak or flattish U.S. academic demand, that’s not a surprise. We don’t expect that to change very much in the next two or three years quite honestly. So it’s not a surprise.

Mediterranean Europe is not particularly strong, although Turkey as part of Europe is very strong. There are plenty of other strengths in Europe. India has been strong for us whether China is growing at 8% or 10%, we couldn’t tell the difference, for us it’s strong.

Japan has been all right for us, actually I would say strong. So other than U.S. academic funding and Southern Europe or Mediterranean Europe, I think basically everything has been quite solid with many pockets of strength.

I think we’re a little bit surprised on the positive side that data storage and semicon has turned around much more quickly than what we had anticipated and other industry players seem to confirm that as well. We don’t sell a lot into solar and PV, but that’s obviously an area of downturn and weakness. We sell very little into that.

But we sell more into semicon and data storage of the order of $100 million per year altogether, not all of it is fab line stuff, a lot of it is also semiconductor and data storage research equipment.

And they’re not -- the big secular trends there is to go to 450 millimeter fabs and to go to smaller and smaller feature sizes, 28 to 20 nanometers. All of that again plays to our strength.

But here, in addition to these secular 10-year trends, we definitely see a faster turnaround than what we had anticipated. So that’s been maybe another area, a less than 10% area for us but nevertheless an area of greater orders than what was anticipated.

Other than that, it’s pretty much been solid and I would just say there is an incremental improvement in tone just about anywhere. I think the concern about the significant or a downturn or slowdown which was around in October, November of last year, it’s greatly reduced and there’s more optimism in the market in general.

Jon Groberg – Macquarie Capital

Great. Thanks for all the color and congratulations.

Frank Laukien

Thank you, Jon.

Operator

Thank you. The next question in the queue comes from Derik DeBruin. Please go ahead.

Derik DeBruin – Bank of America

Hi. Good morning.

Frank Laukien

Hi, Derik.

Derik DeBruin – Bank of America

Hey. Now that we’re able to talk about the BEST business a little bit more, can we just talk about, how you see that business progressing over the next couple of years with this, I mean, you’re talking about 15% organic growth in the business this year. Is that a relative run-rate for it and I guess before you talked about, explaining that, you talked about doing some R&D collaborations maybe to absorb some of the costs of the business? Can you talk a little bit about that and is the business profitable next year, even if you outbreak given this year. Just a little bit more color on how you’re seeing that kind of unfolding.

Frank Laukien

So, I’ll start actually and then I’ll turn things over for Tom. The sort of big picture over the last three years at BEST, we had asked them to be at or near break even and to grow as rapidly as possible to take advantage of the growth opportunities and the many unchartered markets that they’re getting into, and I think they’ve succeeded with that really very nicely with doubling in two years, essentially doubling in two years and then unfold improvement in backlog or multi-year backlog.

So, if the last three years were sort of near break even and a 40% CAGR, the next three years we’d like to see -- we will not likely see 40% CAGR, but maybe 15% to 20% CAGR, so reduced but still very fast both with emerging and profitability. That’s sort of the highlight direction. And Tom, you could maybe give some preliminary color what you might expect for next year, this year is an operating break even year.

Tom Rosa

Yeah. Hi, Derik. This is Tom Rosa. Couple -- I’ll address that in a couple of ways. The 15% organic growth rate this year is actually just about equal to last year’s growth rate on a currency adjusted basis we’re facing some FX headwinds this year. So, on a currency-adjusted basis we expect about 20% growth, this year just as we had 20% currency adjusted growth last year.

For 2013, we’re still in the planning stages, but we believe that kind of growth rate will again be achieved. We’re continuing to see good growth across our materials and devices platforms.

As far as the bottom line outlook, we are -- we do have a number of R&D efforts underway, collaborations, et cetera, and this year, as an example, we expect R&D to be up about $3 million over last year.

So, as we continue to invest in R&D and for instance we just set up a new R&D center to promote the development of our FCL product in Fremont, California late last year, which will add to our R&D cost this year, but our goal is to be break even on an adjusted basis this year, and as we complete our relocations in 2012, our goal certainly would be to become profitable in 2013.

Derik DeBruin – Bank of America

Great. That’s very helpful. Some of the commentary around the end markets has been rather mixed and there has been some talk about forward delays at some of the pharma companies. Frank, your NMRs are certainly big ticket items that could potentially be [subdue] those type of delays. Did you see anything of interest unusual in the pharma markets in Q1?

Frank Laukien

I think it all depends what’s been called the pharma market these days. If one is focused on the top 20 pharma companies, I mean, they haven’t been growing, they’ve been consolidating that’s not been a fantastic market. But I think that’s just the wrong definition these days. I would call it the pharma biotech CRO/academic environment.

So much of pharma basic drug discoveries these days gets outsource to medical schools and universities, so much of development goes to CROs whether they’re here or in India or China or elsewhere. A lot of the pharma R&D really occurs in biotech companies, the successful ones gets purchased. It’s just a completely changing industry.

So, yeah, the top 20 pharma companies that’s not a great market and the trend hasn’t been good. But if you look at the pharma biotech CRO/academic continuum, which is really relevant, it’s a very healthy market.

Derik DeBruin – Bank of America

Great. I’ll get back in the queue. Thank you.

Operator

Thank you. The next question in the queue comes from the Amanda Murphy. Please go ahead.

Amanda Murphy – William Blair & Company

Hi. Good morning. Thanks. I had a follow-up on the margin questions. It sounds like if you look ex-CAM the margins might have come in a bit better than you expected in the quarter. So in terms of that if your characterization and also can you just remind us again, where you stand with the various initiatives that you have in place to drive margins through the year?

Bill Knight

Hi, Amanda. It’s Bill Knight. The initiatives are ongoing certainly and evolve around the standards as we’ve described before. Every new products that Frank mentioned, I think, 13 new products that have come out -- every new product we introduce has a lower cost structure than its predecessor, along with improved capabilities and solutions for our customers that obviously helps with the gross profit margins.

We continue to work on optimizing our factories whether it’s taking some of the non-core activities, whether it’s machining or cabling, whatever and outsourcing that. Relaying out our factory floor to improve production flows, certainly working with vendors near the factories and throughout the globe to improve both quality and pricing and delivery. So it’s a whole series of events that we are working on or processes that we are working on.

So I think quarter-to-quarter, there’ll be a little bit of variability, but I think we will start these initiatives, really focused on them about three years ago. And I think that the total product line that we have in the marketplace now is really starting to deliver the margin targets, those profit margin targets that we had focus on for quite a while.

And we certainly expect improved margins, operating margins, gross profit margins as we move out to 2013, 2014.

Frank Laukien

Maybe a couple of additional comments on that. Actually subsequent to the quarter, we divested a small Bruker Optics machining operations in Texas. It’s incremental change, but its all good steps that are part of our operational excellence program. And one thing that I’m really pleased sort of by midway through this first quarter and hopefully very visible in the second quarter, our CAM centralized factory in Fremont, California is really beginning to click and provide the output that we had hoped for and I’m sure that’s going to have a good impact on gross margins and operating margins on CAM.

So, I’m very pleased with the CAM progress. It’s not fully visible in Q1 yet, but I know we’ve really made a lot of progress. And I think it will really show in Q2, Q3 and beyond.

Amanda Murphy – William Blair & Company

So, if you just look at it on a high level. Is there a way for us to think about how far you are through these initiatives, that 10%, 50%? How much more room do you have there? It sounds like quite a bit, but just kind of think about it conceptually.

Frank Laukien

You know, I mean gross profit margins we started a long time ago and that will never stop. We just raised the bar by another 2% or 3% every three years or so. I really think that’s a continuous process. And, yeah, we’re sort of approaching at BSI over around 50% which at some point long time ago was our goal, but I’m sure we’ll move those targets up to -- this is not for a specific year. But we’ll move those targets up 50 -- higher.

I don’t see why over time and I’m not going to specify the timeframe right now. But over time our margins, gross margin should be in the mid 50s. So, that will never end and I don’t know what inning we’re in. That’s just an ongoing investment.

The outsourcing to low-cost countries, the further divestiture of certain context machining, cabling, electronics, I think there -- we’re not at half time yet. We started with something that’s taken place, something that are ongoing. It’s still early innings. I don’t know what the percentage is. Maybe we’re at 30%.

Amanda Murphy – William Blair & Company

Okay. That’s helpful. And then just last one for me, switching topics. I’m curious if you can provide some more color on the Applied Markets, what you’re seeing there. You’ve talked in the past about leveraging CAM’s sales force in that market, is that something that’s progressing well for you guys?

Frank Laukien

The applied markets are doing well. And CAM is growing particularly fast. I think at CAM, not surprisingly where we have new products on the market already, than the ICP-MS, the aurora and the SCION GC-MS and GC-triple quad that we brought out last year. They’re really growing very nicely.

Our GC standalone products, which were still the older Varian products with the Bruker logo. We’re not growing until recently. But now that we have also a next-generation Bruker -- redeveloped Bruker standalone GC product line, we think that will also begin to move in the right direction.

And yeah, we are, to some extent using CAMs or life science products and selling them into the Applied Markets via CAM. It’s not a huge factor. It’s sort of an incremental less than 10% and, of course, where also some CAM products, if you like, are ultimately also going into traditional life science or clinical markets. But those are just the 5% or 7% cross-selling synergies. They’re not the big drivers but they’re nice. They’re incremental and they’re easy to get.

Amanda Murphy – William Blair & Company

Got it. Thank you.

Operator

Thank you. The next question in the queue comes from Tycho Peterson. Please go ahead.

Tycho Peterson – JPMorgan

Hey. Good morning. Thanks for taking my question. First one, I know you don’t like to give a lot of comment on backlog, but can you just give us a sense of how much of a growth you’re seeing in backlog is kind of old legacy business versus maybe some of the acquisitions?

And then can you also maybe just address the backlog conversion? I know you talked about in your comments, Frank, about you haven’t been able to work down the conversion times. But how big a priority is that and how should we think about your ability to work down backlog conversion over time?

Frank Laukien

Yeah. So our backlog grew overall. We thought we would begin to chisel away at those a little bit in Q1, but the orders were just very, very good. The BSI backlog also increased compared year-over-year for sure and also compared to the fourth quarter, which is unusual actually, but we really had very good bookings in Q1.

And we actually already have to slightly modify our own business planning. We had planned for somewhat less new orders. We actually need to increase our output in some of our divisions. I don’t want to go into too many details there for competitive reasons even further.

So -- and yeah, backlog -- backlog conversion and shortening the length of the time we have from our backlog actually remains very much a priority. So operational excellence, order execution and production logistics that goes with that is a very high priority for Stephan Westermann, our Executive Vice President who’s running that part of BSI, and things are in very high gears to accomplish that.

And we’re making good progress. I think you’ll see a lot of that. If we fall back a little bit due to high orders, we’re not too unhappy obviously.

Bill Knight

Some of the things I mentioned earlier as far as some process change and a little bit of outsourcing, it’s not only to pull some costs out. But as Frank just alluded to, we really are looking to increase the output on our existing brick-and-mortar. And we have opportunities to do that that will help, I think, bring down some of the delivery times and get our backlog, we feel, at a more acceptable level. But it was a certainly strong quarter for orders and it’s a nice problem to have.

Tycho Peterson – JPMorgan

And then in your commentary here, Frank, you talked about some of the strength in international markets and I think you said Japan was fairly strong. Can you just talk about specifically, where we are in the process? Are we building infrastructure you had previously called out I think, $200 million in the Japanese budget to rebuild infrastructure, so I’m just wondering if there’s a bullish demand here that you’re seeing?

Frank Laukien

Okay. Good question, Tycho. I’m not sure I have all the details at my fingertips. I know we did already last calendar year receive some of these orders, rather large orders for the Sendai province and Tohoku University in particular for a lot of our product lines.

And some of that has been delivered -- I can’t tell you right now at all. I suspect some of it has been delivered and some of them still will come through. I think, however, my impression is not that this is the goal of re-building after the tsunami. I think the demand just generally has been healthier in Japan. And for instance also, Japanese semicon customers or whether its research or fabline, orders have been coming through.

I don’t think they’re all in revenue yet but -- in general, it seems like a healthier picture and not -- but there was an element. And I can quantitate it and time it for you properly right now, also of some sort of a rebuilding after that -- in the Sendai and other provinces. I think most of the orders we have had probably and most -- some of the revenues has come through and some of it hasn’t, but I don’t have it quantitatively.

Tycho Peterson – JPMorgan

Okay. And then just last one on capital deployment, I mean it sounds like we should expect maybe some continued bolt-ons on a go-forward basis. Has the M&A pipeline change dramatically for you guys in the past six months or so or are you seeing more deals coming your way?

Frank Laukien

Well, certainly since, I think there was a bit of maybe in Q2 of last year, Q1, Q2 of last year in some deals that we did look at. M&A valuations were little too rich in our opinion and we did not proceed with those.

And the M&A pipeline for us in -- what we’re looking at which are smaller to midsize acquisitions, it’s really not so much. I don’t see it so much dependent on economic factors or on seasonality or anything like that. I think it’s more of a continuum of smaller to midsize companies that have very nice products, but don’t have the global reach and for whom Bruker might be an interesting partner.

Tycho Peterson – JPMorgan

Okay. Thank you.

Frank Laukien

You’re welcome.

Operator

Thank you. The next question in the queue comes from Dan Leonard. Please go ahead.

Dan Leonard – Leerink Swann & Company

Thank you. Just two questions. First off on CAM for the quarter, if there was about a 200 bip delta on your operating margin, I’m coming up with a $6 million loss for CAM. Does that sound about right? And if it does, can you walk me through the pacing of how you get to the $10 million loss for the full year?

Frank Laukien

That’s approximately correct. And we believe, while that if you multiply that by four it’s higher, but I think the trends that we’re seeing we believe that we will -- that $10 million is still a reasonable number. It’s obviously an estimate but I think it’s a reasonable number for the year.

Dan Leonard – Leerink Swann & Company

Okay. And my follow-up, Frank, could you quantify the boost to margins that would occur if your bookings growth did in fact slow and you were able to draw down some of your backlog?

Frank Laukien

I understand the question. I’m presently not -- I don’t think I can do that piece of analytics ad hoc. I apologize. But it’s a very good question. I don’t think I have a sensible -- a quantitative answer for you here.

Dan Leonard – Leerink Swann & Company

Okay. But presumably, there should be some boost because there’s been catch-up issue from the compensation standpoint, correct?

Frank Laukien

Okay. Generally, that is correct. Yeah.

Dan Leonard – Leerink Swann & Company

Okay. Thank you.

Frank Laukien

Yeah.

Operator

Thank you. The next question comes from Dan Arias. Please go ahead.

Dan Arias – UBS Equities

Hi. Thanks very much for the questions. Frank, I appreciate the notion that technology and the secular trends you’re seeing are the key factors for you guys. But I guess, just on the bigger picture, what are your assumptions for growth this year including in terms of the macro climate for Europe? Do you assume that the EU sort of stays where it is or declines modestly? What’s the implied move forward overseas there?

Frank Laukien

Well, for European Union research budget, we don’t assume a decline. European -- even if there is a small contraction in the European Union and most European Union countries seem to be shrinking their economies slightly.

I think the dynamics for research and development at universities and R&D also among the industrial customers excluding some Mediterranean countries I think are really quite healthy. Because everybody understands that there is the enlightened element that that’s a good thing to invest in on a political and societal reasons.

I think it’s also competitiveness of nations. I think people see what investment occurs elsewhere in the so-called emerging markets, which really aren’t emerging. There’s a huge rapidly growing market. And so the R&D spending in most of Europe is healthy.

For the European Union, it’s very healthy. Central Europe, Eastern Europe, Russia, it’s dramatically growing. Within China, it’s dramatically growing. I mean, whether China grows 10% or 8%, really doesn’t matter that much for our industry.

When China said they want to go from GDP of 1.7% spend on R&D to 2.2%, that’s the big news. Those are the big trends for Bruker not whether they grow it 8% or 10% and built more or less growth for apartment buildings.

Same for Russia, they have declared pre-election albeit but I think generally the trend is there that they want to bring their R&D spending to over 2%, I think to 2.5%, which is an ambitious goal, but nonetheless, that means in certain R&D zones in the Moscow, St. Petersburg and a few other areas, there is very dramatic improvement and increase in R&D spending.

Those are the important trends, not the macro trends. The headlines don’t matter that much. These trends are much more important.

Dan Arias – UBS Equities

Okay. Thanks for that color. And then I guess within mass spec, there’s been some speculation on changing dynamics on the Qq-TOF market. Can you just comment on the uptake of maXis and whether or not you’re seeing anything different in terms of customer preference or maybe overall share gains on your part?

Frank Laukien

Yeah. The maXis -- obviously ASM is not far from now and we’ll have a press release then product announcement. I’m sure there’ll be other companies with product announcements.

So most of the mass spec comments, I would, perhaps, defer by a few weeks until we have our press conference in Vancouver. But, yeah, our maXis had excellent gains and excellent uptake and gains in market share for sure.

Dan Arias – UBS Equities

Okay. How about on NMR? I mean most people tend to focus on competition with Agilent there, but I’m just wondering if you can comment on your experiences in Japan or China. Is there anything you can say about the regional competition that you see there with JEOL or maybe an opportunity for share gain there?

Frank Laukien

JEOL has -- JEOL is NMR business. JEOL research -- sorry, JEOL residence as they are called, have done some interesting innovative things in a few niche markets in solid state NMR and so on. So at the recent ENC conference they had some -- a couple of nice new product introductions.

So I think, it’s not only Bruker and Agilent, for sure. I mean, there are -- that’s a third viable competitor. And they’re stronger in Japan and part of Asia Pacific. And they’re present elsewhere as well. So I would never underestimate them.

Dan Arias – UBS Equities

Thanks, Frank.

Operator

Thank you. The next question in the queue comes from Isaac Ro. Please go ahead.

Isaac Ro – Goldman Sachs

Hi. Good morning. Thank you for taking the question. If I could just ask the first question on BSI and the second one on BEST. On BSI, obviously if I’ll take your organic growth and compare it to peers, I think in the last question you pointed out pretty solid. And I would assume -- it would imply that you guys are doing pretty well in market share. So, could you offer some color as to where you think you’re doing the best in terms of incremental share gains across the portfolio?

Frank Laukien

Isaac, it’s -- we think it’s actually pretty broad. I couldn’t isolate one product or even one division. It’s pretty broad based. I think we’re really gaining market share from EDS, EBSD to x-ray tools to atomic force microscopy. We certainly haven’t seen any market erosion in NMR mass spec in the Qq-TOF area in microbiology we’ve been gaining.

And this is not the complete list. So it’s not -- whatever I didn’t mention, we’re losing. I think it’s really pretty broad base. I’m not aware of any area right now where -- let’s say we’re in trouble or backpedalling and losing, but it’s pretty broad. It’s really quite healthy.

I mean, yeah, in mass spec it’s been -- in life science mass spec, it’s been good. But in many other areas, it’s been solid to growing in terms of market share.

Isaac Ro – Goldman Sachs

Great. That’s very helpful. And then just secondly on BEST, if we look at sort of the move forward plans from here, clearly from a gross margin perspective a little below the corporate average. And so, I’m just wondering if you look at ways to improve or maintain the growth rate on topline as well as improve profitability, how would you kind of breakout the opportunities -- a gross margin versus the OpEx side?

Tom Rosa

Yeah. Hi, Isaac. This is Tom Rosa. The gross margins this quarter were about 22% and absolutely were well below the Bruker standard. But I do want to point out that three or four years ago, we were at 8%. We’ve made a tremendous drives on improving gross margin. It’s still a material intensive business.

I think over 84% of our sales in Q1 were wire and other material type product related, that’s abnormally high. We expect the second half of the year to be more device-oriented not -- but still on the 70/30 type ratio in favor of materials.

So, we do have opportunities, we think down the road to improve our gross margin as we transition into more device-oriented products. But for now, the gross margin number you saw are in Q1 is probably pretty representative of what we will see for the full year.

Frank Laukien

Isaac, if I may add. I think the P&L appearance of BEST even in 5 or 10 years even if it succeeds wildly, it will always be very different from a scientific instrument’s P&L appearance.

On the material side, your SG&A is much, much lower than the high SG&A we generally face in the scientific instruments or life science tool space. Gross margins are lower but much lower SG&A.

And even for the device business, a lot of the device business will be via OEM partners in the future. And so the P&L appearance even long term -- at the operating margin, I don’t see why there’s BEST business over quite some time cannot go into the mid to high teens eventually. But the way to get to these operating margins, I think will always be very different, generally with lower gross profit margins and lower expenses.

Isaac Ro – Goldman Sachs

That makes kind of sense. Okay. Thanks so much.

Frank Laukien

Sure.

Operator

Thank you. The next question comes from Jon Wood. Please go ahead.

Jon Wood – Jefferies & Co.

Hey. Thanks. Can you hear me?

Frank Laukien

Yeah, Jon.

Jon Wood – Jefferies & Co.

Hey. Good morning. So can you guys comment on the Veeco metrology business in the quarter? Anything you’re willing to offer on kind of revenue and then the bookings trajectory would be great?

Frank Laukien

Yeah. That was actually another positive surprise. We had a very strong year last year and because of some of the weakness in semiconductor and data storage had been pretty conservative in budgeting bookings and revenue for the year.

So I think on revenue, they were a little bit above their plan, nothing that remarkable. But in terms of bookings, they were quite a bit better than they’re essentially flat plan compared to last year. So that was the positive surprise on the booking side.

Jon Wood – Jefferies & Co.

And Frank, I know you’re cycling up again some backlog flush there in terms of revenue. So, was that business flat, up or down off of that comp last year, when you actually flushed the backlog from the fourth quarter of ‘10?

Frank Laukien

Good question. I know that the BNS business, ex-Veeco as you call it, but the Bruker Nano Surfaces Division, they had a very unusual first quarter last year. It was a very, very strong, very high margin, but that was basically have a lot to do with them settling into that new revenue recognition model.

They had a very weak Q4 2010 because a lot of their revenue got deferred according to our more conservative revenue recognition rules. And then Q1 was unusual for them last year.

Having said that, I’m not sure -- how can we provide some additional color on that, Jon?

Jon Wood – Jefferies & Co.

Just the revenue level on the first quarter.

Frank Laukien

Mike, do you have any...

Mike Knell

Yeah. Revenue was $44.4 million for BNS.

Jon Wood – Jefferies & Co.

Okay.

Mike Knell

A GAAP gross margin of 45%, which was up from last quarter’s 2011, 38% margin.

Jon Wood – Jefferies & Co.

All right. That’s wonderful. Thanks.

Frank Laukien

And the adjusted gross margins on BNS are in the mid 50.

Jon Wood – Jefferies & Co.

Okay. All right. Great. And then, Bill, the last one for you, just the -- you guys have talked about $80 million to $120 million of free cash flow as of last call. Can you just give us an update of how you’re tracking to that plan currently just -- and are you still within the range of the top end track and lower end? Any qualitative commentary around that would be great?

Bill Knight

I think we’re still with the financial goals that we talked about in our call on February 22. I think we’re still very comfortable with the targets.

Jon Wood – Jefferies & Co.

Okay. Thank you very much.

Operator

Thank you. The next question in the queue comes from [Robert Colesen]. Please go ahead.

Robert Colesen – Analyst

Hi. Congratulations on the quarter. Just a real quick question. Could you comment a little on that IT fusion project. It seems like the life surface it was a sleeping giant, but we don’t know too much about it?

Tom Rosa

Yeah. Hi. This is Tom Rosa again. Yeah, the -- sort of the benefit of others that are listening the either nuclear fusion project is something on which we booked the $36 million order for LTS wire back in late 2009.

We began shipping on that in a very small amount last year coupled $2 million to $3 million. We had approximately $4 million of shipments in Q1 on that same project and with very good margins for us.

The second half of the year, we expect to be stronger. We don’t expect any significant shipments in the next quarter. But it is progressing well. It’s a major nuclear fusion project that’s going up in France and very pleased to be part of it.

Robert Colesen – Analyst

Thanks, Tom.

Tom Rosa

You’re welcome.

Operator

Thank you. The next question in the queue comes from Steve Unger. Please go ahead.

Steve Unger – Lazard Capital Markets

Hi. Good morning. Just a couple quick questions. Frank, as far as capacity in your internal infrastructure as -- last year, you were controlling expenses, you had a hiring freeze. Are you running sort of a tight model as far as having service personnel and installation personnel to get the products in?

Frank Laukien

Well, we’re trying -- good question, Steve. We’re trying to get it right, of course. So in terms of capacity, we had quite a bit of capacity investment last year including at BEST and of course ongoing this year.

Last year, we hired a little too front-loaded early in the year, which hit our expenses. And so in hindsight last year, if I could do it over again, we would do it more gradually through the year.

We tried to plan that very well this year. And so if we grow at 10%, we hope to -- that our head count grows by 5% or less this year. And I think we’re very good this year at pacing it throughout the quarters from what I can see. So we’re trying to get it right, which we didn’t do optimally last year. And so I think we’re neither too tight nor too generous, I hope we’re at about the right level.

Steve Unger – Lazard Capital Markets

Great. And then could you comment on the progress of the MALDI Biotyper and as far as your development plan? I know that BioMerieux is planning to at least file the VITEK MS is what they called it by the end of the June quarter. Do you have similar plans?

Frank Laukien

Well, for the MALDI Biotyper, we brought the -- a key conference for that was in London in early April at the so called ECCMID conference. And we were delighted in -- so we have now over 500 installations of phase 4 either by lease or by payment worldwide, which makes it the clear market leader.

We also brought out some very important new products. The products were not a new box or a piece of hardware, but a very crucial fungi library and methods, as well as a separate mycobacteria including tuberculosis product. And a number of other further innovation, I think those were the only multi-top innovations at this particular conference.

And we have a large number of partners, including some very major partners, Siemens Healthcare and BD, plus the number of other integrators that all use to MALDI Biotyper. So very good progress, a lot of enthusiasm, continued innovation, more assays going onto that platform. Other things that are work-in-progress that may come out next year as additional assays and products for that platform. So it’s quite strategic for us.

We’re working with the FDA. I would like to think that we may, in the second half of the year have FDA clearance. But as you know, that’s always very difficult to predict and it’s obviously up to the FDA.

Steve Unger – Lazard Capital Markets

Got it. And then just lastly on the Varian transition of those products, those legacy products, could you point to, I guess, what would be the key enhancement to the legacy products that have done specifically in the SCION platform?

Frank Laukien

The SCION -- so the GC-MS platform SCION last year that we brought out last year, that’s been a substantial redesign and you’re probably familiar with that already. I mean it’s faster. It’s more sensitive, smaller footprint, incredible convenience for doing MS/MS, making MS/MS basically as easy for relatively untrained operators that’s running this GC-MS, which hasn’t been the case previously.

And the GC, SCION, the SCION standalone really is a new electronics platform with a much better electronics platform, with also a lot of other -- I’m sorry, let’s call them plumbing improvements in various parts of the GCs, the valves, the injectors and so on. Where we -- in some cases, I would say, drew even with other market leaders where previously Varian had some disadvantages and in some cases where we can now comfortably exceed the specifications of other products on the market.

Steve Unger – Lazard Capital Markets

Got it. So, you feel like you’ve got a product now that’s directly comparable to the adjuvant platform?

Frank Laukien

Yeah. I think it has a number of unique selling points and some of the -- I don’t know how analytically important they were, but if you want to go into specsmanship and so on, which some customers like to do that. I think we’re -- let’s call it roughly comfortable with some nice advantages in certain areas.

Steve Unger – Lazard Capital Markets

Got it.

Frank Laukien

Very good platform also. It’s not only what can they do for us in 2012. I think it’s a very new good platform for the next...

Steve Unger – Lazard Capital Markets

And then if I can just sneak one quick financial question. As far as capital deployment in a quarter, how much did you spend on acquisitions and it looks like you bought back some stock?

Frank Laukien

We did not buy back any stock. And I think we’ll have the SkyScan acquisition accounting I think in the -- because I think will be in our 10-Q.

Bill Knight

Yeah. We had about property plant equipment about $10.8 million and the acquisition was $21.7 million.

Steve Unger – Lazard Capital Markets

Got it. Great. Thank you.

Operator

Thank you. There are two further questions in the queue. The next question comes from Peter Lawson. Please go ahead.

Peter Lawson – Mizuho Securities

Hey, Frank.

Frank Laukien

I could not hear the name. I’m sorry. Could you repeat, please?

Peter Lawson – Mizuho Securities

Hi, Frank. It’s Peter Lawson.

Frank Laukien

Hi.

Peter Lawson – Mizuho Securities

Just on the product lines and product classes, which ones do you think surprise you the most year-to-date?

Frank Laukien

A very good question. I think probably maybe without getting into product lines for competitive reasons, I think probably high-end life science tools and any products going into semiconductor or data storage, either research or fab were probably the biggest positive surprise in the first quarter.

Peter Lawson – Mizuho Securities

Thank you. And then, just which areas do you think had increased visibility or have increased visibility and decreased visibility for the year?

Frank Laukien

Yeah. I don’t mean to repeat, but clearly increased visibility in semiconductor data storage, LED, not sure -- I mean areas that are unclear or nebulas are photovoltaic and solar, but that’s a very small part of what we’re doing. So there we have a little visibility of how this shakeout will occur, but luckily it doesn’t matter that much for us.

I don’t think we have any improving clarity on NIH budget again there. There’s plenty of other spending. There is pharma spending going more do the academia side via outsourcing partnerships. There’s many other sources of U.S. academic funding, but that’s not one of the areas where we have no more today than we knew three or four months ago.

I think the general industrial mood and of -- could there be a global maybe also Asian recession or slowdown, maybe a little bit of a slowdown, but not a major slowdown. I think that generally the mood in Asia and they’ve been watching Europe, I think it’s really quite a bit more positive than perhaps in the middle of the fourth quarter of last year is my impression from multiple qualitative data points that I get sort of from our field operation.

Peter Lawson – Mizuho Securities

Thank you, Frank. Just two very quick follow-ups for, Bill, around the P&L. So interest in other was higher than expected, what was that due to? And then the same question for the tax rate that seemed higher than expected, what should we expect for the rest of the year?

Mike Knell

Yeah. Hi, this is Mike. So, interest in other really as Stacey mentioned before $3.5 million interest expense which is up about $2 million from Q1 last year and also our exchange losses were higher than last year that’s really driving that interest in other sense number. And on the tax rate, really the largest driver is U.S. losses that we are not able to benefit for income taxes as we have full valuation allowance on our U.S. losses. So that’s driving that up if it’s pretty consistent to what the rate was in Q1 of last year.

Peter Lawson – Mizuho Securities

Mike, thanks so much.

Mike Knell

Okay.

Operator

Thank you. There’s one further question in the queue. Next question comes from Derik DeBruin. Please go ahead.

Derik DeBruin – Bank of America

Hi. Actually we’re going to ask interest rate and tax, but just on the tax is the full rate then 32% for the year is it -- that’s still kind of where you’re looking for?

Mike Knell

That’s probably materially correct. Yeah. Later on there.

Derik DeBruin – Bank of America

Okay. Thank you.

Operator

Thank you. There are no further questions in the queue.

Frank Laukien

Okay. Great. Thank you very much for joining us today. And we look forward to speaking to some of you at our ASMS press conference and others will probably see on our next earnings call. Thank you very much for joining us today. Bye-bye.

Operator

Thank you, ladies and gentlemen. This concludes the call for today. Thank you for joining us and have a great day.

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